Fund Beating 99% of Peers Sees Few Software Firms Surviving AI

Core Viewpoint - The application software sector is facing significant existential threats from advancements in AI, leading to a decline in stock values and a challenging environment for established firms [1][2]. Group 1: Market Performance - An exchange-traded fund tracking the US software sector has decreased by 22% this year, contrasting sharply with the semiconductor sector, which has seen substantial gains due to increased demand for computing driven by AI [2]. - The Polar Capital fund, managed by Nick Evans, has outperformed 99% of its peers over the past year and 97% over five years, indicating a successful strategy in navigating the current market conditions [1]. Group 2: Company Strategies - Nick Evans has divested from most application software holdings, retaining only a small position in Microsoft Corp., and has sold off shares in companies like SAP SE, ServiceNow Inc., Adobe Inc., and HubSpot Inc., stating a commitment not to return to these companies [4]. - Companies producing complex software packages, such as SAP, may exhibit more resilience; however, the increasing power of AI tools introduces significant uncertainty regarding their long-term valuations [6]. Group 3: Competitive Landscape - AI coding tools have advanced to a level where they can replicate and modify existing software, intensifying competition for established firms from both their clients and emerging AI startups [5]. - The financial strain on software companies may increase due to the need to compensate employees with cash for lost equity value, as stock prices decline [8]. Group 4: Investment Focus - As of the end of January, seven out of the top ten positions in the Polar Capital fund were semiconductor companies, with Nvidia Corp. being the top holding at nearly 10% of the portfolio, reflecting a strategic pivot towards sectors less threatened by AI disruption [7].