Apollo Investment Management

Overcomplexity to dysfunctionality
Apollo Asia Fund: the manager's report for 3Q2013

The Apollo Asia Fund's NAV fell 0.8% in the third quarter, to US$1,896.80. Over the last twelve months it was up 9.3%.

Despite a 5% retreat in NAV from the peak in May, the estimated current-year PE of the fund at the end of September was 15.6, still relatively high by the fund's own historical standards. Moreover, some of the high-quality, cash-generative consumer stocks which have stood us in good stead in the past are now priced for ongoing high growth which we doubt they will be able to deliver, and many of the stocks less highly rated are discounted for good reason. Stock selection currently seems quite challenging.

Geographical breakdown
by listing; 30Sep13
% of assets
Hong Kong
Net cash & receivables

Moreover, a growing proportion of our attention goes to monitoring (and trimming) our existing holdings, many of which seem to be finding their own businesses equally challenging.

Our report in July 2011 discussed bureaucracy and overcomplexity, highlighting this graphic illustrating an issue which appears more and more relevant. The complexity of simple tasks and services seems to be growing apace. More and more detailed regulation is crowding out useful activity. More and more professional people seem to be swamped - and to have less and less time remaining to focus on the most important aspects of their jobs. More and more systems seem to be tipping from overcomplexity to dysfunctionality. Fascinating examples have arisen in recent weeks.¹ ²

There must be beneficiaries of this somewhere. Individual lawyers, regulators, and fixers are hard to invest in. Some IT companies, conference organisers, printing companies and hotels may benefit - but these are not particularly promising sectors for a fund such as ours.

Related issues, which might be addressed in analogous diagrams, include the rising costs of environmental damage and resource extraction. These also tend to benefit GDP in the short run, but leave a dwindling percentage of it representing more useful activity. Similarly, if individuals are becoming wealthier on paper, but a growing percentage of their income is consumed by food, housing, transport and debt service, they may find their real disposable incomes dropping. Companies providing the essentials may prove to be attractive investment propositions, but it seems increasingly important to recognise that a continuous rise in living standards is not to be taken for granted. The Asian countries in which we invest have had an extraordinary few decades; straight-line extrapolation remains common, but we try to avoid it. Encouragingly, there seems to be a slight increase in discussion about the difference between growth and development, about resource constraints of various types, and about more appropriate goals for society. It will probably take a long time for these debates to translate into action. If the pie is no longer growing rapidly then distribution will become more complex; meanwhile, political tensions may continue to rise.

In the last quarter we have been trimming and exiting a number of long-held positions, for various reasons:

In the former cases, where the concern is valuation, but the underlying businesses are still of high quality, we have been gradually selling down but (as yet) not out. The cases where the business is deteriorating are of greater concern, and command greater attention. When we lose confidence in integrity or governance, we try to exit as soon as possible, so the two latter holdings have gone.

The companies we like are those which have continued ability to grow and a clear plan of action which we believe they will be able to implement steadily, adjusting to inevitable gusts, but able to maintain a steady course even in changing circumstances. Any well-run company of this type is one that we would like to have on the radar screen, as analysis often takes us months; we can then be in a position to buy when valuations are fair or better. We have a number of these, and have added one new one recently. We have many more candidates on the watchlist or yet to research, but are always happy to hear of more.

Claire Barnes, 3 Oct 2013

  1. A leading bank directs card applications to be made online. Almost all such applications fail. When a human can be found, after the usual half hour navigating a robotic call centre, it transpires that the bank knows this, and recommends calling an individual on a mobile phone. Does this individual actually work for the bank? Who knows? The systems are so complicated that they have to be bypassed.
    Meanwhile, the marketing department, or the computers, continue to send out instructions that are known to fail; and the customers continue to spend weeks in pointless activity. Expensive advertising campaigns seek to build an impression of brand quality.
    Officials marketing the bank's corporate services now have a new marketing proposition: to sort out the personal banking woes of individuals who can take decisions on corporate accounts. The officials may not be able to navigate their internal systems either, but the worse the personal banking services, the more attractive the offer. And it is easier than arguing the merits of the corporate banking services, or sorting out the deficiencies there...
  2. Visas. Becoming more time consuming for many countries, and I doubt that the increased complexity helps national security. My last visa for India took more of my time to procure than I spent in the country (attention time, not processing time). Getting the latest one was much, much more complicated. I will try to use it to the full, and to avoid for as long as possible the need to apply for another. This country wishes to encourage foreign investment, and has expensive marketing campaigns to encourage tourism?

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