Fund managers are using derivatives and supplier stocks to try and mirror TSMC’s rise.
TSMC has become so big that it’s now jamming up the system. According to Bloomberg, the chipmaker’s unstoppable run in Taipei this year has pushed its weight in major stock indexes to levels that money managers can barely handle.
TSMC’s stock has surged by more than 36% so far this year, driven by the never-ending AI demand that has now left over US$100 billion in global funds stuck, unable to keep pace because of strict portfolio limits.
The issue is many active funds are legally restricted from investing more than 10% of their portfolio in a single stock, so that’s why even managers who want to chase TSMC’s rally can’t do it.
Roxy Wong, senior portfolio manager at BNP Paribas Asset Management Asia, said her team has been forced to stay underexposed. In her own words:- “We’re consistently underweight TSMC, not because of conviction, but due to structural limits. The real risk for us is being underweight.”
“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,” said Vey-Sern Ling, senior equity adviser for Asia technology at Union Bancaire Privee. “It’s a vicious cycle which inflates valuations of ‘hot’ stocks.”
Rally pushes TSMC beyond fund limits
Right now, TSMC controls nearly 43% of the Taiex, Taiwan’s main stock index. It also makes up close to 12% of both the MSCI Emerging Markets Index and MSCI Asia Pacific Excluding Japan Index, which means any manager tracking those benchmarks is instantly at risk of breaching their caps.
European UCITS rules cap exposure to any one stock at 10%, and Taiwanese regulators enforce the same limit, though officials are reportedly discussing whether to relax those limits but nothing has been finalized yet.
On the flip side, passive funds (those that just mirror the index) have more flexibility under updated European and Taiwanese regulations, letting them better match TSMC’s growing dominance.
The company’s shares were steady in early Wednesday trading in Taipei, showing no sign of slowing.
And while other markets have faced similar single-stock dominance (like Alibaba in Hong Kong and Samsung Electronics in South Korea), TSMC’s situation is way too different, as it is the only stock in Asia worth over $1 trillion, so its sheer scale is overwhelming portfolios across continents.
To keep up, some managers are using derivatives like futures and options to mirror index movements without breaking legal limits, while others are piling into TSMC-linked companies like Hon Hai (known globally as Foxconn) and ASE in efforts to replicate part of TSMC’s momentum through its supply chain.
But these substitutes can only go so far. John Tsai, a portfolio manager at Eastspring Investments in Singapore, said the scale of TSMC’s weight has made risk management difficult.
“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,” John explained.
The problem though is:- “It’s hard to find a proxy that replicates TSMC’s combination of market position, growth trajectory, and stability,” Roxy admitted. “The weight keeps rising, and our underweight position keeps widening.”
Don’t just read crypto news. Understand it. Subscribe to our newsletter. It’s free.
