Manchester & London reacted swiftly to the technology sell-off, slashing exposure to Microsoft as software companies went into freefall on the back of Anthropic’s latest offering.

Mark Sheppard, manager of the £409m tech trust, cut his 21.8% exposure to Microsoft to just 4.8% over the past week as losses ramped up at the tech giant, which is down 13.5% over the past week. 

Technology stocks have been on a downward trajectory but losses gathered pace following the launch of Anthropic’s new legal tool.

The potential applications of Anthropic’s time-saving productivity tool threw the future viability of data companies into question, triggering a wave of double-digit downgrades that started in the US market and rippled through to UK equities.

Data-reliant businesses such as Relx, London Stock Exchange Group and Experian are down 17.9%, 12.8% and 9.3% respectively since markets opened on Monday, dragging the likes of Finsbury Growth & Income down with them. They are among manager Nick Train’s top holdings, jointly making up a third (33.6%) of the £903m portfolio. FGT’s share price is down 5.3% since the start of the week.

Even worse affected is HgCapital, which has lost a quarter off its share price in the past week. Its specialism in unquoted software businesses has left it particularly exposed to the market sell-off.

MNL was not unscathed despite moving early, with shares down 6.9% over the past week.

‘There’s three sorts of fund manager when things become difficult,’ he said. ‘One that does nothing, another that doubles up on their positions that have gone down, and there’s a rarer sort that listens to the market and starts adapting – we are the latter.’

Sheppard avoided some of the worst drawdowns in doing so, but software companies’ markedly reduced prices may now be looking attractive to value-seeking investors. That would be a mistake, he said.

‘The sell-off in these UK companies like Relx and LSEG is totally warranted and I suggest they will have further to fall. There may be some bounces and recoveries along the way, but at the end of the day, these business models have now been disrupted,’ he said. 

‘The stock market is not stupid as a collective. If it starts marking down these companies by 15% in a day, that’s because people can clearly see the sense of direction.’

Many of the software business that have been damaged in recent days will eventually recover, but it will take years to bring them up to speed with rapid development in AI, according to Sheppard.

The sell-off has echoes of the 2000s, when software companies moved to a per-seat licensing model which caused ‘three years of turmoil with some heavy drawdowns’ for the sector. Sheppard expects a similar prolonged bout of growing pains for software companies now that they transition from the per-seat system to an outcome one.

‘Will they disappear? No they won’t,’ he said. ‘But whenever a stock or a business has to change its business model, it isn’t a quick process.

‘Look at any turnout in history, like Starbucks, or Nike, or Rolls Royce – they took years, and they’re very small turnarounds by comparison.

‘These software companies are right at the beginning here, so anyone suggesting that they’re going to dive in and buy some of these because it’s going to be a quick turnaround, well, I’d be very surprised.’

Sheppard held a 3.1% position in US software company Synopsys until recently but sold out as it became increasingly apparent that AI would disrupt its business model. Its share price is down 18.4% over the past week.

Shoot first and ask questions later

The hit to companies developing application software – systems developed for individual users or small teams – did not come as a surprise to Sheppard, who foresaw their current models becoming redundant because of AI.

He was not, however, expecting enterprise software developers – who create scalable systems for large organisations – to be called into question.

Sheppard thought Microsoft would be shielded due to it being a hyperscaler that is ‘growing very fast’, but decided to ‘downsize that position dramatically’ once it came under fire.

‘We first said that AI is going to disrupt application software three years ago, so this is no surprise to us. It is a surprise that the pain has bled into enterprise software,’ he said.

‘The market has decided that it needs to see progress in hyperscalers, the big problem being that they are spending more on capex than their revenue growth. Microsoft pointed out in their results of their revenue growth is likely to accelerate, but in the meantime, the market wants to shoot first and ask questions later.’

Despite sharp drawdowns among software companies in recent days, Sheppard does not think the projected disruption on these companies from AI has been overblown.

Elon Musk’s ambitions to build AI data centres in space may have sounded outlandish when he announced SpaceX’s acquisition of xAI on Monday, but investors should pay attention to the direction of travel.

‘People are seriously considering, on an economically sound basis, putting data centres in space,’ Sheppard said. ‘Is that saying that AI is going to grow nice and gently for a few years, or is it telling you that growth in AI is going to be absolutely monstrous?’