The Apollo Asia Fund's NAV fell 2.6% in the first quarter, closing at US$847.55, 5.1% below the high-water mark established at the end of October. Over twelve months, it was up 9.9%.
During the fourth quarter we remained on the sidelines; during the first quarter we've been buying. We made our first investment in Japan, and continue to find many opportunities there to consider. We bought one high-quality Singapore manufacturer which we've followed for years, and otherwise added to some of the existing holdings. The cash balance has halved to 8% of assets.
Although we have not seen opportunities quite as compelling as during the Asian crisis of 1997-98, which may have been once-in-a-lifetime, we now find a great deal in which to be interested. We have spotted some companies trading below net current assets, or below net cash; some with operating cashflow yields over 30%, etc. However, some of these are illiquid, or have upside to "fair value" but limited growth prospects beyond - and the value of a minority shareholding is frequently not proportionate to that which we would pay for control, if the capital allocation decisions would differ. We are now generally more interested in finding well-managed companies with long term growth prospects at a reasonable price, particularly since we believe there will be ongoing secular growth in Asia. Last year Mr Market was exuberant about almost everything, and forgot about the persistence of cycles: now, suffering from painful losses, he remains very attached to some perceived bastions while tired and emotional (or a forced seller) in respect of some former favourites.
by listing; 31 Mar 08
% of assets
|Net cash & receivables|
Asian businesses are now facing a fascinating mixture of challenges and crosstrends. Inflation in the cost of raw materials, fuel, and wages has been a challenge for a couple of years. In some areas, food price inflation is now causing real hardship, with cutbacks in nutrition affecting the concentration of workers and students; in others, it merely affects consumer spending patterns, to an extent which is highly variable. Many Asian manufacturers had become used to gradual currency appreciation, offset by productivity improvements: accelerated foreign exchange movements have exposed the prevalence of US$ pricing and a frequent lack of pricing power - not all can refocus on the remaining boom markets, or on harder-currency competitors. In some cases the inability to recover cost increases should be temporary; in others it appears more permanent. Chinese government moves to slash export rebates, rapidly drive up minimum wages and working conditions, reduce environmental damage and improve tax enforcement have been so determined and swift as to reshape whole business sectors in short order: some bemused manufacturers are now seeking low-cost labour pools in Vietnam, Indonesia, and beyond, but will not always find that total costs can compare. Many China-based exporters are examining local market opportunities for the first time, in search of renminbi revenue after the reduction of VAT rebates on exports. Old contract processing arrangements are being phased out; old transfer pricing arrangements are resulting in scrutiny and tax settlements. Some companies are still short of manpower: the closure of Guangdong factories has brought queues of jobseekers to the gates of others. Construction and hotel companies in Malaysia lost key employees and whole workteams to the Middle East and Macau; shifting fortunes and exchange rates are causing some expatriate workers to rethink. Some companies are affected by a sudden credit crunch; others with cash or continued access to capital are snapping up the resultant casualties.
It seems hard to generalise in such an environment. Fortunately as stock-pickers we can continue to sift through, and act when and if confident. Clearly there are winners as well as losers from all this turbulence. For example, current commodity prices make many new projects viable. These are not always our sort of opportunites, given our preference for proven management and for calculable risks, but we can look at the suppliers of shovels to each gold rush.
Politically, 2008 is proving interesting, not least in Malaysia. Our long-standing policy of avoiding companies dependent on politicians, connections, or dysfunctional decision-makers, and companies competing with those significantly better-connected, has limited our investible universe here. A move to meritocracy and to better stewardship of resources could unleash hitherto-squandered potential for individuals and for the country. It would be premature to assume that outcome, but the mere possibility is refreshing. Our current investments, meanwhile, have demographics and good management on their side.
As always, we worry more about minimising mistakes than about missed opportunities. The latter are legion, but our investigations proceed slowly. Feedback from fellow-investors about promising ideas, or looming problems, is always most welcome.
Claire Barnes, 10 Apr 2008
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