Apollo Investment Management

Falling prices, long-term value
Apollo Asia Fund: the manager's report for 1Q2009

The Apollo Asia Fund's NAV fell 6.3% in the first quarter, to US$577.39: down 32% year-on-year, and 36% from the peak of May 2008.

  MSEUCFFX chart

March saw a fast and furious rally in Asian & global indices: the rise in our shares has been much more subdued. Globally, I see this as a rally in an ongoing bear market, with the economic crisis having many further stages to run. Asian equities seem attractive, for the long run. I would not be surprised to see the bear regain global dominance and take Asian shares with it, but have never claimed any ability in market timing, and am comfortable having the fund almost fully invested. The accompanying 2-year chart of the Asia-ex-Japan index puts the rally in context (calls of 'a new bull market' may be over-excited), and shows that the regional markets overall marked time during the four months of most appalling news flow, rather than hitting new lows like the US, UK, Europe and Japan. Although the region's export dependence has made it highly vulnerable in the short term, with double digit falls in GDP forecast for some countries and regions, its relative structural flexibility and fiscal / banking strength should make it a safer long-term haven.

Politics is the most obvious wildcard which could upset this prediction. Much of Asia currently looks politically complex, but we see no clear trends to cause a change to our asset allocation. The profligacy of western politicians seems to present more immediate dangers. From this distance, the tensions of monetary without political union in Europe look tricky.

During the first quarter, we bought three new names (which totalled 12% of NAV by end-March), and added to five existing positions. We sold one position entirely, and reduced our stake in the troubled Chinese manufacturer. The latter represented only 0.2% of NAV at the quarter- end, due to sales and price decline: we chose to hold the balance at present prices, since its debt is being restructured, and market cap is 6% of book and a quarter of peak earnings and cashflow. The stake we eliminated was Singapore Post, bought in June 07 as a steady cashflow and yield stock: it did not prove as defensive as hoped, although the price declined by less than many others. We had been reducing the stake gradually since a few months after purchase, as and when we had more attractive ideas to buy, but the catalyst for the final sale was the new prospect of a declining population, accompanied by faster-than-forecast declines in usage of snail-mail services in other markets.

We have long-term growth expectations for all other companies in the fund. We seek companies of Buffett-style quality with good growth prospects at a reasonable price: we now have an abundance of plausible candidates from which to choose, and ideas to pursue.

We have as yet made no changes based on relative value. Our holdings on the highest recurrent PEs are modern retail and consumer-staple-brand companies, with stable cashflows and relatively predictable growth prospects based on demographics and purchasing trends: even at peak prices, earnings yields remained justifiable with a fair margin over deposit and bond yields, and that margin is now much wider. Our recent purchases have however been riskier and cheaper. The question is whether we should reposition more actively. Investor views on how to prioritise the merits of current opportunities remain welcome: meanwhile, any change is likely to be gradual.

Geographical breakdown
by listing; 31 Mar 09
% of assets
Hong Kong
Other equities
Net cash & receivables

At the end of March, the portfolio was on a historic PE of 7.8, with a current- year dividend yield estimated at 5% after local taxes. Price to book (with IFRS caveats) is 1.07. Over the last twelve months, the portfolio's historic EPS (which incorporates changes to the portfolio, and not just the performance of the present holdings) rose 16%, and its book value by 39%: reflecting current uncertainties and reduced payouts, the estimate for current EPS has remained flat, and for current DPS has fallen 13%.

While we have by no means emerged from the economic storm, these numbers suggest that the portfolio has suffered no loss of intrinsic value over the last twelve months, and that the decline in NAV can be attributed entirely to derating. (Subjectively, I believe the intrinsic value has increased, if our assessment of recent purchases is not too wide of the mark.)

In the 4Q report I omitted to give the figure for portfolio turnover in 2008, which was 28%: the annualised figure for 1Q09 has been a little higher.

Imminent rights issues and expected placings will absorb most of the end-March cash balance, so the Fund remains open to limited new investment. The patience of existing investors with disappointing short-term price performance has been much appreciated: thank you.

Claire Barnes, 7 Apr 2009

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