Apollo Investment Management

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Apollo Asia Fund: the manager's report for 3Q18

Apollo Asia Fund's NAV rose 2.2% in the third quarter, to US$2,269.29. At the end of September, it was 3.7% below the high set in January, and a scant 1.6% up year-on-year. (Please don't get too excited: our 3Q and y-o-y gains were surrendered in the first weeks of October.)

Vard proceeded to a delisting which it continued to describe as 'voluntary' even though the only investor that volunteered for it was its controlling shareholder, Fincantieri. It could have persuaded minority investors to sell to it at a fair price, but instead chose to bludgeon them with all the aggression allowed by the Singapore regulators, in the hope of squeezing out other shareholders at an unfairly low level. Despite repeated extensions, which capped the price and precluded cyclical upswing for two depressing years, it did not succeed in obtaining enough acceptances to proceed to compulsory acquisition. We salute the minority investors who will hold shares in the delisted company and fight on; we hope that they eventually achieve a better deal. Many more investors were reluctant or unable to hold shares in unlisted entities, and were therefore forced to sell at a price which even the IFA deemed unfair, less than one-seventh the previous high. (AAF exited too: we normally own listed shares, and prefer to invest in businesses where we are treated as long-term partners.) The number of such squeeze-out delistings is a disgrace to Singapore, and each one results in the disillusionment of a new cohort of shareholders. Unless and until the rules are amended, long-term investment in any cyclical company listed in Singapore is unnecessarily risky. Given the shortfall in regulatory protection, investors would need to be that much more confident in the intentions of the controlling shareholders.

Geographical breakdown
by listing; 30 Sep 18
% of assets
Hong Kong
22 
India
Indonesia
Japan
Malaysia
Singapore
Thailand
13 
Vietnam
18 
Other
10 
Net cash & receivables
15 
 
100 

Fortunately, after our disappointment in the dismal behaviour of Fincantieri (controlled by the Italian government) and of Vard's directors, our confidence in human nature was restored by the board of the smaller Techcomp Holdings. Techcomp too had experienced several tough years, and its founder decided to take the core business private. He and the other directors of Techcomp considered the interests of all parties: the resultant two-way multi-stage deal was complex, but proceeded with general consent. It took a long time, but this was due to necessary structuring and approvals rather than controlling-shareholder malevolence. (The one aspect unnecessary was the final multi-week delay in payment while Hong Kong dollar paper cheques went into the mail and clearing systems around the world: this would not have benefitted the buyers, who had put funds in escrow, so we assume it a wheeze perpetrated by the payment agents: the principals in future deals may wish to check this detail.) We were sorry to part company with Techcomp's UK subsidiary Edinburgh Instruments, whose technologies still seem very promising - but were happy with the overall deal, thank the board for their perseverance, and wish the Techcomp team well.


In a quarter globally and regionally characterised by intensifying trade war and rising political tensions, Malaysia remained in an unusual state of hope, five months after the peaceful democratic transition. While some financial scandals were known, the incoming government expressed shock at new discoveries (for example, the disappearance of trust funds set aside for GST and income tax refunds), at the size of off-balance-sheet and imprudent contingent liabilities, and at the very poor structuring and extravagant specifications as well as the high cost of many large contracts. It has cancelled some projects, postponed others for reevaluation, and proudly announced remarkable budget reductions for public transport works which continue. Residents are optimistic that a new attention to detail and the reduction of fat commissions may result in better design as well as much lower costs.

The government abolished GST, in fulfilment of an election pledge, and replaced it with a sales and service tax generating about half the revenue. Some of us aware of GST's theoretical advantages wish that it had instead reduced the rate to zero while sorting out the botched implementation that had caused so much resentment, but a government move to reduce burdens on the public was a welcome contrast to the perceived oppression of the recent past. The determination to respect a manifesto promise commanded open contempt from one veteran minister of the old regime who explained repeatedly that manifesto promises are made to be broken, but contributed to a new optimism among many voters. Ministers are warning of new taxes to be announced in the budget in early November, but more prudent spending should cut recurrent as well as capital costs. The government has an oversized equity portfolio which it is willing to sell down, and a well-managed privatisation process could do wonders for national efficiency while boosting a lacklustre market and starting to repair the national balance sheet.

Malaysia is interesting now, because the new government is disowning some mistakes of the past. From the PM down, ministers note that GDP growth has been achieved, but has failed to deliver prosperity. The new administration promises to seek benefits for the people, with more attention to education, welfare, and the environment. It is inviting fresh ideas, to set new aspirations, new policies, a new direction. It is keen to boost collaboration within ASEAN, and a major rethink in Malaysia could be of widespread relevance.

The challenge will be to translate these good intentions into effective policy - especially as regards the environment, which is the most urgent issue, the most complex, and the least well understood.¹ When Khazanah invited Professor Joseph Stiglitz to address its useful brainstorming conference on 'Striving for Balance', he devoted much of his time to the existential risk of collapse, noting that we are living well beyond planetary boundaries; if we continue to poison our air and water, and to deplete our aquifers and topsoil, we will not have to worry about mere financial statistics. These are global challenges, but the pace of landscape remodelling and of insouciant extinction in South East Asia is phenomenal, and the destructive nature of much of the economic activity is so great that it would be an excellent first step to stop digging.²

While few governments have a complete energy or environmental policy, some have useful experience in individual modules.³ In the UK, frustrated citizens have drafted A People's Manifesto for Wildlife, with recommendations for action. The global concern about plastic waste, crystallised by China's ban on imports, and the resultant dumping, has forged a consensus that there are indeed some industries that Malaysia does not wish to encourage (this may be new), and on the need for regulatory attention. Total solutions may be elusive, but an interest in the issues and in global best practice should help with mitigation - and with decisions on how best to tax illth, and encourage the creation of genuine wealth. The move to accrual accounting in public finance could usefully be accompanied by an attempt to measure natural capital, price the use of scarce resources (water, topsoil), and move towards an economy based on natural income.4

The environment is sometimes discussed as if it were an afterthought to serious matters of economics and business, something that may be valued by children and tourists, and for photo-opportunities with visiting heads of government. We not only confuse but invert the importance of reality and model, forgetting the essentials on which all life is based. Even within the environmental field, celebrities command most attention. The beleaguered Malaysian tiger is an important symbol of the nation, and is now commanding renewed support - metaphorically from Tun Mahathir, who wants to rebuild the country's reputation as an Asian Tiger, and practically from the state of Terengganu which has established a new reserve. Less charismatic creatures receive less attention, and we may not have the baseline statistics to warn of their decline (or existence), so urgently need to raise awareness of the interconnectedness of ecosystems, and not just where eco-services can be quantified. As noted last year in the context of Myanmar, the consideration of environmental impact is not just about saving the tiger, 'it's about saving farmers' lives and the lives of their children'. And yes, I do also believe that it's of practical importance to investors.


Three books were published on Malaysia's biggest recent corporate scandal. I recommend Clare Rewcastle Brown's, 'The Sarawak Report: The Inside Story of the 1MDB Expose'. It's an excellent read for those of us who followed closely as events unfolded, and checked regularly on Clare's indispensable Sarawak Report website, as well as for those newly curious about the whole story. The cover describes it as 'the story of the have-nots and the have-yachts, of the failings of globalisation, and how a tiny rainforest campaign derailed the world's largest theft and brought down a government'. Many people within Malaysia contributed to this derailing, some at great personal risk, and it was extraordinarily lucky that an investigator of such determination had the local interest and standing to help from an overseas base with greater legal protections - but Mrs Rewcastle Brown deserves the adulation she receives in Malaysia, where she is once again a welcome visitor. That one private person can make such an extraordinary difference is an inspiring tale for our times - and especially for researchers, an example of the insights sometimes achieved by tugging diligently at small anomalies.

Stockpickers are never short of anomalies to investigate - and are in the happy position that we may be able to double our productivity without increasing our ecological footprint. Worth a try!

Claire Barnes, 23 Oct 2018


  1. A global challenge, as we all spend too much time surrounded by concrete and looking at screens, but we need to encourage the understanding of ecosystems, and an appreciation of their complexity and interconnections. Flooding may be related to the chopping down of trees, poverty in fishing villages to land reclamation and coastal development, failed durian harvests to the loss of bats, and dengue incidence to the poisoning of frogs.
  2. Literally, as well as metaphorically. I referred in the 2Q report to landslide-risk projects near my house, which have seen hillsides and riverbanks stripped bare. They were then on three sides: now they are on four, and complemented by nearby piling and tunnelling which makes me glad to have practised sleeping through turbulence on planes. The demand for competent repairmen greatly exceeds supply; one of many encouraging appointments was of Nurul Izzah to chair a review of technical and vocational training.
  3. I mention this partly to encourage friendly governments, universities, and individuals to step up interaction. Amidst the swirl of international news, mainstream media coverage of Malaysia post-election has been disappointingly poor, but during this transition period there is an opportunity to consider public policy improvements of far-reaching impact.
  4. Natural income meaning sustainable harvests, catches, etc. To value natural capital is not to assign a monetary value to everything, but to agree on appropriate limits, before optimising allocation. If we do not start to measure environmental costs, decisionmakers may be misled by the ongoing use of traditional growth indicators (FDI promised, palm oil exported, concrete poured). Herman Daly has explained the use and abuse of the 'natural capital' concept.

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