Introduction
The Global Industry Classification Standard (GICS) provides a rigorous method for categorizing companies into a specific sector and industry group that best captures their business operations. This classification mechanism is vital for investors, analysts, and economists looking to compare and contrast companies within the same industry segments.
Key Benefits of GICS
- Systematic Identification: GICS assigns each company a sector, industry group, industry, and sub-industry classification.
- Comparative Analysis: Institutions like investors and analysts utilize GICS to gauge a company’s competitors.
- Comprehensive Structure: As of 2021, GICS features 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.
Utilizing GICS for Investment Insights
A robust industry classification is essential for investors aiming for a diversified portfolio or wanting to identify competitors within a specific industry. At the apex of the GICS hierarchy are 11 key economic sectors:
- Consumer Discretionary
- Consumer Staples
- Energy
- Materials
- Industrials
- Healthcare
- Financials
- Information Technology
- Real Estate
- Communication Services
- Utilities
Each company is classified within these sectors to adhere to the principal business that generates its highest revenue, incorporating additional variables such as earnings and market perception.
Evolution and Adaptation of GICS
Since its origination in 1999, GICS has undergone numerous revisions, adapting to market changes by adding, eliminating, or refining its groups. Significant updates included the addition of the real estate sector in 2016 and the rebranding and expansion of the telecommunications sector to communication services in 2018—a move reflecting the growing convergence of media, entertainment, and technology.
Real-World Application of GICS
Globally, more than 26,000 stocks are categorized using the GICS system, encapsulating over 95% of the world’s listed market capitalization. This system not only facilitates stock analysis for portfolio managers but also serves as a benchmark for MSCI indexes—where MSCI’s indexes support over $14.5 trillion in assets under management, with many of these assets tailored to specific sectors.
GICS vs. ICB: Same Objective, Different Approach
The GICS system is paralleled by the Industry Classification Benchmark (ICB), maintained by Dow Jones and the FTSE Group. Both standards share similarities yet diverge in the categorization of consumer business sectors.
- ICB: Divides companies based on the provision of goods vs. services
- GICS: Differentiates between cyclical and non-cyclical businesses, or discretionary spending and staples
Such variations, while notable, generally provide equivalent sector and industry designations, catering to different users’ analytic preferences.
Adapting to the Modern Economy
Recent critiques question the relevance of traditional classification systems like GICS and ICB in our tech-driven, multifaceted modern economy. Corporations now span multiple sectors; for instance, Apple operates in hardware, software, and entertainment, and Amazon extends its reach from cloud services to entertainment production. Industries are interwoven, driving calls for a classification system that escapes the confines of a vertical industry lens and embraces business models reflecting today’s economy’s dynamic and hybrid nature.
Adapting GICS to these updated paradigms will ensure that investors hold a clearer understanding of the broader reaches and nuances of contemporary business activities and competition.
By understanding and utilizing the powerful insights provided by the Global Industry Classification Standard (GICS), investors can optimize their strategies, gain competitive intelligence, and foster expansive, diversified portfolios.
Related Terms: MSCI, Standard & Poor’s, industry classification, sector analysis, portfolio management
References
- Morgan Stanley Capital International. “The Global Industry Classification Standard (GCIS)”.
- Morgan Stanley Capital International. “Frequently Asked Questions about GICS”, Page 1.
- Morgan Stanley Capital International. “Indexes”.
