Apollo Investment Management

Kafka's costs
Apollo Asia Fund: the manager's report for 1Q2016

Apollo Asia Fund's NAV rose 1.6% in the first quarter, to US$1,868.91, with a March rally in Asian markets and currencies offsetting the declines of the previous two months. We have still made no net headway in US$ terms over the last three years, and the NAV remains 12% below its high set in August 2014.

Geographical breakdown
by listing; 31 Mar 16
% of assets
Hong Kong
18 
India
Japan
23 
Malaysia
10 
Singapore
Thailand
11 
Vietnam, incl funds
Other
Net cash & receivables
13 
 
100 

The enthusiasm expressed in Jan-Feb for a War on Cash was dominated by people who need to travel more, or more adventurously. Bank notes in some countries have to be new, unmarked, unfolded - but then the traveller can proceed with confidence. Not so with plastic. Cash works: plastic all too frequently does not. ATM domestic networks may have been relatively reliable to date (although even in the UK, were RBS computers not out of action for weeks? and the question arose, 'Why do bank IT systems keep failing?'). Cross-border ATM withdrawals and especially card payments are prone to failure, time-consuming to troubleshoot, and when they work, expensive. The EU's benevolent quest for fairness may keep charges down there, but when I use a plastic card overseas it usually now costs 4%, sometimes 7%. Money changers' spreads have soared too in recent years, in Malaysia from anecdotal experience by a factor of ten, as once-low-overhead businesses grapple with new regulation - but they remain much cheaper than the banks, and charge a fraction of these card rates. A society without cash would be vulnerable to cyber-attack, and to predatory oligopolies; it would have one more barrier to small business startups; and it would be much less resilient. Cash is time-tested, reliable, cost-effective, and essential.

Some argue that eliminating cash, or large notes, would reduce crime and terrorism. There is no evidence of this. Where I live, eliminating cash would hurt my quality of life by forcing out of business more of the small grocers, cafes and traders who sell Real Food; the effect on those individuals would be much more serious. Taxpayers here are interested in crime and money-laundering, and curious to see whether action will be taken on the cases in the headlines, which at present involve big banks and credit cards.

The War on Cash is a ploy by governments desperate for revenue and contemplating deflation, to remove a safe haven from negative interest rates and facilitate confiscation. It is doubtless encouraged by lobbyists for the big banks, to prevent any escape from their services.

The increasing difficulty of opening and maintaining bank accounts has been inadequately discussed in mainstream media. Your fund recently set up an additional bank account, an extension of the existing Northern Trust relationship, and this took five months. No concerns were raised: just normal internal processing time. I am told that it is difficult nowadays for a non-resident to open a bank account in the UK, regardless of practical needs, dependent relatives, or changes at the competing bank which one may have used for decades. In Asia, HSBC's enthusiasm for peremptorily closing corporate accounts has caused problems to many of the finest businesses and regional entrepreneurs that we know: to us too, and the details of our recent experience beggared belief - but we are in such distinguished company that we suspect this is becoming a significant drag on productive activity region-wide.

Kafkaesque: having a nightmarishly complex, bizarre, or illogical quality...

We wonder how many other accounts have been closed without notice, and turn out to be unavailable when required - or disappear from view, with no statements or paper correspondence, and remain unclaimed, awaiting processing, or untraceable. The move to electronic statements is causing problems in case of bereavement without a paper trail for heirs. Our inability to obtain statements of transactions or balance on a live account for almost two years despite repeated requests, and the eventual payout of the balance only after it became known that our own book-keeping had been thorough, made me wonder about losses to fraud, and/or whether the banks are accumulating significant new reserves which are guarded from withdrawal.

Growth in 'financial services' has often been regarded as a sign of a country's sophistication, but we should perhaps be wary about the percentage of economic activity devoted to what should be a supporting function. Stated figures will understate reality by a growing margin, as the effort to set up routine transactions is increasingly transferred to the customer, and the burden of bank-required paperwork spirals. Maintaining a bank account never used to be time consuming and expensive... nor did compliance, when it was based on principles rather than box-ticking, and when one did not need to fear the consequences of a misplaced hyphen. The speed with which the time consumed in these activities has grown, displacing more useful activity, has been shocking. For decades, banking services just worked, and complications were minimal: this was not something most of us had to spend time on. This has changed in the last few years. Many of the victims are nervous of highlighting problems, or too busy to do so, and I think it is worth considering the cumulative impact of such disruption. When I first wrote about such issues, we worried about the impact on our own business; later, about the independent fund management sector; now, about the economy of Hong Kong and the vitality of Asia's cross-border SME's.

Such concerns strike at the heart of the long-standing investment case for Asia: that it would leverage global growth (now in doubt), with nimble businesses unburdened by excessive bureaucracy. The new bureaucratic load may negate those advantages, as we hear that the US is least affected, and the more orderly Asian countries possibly most burdened. Demands are frequently expressed in complicated English, which even British professionals struggle to understand. These may be imperfectly translated, or imposed in the original on people for whom English may be a third or sixth language.

The efficiencies of electronic payment are sometimes disappointing. An HSBC branch was unable to arrange payment to a company: its name was too long. HSBC suggested that the company shorten its name. The recipient suggested we send them a cheque. I hope for slow progress in the War on Cheques - and if all else crumbles, it may be reassuring to know that barter trade thrives in the Straits of Malacca.

Meanwhile Hong Kong has been grappling with political headwinds, and diminished freedom of expression. While the issues are much broader, disconcerting market-specific newsflow has continued in April: see David Webb's articles 'SFAT's red flag on Moody's chills negative research' (a shocking verdict, maybe I won't discuss possibilities on the short side) and 'HKEx cuts hit corporate governance of whole market'.

Against this backdrop, it is heartening to note some improvements in Singapore, where all institutional investors should now be able to obtain proxies for attendance at AGMs. This sounds normal, but was long overdue.

A holiday in Iran was fascinating, and highly recommended. Watching polo on the maidan in Isfahan, with an enthusiastic crowd joining in recitations from the Shahnameh, was one of many unexpected highlights. With sanctions lifted, tourism should boom - constrained, temporarily, by the availability of hotel rooms, although old buildings are now being renovated for boutique hotels and cool restaurants. Go soon, and book early!

Claire Barnes, 20 April 2016


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