Polar Capital Fund Manager Warns: Few Software Firms Will Survive AI Disruption

Nick Evans, a fund manager at Polar Capital, has become one of the most watched investors in the technology sector after anticipating one of the biggest corrections in the software market in recent years. His $12 billion global technology fund has beaten 99% of peers over the past year and 97% over the past five years, a performance he attributes to the decision to sell holdings in application software companies before prices collapsed.

The existential threat

Evans is blunt when describing the sector's future: "We think application software faces an existential threat from AI," he told Bloomberg. This conviction led him to liquidate almost all positions in the sector, including giants like SAP, ServiceNow, Adobe, and HubSpot. "We won't go back to these companies," he assured.

The reasoning lies in the dizzying evolution of AI-assisted programming tools. Evans points to products like Anthropic's Claude Cowork as an example of how the technology can already replicate and adapt much of the existing software on the market. This capability creates a double threat: client companies can develop customized internal solutions, and AI startups can enter markets previously dominated by established players.

The software exodus

The sector is already feeling the pressure. The iShares Expanded Tech-Software Sector ETF, which tracks major U.S. software companies, has fallen more than 22% since the beginning of the year. Companies like Salesforce and ServiceNow have already lost around 25% to 27% of their value.

Evans leaves a clear warning for investors who see these drops as buying opportunities: most stocks remain "toxic" because only a few companies will survive the structural shakeout. He argues that current market valuations do not reflect the uncertainty around terminal values of software companies or the pressure on free cash flow that will worsen as share prices fall and companies are forced to compensate employees with more cash instead of equity.

The bet on semiconductors

The Polar Capital fund has aggressively repositioned into semiconductor manufacturers, which directly benefit from AI infrastructure demand. Nvidia has become the portfolio's largest position, representing about 10% of the portfolio. Exposure to the semiconductors and semiconductor equipment sector reaches 37.1%.

Evans also maintains selective positions in infrastructure software companies that support essential internet and data systems, such as Cloudflare and Snowflake, and a small position with call options in Microsoft, which he considers more resilient in an AI-dominated scenario.

Why it matters

• **Systemic risk**: The prediction from a manager with a proven track record suggests the sector's decline may not be a simple cyclical correction, but a permanent structural transformation.
• **Employment pressure**: The growing ability of AI tools to replace traditional software may accelerate digital transformation within companies, reducing dependence on external vendors.
• **Investment opportunities**: The rotation into semiconductors and AI infrastructure may indicate where institutional investors are directing capital during a phase of uncertainty in the technology market.