Equities

TSMC Up 42%, Pushes Funds to Diversify Beyond Limits

TSMC's 42% surge challenges funds with single-stock limits, prompting diversification into emerging semiconductor players.

By Max Weldon

5/16, 20:10 EDT
Taiwan Semiconductor Manufacturing Company Ltd.
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Key Takeaway

  • TSMC's stock surged 42% in Taipei, challenging funds with single-stock holding limits and prompting a search for alternative investments.
  • UCITS regulations cap TSMC exposure for some funds, influencing diversification strategies within the semiconductor sector.
  • Despite TSMC's success, increased put-to-call ratios indicate market caution and interest in broader semiconductor industry opportunities.

TSMC's Soaring Success

Taiwan Semiconductor Manufacturing Co (TSMC), known for its dominance in producing advanced chips for artificial intelligence (AI), has seen its shares surge by 42% in Taipei this year. This remarkable performance has attracted significant attention from money managers globally. However, the company's rapid growth presents a unique challenge for investors, particularly those governed by restrictions on single-stock holdings. Funds, especially those adhering to the UCITS (Undertakings for the Collective Investment in Transferable Securities) regulations which cap single stock exposure at 10%, find themselves at a crossroads. Zhikai Chen, head of Asian and Global EM Equities at BNP Paribas Asset Management, highlighted the dilemma, stating, "The tricky part is that the size of the company is now so big in our benchmark that we cannot meaningfully overweight it... It’s prompting us to look at some other names that’s currently one or two generations behind TSMC’s technology to get more active exposures."

Investment Limits and Market Impact

The UCITS framework, a regulatory standard set by the European Commission for mutual funds in the region, imposes a limit on investment concentration, thereby affecting how funds can allocate their investments in TSMC. With TSMC's weight at 9.5% in the MSCI AC Asia ex Japan Net Total Return USD Index and an even more significant 32% in the local Taiwanese equity benchmark, funds are exploring alternatives to maintain diversified and compliant portfolios. This situation has led to a search for potential investments in companies that are currently lagging behind TSMC technologically but offer growth opportunities in the semiconductor and AI sectors.

Diversification Strategies

As funds navigate the constraints imposed by their investment mandates, the focus shifts towards identifying companies that could complement or serve as alternatives to TSMC within their portfolios. The exploration of these opportunities is not just a matter of compliance but also a strategic move to capitalize on the broader semiconductor industry's growth. JPMorgan Asset Management Ltd.’s SAR Asian Fund and Fidelity Emerging Asia Fund, with more than a 9% weighting in TSMC as of the end of March, exemplify the significant role TSMC plays in investment strategies across the region.

Market Sentiments and Future Outlook

Despite TSMC's impressive performance, including a jump in April sales and a larger-than-expected dividend payout, market sentiments show signs of caution. The put-to-call ratio on its US-listed shares has increased since the end of March, indicating a higher trading volume in bearish options compared to bullish contracts. This data suggests that while optimism remains for the semiconductor industry's advancement, as echoed by Xin-Yao Ng, director of investment at abrdn, investors are also considering the broader ecosystem of smaller companies poised to contribute to the sector's growth.

Street Views

  • Zhikai Chen, BNP Paribas Asset Management (Neutral on TSMC):

    "The tricky part is that the size of the company is now so big in our benchmark that we cannot meaningfully overweight it, especially funds subject to UCITS which cap single stock exposure to 10%... It’s prompting us to look at some other names that’s currently one or two generations behind TSMC’s technology to get more active exposures."

  • Xin-Yao Ng, abrdn (Bullish on semiconductors but Neutral on TSMC due to holding limits):

    "We are structurally very positive on the advancement of semiconductors... there are many smaller companies that we think will play important parts as well."