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

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.

Alibaba Group Holding Ltd (NYSE:BABA) was the 3rd largest holding for Zheng’s Keywise and arguably the most frustrating. Zheng increased the position in the last quarter of 2014 to 100,533 shares for a value of $10.5 million representing a 10.86% stake of his 13F portfolio. Although Chinese stocks have been on a tear, bullish sentiment waned in Alibaba Group Holding Ltd (NYSE:BABA) as investors felt nervous about the expiring lockup period. Further, questionable acquisitions (ChinaVision) and accounting irregularities continue to pressure the stock downward. Dan Loeb’s Third Point is the largest investor among the funds we track with an investment value of about $1 billion as of the latest filing. Rob Citrone’s Discovery Capital Management is second with $960 million allocated. Shares of Alibaba Group Holding Ltd (NYSE:BABA) declined 20% in the first quarter of 2015.

Noah Holdings Limited (ADR) (NYSE:NOAH) is a $1.7 billion wealth management service provider operating in China. The company focuses on the high-net-worth population and provides asset management services as well as managing its own fund of funds and real estate fund products. Mr. Zheng started a new position in Noah Holdings Limited (ADR) (NYSE:NOAH) for Keywise Capital in the fourth quarter of 2014. Zheng was again rather aggressive with his new pick by immediately making it the fourth largest position in Keywise’s portfolio. At the beginning of 2015, Keywise Capital held 437,283 shares of Noah Holdings Limited (ADR) (NYSE:NOAH) with a value of $9.1 million, representing 9.5% of its 13F portfolio. Keywise Capital’s position in Noah is one of the largest among the firms we track. Other firms with positions are Ken Griffin’s Citadel Investment Group, Matthew Hulsizer’s Peak6 Capital, and Chuck Royce’s Royce & Associates.

JD.Com Inc (ADR) (NASDAQ:JD) is a $47 billion market cap holding company that engages in online direct sales. The company offers through its website and mobile applications a selection of authentic products to Chinese consumers. Investors are bullish on the company as it aims to change the e-commerce landscape in China. Recently JD.Com Inc (ADR) (NASDAQ:JD) announced it would launch the JD Worldwide platform, which will aim to offer authentic goods that previously weren’t available to the Chinese consumer, and help international sellers with no presence in China to sell to Chinese buyers. At the beginning of the year, Keywise Capital held some 70,000 shares with a value of $1.6 million, accounting for a 1.68% position in the firm’s 13F portfolio. As JD’s stock began to point downward in the fourth quarter, Zheng reduced the position by almost 80% from the level of the previous quarter. That proves unwise, as JD.Com Inc (ADR) (NASDAQ:JD)’s stock rebounded with a big first quarter, rising by 27%. Stephen Mandel’s Lone Pine Capital is the largest shareholder among the funds in our database, followed by Philippe Laffront’s Coatue Management. Both firms opened new positions in JD.com during the fourth quarter of 2014.

Disclosure: None

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