Should you invest in Nippon India Taiwan Equity Fund NFO?

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

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

Cathay Site, given its expertise in the local market, will be the fund’s advisor. The advisory service will however be of a non-binding and recommendatory nature. The fund will follow a multi-capitalization investment strategy with a portfolio made up of growth and value stocks. It will focus on new technology trends and hold less than 10 percent investment in a single stock. The Nippon India Taiwan Equity Fund will be compared to 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 film Armageddon and true to this, Taiwan plays a vital role in the global supply chain for electronics and semiconductors. Information technology accounts for around 57% of TAIEX’s weight, reflecting the country’s manufacturing prowess in this sector. The other sectors of the index are financials and materials with weights of 12.1 and 9% respectively. In the MSCI Emerging Markets Index, Taiwan has the second highest weighting of around 14.71 percent, behind China and ahead of India.

Taiwan’s dominance in the global electronics / semiconductor supply chain can be estimated from some statistics: it owns about 20% of the production in the global silicon wafer segment, about 73% in the manufacturing of custom integrated circuits (IC stands for integrated circuits), 49 percent in integrated circuit testing and packaging, and nearly 20 percent in integrated circuit design.

Globally, it was ranked first or second in the world in many semiconductor subsectors. It has a significant 52 percent market share in the global contract manufacturing of semiconductors.

Most of the hi-tech semiconductor giants in the United States (like Qualcomm, Nvidia, Broadcom, AMD) follow what is called a “factory-less” business model, in which they design and sell the hardware chips. semiconductors, but subcontract the manufacture of the chips to foundries (factory where the semiconductor chips are manufactured). In fact, this has been a key factor among others in the stock price performance for some semiconductor companies.

For example, the child star of the semiconductor industry – Intel, has faced serious technology-related production / efficiency issues at its captive foundries. Over the past year, Intel’s stock has fallen 1%, while that of its counterpart Advanced Micro Devices (AMD) has risen 72%. AMD was able to complement its improved processor technology with its factory-less business model, and thus greatly benefited from the superior technological manufacturing prowess of Taiwan Semiconductor Manufacturing Company, the world’s largest foundry.

In recent times, Taiwan’s role in the technology supply chain has only become more crucial following the global semiconductor chip shortage. That aside, as a sector, semiconductors will have many tailwinds over the next decade, driven by accelerating digitization trends. Additionally, compared to other industries, semiconductor manufacturing is extremely high-end and precision-driven, requiring unique skills that are not easy to move.

The fact that Taiwanese companies have been able to continue to dominate this space for decades is in itself an example. Also, the fact that a giant like Intel has not been able to match TSMC’s manufacturing technology is another indicator.

So, while the Nippon India Taiwan Equity Fund examines the opportunities in the Taiwanese domestic market beyond technology, it is primarily betting on the semiconductor sub-sectors.

Risks to be taken into account

Some of the main risks to be aware of when considering an investment in the fund are as follows. First, the Nippon India Taiwan Equity Fund does not have a clear track record to assess. The fund presentation highlighted TAIEX’s performance over the past 11 years. CAGR returns including currency benefits are around 11%. This is no different from the returns of the S&P BSE 500, which also rise to around 11% over the same time frame.

Excluding the monetary benefits of the appreciation of the Taiwan dollar (TD) against the Indian rupee, the S&P BSE 500 is clearly a winner. On average, the INR has depreciated by about 5% against the TD over the past 11 years.

Second, semiconductors are a highly cyclical industry that goes through phases of over-supply and under-supply resulting in wild fluctuations in many stocks. There is no reason to believe this has changed despite accelerating digitization trends. We are currently in an upward cycle and the tide may change in the future.

Third, the geopolitical risks involving Taiwan due to a belligerent China under President Xi, while an extreme risk, cannot be entirely ignored. China regards Taiwan as a separatist province and President Xi publicly declares that reunification must be achieved. Beijing does not exclude a possible use of force to achieve reunification. While such an event would represent a significant risk for all global stock markets, it is significantly more for investments in Taiwan.

Besides these risks, there is another important factor that makes focusing on semiconductor investment opportunities in the United States the first option for investors interested in this space. There is greater value in chip / processor design and development than in manufacturing, which is why most of the international giants have gone factoryless. However, there are currently no proposed funds to exploit this space. The Nasdaq 100 investment opportunity offered by some fund companies only has a weighting of around 15% in semiconductors.

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