Fang Zheng founded the Hong Kong-based Keywise Capital Management in 2006 after previously co-founding and managing Neon Liberty Capital Management and acting as the portfolio manager and vice president at the JP Morgan Emerging Market Equity Group prior to that. Keywise focuses on companies in the Greater China market, including mainland China, Singapore, Taiwan, and Hong Kong. In particular, the fund focuses on under-researched companies with high growth prospects. Keywise manages two main funds, the Pheonix Development Fund and the Penguin Development Fund. Keywise recently filed its 13F with the SEC disclosing its long positions in U.S-traded equities as of September 30, which includes Chinese companies trading on the U.S markets. Let’s take a closer look at Keywise’s top five U.S equity picks, all of which are in Chinese stocks. Those stocks are Qihoo 360 Technology Co Ltd (NYSE:QIHU), Vipshop Holdings Ltd – ADR (NYSE:VIPS), 500.com Ltd (NYSE:WBAI), Noah Holdings Limited (ADR) (NYSE:NOAH), and Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP).
First a little about ourselves. We at Insider Monkey track smart money activity. Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 37 months and outperformed the S&P 500 Index by over 53 percentage points (see the details here).
#5 Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP)
Shares held (as of September 30): 115,415
Total Value (as of September 30): $7.29 million
Percent of Portfolio (as of September 30): 13.00%
Keywise Capital cut its Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) position by 52% in the third quarter, but still owned 115,415 shares at the end of September. The fund could be taking some profits, as Ctrip shares are up by 63% year-to-date. The slowing Chinese economy hasn’t slowed the company’s execution. Ctrip.com has beaten analyst profit and revenue expectations every quarter this year and has plenty of room to grow. Boston Consulting Group estimates that almost half of all global passenger traffic will be Asia-connected by 2030. Andreas Halvorsen‘s Viking Global owned 5.76 million shares of Ctrip at the end of the second quarter.
#4 Noah Holdings Limited (ADR) (NYSE:NOAH)
Shares held (as of September 30): 314,033
Total Value (as of September 30): $7.38 million
Percent of Portfolio (as of September 30): 13.15%
Noah Holdings Limited (ADR) (NYSE:NOAH) is up by 32% year-to-date, as the rich get richer in China and assign the company to manage their wealth. Revenue and earnings have been steadily growing over the years, although the company’s third quarter could be a little lackluster, owing to the Chinese stock market running into some softness in August. The long-term looks good however, as China continues to develop. A total of ten funds out of the approximately 730 elite funds that we track reported stakes worth $33.02 million at the end of June, up from five funds with just $10.51 million in shares at the end of March. David Kowitz and Sheldon Kasowitz‘s Indus Capital owns 563,500 shares.
We delve into Keywise’s top three Chinese stock picks on the next page.