Portfolios that have performed strongly this year find themselves in an awkward position: the very winners that produced the gains now threaten to breach concentration limits, prompting managers to reduce positions in those same names.
"We have been forced sellers of TSMC, Samsung and MediaTek," said Sam Konrad, investment manager for Asia Equity Income at Jupiter Asset Management, referring to the chip-related stocks that have posted exceptional year-to-date returns of 52%, 159% and 184% respectively. The need to trim holdings of the top performers reflects how the rally has become focused on a tiny number of companies.
The effect is visible in index composition. TSMC now occupies 41.5% of Taiwan’s TAIEX, and Samsung together with SK Hynix make up 55% of South Korea’s KOSPI. Those concentrations mean that these country indexes are effectively large bets on one or two names rather than broad baskets representing many companies. That outcome complicates the task of active managers trying to beat benchmarks designed to reflect diversified exposure.
HSBC flagged the difficulty for active funds, noting that TSMC is the largest portfolio underweight among Asian and global emerging-market funds as managers struggle to match benchmarks distorted by record-breaking rallies. Herald Van der Linde, head of equity strategy for Asia Pacific at HSBC in Hong Kong, described the situation as creating "structural challenges." He said that as equities outperform, funds will find it harder to add exposure and will therefore perpetuate a cycle of forced selling and ever-larger underweights even where fundamentals remain strong.
That cycle of forced selling has had market effects beyond holdings. The concentrated rally has been one of several factors adding pressure to the Korean won, and rapid swings have contributed to sharp recent moves in regional markets. South Korean stocks slid about 12% and Taiwan equities fell roughly 6% in the three sessions from their record highs as investors weighed AI valuations.
The narrowness of the run-up has also amplified the move into passive and index-linked vehicles. BNP Paribas, using EPFR data, finds that over the last five years Asia’s active funds experienced $269 billion of cumulative outflows while passive funds drew in $510 billion; about a quarter of the passive inflows arrived in the past six months. William Bratton, head of cash equity research for Asia-Pacific at BNP Paribas Securities, described the recent scale of inflows into regional passive funds as unprecedented in the last 10 years.
Within sector performance, information technology has led the region with outsized gains tied to AI demand, while other sectors such as consumer staples and healthcare have lagged, according to Goldman Sachs. At a country level, the distortion is stark: the MSCI Asia Pacific ex-Japan index is up 27% year-to-date, yet when Korea and Taiwan are excluded it is down 4%.
The pattern echoes dynamics seen in the United States, where a handful of large technology stocks have come to dominate the S&P 500, drawing capital into passive and thematic strategies. In Asia, however, the concentration has become more extreme and has unfolded more rapidly, accelerating the shift toward passive vehicles and intensifying rebalancing effects.
Those rebalancing flows have been dramatic. Exchange data show that foreigners’ portfolio rebalancing drove a record $27.9 billion outflow from South Korean equities in May. At the same time, Nomura tracked a $20.4 billion year-to-date inflow from U.S.-domiciled funds into South Korea and Taiwan, a pattern reflecting large-scale reallocations into the region’s largest winners.
Fund managers have responded in different ways. Some stock pickers are moving further down the AI-derived value chain to mid-sized suppliers and equipment providers, seeking names that are not already dominating indexes. Isaac Thong, senior investment director for Asian equities at Aberdeen Investments, recently added ASMPT and Grand Process Technology Corp, both mid-sized suppliers to chipmaking firms, as part of this approach.
Others, such as Konrad, maintain a preference for large-cap stocks and have concentrated regional exposure. Konrad’s fund has nearly half its allocation in Taiwan and South Korea, including holdings in electronics manufacturers Hon Hai and Quanta and a significant position in chip designer MediaTek.
The present degree of concentration in Asia has surpassed previous episodes when a trio of Chinese tech giants dominated their market. At their peak in October 2020, Baidu, Alibaba and Tencent represented 37.14% of the narrower MSCI China benchmark, a level lower than the concentration now seen in Taiwan and South Korea.
Market strategists warn that the concentrated rally produces both upside and downside risks. Rupal Agarwal, Asia quant strategist at Bernstein, said the relentless rally since April has increased concentration risk in Asian equities to levels "we have never seen before." That same narrowness can exacerbate volatility when sentiment shifts, as recent steep declines show.
Implications for active management and markets
- Benchmarks dominated by a few large names reduce the representativeness of index tracking and make outperformance by active funds harder to achieve.
- Forced rebalancing and sales by active managers can pressure currencies and amplify regional market moves.
- Investors and managers are increasingly exploring smaller suppliers and non-benchmark exposures to capture AI-driven growth without being concentrated in the headline winners.
The market structure effects and large fund flows underline how a concentrated leadership by a handful of AI-related chip firms has reshaped Asian equity investing. Whether managers continue to pare the biggest winners, or whether inflows to passive and active strategies rebalance this concentration over time, will determine the near-term dynamics of returns and volatility across the region.