The Apollo Asia Fund's NAV fell 1% in the second quarter, reaching a new high and then giving back all the gains to close at US$668.65. Over the twelve months to end-June, NAV rose by 25%, with roughly half of this from growth in intrinsic value (judged by earnings & dividends per share) and half from multiple expansion. Our ordinary shares at end-June were on an estimated PE of 12 for the current year, with a dividend yield of 3.9% after Asian taxes. We pay attention to quality, and not just to simplistic valuation parameters, so this is respectable, although still 50-100% more expensive than during the years 1998-2003 when we found the best hunting.
For what it is worth (and we suggest that this is not much), we currently expect growth in per-share earnings and dividends to continue at 10-15% for the couple of years ahead. That could easily be derailed by a host of economic perils which are too familiar to need repetition. A reasonable expectation of future returns might therefore be based on that hoped-for growth figure, or on Asian nominal GNP growth which could be of the same magnitude, or more conservatively on the current-year earnings yield which is 8% - less the significant costs of paying your fund manager, the HSBC group, brokerage & other dealing & operating costs. This base return could then be enhanced or eliminated by rerating, by currency movements, and the percentage of good decisions versus howlers made by your fund manager: all such factors may be as likely to reduce your returns as increase them. Past returns are therefore a poor guide to the future, except when the correlation is negative, for which there is often a logical reason. Intrinsic value should be the anchor for decision-making.
as at 30 Jun 2006
% of assets
|Hong Kong-listed equities|
|Net cash & receivables|
Reviewing trading activity, the quarter was one of two halves. During April and early May, most of our transactions were selling; since then most have been buying, although there has been a lamentable lack of panic and price destruction in the companies with which we are most comfortable. It has however been helpful to see a two-way market again, although in small companies this is never continuous, so we have been able to add to some of our existing positions at prices we've thought acceptable. We are also finding more plausible candidates for investment, so from a bottom-up analytical perspective the outlook looks much rosier than three months ago. (Economic armageddon-risks seem about the same; as for global politics, you decide.) We still have 17% cash, for which the prospects of finding a good home therefore seem somewhat brighter, although we see no hurry. To forestall subscription enquiries, we have no present intention to reopen; redemptions remain welcome, and may be logical for investors who wish to take more aggressive action in response to these market conditions.
To summarise the quarter and explain where we may be now, I find it hard to improve on the Grand Old Duke of York: we are neither up nor down. With appropriate caveats on the fog of war, recent accuracy of British locational intelligence, etc. Baffled non-British readers are referred to the Wikipedia entry.
Claire Barnes, 5 July 2006
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