Apollo Investment Management

World in flux
Apollo Asia Fund: the manager's report for 1Q2014

The Apollo Asia Fund's NAV rose 0.5% in the first quarter, to a fractional new high of US$2,013.48. During the quarter we sold out of two holdings, reduced six, and increased three. Of the eight companies we sold, three were because of deteriorating business conditions, three on valuation grounds, and two due to management decisions that dented our confidence. Bearing in mind that we try to invest only in good businesses, with management teams whom we trust, it seems worth noting that we seem to spend more time than before pondering whether these teams are up to the new challenges, and how boards or management might be strengthened.

Geographical breakdown
by listing; 31Mar14
% of assets
Hong Kong
17 
Japan
15 
Malaysia
10 
Singapore
15 
Thailand
10 
Other
11 
Net cash & receivables
22 
 
100 

It was a bumper quarter internationally for unanticipated disruption: three months ago we would never have expected parts of the UK to be cut off for weeks by floods, Crimea to return so swiftly to Russian control, or Kunming station to be the site of a massacre. To all of these events, government responses seemed inadequate. When events are truly unpredictable, as with the bizarre disappearance of MH370, this may be understandable. More interesting are the cases where underlying problems and tensions have been ignored, with unexpected or disastrous consequences. Some of the old models and narratives of societies are breaking down. Clear analysis would help, but seems often unpalatable: as a result, policies on many issues are unusually incoherent.

"Since all previous sources of growth - cheap labour, growing commodity prices, expansion of consumer credit - have already been exhausted, further growth would require incentives for investment. But that requires protection of property rights and enforcement of contracts - exactly what corruption in government and the judiciary undermines." Sergei Guriev was talking about Russia (FT, 3rd April), but the comment seems relevant to much of Asia.

A letter to the FT from the Global Ocean Commission made me think about the timescales of change: 'Oceans suffer tragedy of the commons'. The authors observed that "the current rate of ocean acidification is at least 10 times faster than anything that has been recorded for the last 65m or even 300m years" - so my impression that the world is changing at an accelerating pace may not just be a reflection of the ageing of the observer! In the early years after establishment of this fund, I was lobbying unsuccessfully for recognition of ocean issues, such as overfishing, on the agenda for socially responsible investment. This was deemed eccentric. In little over a decade, a major crisis has become apparent. Regulation has led to recovery in some areas, but it is hard to see how effective action can be coordinated on a global basis, given the lack of enforcement in Asia. However I shall look forward to reading the Commission's proposals, due soon.

In a fast-changing world, business models have to keep pace. Creative destruction has served society better than 'too-big-to-fail'. Instability may lead to opportunity, and we are certainly on the lookout. A snag is that established business models are often disrupted by upstart innovators, and the latter are not only riskier, but often not open to investment. We'll keep looking.

Claire Barnes, 18 Apr 2014

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