The only Asian giant with a market value exceeding one trillion dollars! Institutions are forced to "underweight" Taiwan Semiconductor
Taiwan Semiconductor has become the only trillion-dollar company in Asia, and its weight in the index has soared, but the holding rules have put a "tightening spell" on fund managers. Due to the single stock holding limit of 10%, funds managing over $100 billion in assets are forced to "underweight" this AI giant, facing a significant risk of underperforming the benchmark. Although attempts have been made to compensate by investing in related stocks, finding alternatives that can compete with Taiwan Semiconductor is extremely difficult, creating a unique investment dilemma
Since the beginning of this year, TSMC's stock price in Taipei has soared by 36%. This surge has pushed its weight in the Taiwan Weighted Index to nearly 43%, and its weight in the MSCI Emerging Markets Index and MSCI Asia Pacific (excluding Japan) Index has also reached a new high of nearly 12%.
However, according to a Bloomberg report on November 12, this situation directly affects funds with a scale exceeding $100 billion that are benchmarked to the MSCI Index. Due to the EU's UCITS rules and local regulations in Taiwan, which generally set a single stock holding limit at 10% of net asset value, these actively managed funds cannot fully allocate to TSMC, resulting in a significant risk of performance lag. In contrast, passive index funds typically have greater flexibility to match benchmark weights.
“Our continued underweight in TSMC is not due to investment conviction, but rather structural constraints,” said Roxy Wong, a senior portfolio manager at BNP Paribas Asset Management. “For us, the real risk lies in the underweight itself.”
To address this challenge, some fund managers have turned to investing in companies such as Hon Hai Precision or ASE Technology Holding, which are seen as part of TSMC's value chain, or using derivatives like futures and options to hedge. However, this strategy has clear limitations.
“For portfolio managers, managing such a large index constituent risk is quite challenging,” noted John Tsai, a portfolio manager at Eastspring Investments Ltd.
Analysts believe that while these alternative targets may benefit from the same AI-driven factors, they struggle to replicate the strong pricing power, profit quality, or business resilience that TSMC derives from its dominant position in advanced chip manufacturing.
As Roxy Wong stated, finding a proxy that can replicate TSMC's market position, growth trajectory, and stability is extremely difficult
