Apollo Investment Management

Limitations in a growing investible universe
Apollo Asia Fund: the manager's report for 1Q2005

The Apollo Asia Fund's NAV rose 6.8% in the first quarter, closing at US$532.62. (Performance charts.)

Geographical breakdown
  as at 31 Mar 2005
% of assets
Hong Kong-listed equities
Indonesian equities
Malaysian equities
Singapore equities
Thai equities
Other equities
Net cash & receivables
Rounding adjustment

In late 2004 and early 2005, we sold our shares in Bumrungrad Hospital, mainly because the Thai government's mishandling of tensions in the south had the potential to affect comfort levels of Bumrungrad's important overseas Muslim clientele and of their Bangkok customers alike. The breadth of the management's overseas expansion plans also makes us slightly nervous. Apart from this sale, we made relatively few changes to the portfolio during the first quarter, but have decided henceforth to publish only the geographical breakdown, and not the list of holdings.

Although we are committed bottom-up investors, and the geographical distribution of assets is always to some extent accidental in that it arises from a small number of decisions on individual companies (rather than top-down market prediction, economics, or the unfortunate industry norm of stockmarket capitalisation-weighting), some anomalies in the geographical spread are worth highlighting. For example, we currently hold nothing in Korea or Taiwan, although good investment options may exist, because I have yet to find companies for which I have developed requisite simultaneous levels of comfort and enthusiasm. (Both are necessary before we take the plunge.) In China we can and do have investments, through companies listed elsewhere, mainly in Hong Kong and Singapore. In India, we would now have some investments if we had FII status or, even better, the restrictions on foreign investors were abolished: the participation note structures I've seen appear more suitable for short-term traders than for dividend-discounting long-term investors. In the long term I will be revisiting, with a desire to participate in major secular trends rather than necessarily in each cycle. For investors who'd like Indian exposure meanwhile, I suggest the India Capital Fund, run by Dr Jon Thorn.

In February and March I revisited the Philippines and Japan, and from both trips left convinced of a strong cyclical upturn, driven by a multitude of individual company decisions made by managers reacting to years of economic depression. However, we currently have no investments in either country. We have a preference for great long-term investments rather than value plays and turnarounds, which restricts the choice in the Philippines. Our problem in Japan is the opposite: the size and complexity of the market. While valuations are no longer far out of line with other major markets, it may not be appropriate for a generalist outsider to attempt stock selection. We may act in future, but in the meantime investors may wish to consider Japan funds run by firms such as Morant Wright in London, or Orbis Investment Management. (If readers have other recommendations for Japan, please let us know.) For much more decisive management and asset allocation in global emerging markets, contact the man who spotted the new opportunities in the Philippines much earlier than most of us living in the region (I am embarrassed to admit that I should have acted a year ago on his advice to investigate): David Halpert of Prince Street Capital Management.

Fortunately that leaves us with core exposure in Greater China and Southeast Asia, a part of the world which still looks a better bet than most others. (Those who have enjoyed the fruits of past forays may be disappointed that we have nothing at present in anywhere as exotic as Kazakhstan or Papua New Guinea.) The current-year PE for our ordinary shares was 10.7 at end-Mar, with a net dividend yield after Asian taxes of 4.2%. As always in this context, by 'current-year' we mean the next full financial year to be reported. 32% of the 'current year earnings' relates to companies with a financial year ended between December & March but yet to be reported. The current-year estimate reflects earnings growth of 16% for companies currently in the portfolio, now operating on a relatively steady-state basis but slowing: we currently expect only 5% for next year. The rise in portfolio EPS over the last twelve months was 30%: higher than the figure for the current holdings, due to portfolio changes, but this will not always be the case, and future expectations should always be based on the underlying performance and rating of a static portfolio.

Claire Barnes, 4 April 2005

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