Steady as she goes
Apollo Asia Fund: the manager's report for 4Q2001

The NAV of the Apollo Asia Fund rose 3% in December, giving us a rise of 12% for the quarter and 34% for the calendar year. NAV at quarter-end was US$128.56. (Performance charts.)

Despite the rise, and despite downward revisions to a number of forecasts since September, the ordinary shares in the portfolio are now on an estimated current-year PE of 6.4, with an expected dividend yield after all Asian taxes of 6.7%. By 'current year', as usual, I mean the next full year to be reported, which for all of the companies we hold at the moment means the year ending between 31st December (in the bag, but yet to produce accounts) and 31st March. In a normal year that would mean that the outcome would by now be fairly certain, but this year is harder to call; nevertheless I would guess that this year's overall result for the portfolio should not differ too much from the estimate. Figures for next year are complete guesswork, but despite my lack of enthusiasm for the macro-economic backdrop, I think our companies are capable of positive growth in earnings and dividends. The current-year earnings figure represents growth of about 7% in 2001 (in fully adjusted per-share terms) for the companies at present in the portfolio. Once again we have been fortunate to do slightly better with 'portfolio earnings per share', which grew 21% over the last year, because we have occasionally been able to sell high and reinvest in cheaper opportunities. (Here I shall repeat my caveat that we will not always be able to do this, because we will sometimes sell dogs and pay up for higher growth potential - but always on a judgment, imprecise as it may be, about 'intrinsic value').

These attractive valuations - earnings yield 16%, dividend yield close to 7% - are right in the middle of the range experienced since inception of the fund 4 years ago. While we remain very nervous about global systemic risks, that has been true throughout the period; in the meantime the managers of our companies have fortunately cracked on with day-to-day business, and grown significantly, to our mutual advantage. One factor which has indisputably changed is the level of interest rates, especially on bank deposits. All in all, the risk-reward balance of our portfolio still looks pretty good.

The top ten holdings are shown to the left; not many have changed. Holdings outside the top ten include China Hongkong Photo, Glorious Sun, Kingboard Copper Foil and Ocean Glass (1-3% each), and Aeon Thana Sinsap, BAT Indonesia, Golden Land, and United Tractors (0.5-1% each). Compass East was sold; we had made a profit of over 70% in six months, and while the valuation numbers still suggested that it was cheap, the expiry of key contracts as well as the total export dependence caused us to seek better risk-reward ratios elsewhere.

Aeon Thana Sinsap is a new listing in Thailand. We are likely to consider IPOs only when the management or controlling shareholders are familiar, waiting otherwise until companies have a track record in the public domain. This company is part of the Aeon-Jusco group, with a business model familiar both from the listed Japanese parent and from the HK affiliate in which we already invest. The Thai company is younger, smaller, and has first-mover advantage in rolling out its consumer finance business in Thailand, where it is consequently growing fast. However, we were unable to obtain any at the IPO price, and hoped to buy in the aftermarket, but it took off fast from the starting blocks and soared by 68% in 3 weeks, so having bought a little at an acceptable price we left it at that for now.

Otherwise during the quarter we added to familiar names (others were on the watchlist, and might have been added had their prices come into range), ending the quarter slightly more than fully invested. Portfolio turnover for 2001 was similar to past years, at 51%.

Thanks to all co-investors for your support - and above all for your ideas; please keep these flowing.

Claire Barnes, 4 Jan 2002