Tata MF Files for Global Semiconductor Fund of Funds

Tata Mutual Fund has just filed with SEBI for a Tata Semiconductor Fund of Funds. A fund of funds or FOF is a feeder fund that will invest in semiconductor stocks in other countries.

In this case, the Tata Semiconductor FOF will invest in global semiconductor ETFs since these would be benchmarked to an index and hence costs would be a lot lower. This will give the Tata Fund passive participation at an economical cost.

There are several semiconductor related ETFs in the global market. Some of the popular names are iShares Semiconductor ETF, iShares MSCI Global Semiconductor UCITS ETF, Van Eck Semiconductor ETF, SPDR S&P Semiconductor ETF and Fidelity Semiconductors.

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While iShares are managed by Blackrock (the largest ETF manager in the world), SPDR is managed by State Street Global Advisors. Both Blackrock and SSGA are among the largest passive fund managers in the world.

There is an interesting background to the semiconductor story. In the last 2 years, there has been a spurt in demand for mobile phones, computers and gaming consoles. At the same time, cars and other home appliances have become a lot smarter and savvier.

The one factor behind this story is the chip or the semiconductor, which is the heart and soul of any modern day appliance. If demand is one side of the story, the other is supply and the world is likely to be undersupplied with semiconductors for next few years.

Mobile phones, notepads and laptops have been the biggest consumers of semiconductors. But the manufacture of semiconductors is a tricky business.

It takes an investment of $5-6 billion to set up a semiconductor fabrication unit (FAB) and the supply would take 4-5 years to come in.

Globally, some of the largest semiconductor companies in the world include Intel, Samsung, Taiwan Semiconductors (TSMC), SK Hynix, Broadcom, Qualcomm, Nvidia etc.

Most of these stocks have been multi-baggers in the last 3-5 years and despite steep valuations, most of them are expected to outperform in the coming quarters due to the persistent shortage.

Just look at 2 of the most valuable semiconductor stocks in the world. Nvidia and TSMC have a combined market cap of $1.6 trillion. That is the kind of value creation that has happened in these stocks and there is still room.

That is what the Tata Semiconductors fund is betting on. After all these semiconductor chips are not just integral to mobiles and laptops but to white goods, cars and other electrical appliances.

They could see an explosion in demand with the rise in new avenues like Internet of Things, Artificial Intelligence, Machine Learning etc.

With the India corporate story seeing a lot of questions on valuations, fund houses are looking at some international diversification. New ideas wherein Indian investors can participate in global stories like semiconductors, electrical vehicles etc will surely help.

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