New GICS classification: How will investors be impacted?

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09/12/2018 | 03:16 pm
The MSCI and S&P index providers will be carrying out a major dusting of their GICS classification, divided into 11 categories, on September 28. This may have some impact on portfolios.
This is quite a stock market index revamp. Under the new GICS (Global Industry Classification Standard) classification, the telecom sector, renamed "Communication Services", will house several companies currently housed in IT and Discretionary Consumer Affairs. Verizon, CenturyLink and AT&T will be joined by Comcast, Disney, Naspers, Netflix, TripAdvisor but also Alphabet or Facebook.

Some additional changes will be made in the sub-category. For example, Internet Distribution & Direct Marketing will integrate all online marketplaces dedicated to consumer products and services, with or without stocks. Alibaba and eBay will be part of it. In IT, companies currently classified in the "Internet Services and Software" sub-sector (data centres, cloud, storage infrastructure, hosting) will migrate to a new category called "Internet Services and Infrastructure", attached to "IT Services" (Verisign and Shopify will be included). The "Software & Internet Services" categories and their sub-categories will disappear.

Illustration of sectoral changes (Source LFL Research - Click to enlarge)
According to the work of LFL Research, the former "Telecommunication Services" sector should increase from a weight of around 2% to 10.1%. The IT segment is expected to decline from around 26 to 21% and the consumer discretionary segment from 12.8 to 10.1%.

A sign of the times

Financial indices always reflect something: a country, a sector, an investment style, etc... The generic ones  are expected to follow major economic trends. For example, the 1896 Dow Jones included companies in the sugar, cotton, leather, metals, energy, machinery or tobacco industries.

Since the new millennium, the relative weight of technological stocks has continued to increase. In the S&P 500 index, the global benchmark, the Technology ("IT") sector weighs about 26%, compared to just under 16% on average since 1990. This is to reflect these changes that the GICS classification will change on September 28.

“Index-managers MSCI and S&P Dow Jones seem to have decided—appropriately, in our view—that technology has advanced to the point that a line should be drawn between those who use technology and those who produce technology,” says Brad Sorensen, managing director of market and sector analysis for the Schwab Center for Financial Research.

This redistribution will necessarily lead to significant changes. Managers will have to replicate the new architecture. Strategies will also be impacted. This could also lead to some changes in some investors’ stock portfolios, especially those who invest in the tech sector through sector-focused funds.

"If you hold sector-specific funds for the tech or consumer discretionary sectors, you may already have noticed the funds selling the stocks of the companies that are moving. That means your portfolio could be changing without you having to buy or sell anything—so be sure to check your allocations. If your funds no longer give you access to the shares you want, you may have to sell some tech and discretionary stocks and buy some communications stocks.", a note from Charles Swab warns. In addition, sales by these funds could result in gains that show up in the tax bill.
Romain Fournier
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