Late last year, MSCI and S&P Dow Jones Indices announced changes to their Global Industry Classification Standard (GICS®). The current Telecommunication Services sector will be renamed Communication Services. As part of this change, later this month several stocks currently listed in the Information Technology sector will move to the Communication Services and Consumer Discretionary sectors.
What is GICS and why is this meaningful?
GICS® was developed by S&P Global and MSCI in the late ‘90s to provide a global standard method of classifying companies by economic sector, industry, and sub-industry. Nearly 20 years on, it is the standard used by investment managers and third-party investment data providers. Most investment managers report on their portfolio’s sector and industry exposures based on the GICS system; in many cases, the investment manager’s research analyst teams are organized by sector or industry.
GICS assigns companies to sectors and industries based on their primary business activity (typically based on revenues). The system covers 68 industries organized into 11 sectors:
- Energy
- Materials
- Industrials
- Consumer Discretionary
- Consumer Staples
- Healthcare
- Financials
- Information Technology
- Telecommunication Services (to be renamed Communication Services)
- Utilities
- Real Estate
In its current form, the Telecommunication Services sector encompasses communications network providers, traditional phone carriers, and wireless services. Beginning in late September, the sector definition expands to cover advertising, broadcasting, cable & satellite, publishing, movies & entertainment, and interactive media & services. MSCI is making this change to reflect our current economy. As Sebastien Lieblich, MSCI managing director notes, “Cable companies are combining with telecom companies, creating their own media content and delivering it to consumers. The lines among media, communications, and content are blurred. It is time to acknowledge this convergence and the overlapping services these companies provide.”[1]
MSCI and S&P Dow Jones Indices are also moving internet marketplaces including eBay and Alibaba out of the Information Technology sector and into the Consumer Discretionary sector to reflect the mainstream adoption of internet retailing.
What does this mean for me?
The Information Technology sector currently represents more than 25% of broad market indices Russell 3000® and S&P 500. However, the Telecommunication Services sector currently comprises less than 2% of those same indices, so we expect to see a substantive shift in relative terms[2]. While MSCI and S&P Dow Jones Indices are keeping most changes confidential until the official release date, we know these changes will affect the sector classification of several notable companies:
- Alphabet Inc., Facebook, Twitter, and Baidu move from Information Technology – Internet Software & Services to Communication Services – Interactive Media & Services
- Activision and Nintendo Co. Ltd are moving from the Information Technology – Home Entertainment Software category to Communication Services – Interactive Home Entertainment
- Live Nation Entertainment, Disney Co., and Viacom are moving from the Consumer Discretionary – Movies & Entertainment to Communication Services – Movies & Entertainment
Sector funds will see the greatest impact as Information Technology funds may be required to sell stocks in companies that are leaving the sector and funds centered on Telecommunication Services need to expand their holdings to accommodate new entrants. Diversified funds with absolute or index-relative constraints on sector and/or industry investment may also see shifts in holdings and exposures as they incorporate these changes. That said, MSCI and S&P Dow Jones Indices announced their intent late last year, allowing plenty of time for managers to get comfortable with the upcoming changes.
Notes:
[1] MSCI. (2017, November 15). S&P Dow Jones Indices & MSCI Announce Revisions to the Global Industry Classification Standard Structure in 2018 [press release].
[2] Index sector weights are provided by Morningstar and as of August 31, 2018.
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