Apollo Investment Management

Snakes & ladders
Apollo Asia Fund: the manager's report for 3Q2006

The Apollo Asia Fund's NAV rose an unexciting 1.5% in the third quarter, closing at US$678.42 - 4% below April's closing high, but up by 18% year-to-date and 24% over the last twelve months.

The flat overall performance conceals significantly divergent price movements among individual holdings. We commented in the 2Q report on a "lamentable lack of price destruction in the companies with which we are most comfortable", and should clearly be more careful what we wish for! Such price destruction promptly ensued for two of our holdings, as reported on 4 Sep, but following news which left us as well as other investors less comfortable - and to an extent which, while less at this stage than the price erosion, was significant enough to keep us from committing new money to the shares. A third holding has recently joined the slide, on sector trends rather than hard company news but again we suspect that the market may be right. Many Asian businesses are suffering from high cost inflation (wages, energy, raw materials, rents...), overinvestment, and a lack of pricing power. Perhaps recent commodity prices will eventually result in some positive earnings shocks, but in many cases the past increases are still feeding through, and we find it hard to believe that the extraordinary boom in US consumption can continue much longer. Despite this wariness on the difficulty of current trading conditions, we continue to encounter promising businesses with enthusiastic managers who appear to be up to the challenges: idea-flow remains healthy, and we have a satisfactory backlog of potential new investments under review.

Geographical breakdown
  as at 30 Sep 06
% of assets
Hong Kong-listed equities
Indonesian equities
Malaysian equities
Philippine equities
Singapore equities
Thai equities
Other equities
Net cash & receivables

Politics for once has brought some cheer: we considered Thaksin one of the greatest long-term threats to his country, and are delighted to see him gone - but Asian investors, unlike western pundits, thought likewise, and our Thai holdings barely budged in price.

While very comfortable with our Thai holdings, it is anomalous that the Hong Kong weighting is currently only slightly larger. This is partly due to the three price slides, all from HK-listed companies; however the HK-listed universe remains one of our favourite hunting grounds, and it is likely to remain our most significant market.

We were recently asked about portfolio concentration, which we favour in principle but there are practical constraints. The fund currently has 23 holdings, including some legacy positions which are smallish in percentage terms but not liquid enough to boost significantly; all these remain reasonably priced, and we have no holdings which we would prefer not to own at their current levels. Our top five holdings account for 40% of the securities by value; the top twelve for 79%.

Claire Barnes, 6 October 2006

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