Global Industry Classification Standard: Overview
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Summary:
Discover the Global Industry Classification Standard – a classification method shaping how companies are categorized within economic sectors. Developed collaboratively by Morgan Stanley Capital International (MSCI) and Standard & Poor’s, GICS assigns businesses to sectors, industry groups, industries, and sub-industries. This system enables investors, analysts, and economists to assess and compare companies effectively. Learn about GICS’s hierarchical structure, its influence on investment strategies, its utilization in MSCI indexes, and how it compares to other classification systems.
The Global Industry Classification Standard plays a pivotal role in categorizing companies based on economic sectors and industry groups. Created jointly by Morgan Stanley Capital International (MSCI) and Standard & Poor’s, GICS facilitates comprehensive comparisons among competing companies. This article delves into the intricacies of GICS, its hierarchical structure, applications, and significance in the investment landscape.
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The Framework of GICS
The Global Industry Classification Standard employs a hierarchical structure to precisely categorize companies. It classifies them into 11 economic sectors, which further divide into 24 industry groups, 69 industries, and 158 sub-industries. This systematic approach aids investors in identifying competitors within the same industry.
The 11 sectors
The top-level sectors span a broad range, including Consumer Discretionary, Consumer Staples, Energy, Materials, Industrials, Healthcare, Financials, Information Technology, Real Estate, Communication Services, and Utilities. Each stock is assigned a code across these levels, reflecting the company’s core business activity.
Classification criteria
Companies receive GICS classification codes based on their primary revenue source, guiding the identification of their principal business activity. Although revenue is a key determinant, factors like earnings analysis and market perception are also considered in the classification process.
Evolution and Application
Since its inception in 1999, GICS has undergone revisions to adapt to evolving industries. Additions, deletions, and refinements have refined the classification system. Notable updates include the introduction of the Real Estate sector in 2016 and the renaming of the Telecommunications sector to Communication Services in 2018, incorporating media and entertainment interests.
GICS across the globe
GICS has classified over 26,000 stocks globally, representing over 95% of the world’s listed market capitalization. Portfolio managers employ GICS for stock analysis, competitor evaluation, and benchmarking MSCI indexes. With more than $14.5 trillion in assets under management benchmarked to MSCI indexes, GICS plays a significant role in shaping investment strategies.
GICS vs. ICB
GICS competes with the Industry Classification Benchmark (ICB), maintained by Dow Jones and FTSE Group. While both systems classify companies, GICS emphasizes cyclical vs. noncyclical, and discretionary spending vs. staples. Despite differences, many sector and industry designations align between GICS and ICB.
Modernizing classification
In an era of diverse conglomerates and evolving business models, critics advocate for updating GICS to reflect the broader scope of today’s corporations. The call is to shift from vertical industry categorization to one centered around business models, aiding investors, customers, and employees in navigating new strategic landscapes.
GICS Codes and Sub-Categories
Each company classified under the Global Industry Classification Standard is assigned a unique GICS code that reflects its primary business activity. These codes allow for precise categorization and quick reference. Here are examples of GICS codes for some sectors:
- Information Technology Sector: This sector includes companies involved in technology hardware, software, and services. Some sub-industries within this sector have their own GICS codes, such as 45102010 for Software and 45202030 for Internet Software and Services.
- Healthcare Sector: Within this sector, you’ll find companies engaged in pharmaceuticals, biotechnology, and life sciences. GICS codes like 35201010 represent Pharmaceuticals, while 35202010 is for Biotechnology.
- Consumer Discretionary Sector: This sector covers companies related to consumer goods and services. Sub-industries like 25301010 for Internet & Direct Marketing Retail and 25401020 for Hotels, Resorts & Cruise Lines have their own GICS codes.
Applications of GICS in Investment
GICS isn’t just a classification system; it has significant applications in the world of investment:
Portfolio management
Portfolio managers use GICS to diversify investments by selecting stocks from different sectors or industry groups. This helps spread risk and optimize portfolio performance.
Sector analysis
Investors analyze specific sectors to identify trends and opportunities. GICS makes it easy to compare the performance of companies within the same sector, helping investors make informed decisions.
Benchmarking
GICS is instrumental in benchmarking various financial products, including exchange-traded funds (ETFs) and mutual funds. By tracking a specific GICS sector or industry group, investors can gauge how well a fund aligns with their investment goals.
GICS and Market Indices
Several prominent market indices use GICS to classify and track stocks. For instance:
S&P 500
The S&P 500 index, maintained by Standard & Poor’s, uses GICS to categorize its component stocks into sectors and industry groups. This classification allows investors to assess the performance of different sectors within the index.
MSCI world index
The MSCI World Index, developed by Morgan Stanley Capital International (MSCI), relies on GICS for sector classification. It provides a comprehensive view of global equity markets based on GICS sectors and sub-industries.
With the growing emphasis on environmental, social, and governance (ESG) factors in investing, GICS is evolving to accommodate ESG considerations. This includes the creation of GICS ESG scores that assess companies’ sustainability performance within their respective GICS sectors.
The Global Industry Classification Standard has become an indispensable tool for investors, analysts, and economists worldwide. Its hierarchical structure, precise categorization, and applications in portfolio management and benchmarking have solidified its place in modern investing. As markets continue to evolve, GICS will likely adapt to ensure it remains relevant and useful for the financial industry.
Frequently Asked Questions
What is GICS?
Stands for Global Industry Classification Standard. It is a framework used to categorize companies into economic sectors and industry groups.
Who developed GICS?
GICS was developed collaboratively by Morgan Stanley Capital International (MSCI) and Standard & Poor’s.
How does GICS affect investment strategies?
Plays a crucial role in investment strategies by aiding investors in identifying and comparing companies within the same industry, allowing for more informed decisions.
Key takeaways
- GICS classifies companies into economic sectors, industry groups, industries, and sub-industries, aiding precise categorization.
- It enables effective industry comparisons and assists investors in analyzing and benchmarking stocks.
- With over 26,000 stocks globally classified, shapes investment strategies worldwide.
- GICS competes with the Industry Classification Benchmark (ICB), emphasizing different categorization criteria.
- Modernization of classification systems is debated to reflect the evolving business landscape.
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