A less predictable world
Apollo Asia Fund: the manager's report for 1Q17

Apollo Asia Fund's NAV rose by 11.9% in the first quarter, to US$2,030.55.

More regional companies suffered from capricious action by governments. Fortunately this quarter none of our holdings were affected, but my impression is that these incidents are becoming more frequent. To select two examples:

India is in the headlines again with its ban on alcohol near highways - unfortunate for many who have sunk millions into restaurants, bars and hotels; readers may wish to note that five-star establishments are affected too. Tens or hundreds of thousands of businesses are now in crisis mode, but regional authorities are responding in various ways to the different lobbies, and I imagine that the scope may be reconsidered.

Mining companies often tempt predators, once the work and the capex of setup are done and the cashflows turn positive. Mining activities open to foreign investors are generally capital intensive, and therefore need some assurance that the terms negotiated will remain in place over the contract period. The Australian company Kingsgate has always claimed that its Chatree gold mine in Thailand was run according to international best practice, but has battled for years to defend it. The mine was prematurely closed at the end of 2016, supposedly on environmental concerns: the company claims that these were based on unsupported allegations and contravened extensive evidence already known to the government. All investors in Thailand should consider the chairman's statement in Kingsgate's 2016 annual report. At the time of publication, in October, while talking of 'questions that are likely to haunt the Thai economy for a long time to come', the company appealed for shareholder patience as 'legal, financial, operating and diplomatic matters relating to Thailand remain uncertain and highly sensitive'; it now reports numerous unanswered requests for meetings and is resorting to the expensive and time-consuming route of testing TAFTA, the Australia-Thai Free Trade Agreement of 2005. The share price suggests limited hopes of satisfaction.

It has been startling to see the US moving away from the rule-based order in which it invested so heavily over the last seventy years, at a time when its economic influence may already be dwindling. If the US obeys international law only when it suits, other governments need not reach far for justifications when they choose to do likewise; and if the professional classes in these countries become too cynical about the perceived hypocrisy of the rule-setters, expectations and behaviour may be adjusted accordingly.

The rule of law, the enforcement of contracts, predictable mechanisms for dispute resolution, logic-based regulation and the ideal of a level playing field are often taken for granted; if any or all are de-emphasized, the risks to individual businesses will rise, and I see no benefit to compensate for this higher risk in the expected returns to investors.

We were pleased, therefore, to hear that the State Securities Commission of Vietnam was seeking feedback on how to improve its markets and regulations, and on investors' wishlists. While there always seems much still to do, we remain impressed by the benefits of incrementalism, and the great strides taken by Vietnam in recent decades, as discussed in the 3Q report. Our suggestions, based on the experience of Apollo Asia Fund and Panah Fund to date, may give a flavour of the ongoing challenges of emerging market investment. Capital raising and efficient allocation remain important to Vietnam so the SSC's interest in improvement is both logical and encouraging.

A visit to some of the new Vietnamese assets encouraged us to top up our holding in Siam City Cement, which in recent months has bought the businesses of Holcim in Vietnam and Sri Lanka, and of Cemex in Bangladesh; it already had a greenfield joint venture in Cambodia. While the Thai market is mature and oversupplied, SCCC is now strongly placed in importing countries with major growth potential. Going so rapidly from one country to five will be challenging, but the management team is enthusiastic about the task. We believe that the company was right to seize these opportunities, and that this bold strategic move offers great promise for the years ahead.

Now to find more good investments...

Claire Barnes, 9 Apr 2017