What Is Global Industry Classification Standard?
The Global Industry Classification Standard (GICS) is a widely recognized hierarchical taxonomy used to categorize public companies into specific economic sectors and industries based on their principal business activities. Within the realm of portfolio theory, GICS provides a standardized framework for investors, analysts, and market participants to understand and compare companies across global markets. Developed jointly by MSCI and S&P Dow Jones Indices in 1999, GICS aims to provide consistent and comprehensive industry definitions for the global financial community.22, 23
History and Origin
The Global Industry Classification Standard was created in response to the global financial community's need for a universal, accurate, and consistently applied method for defining industries and classifying securities. Prior to GICS, various classification systems existed, leading to inconsistencies in how companies were grouped and analyzed across different markets and regions. In 1999, MSCI and S&P Dow Jones Indices collaborated to develop GICS, establishing a common language for industry analysis.21 This methodology was the result of extensive discussions with asset owners, portfolio managers, and investment analysts worldwide, aiming to enhance the investment research and asset allocation processes.20 The GICS framework has since been widely adopted as an industry analysis tool, contributing to greater transparency and efficiency in the investment process.19
Key Takeaways
- The Global Industry Classification Standard (GICS) is a four-tiered hierarchical system that classifies companies globally.18
- It was developed by MSCI and S&P Dow Jones Indices in 1999 to provide a consistent framework for industry analysis.17
- GICS categorizes companies based on their principal business activities, considering revenues, earnings, and market perception.16
- The system facilitates investment research, portfolio management, and benchmarking by grouping similar companies.15
- GICS is regularly reviewed and updated to reflect the evolving dynamics of global equity markets.14
Interpreting the Global Industry Classification Standard
The Global Industry Classification Standard is interpreted through its four-tiered structure: Sector, Industry Group, Industry, and Sub-Industry. This hierarchical design allows for a broad overview at the sector level and increasingly granular detail down to the sub-industry level. For instance, a company might be classified under the "Information Technology" sector, then the "Software & Services" industry group, followed by the "IT Consulting & Other Services" industry, and finally a specific sub-industry like "Data Processing & Outsourced Services."13 This detailed classification helps investors assess a company's competitive landscape, understand its primary revenue drivers, and compare its performance against relevant peers. By using GICS, market participants can effectively analyze market trends and pinpoint opportunities within specific parts of the economy.
Hypothetical Example
Consider an investment firm looking to build a diversified portfolio with exposure to various economic sectors. Using the Global Industry Classification Standard, they can identify companies belonging to specific industries. For example, if they want exposure to the healthcare sector, GICS allows them to drill down to specific industries like "Pharmaceuticals" or "Biotechnology" within the "Health Care" sector. If they identify Company A as a "Biotechnology" company and Company B as a "Pharmaceuticals" company, they understand these companies operate in distinct but related areas, enabling them to make informed decisions about sector-specific allocations. This allows for precise company analysis and targeted investment.
Practical Applications
The Global Industry Classification Standard is a fundamental tool with numerous practical applications across the financial industry. It is widely used in constructing and analyzing equity indexes, such as those maintained by S&P Dow Jones Indices and MSCI.12 For example, index funds and exchange-traded funds (ETFs) often track GICS-defined sectors or industries, allowing investors to gain exposure to specific market segments. GICS is also critical for benchmarking portfolio performance against relevant industry averages. Asset managers utilize the Global Industry Classification Standard to identify investment opportunities, analyze sector contributions to portfolio performance, and implement sector-based or sector rotation investment strategies.11 Furthermore, research analysts rely on GICS to identify a firm's competitors and compare business operations.
Limitations and Criticisms
While the Global Industry Classification Standard offers a robust and widely accepted framework for industry classification, it does have certain limitations. One inherent challenge for any fixed classification system like GICS is keeping pace with the rapid evolution of industries and business models. As companies diversify or new technologies emerge, their primary business activities may shift, requiring reclassification. GICS addresses this by undergoing annual reviews to ensure it remains representative of global markets.10 For instance, the Real Estate sector was created in 2016 from the Financials sector, and the Telecommunication Services sector was renamed and expanded to Communication Services in 2018 to reflect industry changes. Critiques sometimes arise regarding the assignment of a single GICS classification to a multi-faceted company, as some firms have diverse operations that might span multiple industries, making a single classification potentially oversimplified. Additionally, some market participants, such as Research Affiliates, have noted the challenge of assigning proper valuations to companies in rapidly evolving sectors like technology, where intangible assets play a significant role and traditional classification metrics might not fully capture value.9 The dynamic nature of markets can lead to periods of exuberance or "bubbles" in certain sectors, highlighting the ongoing need for investors to look beyond simple classifications when making investment decisions.8
Global Industry Classification Standard vs. North American Industry Classification System (NAICS)
The Global Industry Classification Standard (GICS) and the North American Industry Classification System (NAICS) are both prominent industry classification systems, but they serve different primary purposes and have distinct structures.
GICS was developed by MSCI and S&P Dow Jones Indices specifically for the global financial community. Its main objective is to provide an investment-oriented framework for classifying public companies, facilitating diversification analysis, investment research, and portfolio management. GICS is a four-tiered hierarchy (Sector, Industry Group, Industry, Sub-Industry) and is applied globally to over 40,000 companies.7
Conversely, NAICS is a standard used by federal statistical agencies in the United States, Canada, and Mexico for the purpose of collecting, analyzing, and publishing statistical data related to their respective business economies.6 NAICS was developed to replace the Standard Industrial Classification (SIC) system and focuses on a production-oriented concept, grouping establishments based on the similarity of their production processes.5 It employs a six-digit hierarchical coding system.4 While NAICS is crucial for economic statistics and government contracting, it is less commonly used directly by financial professionals for investment analysis compared to GICS, which is tailored for capital markets.
FAQs
What are the four levels of GICS?
The four levels of the Global Industry Classification Standard are Sector, Industry Group, Industry, and Sub-Industry. This tiered structure allows for increasingly detailed classification of companies.3
Who uses GICS?
GICS is used by a wide range of financial professionals, including asset managers, portfolio managers, investment analysts, brokers, and stock exchanges. It is also used by researchers and consultants to compare companies and analyze market trends.2
How often is the Global Industry Classification Standard updated?
The Global Industry Classification Standard is reviewed annually by MSCI and S&P Dow Jones Indices to ensure it remains current and reflective of changes in global markets and business activities. This process can lead to the addition, deletion, or redefinition of industries and sub-industries.1
Why is GICS important for investors?
GICS is important for investors because it provides a standardized way to categorize companies, enabling more effective portfolio construction, risk management, and performance attribution. It helps investors understand sector exposure and identify investment opportunities.
Is GICS the only industry classification system?
No, GICS is not the only industry classification system. Other notable systems include the North American Industry Classification System (NAICS), which is government-oriented, and the Industry Classification Benchmark (ICB), which is maintained by FTSE Russell.