Apollo Investment Management

Calm before the storm?
Apollo Asia Fund: the manager's report for 2Q2005

The Apollo Asia Fund's NAV rose 0.2% in the second quarter, closing at US$533.73. (Performance charts.) A rebound in the US$ provided slight headwinds: a little less than half of our holdings are in the linked HK$ and ringgit, and the other relevant currencies fell by 2-5%. We currently do not hedge, holding equities in their currency of denomination and cash balances in a mix of the same currencies. We think the US$'s future is as confetti, that its recent rise is a bear market rally, and that the currencies of Asian countries which supply an increasing share of the world's goods and services, as well as most of its savings, are in the long run a safer bet. (In the long run of course we are all dead, but we rarely have confidence in short-term currency forecasting.) We'd expect all fiat currencies to decline in relation to gold, and are unsure which will win the race to the bottom, but that is another subject: all but the most hardened speculators need portfolio balance. Despite our perception of high risk in global financial markets, investing in well-run Asian businesses still seems as sensible an idea as most.

Geographical breakdown
  as at 30 Jun 2005
% of assets
Hong Kong-listed equities
Indonesian equities
Malaysian equities
Singapore equities
Thai equities
Other equities
Net cash & receivables

Activity in the second quarter was low. Three names were removed from the portfolio. All had given us satisfactory returns, but rose to prices which no longer seemed justified. We added slightly to other positions, but were often frustrated by liquidity; overall therefore we were net sellers, for bottom-up and frictional reasons, and cash has risen to 19%. We have for most of the period had promising ideas under investigation, but are not unhappy sitting on cash, even at minimal interest rates, while building the requisite level of comfort. (This is not always forthcoming, and sometimes when it is we're too slow. Competition in the small-cap arena has increased noticeably in recent years. With luck it may diminish again: interest is often cyclical, and the pitfalls of lobster pots become apparent during downturns.) Meanwhile, we accepted no new investment commitments during the quarter, and remain unsure whether or when this will change.

Portfolio valuation parameters changed very little. Research ideas and feedback from our well-informed investors remain most welcome.

Claire Barnes, 5 July 2005

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