Independent thinking in the Co-Prosperity Sphere
Apollo Asia Fund: the manager's report for 1Q19

Apollo Asia Fund's NAV rose 6.2% in the first quarter, to US$2,131.54.

At end-March, the estimated current-year PE was 11.8, with a net dividend yield after Asian taxes of 4.3%, and price-to-book 1.7. These valuations appear reasonable, given our conservative approach to accounting (recurrent earnings, dilution, etc) and a portfolio which we hope will prove over time to be more resilient than average.

Our growth expectations are however more subdued than at any time over my investing career, and certain risks are rising. Here I am thinking not just of price movements in global financial markets - volatility will recur - but of two other risk categories which may deserve greater consideration. The first is the risk to underlying business performance, in a region where multi-decade trends towards peace, prosperity, and collaboration no longer seem certain to continue, and there are new causes of conflict hitherto unimagined¹, as well as destabilised ecosystems. One can have too much of a good thing: the economic growth which lifted hundreds of millions from poverty after Asia's internal and regional wars is now generating a growing ratio of illth to wealth. Disgruntled victims and uneven distribution of costs and benefits will increase the risks of regulatory action and unpredictable changes in policy. The second area where we see heightened risk is to minority investors from the actions of controlling shareholders and governments, as the latter become more capricious (especially towards foreign investors²), and the former perhaps less principled and more opportunistic.

My starting point for thinking about expected return is the dividend yield, plus expected growth (depending on opportunities, and the efficiency of capital allocation), less costs and Net Negative Surprises from risks of all types, including our own unforced errors. Growth opportunities seem less than before: even without taking a view on geopolitics or environmental factors, the 'easy' gains of normalisation may be over. Risks, as discussed, seem higher than hitherto. Expected returns are therefore lower, and much less predictable.

How To Invest in our brave new world is a question explored here before³, with an embarrassing lack of practical suggestions resulting. I was therefore delighted to hear Jed Emerson at the stimulating Shanghai Literary Festival, talking about his new book 'The Purpose of Capital'. He was interviewed by Philip Marcovici, author of 'The Destructive Power of Family Wealth', an invaluable book for anyone thinking of transferring businesses or wealth to the next generation. I asked both gentlemen if they had practical ideas on How To Invest for those of us not in a position to focus on the next Patagonia, See's Candies, or benign Unicorn. No simple solution was offered; rather, the hope that many different approaches, with independent thinking, will help to improve the allocation of capital and to broaden the range of perspectives applied, avoiding the simplistic boxticking of some ESG methodologies. (The challenges seem too complex and too pervasive for any simple rule-setting at scale.) Our current approach of muddling through lacks grandeur, but may perhaps be appropriate. We run a relatively focused portfolio, and try to build our understanding of each business and whenever possible our relationships with decisionmakers, allowing us to discuss critical issues as and when they arise. This approach, while modest in its ambition, may help, if more widely applied, to minimise groupthink on supposed 'solutions' with unintended consequences⁴.

Antonio Foglia has written eloquently on some of the unintended consequences of FATCA / CRS regulations. Much more important than the bureaucratic morass on which we have written here before, and the personal and cyber security consequences, are the implications highlighted by Antonio for activists, entrepreneurs and all citizens of countries where the government is not wholly benign. Their personal plight is an immediate concern⁵; we'd also highlight the chilling effect of authoritarian states well beyond their own borders, with their reach enormously extended by IT-enabled surveillance. For example, topics of importance for the understanding of modern China are already treated as off-limits by the majority of those who should be most interested, not just onshore but also internationally. Individuals self-censor for fear of potential complications (to their business, their movements, their computers), just as governments do for fear of trade or other repercussions. This is arguably the mirror image of the torrent of unrestrained commentary now the cause of justifiable concern in the west; some of the world's most important issues may be the subject of discussion so channelled that they fail to come to public attention at all. How to build understanding and maintain dialogue in such circumstances will prove challenging. The first concern should be for open society and human rights, but as investors we wonder also about the implications for innovation and the allocation of capital.

Inspiration and rays of optimism came to Malaysia from Mindanao. The impressive and very independent curator Marian Pastor Roces brought extraordinary stories of the newly opened Bangsamoro Museum, and is optimistic that more than fifty years of war may have been brought to an end by the formation of the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM), a breakthrough which she compares to the end of the Troubles in Ireland and the civil war in Sri Lanka. Let's celebrate this respite, and join in those hopes.

Claire Barnes, 8 Apr 2019