TSMC's Dominance and Regulatory Constraints Impacting Fund Performance: Structural Challenges in AI-Driven Markets

The global AI revolution has cemented TSMC's position as the linchpin of semiconductor innovation, but its meteoric rise is now colliding with structural investment constraints. As AI-driven demand for advanced chips surges, TSMC's dominance-accounting for 57% of its Q3 2025 revenue from high-performance computing (HPC) and AI-related chips, according to a Carbon Credits report-has created a paradox: while the company fuels the AI boom, its outsized influence in financial indices and regulatory frameworks is stifling fund managers' ability to capitalize on its growth. This article dissects how single-stock caps, U.S. export controls, and production bottlenecks are reshaping the investment landscape for TSMC and its stakeholders.

TSMC's Unstoppable Momentum in AI, Amid Supply Constraints

TSMC's third-quarter 2025 results underscore its critical role in the AI ecosystem. With a 39% year-on-year profit increase and a 30.3% revenue surge, according to a Carbon Credits report, the company has become indispensable to tech giants like Nvidia and Apple, which together account for over 40% of its annual revenue, according to a Taiwan News report. However, this success is shadowed by operational hurdles. CoWoS packaging bottlenecks have slowed growth to a 16.9% year-on-year increase in October 2025-the slowest in 18 months, according to a Neuron Expert report, while U.S. export controls restrict the shipment of advanced equipment to TSMC's Chinese facilities, as reported by a Silicon Angle report. These constraints, coupled with rising competition from Samsung and Intel's 2nm chip development, according to a Carbon Credits report, highlight the fragility of TSMC's dominance despite its technological edge.

Single-Stock Caps: A Wall Between Funds and TSMC's Growth

TSMC's stranglehold on key indices has created a regulatory quagmire for fund managers. The company now constitutes 43% of the Taiex index and 12% of the MSCI Emerging Markets Index, according to a Livemint report, forcing funds governed by 10% single-stock caps-such as EU UCITS or Taiwanese regulations-to underweight TSMC. Passive funds can align with benchmarks, but active managers face a dilemma: either dilute their exposure to TSMC or forgo potential outperformance.

For example, European funds constrained by UCITS rules cannot allocate more than 10% of their portfolios to TSMC, even as the company's AI-driven earnings outpace peers, according to a Bloomberg report. To circumvent this, some managers hedge using derivatives or invest in TSMC's ecosystem partners like Hon Hai or ASE, according to a Livemint report. However, these alternatives lack TSMC's pricing power and resilience, as evidenced by its 22.6% U.S. dollar-adjusted revenue growth in October 2025 despite slowing global sales, according to a Neuron Expert report.

Regional Underperformance and Strategic Workarounds

The impact of single-stock caps is most pronounced in regions where TSMC's influence is profound. In China, AI-focused portfolios excluding TSMC missed out on semiconductor-linked gains, despite local firms like Alibaba and Tencent ramping up AI investments, according to a Vaneck report. Similarly, South Korean funds, while benefiting from memory chip demand, struggled to replicate TSMC's AI-driven growth trajectory, according to a Vaneck report.

Fund managers have adopted creative strategies to mitigate these constraints. Some employ futures contracts to hedge index exposure, while others allocate to TSMC's suppliers or customers. However, these tactics often fall short. For instance, Hon Hai's revenue growth in 2025 lagged behind TSMC's, and ASE's earnings volatility exposed investors to supply chain risks, according to a Livemint report.

The Road Ahead: Balancing Growth and Constraints

TSMC's expansion plans, including a 90,000 CoWoS wafer/month target by 2026, according to a Neuron Expert report, aim to alleviate supply bottlenecks. Yet, regulatory headwinds-particularly U.S. export controls-remain a wildcard. For fund managers, the challenge lies in navigating these constraints while maintaining alignment with AI-driven benchmarks. Morningstar analysts note that TSMC's capital expenditure increases and optimistic revenue forecasts, according to a Morningstar report, suggest its dominance will persist, but investors must weigh the risks of overexposure against the rewards of its AI-driven growth.

In conclusion, TSMC's role in the AI era is both a blessing and a curse for fund managers. While its technological leadership drives unparalleled demand, regulatory and structural barriers are creating a fragmented investment landscape. As the AI market evolves, the ability to innovate within these constraints will define the success of both TSMC and the funds that seek to harness its potential.