Apollo Investment Management

Liquidity and haze
Apollo Asia Fund: the manager's report for 3Q2005

The Apollo Asia Fund's NAV rose 2.1% in the third quarter, closing at US$545.05. This was a little above the previous high watermark, but lacklustre compared to a rise of 7.2% for the regional index (MSCI FE-ex-Japan) during the quarter. (Performance charts.)

We continued to hold a significant cash balance, 18% at the quarter-end, which with hindsight has been one drag on performance. Although global economic excess & imbalances seem to me about as depressing as political and environmental trends, and likely to end badly, the cash holdings are not due to my top-down view, but to a reluctance to add more in absolute terms to most present holdings, and to indecision while evaluating a number of plausible new ideas which may well be sensible investments. In some cases we have yet to finish our investigations; in many it is a question of deciding relative merits at valuations which are OK but less compelling than those we have been fortunate enough to enjoy in the past. Two new names were added to the portfolio, nevertheless, but so far in small size, due to liquidity constraints.

Geographical breakdown
  as at 30 Sep 2005
% of assets
Hong Kong-listed equities
Indonesian equities
Malaysian equities
Singapore equities
Thai equities
Other equities
Net cash & receivables

The latest Credit Bubble Bulletin, aptly entitled 'The global liquidity glut', includes remarkable numbers on oil-producer windfalls and the dramatic year-to-date rises in some other markets. While Japan and India have been participating dramatically, on good stories, 11% ytd for mainstream Asia-ex-Japan looks pedestrian by comparison. I am not sure of the reason for this subdued relative performance by a region where the fundamentals have seemed to me reasonably solid compared to other global options. Perhaps it reflects the efficiency of Asian entrepreneurs and the Chinese government at cranking up equity supply? I have not been monitoring the issuance statistics closely enough to say, but suspect it is more of a demand issue - perhaps because stories and short-term trends are more important than lowly-leveraged solidity to the growing number of hedgies and closet- indexers, which are gaining in importance compared to more conservative institutional styles. (Incidentally I agree with much comment on the risks posed by the growing importance of hedge funds, derivatives, etc, although less frequently with proposed remedies, which can be even more alarming than the trends which prompt them.) Crisis this month would not surprise, but liquidity-driven markets can always go on to much greater extremes, and paper currencies have clear deficiencies. (The Apollo Asia Fund currently has no direct exposure to gold, or energy, and little to commodities... which may or may not be satisfactory, and investors should supplement their investment according to their own views: for gold we refer you to AIMS' Phoenix Gold Fund, but timing is another issue, after the recent dramatic surge in both gold price and investor awareness.)

The possibility of a sustained rotational surge into Asian markets is not a particularly comfortable prospect for us. We tend to be better at crises and deep-value than at the mundane least-bad choices which most investors have to make in frothy, liquidity-driven markets. While global excess seems extreme, Asian market valuations are not: we are somewhere in between those two states. Hence our dithering. Reader feedback on these subjects would be welcome; and although the fund remains modest in size by all normal commercial standards, redemption requests may be sympathetically entertained.

Claire Barnes, 4 October 2005

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