On this short episode of The Resilient Advisor Podcast, I outline the implications of the GICS Reclassification for financial advisors.
Advisors who use sector index and index products developed by Standard and Poor’s and MSCI are going to be affected by this change.
These changes will have an impact on about 40% of the S&P 500’s entire market capitalization. It will impact roughly $17.6 trillion in market capitalization.
This includes 10% of the S&P 500 Index market cap,
100% of the telecommunications services sector,
22% of the consumer discretionary sector and
21% of the sector technology sector.
These revisions were announced in January and were implemented at the close of business on Sept. 28, 2018,
Note, The MSCI Equity Indexes will reflect these changes as part of its semi-annual index review in November 2018.
For some historical context, The existing classification system, which was developed in 1999. This change was overdue as they reflect the natural evolution of these sectors and underlying companies.
If you find yourself needing to explain the changes to a client, simply point out that ‘The continued integration of media and internet and telecommunications, has led to clear industry consolidation through mergers and acquisitions.”
Under the proposed changes, the telecommunications sector will be renamed communications services – a more inclusive banner that accounts for content developers and other media. The new sector will include existing telecommunications companies as well as enterprises from the media industry group, which currently falls under the consumer discretionary sector. This category will also include companies from the internet and direct marketing retail sub-industry along with some big companies currently classified in the information technology sector, including Alphabet Inc. (GOOG ) and Facebook Inc (FB ).
The internet and direct marketing retail sub-industry, which is currently listed under consumer discretionary, will be updated to include all online marketplaces and e-commerce companies. Companies such as Alibaba Group (BABA ) and eBay Inc. (EBAY ) will fall under this category.
Finally, the information technology sector will undergo a major overhaul with the internet software and services industry being renamed internet services and infrastructure. Companies such as Shopify Inc. will be impacted. Cloud computing companies currently classified under internet software and services will receive a new category called application software. As a result, the internet software and services industry and sub-industry will be discontinued.
My friend Brandon Hatton of The Hatton Group at Raymond James in Atlanta sent over a detailed report produced by Blackrock on these changes. I recommend connecting with your Blackrock rep and getting a copy if you need more details on these changes. (Or download here)Here are their Key Investor Implications:
Direct Impact: Investors who own funds that follow, or are benchmarked to, indexes that follow GICS.
Secondary Impact: Sector rotation, diversification and hedging models that adopt sector constraints.
Tertiary Impact: Active managers whose investment process monitors sector fundamentals, factors, and trends.
Lastly, if you are a dividend investor, the telecommunications sector provided yields north of 5%. The new communications services sector will yield an average of less than 2%
I hope that this podcast was useful as you look at your 4th quarter allocations and start planning for 2019.