The Apollo Asia Fund's NAV rose 8.4% in the second quarter, to US$1,325.52: over the last twelve months it was up 34.5%. charts.
| Geographical
breakdown by listing; 30 Jun 11 |
% of
assets |
| Hong Kong | 13 |
| Japan | 12 |
| Malaysia | 14 |
| Singapore | 34 |
| Thailand | 22 |
| Net cash & receivables | 6 |
| Rounding adjustment | -1 |
100 |
During the quarter we added one new holding and exited one; we increased our stake in three companies and reduced it in four. So far, so symmetrical. As in Q1, we were inclined to sell into exuberance in South-East Asia, and to add in Japan - but we act only on a company-specific basis, and we were in practice buying in South-East Asia too.
At the end of June, our portfolio was on an estimated current-year PE of 13.7, with a dividend yield of 2.9% after Asian taxes: unexciting by historical standards, but still justifiable compared to the low interest rates available on deposit.
An excessive proportion of my time over the last seven months was spent on bureaucracy, rather than thinking about investment. With luck I can now get back to my real job. But I think it is important to write about the growing burden of regulation, especially because most of us, most of the time, cannot. Protesting about regulation might suggest that one has something to hide, or runs one's business in a sloppy way; it might attract further time-consuming attention from regulators, or cause clients to wonder whether they should opt for a larger firm. Breezy assurances of effortless compliance are therefore common - even when the reality has been highly disruptive.
I was irritated, nevertheless, to read in the latest bulletin from our lawyers in the British Virgin Islands that the new BVI regulations had met "little resistance" from the industry. Of course most of us say nothing, as we cannot be seen to oppose good governance¹, and would have little expectation of influencing the new regulations, even if we had found out about the proposals in time; we just have to scramble to comply. Even in the event of a long-term exodus, the short-term effect is a gravy train. I have no statistics for the BVI economy but would not be surprised if GDP has been tripled. The new jobs must however be of soul-destroying tedium: GDP is not the same as wellbeing. And I doubt it achieves any improvement in governance.
A senior British civil servant told me a few years ago that the government was not at all concerned about complaints of a growing bureaucratic burden, because people always whinge about bureaucracy and therefore all such complaints were to be ignored. This is alarming. It is true that any increase results in grumbling. When it was required that fund managers based in Malaysia should go on regulator-directed courses for 1% of the working year², it was irritating: we learn nothing relevant, and "continuing professional education" is regularly and ruthlessly dispensed by the markets. We have pointed this out, to no avail. If the requirement increased, we would of course grumble further. But will officials notice the difference as the percentage rises? When bureaucratic paper-shuffling consumes 20% of working time, or much more, in some businesses and some weeks (especially for the many individuals who are not good at it, for whom the logically necessary time may be psychologically compounded), this is a serious distraction from useful efforts. Significant further increase risks a collapse of the enterprise. Anecdotal evidence from UK acquaintances in various professions suggests that this is not entirely hypothetical: many highly qualified people in small businesses are taking or talking of early retirement.
This leads me to propose a corollary to
Parkinson's law:
Bureaucracy expands to fill the time formerly available for useful work
- and a counterpart to Gresham's
law:
Excessive regulation drives out thought.
Of course, not all bureaucracy is inflicted by regulators. Government departments can generate their own, a process wonderfully illustrated by Charles Hugh Smith in this graphic, from a 2010 article entitled 'the lifecycle of bureaucracy'. And very large companies can use the regulatory burden as a barrier to entry, while deploying lobbyists to capture the regulators and shape the results to their ends: behemoths may flourish while small businesses struggle and economic biodiversity dies.
Real ecosystems can suffer too. I heard a fascinating talk recently on the pastoral nomadic lifestyle of Transylvanian shepherds, now seriously endangered by the unintended consequences of minor EU legislation, and how a collapse of this lifestyle would alter the countryside.³
In May, seeking a brief escape from markets and bureaucracy alike, I enjoyed a fascinating tour of Qinghai, the Chinese province which is part of Greater Tibet. I was interested to see how the gathering and trading of cordyceps has exploded in recent years. I first encountered cordyceps, the caterpillar fungus, on another trip to Tibet 10-15 years ago. I was intrigued by its biological lifecycle; Hong Kong Chinese friends were riveted by the revelation that a medicine of such high market value could be picked up from the ground, or bought inexpensively from local traders. Now, thanks to mobile phones, the locals are well aware of its value, and cordyceps has brought a new affluence to those areas blessed with an endowment.4 Cordyceps gathering attracts such a large percentage of the population that the government talks of protecting the grasslands from destruction - and much is being fenced off (so I had questions about possible vested interests in the fencing of land over which nomads formerly roamed, and in the construction of dismal 'social housing' for Tibetans whose former lifestyle may have become impossible). Trading is however quite legal, and there are two major exchanges, in Yushu and Maxinxian. (If you ever go to Maxinxian, and coincide with the cordyceps buyers, book your hotel room well in advance.) Fakes are common. We did not hear of a futures market... My excuse for talking about this is that the progressive consumption and death of the caterpillar provides an excellent metaphor for the hollowing out of prosperity by bureaucracy: what remains still looks like a caterpillar, but is made up entirely of fungus.
The historian Joseph Tainter has observed5 that societies often respond to new problems by increasing complexity - eg by adding new layers of regulation - at increasingly marginal rates of return, until the total system costs exceed the benefits. As decline sets in, the cost of maintaining the system becomes unaffordable.
The danger of diminishing or negative return on complex investments also applies to companies. Systems can be over-integrated, if failure in one component shuts down the whole, or if operating flexibility is lost. Streamlining, offshoring, and outsourcing the workforce may leave noone on site empowered to take decisions, or with overall understanding of the system. Business process restructuring based on an ideal concept which overlooks real-life variations and contingencies may prove catastrophic. A recent trip to the UK provided startling examples.6
As investors, we must try to avoid companies vulnerable to such pitfalls of overambition and poor execution, and to find those which are resilient to fast-changing external conditions. Wish us luck.
Claire Barnes, 22 July 2011
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