Asian stock markets manipulated by dominant AI semiconductor companies.

Concentration risks, reminiscent of "Magnificent 7" scenarios, are emerging across Asian markets.

Taiwan and South Korean markets have been driven by AI-fueled surges, benefiting Sam Konrad's portfolio significantly this year, yet his fund's overexposure to these winners poses a challenge for future growth.

Konrad, investment manager for Asia Equity Income at Jupiter Asset Management, notes that they've been compelled to sell shares in TSMC, Samsung, and MediaTek due to their significant market performance this year, with respective gains of 52%, 159% and 184%.

Three major Asian technology corporations - TSMC, Samsung, and SK Hynix from Korea - collectively dominate nearly one-third of the MSCI Asia Pacific ex-Japan Index, posing significant concentration concerns for investors adhering to active portfolio guidelines.

A surge in a limited number of companies has triggered forced selling in actively managed funds, such as those run by Konrad.

Market distortions have arisen due to this situation, with the Korean won facing increased pressure from forced sales and weakening value.

HSBC reveals that Taiwan Semiconductor Manufacturing Company (TSMC) is the largest holding in which investors are underweight in both regional and global emerging markets, amidst a surge in Asian equities that has skewed benchmark indices.

Concentration risks have a dual impact, evident in recent market downturns, where South Korean stocks plummeted by 12% and Taiwanese shares dropped 6% over three consecutive sessions, all while investors anxiously reassess AI's value proposition.

Runaway profit growth expectations have propelled TSMC to dominance in Taiwan's stock market, accounting for 41.5% of the TAIEX (.TWII) index. Meanwhile, Samsung and Hynix command a significant 55% share of South Korea's KOSPI (.KS11) index. This concentration of stocks undermines the purpose of benchmark indexes, which aim to represent diverse portfolios rather than focusing on individual companies.

Active managers face an added challenge in surpassing industry standards.

Herald Van der Linde, HSBC's Asia Pacific head of equity strategy based in Hong Kong, notes that high concentration levels pose significant structural hurdles.

Equities' prolonged success is making it harder for funds to increase their stakes, thereby perpetuating a vicious cycle of compelled selling.

The top performers in this space often remain linked to artificial intelligence, rendering sector rotation ineffective in boosting returns. In fact, information technology has been a standout leader within the region, delivering impressive growth, while consumer staples and healthcare have trailed behind, as noted by Goldman Sachs research.

At a national level, the bank notes that despite the MSCI Asia Pacific ex-Japan index rising by 27% so far this year, its performance is actually negative when excluding South Korea and Taiwan, with a decline of 4%.

The phenomenon is not unprecedented, having been observed in the US, where the seven tech behemoths that make up the S&P 500 index (.SPX) account for approximately one-third of its composition, drawing investment dollars away from actively managed funds and into passive investments like market or theme-tracking funds.

The phenomenon of market manipulation by dominant tech giants is particularly pronounced in Asian markets.

Asia's active funds have experienced significant net withdrawals totaling $269 billion over the past five years, contrasting sharply with the substantial inflows into passive funds, which reached $510 billion, a notable portion of this influx occurring within just six months as per BNP Paribas' EPFR data analysis.

Recent investments in Asia-Pacific's passive funds have surpassed any previous level over the past decade, according to William Bratton, a leading expert on regional market trends.

Stock pickers are now venturing deeper into the artificial intelligence ecosystem by focusing on smaller-cap firms and promoting active investment approaches that diverge from conventional market tracking methods.

Aberdeen Investments' senior investment director for Asian equities, Isaac Thong, has made notable additions to the portfolio, including ASMPT (0522.HK) and Grand Process Technology Corp (3131.TWO).

Konrad's Jupiter fund has a significant bias towards larger stocks, with nearly half of its assets invested in Taiwan and South Korea. His portfolio includes prominent electronics manufacturers such as Hon Hai (2317.TW) and Quanta (2382.TW), alongside SK Hynix, with MediaTek (2454.TW) holding the largest position.

He attributes their distinct investment approach and divergent strategies from industry norms as key factors in their superior performance.

Concentration risk is now a pressing concern in Asian markets, particularly since the trio of Baidu, Alibaba, and Tencent dominated the MSCI China benchmark to the tune of 37.14% at their height in October 2020.

Unprecedented fund inflows are being fueled by market conditions of great turmoil currently.

Foreign investors' rebalancing efforts led to a massive $27.9 billion exodus from South Korean equities in May, as exchange data revealed, concurrently with Nomura's observation of an unprecedented $20.4 billion year-to-date influx from U.S.-based funds into South Korea and Taiwan.

Asian equities have witnessed unprecedented concentration risk due to the prolonged market surge beginning in April, according to Rupal Agarwal, a quant strategist at Bernstein.