Apollo Asia Fund

Tides and tsunamis
Apollo Asia Fund: the manager's report for 3Q2015

The Apollo Asia Fund's NAV fell 10.5% in the third quarter, to US$1,751.80. This poor performance was partly due to currency weakness, although equity markets were also battered: the MSCI all-country Far East ex-Japan index, denominated in US$, fell 18.8%.

Almost all of our operating currencies were down against the US$: the yen strengthened slightly, but the Singapore dollar fell 5%, the baht fell 7%, and the Malaysian ringgit was down 14%.

Geographical breakdown
by listing; 30 Sep 15
% of assets
Hong Kong
Vietnam, incl funds
Net cash & receivables

Tectonic plate shifts have far-reaching consequences that are hard to time or predict: as with geology, so with geopolitics. The great realignment now under way in the Middle East and worldwide may have momentous consequences. Many people seem oblivious to the dangers, and to the need to discriminate between news and propaganda. There is much talk in the investment world of innovation, and much excitement about powerful disruptors - but perhaps too much in the context of new technologies, and too little in relation to political and military strategy. We too spend a lot of time thinking about innovation and potential disruptors in the context of business models, but try not to be so focussed on our own sandcastle that we fail to notice incoming tides and occasional tsunamis.

In the event of an approaching tsunami it may be advisable to run for the hills - if the hills themselves remain stable, and not too far undermined or overloaded. Another option is to head for deep water and float. In this world of rapid and interconnected change, traditional safe havens may be unavailable. Neither bonds nor bank deposits now offer safety, and a new War on Cash seeks to block savers fleeing in that direction. (The unintended consequences of this may well cause as much disruption to efficiency as the closure of physical borders.) We have no great confidence about price performance, but are more concerned about optimising our chances of preserving purchasing power and minimising the risks of permanent loss: in this context a portfolio of carefully chosen equities still seems a relatively attractive option.

The rebalancing mentioned in the last report continued: we added to many of our existing holdings, and lightened a few. We exited our remaining holding in Vitasoy, which we had held for fifteen years: this is a company with an excellent brand and market position, but the shares had been rerated over the years, and we are not sure that underlying growth will be sufficiently rapid to support its current valuation. Conversely, we added exposure to Vietnam through closed-end funds, since discounts to NAV appeared larger than justified. The cash balance at the time of writing has reduced to 15%, and we hope that the current market turbulence may provide good opportunities to deploy this effectively soon.

HSBC served notice to terminate its custody services to the fund, explaining that it now has a target figure for income per fund manager (rather than per entity) which is a multiple of the very large number of US dollars that they currently make from those AIMS funds that have been using its services; and that since we prioritise investment performance over asset gathering they have no confidence that we will ever be worth their while. Since the costs of a custody service relate to the number of transactions, which will rise with scale given the limitations of liquidity, and are charged per transaction as well as ad valorem; and since there is little management overhead required at the relationship level, we fail to understand how they would be better off with one Fidelity or a hundred Fidelity funds rather than a thousand smaller clients. It seems likely that the latter would be just as profitable and more resilient - but there are many aspects of HSBC's current business model which I do not understand. It used to be one of the world's great banks, but I would not currently wish to be a shareholder.

We shortlisted a number of custodians and have provisionally agreed on a replacement: a few details remain to be sorted out so I will withold the name until later, but would be happy to discuss with any shareholder concerned. (This also applies to any concerns about your fund manager's operating base in Malaysia.) We have a target of end-December for the change of custodian. We would have preferred to avoid unnecessary change, but the new custodian may provide us with an improved service.

Our investors have often provided us with interesting insights into opportunities within their own fields of expertise - thank you for this support. We are now scanning a wider and more complex stock universe than hitherto, and continue to welcome constructive ideas.

Claire Barnes, 8 Oct 2015

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