Carrying on in dangerous times
Apollo Asia Fund: the manager's report for 1Q22

NAV of the Apollo Asia Fund fell 7.6% in the first quarter, to US$2,592.69 (Series A). That's up 6.3% year-on-year, and 61% over the two years since March 2020 when markets were beginning to rally after the initial pandemic slump. It's up 23% since the end of 2019, before most of us heard of the virus which has since upturned our lives.

Performance suffered from an unforced error by your fund manager, an ill-timed purchase of Russian equities to diversify our energy exposure. (We have long considered energy on a global basis, as Asia is a major importer; of course Russia is also an Asian power.) An invasion of Ukraine seemed implausible, because it seemed so disadvantageous for Russia, and yet the unthinkable happened. The shares were cheap when we bought them, and extraordinarily cheap when we took thumping losses to sell out. Rightly or wrongly, we exited in the days immediately after the invasion - recognising that there were forces at play far beyond our comprehension, that a prolonged cold war could result in considerable administrative complications, and that all the corporate governance improvements of recent decades could be reversed over time, taking us back to the bad old days of erasable share registers and confiscation risk. We may have handed a huge windfall to local buyers, but all of our Russia-related securities were sold by the end of February.

Our small position in Sri Lanka was an almost-immediate casualty of the conflict in Europe. The economy was in dire straits beforehand but the disappearance of Russian and Ukrainian tourists and tea-buyers was the final straw that caused the currency to fall 36% in a month. The local price of our shares fell by a similar amount, so the US$ value of the holding fell by 66% during the quarter (62% in March). Our company has survived many crises in its long history. Although the political and economic prospects now seem bleak, we can imagine a brighter future and intend to hold. Sri Lanka now accounts for less than 0.5% of the portfolio.

Other, larger, ongoing holdings provided less drama, with reported financial results so far generally positive - one blessing in a quarter which had quite enough background shocks. The upward march of portfolio EPS and NBV, shown in the previous quarter's report, has so far continued.

There may be greater challenges around the world in the months ahead, given much higher prices for energy and other commodities; further supply chain disruption caused by war, sanctions and pandemic (especially as high case-rates hit China); and labour shortages and the return of wage price inflation. Decades of globalisation efficiencies and peace dividends have been thrown into reverse. Rapid and inadequately considered decisions for extreme action in a time of high emotion may have unintended economic costs and political consequences, compounding the disruption from an ongoing pandemic. The whole city of Shanghai is in lockdown as I write, requiring food deliveries to 26 million people. Meanwhile the first quarter saw astonishingly high temperatures at both poles, and a whole ice shelf in Antarctica disintegrated. Despite these I find it disconcerting that the response to our growing environmental problems is so focussed on climate change, implicitly a matter for government action and almost-inevitable frustration. Biodiversity is vital too (extinctions continue apace), and bioabundance equally important (natural ecosystems, not just landscapes of concrete and glass). The forests of Asia and oceans of the world are exhibits for the terrifying arithmetic of the Hemingway decline - but biodiversity and bioabundance are matters on which we can take individual and local action for improvement. Let's do it.

Along with individual steps, let's start bioabundance and biodiversity conversations with companies, and with other local players.

All investors of a certain age have experience with financial crises. Many of us have lived through meltdowns in individual countries, or in regions (Asia...), but few of us have dealt with real-world crises of the current variety and global scale, since a person aged 18 in 1945 would be 95 today. Change always brings opportunities, which I'll leave others to highlight; it also brings unfamiliar risks. Financial assets may be suddenly repriced, but with inflation on the rise it would be unwise to regard cash as a safe haven for the long term. Shared prosperity requires many varied efforts to provide useful goods and services on an ongoing basis. Investing in a diversified portfolio of businesses that provide such goods and services still seems a good option, and careful selection likely to improve the odds. We'll try.

Claire Barnes, 6 April 2022