The outsized influence of three major AI chip stocks—Taiwan Semiconductor Manufacturing (TSM), Samsung, and SK Hynix—which together account for nearly one-third of the MSCI Asia Pacific ex-Japan index, is creating a concentration risk. This is compelling active fund managers to sell these stocks as they hit internal allocation limits, trapping them in a detrimental cycle of selling as prices rise and severely distorting key regional benchmarks.
Sam Konrad, an investment manager at Jupiter Asset Management, confirmed his fund has been "forced to sell" positions in Taiwan Semiconductor Manufacturing, Samsung, and MediaTek—stocks that have surged 52%, 159%, and 184% year-to-date, respectively. Taiwan Semiconductor Manufacturing alone makes up a staggering 41.5% of Taiwan's benchmark index, while Samsung and SK Hynix together constitute about 55% of South Korea's main index. This effectively turns these flagship benchmarks into bets on just one or two companies, stripping them of their intended diversification.
Research from HSBC Holdings PLC indicates that Taiwan Semiconductor Manufacturing is now the most underweight single stock in portfolios of both Asian and global emerging market funds. Herald Van der Linde, head of Asia Pacific equity strategy at HSBC, notes this concentration creates a "structural challenge." As these stocks continue to outperform, funds find it increasingly difficult to increase exposure, thereby reinforcing the "forced selling loop."
The double-edged nature of this concentration risk was evident in a recent sell-off, with South Korean stocks falling 12% and Taiwanese shares dropping 6% from their peaks over three days. Exchange data shows foreign portfolio rebalancing drove a record $27.9 billion in monthly net outflows from South Korean equities in May, with forced selling by active funds adding further pressure to the already strained Korean won.
The Vicious Cycle Proves Difficult to Break
Expectations for explosive profit growth in chipmakers have propelled Taiwan Semiconductor Manufacturing, Samsung, and SK Hynix to dominant positions in their respective benchmarks. This leaves active managers in a bind: avoiding these stocks makes it hard to beat the benchmark, while holding significant positions triggers internal concentration limits, forcing sales.
Herald Van der Linde elaborated that as the stocks keep outperforming, funds will find it "increasingly difficult to add exposure," which strengthens the forced selling cycle and continues to widen underweight positions despite strong fundamentals.
Compounding the issue, the best-performing alternative stocks outside this trio are largely still tied to the AI theme, making sector diversification strategies ineffective for improving returns. Goldman Sachs data shows the information technology sector has led the Asia-Pacific region with explosive gains, while sectors like consumer staples and healthcare have lagged significantly, leaving little room for a meaningful sector rotation.
According to Goldman Sachs, the MSCI Asia Pacific ex-Japan index is up 27% year-to-date, but it has actually fallen 4% when excluding South Korea and Taiwan. This stark gap highlights how the rally is intensely concentrated in just a few markets and a handful of stocks.
Rupal Agarwal, a quantitative strategist at Bernstein, stated that the rally since April has pushed concentration risk in Asian equities to "unprecedented levels." Compared to the historical precedent in October 2020 when Baidu, Alibaba, and Tencent collectively made up 37.14% of the MSCI China index, the current concentration risk in Asia is more severe and expanding faster.
Passive Funds Rapidly Gain Ground on Active Management
This highly concentrated market structure is accelerating a massive shift of assets from active to passive funds. Analysis by BNP Paribas of EPFR data shows that over the past five years, active Asian funds have seen net outflows of $269 billion, while passive funds have attracted net inflows of $510 billion—with a quarter of that passive inflow occurring in just the last six months.
William Bratton of BNP Paribas Securities noted the recent scale of inflows into passive funds in the region is "unprecedented in the past 10 years." Nomura tracking data further shows that US-registered funds have poured a record $20.4 billion into South Korean and Taiwanese equities so far this year.
Faced with persistently distorted benchmarks, some active managers are exploring new paths. These include looking further down the AI supply chain at smaller-cap supporting suppliers and emphasizing the differentiated value of active stock selection over passively tracking an imbalanced index.
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