Apollo Investment Management

Impoverishment and annihilation?
Apollo Asia Fund: the manager's report for 1Q18

Apollo Asia Fund's NAV fell 0.6% in the first quarter, reaching a new high in January before subsiding. At the end of March it was US$2,314.16, up 14.0% over twelve months.

Had we written this promptly at the quarter end, our one company-specific note would have been disappointment at the very protracted timetable being allowed/taken for documentation of Fincantieri's offer for its Singapore subsidiary Vard Holdings. The subsequent endgame was unleashed on a tight timetable, and exposed some shortcomings in Singapore's protection of minority investors. We have commented separately on this here.

In a tumultuous quarter for global political news, we suffered mercifully few other shocks from our company holdings. There were some disappointments, inevitably, but outweighed overall by solid results: the historic earnings per share for our current portfolio rose 19% in the year to end-March, and our current-year dividend expectation rose 27%. These high rates follow weaker performance in recent years, and continue to be heavily influenced by exceptional factors. Investors should not extrapolate high growth rates into the future: the opportunity set seems much less promising than it was in the fund's early years.

Geographical breakdown
by listing; 31 Mar 18
% of assets
Hong Kong
23 
India
Indonesia
Japan
10 
Malaysia
Singapore
Thailand
12 
Vietnam
15 
Other
Net cash & receivables
 
100 

For the last few decades, investors in most Asian countries have assumed that economic growth would lead to rising prosperity, an expanding middle class, and exponential growth in consumption. Likely limits to growth, rising environmental and social costs, and the destruction of the commons, were widely dismissed as fringe interests. John Michael Greer memorably argued in January that we're seeing 'the transformation of the US economy into a Potemkin Village capitalism in which government largesse backed by Ponzi financing props up a thin imitation of prosperity over the top of spreading impoverishment'. It nevertheless came as a shock to read recommendations here in Southeast Asia to invest on a theme of impoverishment. The broker recommended 'nano-credit' and debt collectors, and we have not followed these suggestions. However we agree with the analyst that an old paradigm is breaking down; we may all have to reexamine long-held assumptions.

Geopolitical tensions escalated at alarming speed, allowing little time for necesary reflection to avoid or minimise damage to the international order, long taken for granted by international investors. The attitudes of Western governments and mainstream media towards China (and Russia) shifted dramatically in just a few months, and it sometimes seemed that complacency had given way to panic, with little coherence evident in the response. China added a few more Pearls to its String, and Vietnam was forced to cease operations at another of its offshore oil fields, the Red Emperor or Ca Rong Do. The BBC noted at the time that 'Malaysia, Brunei and the Philippines are all coming under pressure from China to concede 'joint development' in areas where the UN Convention on the Law of the Sea (UNCLOS) gives them sole rights. So far all the South East Asian states have resisted the pressure. Vietnam has chosen to try to develop its fields alone and the result has been military threats from China and, now, a second climb-down.' A few weeks later the SCMP proclaimed that the 'emptiness of US rhetoric has been exposed by China bringing Vietnam to heel', and continued, 'Washington failed to back up words with action... China appears to have entirely got away with bullying a littoral South China Sea state from accessing its own hydrocarbon resources. The development underlines the ultimately shallow assurances the United States has been able to provide to regional states.'

The world suddenly started to pay a lot more attention to plastic waste - partly due to an abundance of dismal experiences (or photos) as the rapidly accumulating problem became impossible to ignore, but accelerated by China's decision last year to stop importing plastic waste from 1 January. European governments started to announce new initiatives within days of the ban coming into effect. While solutions are likely to be elusive, mitigation is clearly desirable, and heightened awareness helpful. Chandran Nair optimistically suggested that Alibaba could 'lead the charge against plastics in China'.

Less widely understood, as yet, is another huge threat. I am among those who have been alarmed for decades about bottom trawling, the visible devastation of the affected seabed, and the likely impact on ecosystems and our future food supplies. All of the disconcerting political, military and trade-war news over recent months worried me less than this article about annihilation trawling. Please read.

Freedom of expression is increasingly threatened in many Asian countries, including Malaysia. So many people are now deterred from writing that people may be making more effort to meet friends in person: some have noted an upturn in business for the coffee shops. If every cloud has a silver lining, we will continue to hunt for the investable ones.

Claire Barnes, 20 April 2018


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