How TSMC’s Stock Rally Is Breaking Portfolio Limits Worldwide

TLDR

• TSMC’s stock has surged by over 36% this year, creating challenges for global fund managers to keep up with their portfolios.
• The chipmaker now controls nearly 43% of Taiwan’s Taiex index, making it a dominant force in global stock markets.
• Strict regulatory limits prevent many active funds from increasing exposure to TSMC despite its strong performance.
• Some fund managers are using derivatives and investing in TSMC’s supply chain to replicate its stock momentum.
• TSMC’s increasing weight in stock indexes has made risk management difficult for investors trying to balance their portfolios.

TSMC’s stock has surged more than 36% this year, pushing its weight in major stock indexes to levels that are difficult for money managers to handle. The rapid rise, driven by strong demand for semiconductors, has left over $100 billion in global funds struggling to keep up with their portfolio limits. Strict rules that cap exposure to individual stocks are preventing managers from increasing their stakes in TSMC, despite its impressive performance.

TSMC’s Dominance in Major Stock Indexes

Currently, TSMC controls nearly 43% of Taiwan’s main stock index, the Taiex. The chipmaker also represents close to 12% of the MSCI Emerging Markets Index and the MSCI Asia Pacific Excluding Japan Index. This overwhelming weight is causing problems for many active fund managers, who are legally restricted from investing more than 10% of their portfolio in a single stock.

Roxy Wong, a senior portfolio manager at BNP Paribas Asset Management Asia, explains that her team has been forced to stay underweight on TSMC.

The growing weight of TSMC’s stock in major indexes is creating a cycle where benchmarked investors must increase their exposure, driving the stock’s value higher and further limiting their options.

Struggles for Fund Managers to Keep Pace

As TSMC’s stock continues to climb, it is becoming more difficult for managers to mirror its growth. Some have turned to derivatives like futures and options to track index movements without breaching portfolio limits. Others are investing in companies within TSMC’s supply chain, such as Foxconn (Hon Hai) and ASE, to gain exposure to the stock’s momentum indirectly.

However, these strategies have their limits. John Tsai, a portfolio manager at Eastspring Investments in Singapore, said replicating TSMC’s performance through other stocks is challenging.

TSMC’s growing dominance in the stock market has made risk management increasingly difficult for investors. Even those who wish to invest in TSMC’s stock find it hard to do so within the regulatory limits. With no signs of TSMC slowing down, the pressure on fund managers continues to grow as they try to navigate the complexities of portfolio management.

Some investors are beginning to question if current regulatory limits on single-stock exposure are still appropriate. Taiwan’s regulators are reportedly discussing whether to relax these limits, but no decisions have been made yet. For now, portfolio managers are left to manage the risks of their underexposure to TSMC while still keeping pace with the broader market.

Despite these challenges, TSMC’s stock remains a central focus for global investors, reflecting its dominant position in the tech sector.

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