Software risk or renaissance?

Magellan Investment Partners

February 2026

(5-minute read)

Artificial intelligence (AI) is driving a structural shift across the technology landscape. This transition has sparked recent fear regarding the long-term viability of traditional software vendors and their established business models. Much of this fear stems from the perceived disruptive threat of AI challengers and the falling cost of software development.

In our view, AI brings both risk and opportunity to software. It is a mistake to view the sector as a monolith. Software is as diverse as the applications and industry verticals it serves. Consequently, the impact of AI will vary significantly across the spectrum of vendors. When the market penalises the sector as if it were a homogeneous entity, it creates some opportunity to identify mispriced assets. We believe a number of enterprise software incumbents remain among the most attractive investment opportunities today.

What exactly are the concerns? We break these down to four distinct areas.

1. Lower cost of software development, enabling customers to rapidly build bespoke internal tools to replace incumbent solutions.
2. Accelerated competition from new software entrants who can exploit the same lower cost of development to come to market quickly.
3. Displacement of traditional software by AI-native applications that change how work is done.
4. Lower workforce headcount resulting from higher AI-driven productivity or professional displacement, affecting seat-based pricing models.

All of these concerns are both valid and, to some degree, observably taking place. The risk-weighted impact, however, depends on the software category and the software vendor being considered.

• First, while AI does unlock productivity gains in coding, enterprise software is more than just packaged binaries. For example, a software customer may be acquiring embedded domain knowledge and industry best practice (such as in supply chain software) or technical specialisation and depth (such as electronic design automation). In-house development is not a one-and-done. A software customer is contracting with a proven vendor who provides continuous development, security and compliance, and service guarantees. It offloads complexity and development risk for the customers, who can then focus on core competencies while benefiting from the vendor's future product innovation.

• Second, there are categories of software that have always been difficult to displace even in the face of competing options. Attributes contributing to this include systems of record, operational embedment, network effects or where outcomes must be deterministic and the cost of error is high. Enterprise Resource Planning (ERP) software is a category that ticks these boxes. Having access to AI alone does not change the long-standing reality that new entrants must contend with these barriers. Software risk or renaissance? 

• Third, AI is an openly accessible capability rather than the exclusive domain of new entrants. Incumbent vendors can find themselves better positioned to integrate AI into their existing suite and leverage its benefits for customers in a way that outside vendors would struggle to replicate. For the customer, adopting integrated AI features can be more effective and cost-efficient than stitching together disparate tools or risking a move to an unproven new platform. 
   
• Finally, there is material uncertainty regarding AI's future impact on the labour force. While workforce contraction in isolation could be a headwind for software vendors using seat-based pricing, those that can unlock higher productivity will capture their share of the value generated, regardless of the specific pricing mechanism. We are already seeing this take place with consumption models or new pricing tiers, such as the newly introduced Microsoft 365 E7 suite, which offers expanded agentic capabilities and is priced at a premium of over 70% to the preceding E5 tier. 

AI is a transformative development, and we expect further emergence of compelling new applications that could change how people work. Because the software sector is so diverse, what this means for any given vendor depends on their specific circumstances. For some software names, AI will be disruptive and a risk to their business models. For the highest-quality software vendors like SAP, Microsoft and Intuit, AI is likely to bring a 'renaissance' of opportunity.

Adrian Lu, Senior Investment Analyst

Funds operated by this manager:

Vinva Global Alpha Fund - Active ETF (ASX: V1AC) , Vinva Australian Equity Fund , Vinva Global Equity Fund , Vinva Australian Alpha Extension Fund , Vinva Global Alpha Extension Fund - Class A , Magellan Infrastructure Fund , Magellan Global Opportunities Fund No.2 , Magellan Infrastructure Fund (Unhedged) , Magellan Core Infrastructure Fund , Magellan Global Opportunities Fund Active ETF (ASX:OPPT)

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Becoming wary of software

Challenger Investment Management

March 2026

(9-minute read)

Challenger IM Credit Income Fund , Challenger IM Multi-Sector Private Lending Fund

For Adviser & Investors Only

Disclaimer:

This material has been prepared by Challenger Investment Partners Limited (Challenger Investment Management or Challenger), ABN 29 092 382 842, AFSL 329 828.

This document does not relate to any financial or investment product or service and does not constitute or form part of any offer to sell, or any solicitation of any offer to subscribe or interests and the information provided is intended to be general in nature only. This should not form the basis of, or be relied upon for the purpose of, any investment decision. This document is not available to retail investors as defined under local laws.

This document has been prepared without taking into account any person's objectives, financial situation or needs. Any person receiving the information in this document should consider the appropriateness of the information, in light of their own objectives, financial situation or needs before acting.

This document is provided to you on the basis that it should not be relied upon for any purpose other than information and discussion. The document has not been independently verified. No reliance may be placed for any purpose on the document or its accuracy, fairness, correctness, or completeness. Neither Challenger Investment Management nor any of its related bodies corporates, associates and employees shall have any liability whatsoever (in negligence or otherwise) for any loss howsoever arising from any use of the document or otherwise in connection with the presentation.

Emerging Markets: How AI concerns are impacting India

Pendal

March 2026

(5 minutes read time)

Fears that rapid advances in artificial intelligence could slow global IT spending have weakened investor confidence in Indian software stocks. Pendal's Global Emerging Markets Opportunities team investigates the implications for India's growth and current account balance.

THE explosion in capability of AI models in recent months has led some equity market participants to become more cautious about the outlook for various service sector industries, leading to selloffs in sectors from software to financial planning.

As investors who approach the asset-class primarily through top-down, country-level developments, the GEMO team has been thinking about what this might mean for India.

India is one of a group of emerging markets that tend to run current account deficits.

"These are countries that have significant latent domestic demand but where, for various historical, geographical or institutional reasons, domestic production falls short. These markets tend to have higher beta to global liquidity and risk appetite," says James Syme, senior fund manager, JOHCM.

"Most pertinently for India, the growth cycles of these countries tend to be constrained by inflation and external deficits, with both vulnerabilities reflecting demand running too far ahead of supply."

Since the end of 2010, India's current account deficit has averaged 1.7 per cent of GDP, although the maximum deficit was 5.1 per cent of GDP.

The structure of the current account balance has developed through time, and changed with India's economic cycle, but some components remain structurally important.

In 2025, India ran a deficit in non-oil goods of US$189 billion (4.9 per cent of GDP). Net oil imports were US$122 billion (3.2 per cent of GDP).

The resultant trade deficit of US$311 billion (8 per cent of GDP) was substantially offset by a net positive services balance of US$210 billion (5.4 per cent of GDP).

Notably, the surplus in IT services was US$227 billion (5.9 per cent of GDP). India also ran a positive income balance of US$85 billion (2.2 per cent of GDP), for an overall current account deficit of US$17 billion (0.4 per cent of GDP).

Syme says this relationship between IT service exports and oil imports is key for India's economy, and the two have grown together.

In fiscal year 2019, net IT service exports were US$85 billion, and oil imports were US$93.9 billion.

"The varying cycles in global IT service spending and the oil price are key for the health of the Indian economy," explains Syme.

At a time of higher oil prices, what does the downturn in sentiment towards software and IT service stocks mean for India?

In the first two months of 2026, the MSCI India IT Index has fallen over 20 per cent in USD terms.

"This is concerning, because the aggregate revenue of India's listed IT companies has a high correlation with the economy's IT service exports," says Syme.

If the negative outcome that stocks are pricing in comes to pass, particularly with higher oil prices, India's growth may be constrained by the current account balance.

"However, it is important to note that the 12-month forward consensus estimates for both the revenues and profits of the constituents of MSCI India IT Index have increased by 3.4 per cent year to date," notes Syme.

"This steady growth in the fundamental outlook for these companies suggests both opportunity in the sector, where we remain overweight, and ongoing support for the Indian economic growth story, although we remain underweight the country on valuation grounds.

"We do not feel that share price moves alone constitute a macro-level signal for India at this time."

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Pendal MicroCap Opportunities Fund , Pendal Sustainable Australian Fixed Interest Fund - Class R , Pendal Focus Australian Share Fund , Pendal Horizon Sustainable Australian Share Fund , Regnan Credit Impact Trust Fund , Pendal Sustainable Australian Share Fund , Pendal Multi-Asset Target Return Fund , Barrow Hanley Concentrated Global Share Fund , Pendal Active Balanced Fund , Pendal Active Conservative Fund , Pendal Australian Equity Fund , Pendal Australian Long/Short Fund , Pendal Australian Share Fund , Pendal Dynamic Income Fund - Class R , Pendal Fixed Interest Fund , Pendal Global Emerging Markets Opportunities Fund - Wholesale Class , Pendal Global Property Securities Fund , Pendal Government Bond Fund , Pendal Imputation Fund , Pendal MidCap Fund , Pendal Monthly Income Plus Fund , Pendal Property Investment Fund , Pendal Short Term Income Securities Fund , Pendal Smaller Companies Fund

 This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at December 8, 2021. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient's personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

Australian Secure Capital Fund - Property Update

Australian Secure Capital Fund

March 2026

(1-minute read)

February was another strong month for Australian property values, posting a national rise of 0.8% for the second consecutive month. Perth (+2.3%) again led the way with a second straight monthly rise of greater than 2%, adding more than $22,500 to the median dwelling value over the month. Similarly, Brisbane (+1.6%) and Adelaide (+1.3%) again saw monthly increases of greater than 1%. 

Conversely, values in Melbourne and Sydney were flat over February, with both cities notching slight rolling quarterly decreases of -0.4% and -0.1%, respectively. As a result, regional areas continue to outperform the capital cities, rising by 1.1% month-on-month, compared to 0.6% for the capitals. Nationally, rents increased 1.7% over the three months to February 2026, denoting the highest rolling quarterly increase since April 2025. 

Source: Cotality HVI, 02 March 2026

Funds operated by this manager:

ASCF Select Income Fund , ASCF High Yield Fund , ASCF Premium Capital Fund , ASCF Private Fund (Wholesale)