A top-performing asset manager is warning that few software firms will survive the rapid growth of artificial intelligence – which could potentially automate most of their services.
Nick Evans, a Polar Capital fund manager, saw his $12 billion global technology fund beat 99% of peers over a one-year period and 97% over five years by selling off software stocks ahead of the crowd, according to a Bloomberg report.
“We think application software faces an existential threat from AI,” Evans told Bloomberg.
Software stocks have been slammed over fears that AI, particularly tools like Anthropic’s Claude Cowork, will automate application software – which helps users complete tasks like writing documents, creating spreadsheets and managing payrolls.
An exchange-traded fund tracking the US software sector is down more than 22% so far this year. Industry leaders like Salesforce and ServiceNow are down 25% and 27%, respectively.
Evans said Polar Capital has sold virtually all of its holdings in software firms like SAP SE, ServiceNow, Adobe and HubSpot – telling Bloomberg that the fund “won’t go back to these companies.”
Investors should be “significantly underweight application software and they have to react quickly, because as the models get better, the disruption is accelerating,” Evans said.
The market rout could also hurt software firms in the long run, since many employees receive shares as part of their compensation – and managers could be forced to make up for the equity losses by shelling out more cash, according to Evans.
“We don’t believe current prices reflect the terminal value uncertainty or the pressure on free cash flow,” he told Bloomberg.
Software companies are facing heated competition not just from AI giants, but from their own clients, who are rushing to develop in-house AI tools to cut down on costs.
Evans told Bloomberg he expects only a few companies to survive a painful reckoning ahead – comparing it to the internet’s blowout impact on print media in the 2000s.
Some companies – like SAP, a German firm that makes complex software packages – will be more resilient during this market shift, Evans said.
But AI tools are “getting dramatically more powerful,” so it’s unclear how even the most specialized software firms will fare in the long term, he added.
The outperforming hedge fund is bullish on chipmakers, with semiconductor firms making up seven of its top 10 positions as of the end of January.
Its top holding is Jensen Huang’s Nvidia – which accounts for nearly 10% of the total portfolio.
The fund is also optimistic on firms that make networking gears and fiber optics, and those that provide energy infrastructure critical for power-hungry data centers.
Evans also increased holdings in infrastructure software firms like Cloudflare and Snowflake in January, and said he has a neutral view on cybersecurity software, which doesn’t appear to face any immediate risks from the growth of AI.
Wall Street is still debating the future of the software sector in the face of artificial intelligence.
JPMorgan Chase strategists took a more optimistic view last week, writing that software stocks like Microsoft and ServiceNow could rebound following recent “extreme price action.”
