Apollo Investment Management

Ominous tremours
Apollo Asia Fund: the manager's report for 2Q2013

The Apollo Asia Fund's NAV fell 1.2% in the second quarter. After attaining a new high in May, it gave up all the gains in June, to close at US$1,911.46. Over the last twelve months it was up 22.7%.

Despite this quarter's setback, valuations remain as high as at any time since inception: the estimated current-year PE at end-June was 16.9, the dividend yield 2.9% after Asian taxes, and price to book 2.6. Recent NAV appreciation has been only partly from the underlying performance of our companies: it has been enhanced by rerating, and the rerating gain could easily be reversed.

Geographical breakdown
by listing; 28Jun13
% of assets
Hong Kong
14 
Japan
15 
Malaysia
9 
Singapore
24 
Thailand
13 
Other
8 
Net cash & receivables
17 
 
100 

Amid the economic and market turbulence of the quarter, and political turmoil in various other parts of the world, two regional shocks that may have received inadequate media attention are the bizarre responses of the Malaysian government to its disputed election victory, and the virulence of religious violence in Burma. In Malaysia, the willingness to play with racist fire is in screaming dissonance with ongoing official proclamations of 1Malaysia. The maturity of the response by civil society and by most of the opposition has been impressive, but the government's apparently panic-stricken flailings were unnerving.

The emergence of religious violence in Burma caught most western observers by surprise, jarring awkwardly with the euphoria on new freedoms and market opening. At the Irrawaddy Literary Festival in February, Timothy Garton Ash was so flummoxed by a question on the rise of Buddhist fundamentalism that he interpreted it as relating to Islamic fundamentalism. The questioner was from Sri Lanka, and perhaps unusually well prepared to pick up the early warning signs. Few outsiders seem to have been prepared for the vicious religious violence which ensued in the Burmese heartland over the next few months. Violence has no place in the principles of the Buddha. We are grateful to writers who have explained how the perversion of militant Buddhism has been able to arise in Sri Lanka, and are attempting to analyse the outbreaks in Burma.

A further danger is that violence against Muslims in Burma may spill over into the domestic politics of Indonesia (where the Burmese embassy in Jakarta was attacked) and Malaysia (where many migrants were detained) - especially when politicians are casting around for populist issues.¹

Indonesia has an election coming up next year. An interesting recent lecture by Prof Donald Weatherbee at ISEAS discussed Indonesia as the "crumbling cornerstone" of ASEAN. Indonesia was vital to the formation of ASEAN - but Indonesian politicians are now focussed on domestic issues, and may have neither the interest nor the stature to provide ongoing leadership to the regional grouping, while few other member states have the credentials to do so. Does ASEAN matter? It is only very recently that ASEAN has become a market byword for opportunity. (Thai companies, taking a lead from their government and media, are at present particularly enthusiastic about the opportunities for regional integration and the advantages of their location.) On certain aspects of foreign policy, it would be helpful if ASEAN could work as a group. The observations about the limited horizons of Indonesia's leaders may be reassuring in some respects, but the concerns seem noteworthy.

Market volatility continues to throw up new investment ideas for examination. The overwhelming majority remain in our backlog pile. The resolution to mine this more efficiently is a constant, but the efficiency gains are regularly elusive! Of the ideas we investigate, most are opportunities that we decide to pass. A few have recently made the cut, but are too illiquid to make much of a difference. In the main, we have been adding to existing holdings, while trimming others on risk concerns related mostly to the ability of managements and boards to deal with changing circumstances.

A recent trip to Japan provided more insights into failures of execution overseas than of new ideas for possible purchase, but at least there were both. We are much less confident about that market since the onset of Abenomics: spectacular share-price gains in yen terms have been mostly offset by currency depreciation while eliminating many value propositions. Unfortunately, we held few of the greatest beneficiaries of the currency reversal. The three stakes that we have held from November to June were up 9% over that period in US$ terms; 10-11% including dividends. Other Asian markets have seen an explosion of the analytical talent devoted to them, making them distressingly more efficient.² Japan by contrast remains underanalysed, and therefore a promising hunting ground, although one strewn with value traps.

However great the backlog, we are grateful for all the good ideas for investigation from our investors and other readers. If I have neglected to reply to any such, my apologies, the volume of mail is sometimes overwhelming - but please keep the good ideas coming.


Claire Barnes, 7 July 2013

  1. There may be a more direct impact in Bangladesh, an immediate neighbour, but we have even less insight there, and it would have less impact on foreign investors.
  2. Characterising efficiency as distressing is from our perspective as investors, when it affects the valuation of the companies that we would like to buy: it should be a positive at the macroeconomic level if it improves national capital allocation, but it remains to be seen whether the effect stretches that far.
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