Flexible investments
Apollo Asia Fund: the manager's report for 4Q18

Apollo Asia Fund's NAV fell 11.6% in the fourth quarter, to US$2,006.57. This was the largest quarterly decline since 4Q08. That year we saw six successive monthly declines with a 38% drawdown, and in 1998 we saw five successive down-months totalling 50%. Current market conditions have been mild by comparison, and the coincidence of tenth and twentieth anniversaries may well have affected psychology - but there is plenty to worry about, and 2019 may well prove more interesting. In 2018 the net asset value fell 13.8%; portfolio turnover was 15%.

Following the share price declines, portfolio valuation appears to have improved. At end-Dec, the estimated current-year PE was 11.7, and by this we mean the next set of full-year results to be reported, which for many companies will be for calendar 2018. The net dividend yield after Asian taxes was 4.9%, with price-to-book (historic book) of 1.7. These numbers are better than for some years: but for a couple of quarters during the Global Financial Crisis, we would have to go back to 2006 to find a lower current-year PE. Given the magnitude of trade shocks and macro volatility, and more frequent surprises at the corporate level, we are more worried about existential risks than about fine-tuning our forecasts, and may not have been adjusting them fast enough - but are nevertheless happy to see renewed growth in our calculations of portfolio earnings, dividends, and net assets per share. This trend has been been helped by purchase of relatively lowly-rated companies in Vietnam, now representing 24% of our equity holdings but contributing (we hope) 37% of current-year earnings.

However, after many decades of global expansion made possible by global cooperation, convergence, and collaboration, plus a peace dividend, and a ten year sugar-boost from unprecedented monetary policies, it seems unlikely that the bull market which these enabled will end with a mild correction. It seems more likely, intuitively, that the accumulated excesses which were too scary to permit normal clearing ten years ago will have been compounded, generating further unintended consequences, and that relatively mild setbacks will eventually cause small explosions - sometimes leading to large ones - and usually not where we expect. It seems prudent to focus on resilience first (management calibre and integrity being key factors in company resilience), and value only second.

In a quarter of geopolitical shocks and market turbulence, the family shareholders of Malaysian flexible packaging company Daibochi surprised us by announcing the sale of their 42% stake, at a 20% discount to the market price. As the people who know the company best declared themselves sellers, albeit in a share swap, the price understandably slumped to meet the new yardstick. Minority shareholders will be entitled to the same share swap, with a cash alternative. The buyer, Scientex, a Malaysian company which has long been a supplier of commodity packaging films to Daibochi, immediately declared that it wishes to retain the current employees, management, board, and listing - and arranged a meeting with Daibochi investors to explain the major opportunities which it sees, as a result of the new initiatives by multinationals to address changing consumer and regulatory attitudes to plastics. Scientex has achieved tremendous growth in its own packaging business, and has greater depth of management; while Daibochi had done an excellent job over the years in developing, broadening and deepening customer relationships, and in its strategic expansion into Myanmar, Scientex may be better placed to respond to the new opportunities and challenges. While mergers are often value-destroying, Scientex is pledging appropriate sensitivity and continuity. At present it seems likely that Daibochi may remain listed, with a new shareholder, ERP system, only slightly augmented board, and not too much change in the free float - in which case the strike price for the deal will matter only to those who volunteered for it. This could change with market movements or new developments, so we are monitoring closely, but hope for a good outcome in this specific case.

Market volatility is such that we cannot hope to spot all opportunities. Groupthink abounds; input from the coalface can be invaluable. Ideas from our investors are much appreciated: thank you all.

Claire Barnes, 7 Jan 2019