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Alibaba Group Holding Ltd (BABA) Can’t Stop Fang Zheng’s Keywise Capital From Dominating the S&P 500

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Fang Zheng is managing director and CIO of Keywise Capital. Fang Zheng’s focus was primarily on Asia-based companies and his stock selections with a market cap of $1 billion or more blew out the returns of the S&P 500 index. His eight long positions in companies with a market cap of at least $1 billion returned 10.2% in the first quarter, despite big losses in Alibaba Group Holding Ltd (NYSE:BABA), one of his top picks. That performance compared to the S&P 500 ETF (SPY)’s mere 0.9% returns for the same period.

Prior to Keywise, Zheng was co-founder and portfolio manager at Neon Liberty Capital Management.  In 2002, Mr. Zheng was a Vice President and portfolio manager at the JP Morgan Emerging Market Equity Group.  Mr. Zheng was responsible for the team’s investment strategy in the Asian markets and small-cap arena.  An employee of JP Morgan for over six years, Mr. Zheng began his career as an equity research analyst in Singapore, covering the financial and property sectors.  Prior to joining JP Morgan, Mr. Zheng worked at the Ministry of Machinery and Electronics Industries, CITIC in China, and Rockefeller & Co., Inc. in New York as an equity analyst. Mr. Zheng holds a BA from the University of International Business & Economics in Beijing, an MBA from Harvard Business School, and is a CFA charter holder.

Why is it important to follow Fang Zheng and Keywise Capital? After all, haven’t equity hedge funds returned just 1.4% in 2014, 11.1% in 2013, and 4.8% in 2012? These returns are embarrassingly low compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. What is going on here? Have the managers lost their touch in picking stocks? The answer is a resounding no and the reason is simply size. As funds grow and take on more assets under management, they have too much capital to only invest in their best small-cap ideas, which our backtests have shown, greatly outperform their top large-cap picks. Our small-cap hedge fund strategy, which identifies the best of these small-cap stock picks of the best hedge fund managers returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012 (see the details here).Taiwan Semiconductor Mfg. Co. Ltd. (ADR)

Zheng had a concentrated bet in Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM), a new position in Keywise’s 13F portfolio. The position immediately  became the firm’s largest. At the end of 2014 the firm held 1.8 million shares of Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) at a value of $42 million representing 43.85% of its 13F portfolio. Investors are bullish on Taiwan Semiconductor, believing the world’s largest contract chip manufacturer can position itself for large-scale growth in connected devices. According to Business Insider, the number of connected devices will jump from 1.9 billion in 2014 to 9 billion by 2018. Ken Fisher’s Fisher Asset Management is the largest shareholder among the funds we track with about $500 million invested in the company. Coming in at second place is Jim Simons’ Renaissance Technologies with $350 million invested. Shares of Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) rose by 5% for the first quarter.

Zheng hit a homerun in his second largest position, Vipshop Holdings Ltd – ADR (NYSE:VIPS). Zheng more than doubled the position in the last quarter and at the beginning of 2015 the firm held 666,570 shares of Vipshop Holdings Ltd – ADR (NYSE:VIPS) with a value of $13 million and exposure to the stock of 13.5%. The stock rose by more than 50% during the first quarter after big fourth quarter results in which the retailer reported a 122% increase in revenue and a 150% increase in active customers during 2014. Other firms that had profitable investments in Vipshop Holdings Ltd – ADR (NYSE:VIPS) are Gary Kacher’s Light Street Capital, Julian Robertson’s Tiger Management, and Stephen Mandel’s Lone Pine Capital.

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