The NAV of the Apollo Asia Fund rose 24% in the first quarter, resulting in an increase of 67% over the last twelve months. NAV at quarter-end was US$159.52. (Performance charts.)
We would have done even better had we switched all our holdings in September into Korea, which has since doubled, and are fielding a growing number of questions as to why we are still not involved there. The top-down change is indeed impressive, and we are certainly interested in specific company ideas, but have yet to build the requisite degree of comfort in relation to individual businesses. We worry mainly about the merits of the decisions we do take; we don't worry unduly about missing opportunities - and therefore from time to time we will continue to sit out what other fund managers consider to be the main game. Investors are of course free to diversify, if we skip areas where they wish to have exposure.
One of our problems in Korea is not speaking Korean. Full annual reports in English are hard to obtain for most companies. Summarised financials are available, but we would prefer to have automatic access to the same information as domestic investors. Another major issue is capital allocation. Prices frequently look 'cheap' in relation to earnings or book value, but dividend payouts are low and Korean companies have an appalling track record of value destruction in the allocation of retained capital. Please do relay company-specific ideas which you think we should consider, but until convinced we are unlikely to abandon our investment approach of sticking to good businesses which we think we understand and find reasonably predictable; the approach to reinvestment is an integral part of that qualitative judgment, and English-language accounts are of considerable help to our understanding.
The global risks seem to us unusually high, which would make it a particularly illogical time to abandon the investment approach which works for us. We have been nervous for some years, so long-standing investors may wish to skip the following paragraphs. Although the timing has been more protracted than we originally envisaged, that nervousness is increasing. US financial market developments, seen from here, appear almost as surreal - and alarming - as those in the political sphere. After watching the slow-motion collapse of Argentina (stages of which felt like the cartoon character running in mid-air, somewhere off the edge of a cliff, before looking down), some of the long-predicted systemic problems in the US are being unveiled at similar speed. (Perhaps this is a pantomime? in which principal actors such as Greenspan and O'Neill pretend to be oblivious to the problems, despite cries of 'Look behind you'...) Frantic credit expansion appears to have temporarily succeeded in reflating the bubble to its original size, but at what ultimate cost? and, of most immediate concern to our investors, for how long?
Leaving discussion of all the most important global issues to others, we'll just reiterate the magnitude of our own fears, which include a significant decline in US equities and the US dollar, a surge in protectionism (if the US is behaving like this now, what will it be like in a depression?), market-rigging by official plunge control teams in more major markets (Yam-Tsang-Mahathir style...), and discussion of US exchange controls. By the end of all this, we'd envisage a renewed monetary role for gold.
However, the US credit machine is working overtime, and has kept such nightmares at bay for some time. Meanwhile, Asia is awash with liquidity, and markets are moving higher. Savings rates remain high, and low interest rates are unappealing to many local investors. Many international fund managers are nervous of the US, and can rationalise a two-way bet that Asian companies are leveraged plays on US economic and tech-sector recovery while it lasts (if it exists?), and have stronger underpinnings in a downturn. What more does a relative-return manager need? Momentum, perhaps, and Asian markets now have that too - so the flow of funds may remain irresistible - at least until it stops. With that unhelpful comment we end this simplistic portrayal, because we tend to agree: in a dangerous world, the risk-reward ratio in Asian equities does seem relatively attractive - at least for those in our portfolio.
|Top ten holdings
as at 31 Mar 2002
|Aeon Credit (HK)|
Cafe de Coral
|Land & General bond|
as at 31 Mar 2002
% of securities
|Hong Kong-listed equities||
The top ten holdings are shown to the left; there have been relatively few changes this quarter. We started the quarter with a relatively high weighting in then-unfashionable Thailand, which has since been 'rediscovered' with a sudden restoration of many share prices to nearer fair value.
Holdings outside the top ten include Glorious Sun, BAT Indonesia, and United Tractors. We sold Aeon Thana Sinsap when vertigo set in and the excellent growth prospects appeared discounted, only to watch it soar much, much higher - but it has reached more than ten times book, and a PE of the order of 30 for the year just ended, which may be a bargain by US standards but is more than a touch high by ours. Other disappearances are China Hongkong Photo, Golden Land and Kingboard Copper Foil. Additions have been to existing names.
The estimated current-year PE of the portfolio is 7.7, with a net dividend yield of 5.6%, as at the end of March. (By 'current-year', as always, we mean the next full year to be reported, and at present 47% of the current-year earnings are 'in the bag', from fiscal years already finished but yet to be reported, which should be subject to less forecasting error than the results for the months ahead - a relative statement, given the turbulence of recent months.) These valuations are less compelling than hitherto, but still reasonably attractive against a backdrop of low interest rates. The 'current-year EPS' estimate for the portfolio is about 15% higher than this time last year. For what it is worth, which at this stage is not much, our bottom-up forecasts suggest portfolio EPS growth in low double digits for the year ahead; the important thing is that, despite the difficult environment, we still think our group of businesses is both healthy and capable of growing.
Thanks to my co-investors, particularly to all of you who help with ideas.
Claire Barnes, 4 Apr 2002
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