Panther’s Stephen Woods’ theory on market inefficiency behind his fund’s dominance

Panther’s Stephen Woods’ theory on market inefficiency behind his fund’s dominance


It’s an assertion a lot of managers would probably disagree with.

“I remember as a consultant doing some research, we looked at – I don’t want to name it, but it was a very well-known value manager – and looking at one of the big growth managers at the time; from recollection they had about two-thirds of their portfolio overlap.

“That’s a function of how small Australia is compared to the rest of the world, but, that just makes it even more ridiculous that you’re sticking a label ‘this is going to be a growth manager, this is a value manager’. They’re almost the same.

“Since then all we’ve done is come up with more labels, more fancy names, which I obviously don’t put a lot of credibility in.”

The strategy has taken larger positions in mining and energy (Caltex and Beach) and selectively added some financials (Westpac and Bank of Queensland) while remaining “still very underweight” banks. The portfolio broadly has a slight large-cap and growth bias.

Woods also owns Afterpay, for the fourth time, but when it comes tothe buy-now, pay-later darling, he is no booster.

“It’s not a $30 stock at the moment. It could be in the future and it probably will be in the future, but it’s not at the moment,” he says. “We got into Kogan and Afterpay at the same time, they were both at $6, and we actually sold out of Kogan at $9.90, so we had a good experience first time around.

“We bought back in again at $5 whichI still think is a good price for Kogan, but it’s just gone the other way, whereas Afterpay has been very volatile.” Kogan shares could hit $8, he believes, “but the risk of being slightly contrarian to the market is that a whole bunch of other people form a different view”.

To condense Woods’ beliefs, he places no faith in the efficient market hypothesis, he is pro-momentum, and is convinced the market overreacts to both good and bad news reliably enough to create ideal buying and selling opportunities.

“Our market’s completely inefficient and the information is very, very lumpy. As a result of that, investors tend to completely overreact to any information that’s brought to them,” he says. “I’ve tinkered around the edges to try and improve [the model] based around mistakes we’ve made along the way. Essentially the core of the model is exactly the same as it was. The things I’ve improved particularly would be the momentum triggers.”

Woods’ academic study was based on the idea that past performance is more instructive than a throwaway disclaimer buried in an investment document.

“We are required by law to put that little disclaimer on the bottom – there’s various ways of saying it, I always like to say ‘past performance is not necessarily an indicator of future performance’. Because the fact of the matter is you can prove serial correlation. I did my university thesis on that and you can demonstrate there is correlation of performance amongst good managers and maybe that’s the qualification, that it has to be a good manager.”

He is appalled by the idea of selecting a manager on one-year performance, and says people doing their diligence on fund managers should be looking at continuation of style, discipline, and governance.

“If you really wanted to top the survey rankings you could have some outlandish investment strategy and you’d probably come bottom four years out of five, and the fifth year you’d be No 1. If you were 100 per cent in gold, just as an absurd example, you would have done pretty well last year I would imagine.”

He says the Panther has outperformed in 17 of 17 years (Mercer’s survey provides visibility for the past three). Alignment with investors is achieved by a double hurdle: the fund has to beat the All Ords and deliver a return in excess of 6 per cent to earn a performance fee.

“If I’m collecting a fee even if I beat the benchmark, and I’ve returned -8 [per cent] for my client, that’s not a good result,” he says. And nothing has changed since the $20 million strategy run from a serviced office in the Sydney suburbs topped the league tables, which is to say that Woods has no plans to seed a marketing strategy.

“Harking back to my days as a consultant, it was the biggest brands and the ones who made the most noise that get the largest share of the dollars, and yet were typically the underperformers,” he recalls. “There’s probably almost an inverse correlation of how much advertising they do compared to their actual returns.”

Careful not to sound too cynical, “I very much support my industry,” Woods insists, “and for the average punter on the street it is a good industry.”

His interview withThe Australian Financial Reviewcomes a week afterReserve Bank governor Philip Lowesaid he lost count of how many times he read the words “crash, plunge and dive” in the coverage of the December market rout. As Dr Lowe said, there is a positive aspect, which is the reduced risks associated with “stretched valuations”.

“Everyone thinks of volatility as a bad word but the fact of the matter is volatility is just the size of market movements,” Woods says.

“People react to what they hear and volatility has now become associated with a bad thing. But the classic relationship is in order to have high growth, you also have to have high volatility, high risk, however you want to describe it.”

He’s also added positions in Flight Centre, Bellamy’s, Aristocrat and short-seller target Domino’s, where the short interest is 10.9 per cent according to ASIC.

“[Domino’s has] had some very well-publicised issues, so we did quite a bit of research on that and decided that was going to be a good buy. The difficulty is actually wading through finding out what’s important, removing the noise.”

The fund manager wonders how a hypothetical long-short Panther might work, but it is not an idea he is entertaining. “If you start going long-short, potentially there’s more scope to add value but there’s also more scope to lose money. We’re comfortable,” he says.

“Just as a theoretical point of view, that would intrigue me. You’re looking at both the upside and the downside more closely. I don’t know if it’s half the work, but we’re only looking at the upside, obviously.”

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