TSMC’s AI Surge Pushes Funds Toward Underexposure Due to Portfolio Limits

• TSMC dominates Taiwan’s stock market, holding nearly 43% of the Taiex index amid relentless AI growth.

• Global investment funds face restrictions, leaving over $100 billion sidelined as managers can’t increase holdings.

• Portfolio managers turn to derivatives and supply chain proxies like Foxconn to mimic TSMC’s performance without breaching limits.

Discover how TSMC’s AI-driven rally is reshaping global funds and index investing. Stay ahead with insights on chip sector dominance and investment strategies. Read now for expert analysis.

What is driving TSMC’s stock surge in 2024?

TSMC’s stock surge in 2024 is primarily fueled by surging demand for AI chips, with shares climbing more than 36% year-to-date. This growth has elevated the company’s market capitalization beyond $1 trillion, making it Asia’s largest stock and a cornerstone of major indices. The relentless AI boom has left global funds struggling to keep pace due to regulatory caps on single-stock exposure.

How is TSMC’s index weight affecting investment funds?

TSMC now accounts for nearly 43% of the Taiex index, Taiwan’s benchmark, and around 12% of the MSCI Emerging Markets Index and MSCI Asia Pacific Excluding Japan Index. This concentration poses challenges for active fund managers bound by rules like the European UCITS 10% single-stock limit and similar Taiwanese regulations, forcing underweight positions despite strong performance. According to Bloomberg, over $100 billion in global funds remains underexposed, amplifying risks for benchmark-tracking investors. Roxy Wong, senior portfolio manager at BNP Paribas Asset Management Asia, noted, “We’re consistently underweight TSMC, not because of conviction, but due to structural limits. The real risk for us is being underweight.” Vey-Sern Ling, senior equity adviser for Asia technology at Union Bancaire Privee, added, “The high and growing weight of tech stocks in indexes is an issue because benchmarked investors have to increase their allocation into a very small concentrated list of stocks, which in turn drives their prices and index weights even higher. It’s a vicious cycle which inflates valuations of ‘hot’ stocks.” While discussions in Taiwan aim to potentially relax these limits, no changes are finalized. Passive funds, however, benefit from regulatory flexibility to mirror indices more closely. TSMC’s shares remained stable in early trading, underscoring its sustained momentum. Unlike other regional giants like Alibaba or Samsung, TSMC’s $1 trillion-plus scale uniquely overwhelms cross-continental portfolios. Managers are adapting with derivatives such as futures and options to track index movements legally, or by investing in linked firms like Hon Hai (Foxconn) and ASE Technology to capture supply chain gains. John Tsai, portfolio manager at Eastspring Investments in Singapore, explained, “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.” Yet, challenges persist, as Roxy Wong admitted, “It’s hard to find a proxy that replicates TSMC’s combination of market position, growth trajectory, and stability. The weight keeps rising, and our underweight position keeps widening.” This dynamic highlights the evolving complexities in semiconductor investing amid AI expansion.

Frequently Asked Questions

What percentage of Taiwan’s Taiex index does TSMC represent?

TSMC represents nearly 43% of the Taiex index as of late 2024, driven by its pivotal role in AI chip production and a 36% stock rise, forcing many funds to navigate exposure limits carefully to avoid regulatory breaches.

Why can’t fund managers fully invest in TSMC’s rally?

Fund managers face legal restrictions capping single-stock exposure at 10% under rules like European UCITS and Taiwanese guidelines, leading to underweight positions in TSMC despite its dominance in AI-driven growth and index weight.

Key Takeaways

• AI Demand Fuels Surge: TSMC’s 36% stock increase in 2024 stems from insatiable AI chip needs, elevating its Taiex weight to 43%.
• Regulatory Hurdles Persist: Global funds are limited to 10% exposure, sidelining over $100 billion and prompting use of derivatives for indirect participation.
• Adaptation Strategies Emerge: Investors eye supply chain proxies like Foxconn to capture TSMC’s momentum while managing risks in concentrated markets.

Conclusion

TSMC’s stock surge and index dominance underscore the transformative impact of AI on semiconductor markets and investment strategies, with funds grappling to balance regulations and opportunities. As the company’s weight continues to grow in benchmarks like the Taiex and MSCI indices, proactive adaptations will be essential for navigating this landscape. Investors should monitor regulatory developments in Taiwan and Europe for potential shifts that could reshape portfolio allocations.