Insatiable demand for everything AI has driven up Taiwan Semiconductor Manufacturing Co.’s share price, but that’s put some fund managers at risk of underperforming due to restrictions on portfolio concentration.
Shares of TSMC — the world’s biggest contract chipmaker — have surged 36% in Taipei this year on the artificial intelligence boom. The rally has brought the stock’s weighting in key indexes to new heights.
That’s a problem for active funds based in regions with limits on single-stock holdings. At least $100 billion in funds benchmarked to MSCI Inc.’s Asia and emerging markets gauges plus another $5 billion in vehicles trying to keep pace with Taiwan’s Taiex are affected, according to data compiled by Bloomberg.
“We’re consistently underweight TSMC, not because of conviction, but due to structural limits,” said Roxy Wong, a senior portfolio manager at BNP Paribas Asset Management Asia Ltd. “The real risk for us is being underweight.”
With its big gains this year, TSMC now accounts for nearly 43% of the Taiex. Its weighting is up to almost 12% in both the MSCI Emerging Markets Index and MSCI Asia Pacific Excluding Japan Index.
Wong’s fund, like many others subject to European Union’s UCITS rules, must cap exposure to any single stock at 10%. Taiwanese regulations similarly prevent funds from holding more than 10% of net asset value in any single stock, though regulators are currently in talks about easing this limit.
Such requirements make it difficult for active money managers to keep up with moves in indexes, let alone beat them. Passive index-tracking funds, on the other hand, generally have more leeway to match the weights of their benchmarks under European and recently enacted Taiwanese rules.
Dominant stocks have caused some headaches in other markets as well, such as Hong Kong-listed Alibaba Group Holding Ltd. and South Korea’s Samsung Electronics Co. But the problem has become more extreme with TSMC, Asia’s only stock worth more than $1 trillion.
Some managers turn to derivatives such as futures or options to hedge index movements. Others boost investment in companies seen as part of TSMC’s value chain such as Hon Hai Precision Industry Co. or ASE Technology Holding Co.
“It’s challenging for portfolio managers to manage the risk of having such a large index constituent,” said John Tsai, portfolio manager at Eastspring Investments Ltd. in Singapore. “We are forced to consider other high-correlated stocks that may have the same fundamental drivers and build positions in these stocks to try to replicate a meaningful exposure.”
One problem with this strategy is that while alternatives often share the same AI-driven fundamentals, they don’t necessarily match TSMC’s earnings quality or business resilience. TSMC commands strong pricing power as the dominant player in cutting-edge chipmaking.
It’s hard to find a proxy that replicates TSMC’s combination of market position, growth trajectory and stability, said BNP Paribas Asset’s Wong. And the unique problem posed by TSMC seems unlikely to be resolved soon, as “the weight keeps rising, and our underweight position keeps widening,” he said.
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