Apollo Investment Management

The primacy of resilience
Apollo Asia Fund: the manager's report for 4Q2011

The Apollo Asia Fund's NAV rose 3.1% in the fourth quarter, to US$1,277.06: over the last twelve months it was up only 0.5%. Portfolio turnover in 2011 was 18%.

At the end of December, our portfolio was on an estimated current-year PE of 13.2, compared to 11.8 three months earlier. Estimated current portfolio EPS fell almost 8% during the quarter, due mainly to the Thai floods, and to one of our holdings which stepped on a small landmine and will have to write off an investment which it made only a few months ago.

This illustrates one of our fears: the future will be much more accident-prone than the past. The luck which in the past gave us major winners will need to hold in future, just to pick our way unscathed through the minefield.

Geographical breakdown
by listing; 30 Dec 11
% of assets
Hong Kong
Net cash & receivables

Weather-related catastrophes in Asia more than tripled over the 30 years to 2010, and in China more than quadrupled, according to MunichRe, with a striking chart on page 3 of this pdf file. The company previously noted that the number of flood disasters globally more than tripled over the same three decades, and windstorm disasters more than doubled. While noting that the associated losses were exacerbated by rising population, more people moving into exposed areas, and higher property values, the company considers that the rising number of incidents is clearly due to climate change.¹

Quite apart from global warming, we in South-East Asia have seen remarkable changes in rainfall patterns in recent decades, due to over-development (too much concrete, too few remaining trees). The fallout is exacerbated by a lack of environmental understanding (of slope stability, erosion, natural drainage systems and buffers). At the same time, pollution effects are mounting (eg constant haze, and frequent smogs²). The direct economic costs of environmental negligence appear to be rising fast.

Readers may remember the graphic illustrating how the bureaucratic burden frequently expands to take so much of the economic pie that, even when GDP is still growing, real value added or the quality of life may be shrinking. Similar arithmetic models may be applied to falling resource yields (more and more energy and resources go into the process of extraction, leaving a shrinking net surplus); to the pollution and blowback costs of eco-contempt; and to the maintenance costs of over-complex systems. Examples are more and more frequently in evidence.

It seems increasingly desirable to abandon the goal of 'growth' and focus on 'development', even in those societies where growth is still possible. In practice, it also seems very difficult to form any new consensus. The likelihood is that policies and goals will become steadily less coherent, the absurdities and contradictions increasingly evident, and that we will all have to muddle through as best we can. As investors, our task will be to find companies and managers with the resilience to survive, and ideally prosper, in increasingly chaotic conditions.

Masters of strategic adaptability include Asia's mimic octopus and jawfish. See them while you can.

Claire Barnes, 8 January 2012

  1. A recent Chatham House report, 'Preparing for high-impact, low-probability events', argues that the increasing frequency of such events (Katrina, Macondo, Eyjafjallajkull, Tohoku) 'signals the emergence of a new "normal" - the beginning of a crisis trend'; that governments are woefully unprepared, and that too little attention has been paid to resilience.
  2. As in South Asia... and in North Asia...

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