Apollo Asia Fund

The next three decades may be different
Apollo Asia Fund: the manager's report for 4Q2013

The Apollo Asia Fund's NAV rose 5.6% in the fourth quarter, to a fractional new high of US$2,003.60. Over the year it was up by 11%. Portfolio turnover in 2013 was 25%.

Geographical breakdown
by listing; 31Dec13
% of assets
Hong Kong
Net cash & receivables

A recent FT article by Gillian Tett contained the curious comment that "Most of the time, investors do not ponder the nature of conventional wisdom, or their unstated assumptions; after all, nobody wants to admit they are a creature of their cognitive environment." As recommended there, it seems useful to do all three.

Investors will be familiar with the adage that the most dangerous phrase in investing is that "this time is different". When it comes to excitement over new technologies, fads, and bubbles, the sceptics are generally (in the end) proved correct. Yet today it seems appropriate to examine several potential cracks in the foundations of conventional thinking on economics and investment. I have been fortunate enough to spend my working life in Asia during a period of peace, prosperity, and globalisation, and to have witnessed tremendous growth, with a few major bear markets along the way. I am accustomed to cycles, but currently more interested in secular trends. It seems to me that the next three decades may be very different from the last three, and from the last century or so on which most investment thinking is based. A number of my assumptions have changed significantly in the last five years, with more focus on the following:


Resource limits, more broadly

Environmental damage


Psychology and denial


Economies and sectors



Given the above, rational investment allocation seems more challenging than in the past. Change always presents new opportunities, but they may arise in new sectors, rather than those in which our skills have been honed. Caution as to future growth leads us to see fewer opportunities among the 'inevitables', riding predictable trends of demographics and income growth: some are priced for rates of growth that may become hard to deliver.

Valuations of Apollo Asia Fund's holdings are as high as they have ever been. Fifteen years ago, in December 1998, the current-year earnings yield of the portfolio was estimated at 16%, and the net dividend yield at 6%. Five years ago, in December 2008, the figures were 13% and 5% respectively. Both were years of crisis, which presented opportunities, and set us up for good gains. Now the earnings yield is 6% and the dividend yield 3%: still worth playing, but promising less. On a range of valuation parameters, our portfolio is now 25-30% more expensive than averaged over the last ten years. Cheaper stocks can be found, but they are often cheap for good reason. Many small companies have attracted new attention, as often happens when bull markets mature, and we treat lobster pots with caution.

All this should demonstrate that past performance is no guide to the future. Given the higher starting valuations, return expectations from here should be appropriately subdued. With business risks higher, rational investment allocation currently seems difficult. In a changing world, fresh thinking and skills may be required. Investors may wish to seek fund managers better equipped for the future: redemption requests remain welcome.

Charles Hugh Smith has provided a timely reminder that wealth is not just financial. Those of us with access to libraries and gardens should, like Cicero, count our blessings. He goes further: "What if our commoditized, financialized definition of wealth reflects a staggering poverty of culture, spirit, wisdom, practicality and common sense? What if we defined wealth more by what cannot be bought...?"

May we all enjoy our libraries and gardens12, appreciate our privileged view of unfolding developments, and return refreshed to the world we are making.

Claire Barnes, 10 Jan 2014

  1. Russia and China seem clearer than others. Norway at least made a long-term plan for sensible investment of its windfall proceeds, thanks to an Iraqi, Farouk al-Kasim.
  2. 'The future of oil supply', Richard G. Miller and Steven R. Sorrell, Philosophical Transactions of the Royal Society, Dec 2013.
  3. I ran simple models of GDP implications after reading David Clarke's 'The networking of resource production: do the networks give us warnings when they are about to fail?', Sep 2010, and produced some disconcerting charts. Related articles are 'The failure of networked systems', Jan 2008 (revisited Aug 2010), 'Networked resources, declining quality, and the peak oil argument', Jan 2011, and 'Declining resource quality and the consequences for Australia', Apr 2011.
  4. http://mondediplo.com/2013/12/04philippines
  5. Yang Yongliang exaggerates... slightly.
  6. See for example Herman Daly's 'Wealth, Illth, and Net Welfare'.
  7. Could UK living standards have peaked in the 1980s?
  8. ...and keep an eye on ideas from the European movement for degrowth.
  9. Joseph Tainter's work suggests that once complexity is too great to allow reform, the only eventual way out is the collapse of sections: 'The Collapse of Complex Societies', 1990.
  10. See David Clarke's papers, note 3.
  11. Let's hope this does not become popular in Asia, and that countries continue to compete for investment with predictable tax systems and affordable rates.
  12. Recommended for any good library: Cicero, Voltaire, and Lin Yutang's 'The importance of living'.

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