Relative calm
Apollo Asia Fund: the manager's report for 2Q2004

The Apollo Asia Fund's NAV fell 9% in the second quarter, closing at US$415.66 - which is 3% down for the year to date, but 85% higher than a year earlier. (Performance charts.)

The word 'correction' is overused in financial commentaries, and the phrase 'healthy correction' makes me wince, but this 9% decline leaves me perhaps 20% more relaxed than three months ago. Asian markets then felt extremely frothy, with too much theme-chasing and trend-following. Sharp setbacks (very sharp for some stocks and on memorable days) have restored a salutary measure of fear, and two-way trading has been restored, while valuations have become less heady.

The international backdrop, by contrast, seems more dangerous than ever. One financial commentator called the US a 'Frankenmarket', but the excesses are so multi-faceted that it might more succinctly be called a 'Frankenstate'. My reaction to the current listless complacency coupled with high leverage and extreme valuation can best be described as foreboding.

Investment comfort may be derived by returning hastily to a focus on Asian companies, Asian demographics, and the valuation of the ordinary shares in our portfolio. At the end of June, these were on an estimated current-year PE of 10.3, and yielding an estimated 5.2% after Asian taxes. Current-year earnings-per-share growth for the companies we own at the moment is expected to be 21%. We would not assume trend growth of this magnitude, and part relates to one-off factors such as the recovery from SARS. However, because of changes in the portfolio, 'current-year portfolio EPS' are 36% up over the last twelve months. (Cash flows, appropriate balance sheets, and management integrity remain critically important for individual companies, but less convenient for summarising.)

Within the region, the macro issues which have been disturbing me most are at least relatively mundane by today's international standards - except in Indonesia, where corporate bandits keep the most basic of legal protections high on the risk assessment, but there are some hopes for improvement. Elsewhere, our recurrent irritations concern misplaced socio-economic priorities (debate required globally, but more urgently in Asia due to rapid growth); the rapid increase in bureaucratic burdens and misguided regulatory distortions; and disclosure. The last should not be an issue in the internet age, and should be easy to solve, but 'published' information can be ridiculously difficult to obtain, even on companies which we own, and many annual reports are available only months after the AGMs.

There are no changes in the list of our top ten holdings, despite considerable price gyrations. Portfolio activity during the quarter has been limited, but the desperation for new ideas which I felt earlier in the year has now given way to a more hopeful agnosticism about the relative merits of a reasonable number which we are studying. We continue to benchmark all stock ideas against those which we already own (rather than against an irrelevant universe of those which we'd rather not), while pondering all concentrations of risk in an unscientific but flexible fashion. Constructive suggestions are, as ever, most welcome.

Claire Barnes, 6 July 2004