Mutual Funds

Should you invest in Nippon India Taiwan Equity Fund NFO?

Hari Vishwanath | | Updated on: Dec 04, 2021
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Nippon India Taiwan Equity Fund is India’s first Taiwanese equity fund and will mainly bet on sub-sectors within semiconductors

Nippon India Mutual Fund has launched its Taiwan Equity Fund, an open ended fund that will invest in stocks listed in Taiwan. The NFO of India’s first and only Taiwanese equity fund is open till December 6.

Nippon India Taiwan Equity Fund (NITE) is being offered by Nippon India in collaboration with Cathay SITE, which is one of the largest asset managers in Taiwan with assets under management of around $42 billion.

Cathay Site, given its local market expertise, will be the advisor for the fund. The advisory service will, however, be non-binding and recommendatory in nature. The fund will follow a multi-cap investment strategy with the portfolio comprising growth and value stocks. Its focus will be on new technology trends and it will hold less than 10 per cent investment in a single stock. Nippon India Taiwan Equity Fund will be benchmarked against the Taiwan Capitalization Weighted Stock Index (TAIEX).

What is unique about Taiwan?

‘American Components….Russian Components….all made in Taiwan!’ goes the comic dialogue in the movie Armageddon and true to that, Taiwan plays a critical role in the global supply chain for electronics and semiconductors. Information Technology accounts for around 57 per cent weightage in TAIEX, reflecting the country’s manufacturing prowess in this sector. The other sectors in the index are financials and materials with 12.1 and 9 per cent weightage respectively. In the MSCI Emerging Markets Index, Taiwan has the second highest weightage of around 14.71 per cent, behind China, and ahead of India.

Taiwan’s dominance in the global electronic/semiconductor supply chain can be gauged from some statistics — it has around 20 per cent share in production in the global silicon wafer segment, around 73 per cent in custom IC fabrication (IC stands for integrated circuits), 49 per cent in IC testing and packaging and near 20 per cent in IC design.

Broadly, it held the number one or number two position globally in many of the sub-sectors within semiconductors. It holds a significant 52 per cent market share in global semiconductor contract manufacturing.

Most of the the hi-tech semiconductor giants in the US (like Qualcomm, Nvidia, Broadcom, AMD) follow what is known as a ‘fabless’ business model, wherein they design and sell the hardware/semiconductor chips, but outsource the manufacturing of the chips to foundries (factory where semiconductor chips are manufactured). In fact, this has been one key factor amongst others in driving stock price performance for some semiconductor companies.

For example, the poster child of the semiconductor industry – Intel, has faced severe technology-related production/efficiency problems in its captive foundries. In the last one year, the stock of Intel is down 1 per cent, while that of its peer, Advanced Micro Devices(AMD), is up 72 per cent. AMD was able to complement its improved processor technology with its fabless business model, and thereby strongly benefited from the superior tech manufacturing prowess of Taiwan Semiconductor Manufacturing Company, the world’s largest foundry..

In recent times, the role of Taiwan in the technology supply chain has only become more crucial following the global semiconductor chip shortage. This apart, as a sector, semiconductors have numerous tailwinds over the next decade driven by accelerated digitisation trends. Also, as compared to other sectors, manufacturing in semiconductors is extremely high-end and precision-driven, requiring unique competencies that are not easy to displace.

That Taiwan companies have been able to continue to dominate this space for decades is in itself a case in point. Also, the fact that a giant like Intel has not been able to match the manufacturing technology of TSMC is another indicator.

Thus, while Nippon India Taiwan Equity Fund looks at opportunities in the Taiwanese domestic market beyond technology, it is primarily a bet on sub-sectors within semiconductors.

Risks to factor

Some of the key risks to factor when it comes to considering an investment in the fund are the following. One, Nippon India Taiwan Equity Fund comes with no clear past track record to evaluate. The fund presentation has highlighted the returns of TAIEX over the last 11 years. The CAGR returns including currency benefits comes to around 11 per cent. This is not any different from the S&P BSE 500 returns which also works out to around 11 per cent in the same period.

Excluding currency benefits of the appreciation of Taiwan Dollar (TD) against the Indian rupee, the S&P BSE 500 is a clear winner. On an average, INR has depreciated by around 5 per cent against the TD in the last 11 years.

Two, semiconductors is a highly cyclical industry that goes through phases of over supply and undersupply driving wild swings in many of the stocks. There is no reason to believe this has changed despite accelerated digitisation trends. We are currently in an upcycle and the tide can change sometime in future.

Three, the geopolitical risks involving Taiwan due to a belligerent China under President Xi, although a tail risk, cannot be ignored entirely. China views Taiwan as a break-away province and President Xi is on record saying that the re-unification must be fulfilled. Beijing has not ruled out the possible use of force to achieve re-unification. While such an event would be a big risk for the entire global stock markets, it is significantly more so for investments in Taiwan.

Besides these risks, there is one more important factor that makes zeroing in on semiconductor investment opportunities in the US the first option for investors interested in that space. There is greater value in chip/processor design and development, than in manufacturing, which is the reason most of the international giants have gone fabless. However, currently there is no fund on offer that enables one to tap this space. The Nasdaq 100 investment opportunity offered by some fund houses has only around 15 per cent weightage to semiconductors.

Published on December 04, 2021

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