Samsung, SK Hynix surge "breaks" portfolio red line: Funds forced to sell, foreign capital posts record outflow from Korean stocks

The continued surge in the share prices of Samsung Electronics and SK Hynix is forcing more and more funds to hit the 10% position cap for individual stocks, leading to passive reductions in holdings to maintain compliance.

According to Bloomberg, as the two chip giants repeatedly reach record highs in market value, funds restricted by position cap rules are frequently hitting the red line, prompting GAM Investment Management and Jupiter Asset Management to begin adjusting their portfolios. Analysts believe that the record net outflow of foreign capital from Korean stocks this year mainly stems from such compliance-driven mechanical selling pressure, which may further amplify market volatility.

The purpose of position cap rules is to prevent over-concentration, but in this wave of chip stock surges, it has turned into large-scale passive selling. Florian Neto, Head of Asian Investments at Amundi SA, stated that the rapid growth in market value has forced investors to passively reduce their holdings, and diversification is indeed necessary.

Massive scale of forced selling, historical record for foreign capital outflow

Driven by the AI boom, global capital has poured frantically into Samsung Electronics and SK Hynix. The two stocks have risen 147% and 245% year-to-date, respectively, with both market values breaking through $1 trillion.

However, the sharp surge in stock prices is triggering passive sell-offs due to the position cap rules. Bloomberg data shows that as of Thursday, global investors have cumulatively net sold $63.6 billion of Korean stocks this year, marking the largest monthly sell-off since 1999, of which Samsung and SK Hynix together account for a net outflow of $58.6 billion. Goldman Sachs estimates that since late October, diversification rules have prompted about $69 billion worth of selling.

Funds focused on the Korean market are struggling to deal with the rising weight of the two companies. The Goldman Sachs analyst team led by Timothy Moe said that if the concentration continues to rise, selling pressure may further increase, though most of the selling may already be nearing an end.

Samsung and SK Hynix weigh over half, funds forced to seek alternative chip exposure

The root of the issue lies in these two companies' extremely high weighting in the South Korean stock market. Bloomberg data shows that Samsung Electronics and SK Hynix together make up 52% of the Korea Composite Stock Price Index (Kospi) market value, with Samsung Electronics accounting for 27% and SK Hynix for 25%—far higher than SK Square, Hyundai Motor, Samsung Electro-Mechanics and other companies, each with a weighting of only about 2%.

This highly concentrated market structure means that any significant fluctuation in a single stock is enough to drag the entire index, and also makes diversified funds holding Korean stocks more likely to hit the position cap.

Under the constraints of the position cap, some investors have begun seeking alternative ways to gain exposure to the semiconductor sector. Ha Seok Keun, Chief Investment Officer at Eugene Asset Management in Seoul, pointed out that investors may expand their exposure to the chip industry indirectly through affiliated companies, holding companies, or insurance companies that have large holdings in the two companies.

This strategy offers flexible options for funds bullish on the long-term prospects of Korea's chip sector but restricted from increasing direct holdings due to compliance issues, and may also bring additional capital inflow to related affiliated targets.

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