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New GICS on the block

  • Investment Insights
  • 5 minute read

How we live is changing fast. Technology is redefining the products we buy and services we consume in every conceivable way. Whether this is driving autonomous cars or playing e-sports, society is changing at breakneck speed. How we communicate and seek entertainment and information of any kind is almost unrecognisable from a decade or two ago.

New GICS on the block

As a result, investment sectors are undergoing significant changes. This update to the Global Industry Classification Standard (GICS), which is jointly maintained by S&P Dow Jones Indices and MSCI, is huge news and is affecting a number of big companies and three sectors.*

Sector classifications are fundamental to most benchmarks and the expression of any “house view”. Given that our Close Tactical Select Passive (TSP) fund range intends to be the purest expression of ours, I have had to make sure that the ETFs we use will still express Tactical Asset Allocation (TAA) after the changes.

Sector overhaul

Consider this: in 1900 US sectors were split 50/50 between railroads and manufacturing. Now railroads is just a sub-industry. In 1993 telecoms comprised more than 10% of the S&P 500 but now this sector has declined to little more than 2% of the index with just three constituents (by 2017).

Through mergers and acquisitions, media, telecommunications and internet companies have converged into significant conglomerates which scoop up and disseminate data across multiple channels and platforms, whether fixed line, mobile or cable networks. The hitherto classification of Telecommunication Services had arguably become outmoded.

A new sector called Communication Services has been created to reflect this. Beneath it sit two industry groups: 1) Telecommunications Services and 2) Media and Entertainment; both groups are in turn split into industries and sub-industries. Overall, Communication Services will increase in size as it absorbs constituents from elsewhere.

Where have all the FAANGs gone?**

Alphabet (the parent company of Google) and Facebook have moved to Communication Services from Information Technology, and are the two largest constituents at ~23% and 21% respectively. Netflix (~5%), Walt Disney (~4.5%) and Twentieth Century Fox (~5.6%) hail from Consumer Discretionary. Activision Blizzard (an American video game holding company, ~4.6%) and AT&T (~5%) show the range of the new sector classification and its intention to group together companies with similar sources of revenues or operations.

Amazon is staying in Consumer Discretionary and at ~23.5% will, by some margin, be the largest constituent ahead of Home Depot and McDonalds (~10.2% and ~6% respectively).

Apple and Microsoft will remain in Information Technology at ~20% and 16% respectively.

Impact on ETFs

This change to GICS is unprecedented given that only 5% of index constituents have changed sectors since December 1996. For benchmarking and TAA it’s seismic, and perhaps more so for buyers of ETFs. At Close Brothers, our extensive due diligence and panel of approved ETF providers have allowed us to address these changes with confidence and ahead of time.

Creating a new sector and shuffling the constituents of others lead to many questions which need answers: does my ETF now reflect the new index faithfully? Do I actually want to own what’s in it? If I originally wanted exposure to technology and growth, where do I get that now? Is the new Communication Services sector a play on growth and what will its projected fundamentals for P/E ratios, price-to-book, dividend yield and beta be?

For all investors these are important questions, and especially so for sector-based and Smart Beta ETFs. Watching developments will be very interesting.

Value added

Would a client buying ETFs via a fund supermarket or a robo-advisory service have seen the GICS changes and consequently altered his or her portfolio? Perhaps.

Admittedly, such changes don’t come along every day. But we believe it’s a clear example of the value we provide to our clients through the Close TSP range. Realising that how we are communicating is rapidly changing is one thing; but converting this knowledge into investment opportunities is quite another. At Close Brothers Asset Management, this is what we strive to do every day with the money clients entrust to us.

 

*S&P made these changes on 24th September 2018; MSCI will adapt theirs on 30th November 2018.
**Data sourced from S&P Dow Jones Indices, “Global Applications of S&P500 Sectors”, June 2018.

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