The Global Industry Classification Standard (GICS) is essential for investors, analysts, and economists aiming to classify companies based on specific economic sectors and industry groups that depict their business operations. This classification system plays a critical role in investment management by permitting a transparent comparison of competing companies within an industry.
Development and Purpose of GICS
GICS was jointly developed by Morgan Stanley Capital International (MSCI) and Standard & Poor's (S&P) in 1999. The objective was to create a standardized framework that allows for a systematic classification of companies globally. The framework is widely utilized in the professional investment management community as well as in the creation and maintenance of MSCI indexes encompassing both U.S. and international stocks.
Key Features of GICS
Structured Classification System
The GICS facilitates a hierarchy of four classification levels for companies:
- Sectors: The highest classification level, which contains 11 economic sectors.
- Industry Groups: Sub-categories that encompass a set of related industries.
- Industries: More specific categories within industry groups.
- Sub-Industries: The most granular classification, specifying businesses further.
As of 2021, GICS includes: - 11 Sectors - 24 Industry Groups - 69 Industries - 158 Sub-Industries
The sectors are:
- Consumer Discretionary
- Consumer Staples
- Energy
- Materials
- Industrials
- Healthcare
- Financials
- Information Technology
- Real Estate
- Communication Services
- Utilities
Importance in Portfolios
The classification is vital for investors aiming to create diversified portfolios. By understanding a company's GICS classification, it becomes easier to identify its competitors and assess its market position. The primary factor influencing a company's classification is its main source of revenue. This revenue-based classification helps investors make informed decisions while conducting earnings analysis and evaluating market perceptions.
Regular Updates and Revisions
Since its inception, GICS has undergone several revisions to ensure its relevance in a dynamically changing market. Significant changes included the introduction of a real estate sector in 2016 and the rebranding of the telecommunications sector to communication services in 2018, expanding its scope to include elements of media and entertainment.
GICS in Practice
As of today, over 26,000 stocks are classified under GICS, encompassing more than 95% of the world's listed market capitalization. Investment managers often rely on this classification to conduct thorough analysis and benchmarking against MSCI indexes. Morgan Stanley estimates that more than $14.5 trillion in assets are benchmarked to these indexes, facilitating data-driven investment strategies.
Competition with the Industry Classification Benchmark (ICB)
The Global Industry Classification Standard competes with the Industry Classification Benchmark (ICB), developed by Dow Jones and London’s FTSE Group. Although the two systems share similarities, they differ in their classification methodologies, particularly regarding consumer-focused businesses. The ICB distinguishes between goods providers and service providers at the sector level, while GICS categorizes companies based on whether they engage in cyclical or noncyclical consumer spending.
Questions on Relevance and Future Directions
Despite its widespread use, the relevance and utility of GICS classifications have come under scrutiny. The paradigms established in the Industrial Age may not accommodate the rapidly evolving business landscape dominated by tech giants like Apple and Amazon. Contemporary businesses often transcend traditional boundaries—Apple is a hardware and software giant, while Amazon operates across multiple domains, from cloud computing to entertainment.
Critics of GICS argue for a transition from vertical industry-based classifications to frameworks grounded in business models and value creation. Updating the GICS standards could enable investors, employees, and stakeholders to gain new insights into evolving strategic landscapes, ensuring that classification methods reflect the complexities of modern economies.
Conclusion
The Global Industry Classification Standard is a critical tool for understanding economic structures and company classifications. While it provides a robust framework for investment decision-making, its relevance in today's fast-changing landscape suggests a need for continual evolution. As corporate boundaries blur, moving towards a classification system based on modern business models might offer more accurate insights into the dynamics of the current global market.