What it means
Imagine trying to compare thousands of listed companies without any shared labels. GICS solves this by assigning each company to a category based on its principal business activity, which is mainly judged by where its revenue comes from.
Earnings and how the market views the company are also taken into account. The system has four levels, each more detailed than the last: sectors, industry groups, industries and sub-industries.
Each company receives an eight-digit code, in which the first two digits identify the sector, the first four the industry group, the first six the industry, and all eight the sub-industry. The broadest level contains roughly a dozen sectors, such as financials, health care and information technology.
In practice, GICS underpins many of the things finance people do. Fund managers use it to measure sector weights against a benchmark, analysts use sub-industry peers when valuing a company, and index providers use it to build sector funds.
Company executives also check which group they are placed in, since it determines which funds and analysts follow them. Because classification follows the main business, it can change when a company changes.
A retailer that earns most of its income from online sales or a technology firm that moves into financial services may be reclassified, which can force funds to buy or sell its shares. The providers review classifications regularly and revise the structure from time to time.
A limitation is that any single label hides variety. Conglomerates and fast-changing businesses fit awkwardly into one box, and two companies in the same category may have very different risks.
Good analysts use GICS as a starting point for peer groups, then adjust it with judgement. When using the system in your own work, be clear about which level you are talking about.
A comparison at sector level, such as technology against health care, answers broad allocation questions, whereas a comparison at sub-industry level is better for valuing a single company. Mixing levels is a common source of confusion in presentations.
In practice
Real-world examples.
Example
A portfolio manager compares her fund's sector mix with its benchmark using GICS sectors. She finds the fund is 7 percentage points overweight in technology and decides whether that bet is deliberate or accidental.
Example
An analyst values a mid-sized software company by selecting the other companies in the same sub-industry. She averages their price-to-earnings ratios (share price divided by profit per share) to find a sensible range for the target. If the peer average is 20 and the target earns $2 per share, the implied value is $40 a share.
Example
A consumer goods company expands heavily into online sales. After its revenue mix shifts, the index providers move it to a different industry, and the investor relations team prepares for changes in which funds hold the shares.
Formula
Calculation
Sector weight = Total market value of companies in the sector / Total market value of the index x 100
Suppose an index has a total market value of $2,000,000,000. Three information technology companies in it are worth $300,000,000, $150,000,000 and $110,000,000, a combined $560,000,000. The sector weight is $560,000,000 / $2,000,000,000 = 0.28, or 28%. If a fund holds 35% of its portfolio in that sector, it is overweight by 35% - 28% = 7 percentage points compared with the index.Case study
Seen in the real world.
Brightwave Holdings is an illustrative, fictional listed company that started as a catalogue retailer. Over seven years its online platform grew until it earned more than two thirds of group revenue from fees and technology services.
The head of investor relations saw that analysts were still using retail peers, who traded on lower multiples than technology peers. She prepared a presentation showing the revenue mix and engaged with the index providers about its classification.
When the company was eventually reclassified, funds that tracked the new category bought the shares, and the share price rose by about 6% over a month. The illustrative lesson is that classification is not just a label, since it decides which peers and investors look at a company.
Watch out
Common mistakes.
- Assuming the classification is based on what a company says it does, when it is mainly based on where revenue comes from.
- Treating all companies in a sector as close competitors, when sectors are broad and contain very different businesses.
- Assuming the classification never changes, when companies can be moved as their business mix shifts.
Questions
People also ask.
Who maintains GICS?
It is maintained jointly by MSCI and S&P Dow Jones Indices, which review the structure and each company's classification on a regular basis and announce changes in advance.
How many levels does GICS have?
It has four: sectors, industry groups, industries and sub-industries.
Is GICS the only classification system?
No, other systems exist, such as the industry codes used by statistical agencies and other index providers, and they do not always agree.
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