(May 29): A blistering rally in Samsung Electronics Co and SK Hynix Inc has turned into an unexpected headache for some funds, whose positions have grown so large they are now forced to sell.
Funds bound by a 10% single-stock cap rule have increasingly hit those limits as the two South Korean chipmakers touch daily highs. Among them are GAM Investment Management in Zurich and Jupiter Asset Management in Singapore, which have reluctantly reshuffled portfolios to stay compliant.
Analysts attribute the record foreign outflows this year to this mechanical selling pressure as funds rebalance, adding to already-high volatility. The dynamic also underscores just how crowded the trade has become, with investors piling into the artificial intelligence (AI) frenzy that has pushed both chipmakers to cross US$1 trillion ($1.28 trillion) valuation.
The problem has left investors looking for alternatives. “Investors may seek to indirectly expand semiconductor exposure through affiliates, holding companies, or insurers with significant stakes in the two companies,” said Ha SeokKeun, the chief investment officer of Eugene Asset Management in Seoul.
On Friday, shares of the South Korean chipmaking duo rallied after news that the National Pension Service would raise its domestic equity target.
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For asset managers, diversification rules prevent outsized bets. Exposure to a single stock is typically capped at 10% of assets, while positions above 5% cannot, in aggregate, exceed 40% of a portfolio. While designed to curb concentration risk, First Eagle Investments portfolio manager Christian Heck said it also could cause selling even if funds remain constructive on the underlying stocks.
The constraints are showing up in how money managers are responding to the gains. “We are taking profit more from a portfolio construction point of view, and this is one of the risks,” said Florian Neto, Amundi SA’s head of investment for Asia. “I think those stocks have been moving so fast in terms of market cap that they are getting to levels that investors need to sell because they need diversification.”
Position limits have long been an issue for investors of Taiwan Semiconductor Manufacturing Co (TSMC), whose large weighting in benchmarks forced funds to seek alternative ways to gain exposure. But that dynamic is suddenly becoming more acute in South Korea, where the supercharged rally is inflating position sizes and leading to forced selling. Over the past year, SK Hynix has gained over 1,000% while Samsung has jumped more than 400%. In comparison, TSMC has risen 137%.
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Through Thursday, global investors sold a net US$63.6 billion of local equities, the biggest month since data available in 1999. Within that, Samsung and SK Hynix saw US$58.6 billion worth of net outflows combined this year.
Goldman Sachs Group Inc estimated that diversification rules have triggered roughly US$69 billion of selling since late October, as South Korea-focused funds overseeing nearly US$200 billion contend with the growth of the two chipmakers’ combined weighting. Additional pressure could build if Samsung and SK Hynix’s market concentration keeps rising, strategists including Timothy Moe wrote in a note, though much of the selling has run its course.
Some firms have turned their attention to proxy plays for new ways to accumulate local shares. SK Square Co, which holds a 20.5% stake in SK Hynix, skyrocketed more than 1,000% over the past year. Shares of Samsung Life Insurance Co, the largest holder of Samsung’s crown jewel with a 8.58% stake, more than tripled in the past year
South Korea also imposes a 10% single-stock cap on public equity funds, though Samsung and SK Hynix are exempt. Portfolio managers here can hold the two stocks up to their market weights, which is currently 27.05% and 15.71% respectively. The figure is issued every first trading day of the month, based on data from the previous month.
While these limits may curb additional demand from investors already at or near maximum exposure, South Korea may end up seeing some fresh inflows from those with little to no existing allocation given the historic rally.
“We think that global fund managers are likely to be increasingly attracted to South Korean and Taiwanese tech companies,” said Sam Konrad, an investment manager at Jupiter Asset Management.
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