Samsung May See Passive Funds Cut Exposure Sooner Than Expected

(Bloomberg) -- A cap on Samsung Electronics Co.’s weight in a Korean equity index could kick in earlier than planned, triggering fears that billions of dollars will exit the stock.

Instead of the bi-annual adjustment, the Korea Exchange is considering putting a 30% limit on Samsung’s weighting on the Kospi 200 Index earlier due to the stock’s recent rally, said Ahn Kil-Hyun, the manager of the team that oversees the index. Given the gauge’s popularity among passive funds, research provider Smartkarma’s Douglas Kim expects between $1.2 billion and $1.5 billion in net selling of Samsung shares as a result.

The bourse adopted the 30% cap in June 2019 to prevent a potential plunge in the entire market due to a single stock, rebalancing every June and December. Smartkarma says there’s an 80%-90% chance the rule will kick in for Samsung in March or April.

“It is true that the Kospi 200 Index is being distorted because of Samsung,” Ahn said. “We just want to minimize shocks to the market.”

Ahn added that details have yet to be confirmed, including the frequency of rebalancing. The Kospi 200 index is a market-cap weighted gauge provided by the Korea Exchange. About $30 billion passive funds track the index, according to Gilbert Choi, analyst at NH Investment & Securities. After soaring 44% in 2019 and 9.5% so far this year, Samsung currently accounts for 33.1% in Kospi 200 Index, up from about 28% in September.

A Samsung Electronics spokesman declined to comment on the exchange’s discussions.

The potential forced selling in Samsung shares shows decisions by index providers have grown increasingly important for stock markets in recent years, thanks to the rising popularity of passive investment strategies.

Samsung’s outsized influence on the Korean gauge compares with just a 4.8% weighting of the U.S.’s largest company, Apple Inc., on the S&P 500 Index.

“I’m not sure if such a cap can prevent a distortion in the stock market, as the cap itself could be a factor for distortion,” said Hyun Choi, head of equities at Barings Korea. “It may result in investors increasing exposure to other large caps in their portfolio, which can lead to price distortion.”

SK Hynix Inc., a peer of Samsung and the second-biggest member on Kospi 200, has a 6.4% weight on the measure, followed by Naver Corp.’s 2.65% and Hyundai Motor Co.’s 2.09%.

Other global indices including DAX and Euro Stoxx 50 have market-cap restrictions for a single stock, with both having a limit of 10% for any one stock and they are adjusted on a quarterly basis, according to a note from Smartkarma.

--With assistance from Abhishek Vishnoi, Hitomi Kimura and Sohee Kim.

To contact the reporter on this story: Heejin Kim in Seoul at hkim579@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Naoto Hosoda

©2020 Bloomberg L.P.