Polar Capital fund manager Nick Evans profited handsomely from a strategy of selling software stocks before they tumbled. He warned potential bargain hunters: Most stocks remain risky, and few software companies can weather the storm. "We believe application software is facing an existential threat from artificial intelligence," Evans said. The US$12 billion global technology fund he manages has outperformed 99% of similar funds in the past year and 97% of its peers in five years.
Market concerns that advanced artificial intelligence tools such as Anthropic PBC's Claude Cowork will disrupt the software industry have caused related stocks to plummet this year. Exchange-traded funds tracking the U.S. software sector fell 22%, contrasting with a surge in semiconductor stocks as artificial intelligence drives computing demand.
Evans pointed out that application software, such as document writing and payroll management tools, are particularly at risk. In addition to a small position in Microsoft and some call options, the fund manager has liquidated all other positions in the sector, including SAP SE, ServiceNow, Adobe and HubSpot. "We will no longer invest in these companies," he said in an interview.
In his view, AI programming tools have come a long way, enabling them to copy and modify large swaths of existing software. This means that traditional companies not only have to face competition from artificial intelligence startups, but also the internal competition among customers to develop new tools to reduce costs.
Evans believes that providers of complex software packages such as SAP may be more resilient. But he pointed out that as AI tools "increase dramatically in strength," there is huge uncertainty about their long-term valuation.
As of the end of January, seven of the fund's top ten holdings were semiconductor companies, including Nvidia, the largest holding accounting for nearly 10% of the portfolio. In addition to chip manufacturers, Evans said he is optimistic about network equipment manufacturers, fiber optic companies and companies that provide power and energy infrastructure for data centers.