Claire Barnes' Q3 letter: Overcomplexity to dysfunctionality

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.

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.

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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.