AI-fuelled Rally in Samsung, SK Hynix Shares Creates Sell Pressure for Focused Funds

South Korea's Chipmakers Becomes a Headache for Funds

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’re 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 frenzy that’s pushed both chipmakers to cross $1 trillion valuation.

The problem has left investors looking for alternatives. Some investors may seek to indirectly expand semiconductor exposure through affiliates, holding companies, or insurers with significant stakes in the two companies. On Friday, shares of the 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, these constraints are showing up in how money managers are responding to the gains.

Position limits have long been an issue for investors of Taiwan Semiconductor Manufacturing Co., whose large weighting in benchmarks forced funds to seek alternative ways to gain exposure. But that dynamic is suddenly becoming more acute in 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%.

Through Thursday, global investors sold a net $63.6 billion of local equities, the biggest month since data available in 1999. Within that, Samsung and SK Hynix saw $58.6 billion worth of net outflows combined this year. Goldman Sachs Group Inc. estimated that diversification rules have triggered roughly $69 billion of selling since late October, as Korea-focused funds overseeing nearly $200 billion contend with the growth of the two chipmakers’ combined weighting.

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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.

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.

"We think that global fund managers are likely to be increasingly attracted to Korean and Taiwanese tech companies," said Sam Konrad, an investment manager at Jupiter Asset Management.