New Industry Classification
WHY ARE WE INTRODUCING A NEW CLASSIFICATION STANDARD?
Tadawul’s earlier sector classification had been in place since 2008. However, with the continuous developments in the Saudi economy, new industries have emerged, both in private and public arena. These developments on the economic front also necessitate changes to be reflected in the classification of companies listed on Tadawul.
In the previous sector classification at Tadawul, companies choosing to go public were assigned to sectors that were probably not accurately representing the business of these companies due to classification limitations. The new classification system adopted by Tadawul provides solution to these limitations by closely aligning a company’s business activities and sources of revenues to its sector classification.
Tadawul’s previous sector classification had limitations as it was not based on global classification standards. Furthermore, there were no periodic reviews of companies to reflect changes in the assigned classification due to any change in business profile of these companies.
ADVANTAGES OF ADOPTING THE GLOBAL CLASSIFICATION STANDARDS
GLOBAL INDUSTRY CLASSIFICATION STANDARD (GICS)
GICS is a common global classification standard used by thousands of market participants across all major groups involved in the investment process: asset managers, brokers (institutional and retail), consultants, researchers and stock exchanges.
GICS was developed jointly by Standard and Poor’s (S&P) and Morgan Stanley Capital International (MSCI), which are global and leading companies providing independent international financial data, indices and benchmark-related products and services.
The GICS structure is:
Universal: the standard applies to companies globally
Reliable: the structure correctly reflects the current state of industries in the equity investment universe
Flexible: the structure offers four levels of analysis, ranging from the most general sector to the most specialized sub-industry
Evolving: annual reviews are conducted by S&P Dow Jones Indices and MSCI to ensure that the structure remains fully representative of today’s global markets
GICS has been selected as a global industry classification standard to reclassify Tadawul’s sectors. This move will enable Tadawul to be comparable with other global equity markets. Moreover, this new globally recognized classification standard will encourage foreign and local investors to have better assessment of Saudi Stock Market and would allow more meaningful comparisons with stocks and sectors across international equity markets.
GICS STRUCTURE AND METHODOLOGY
GICS is a 4 tiered, hierarchical classification system, consisting of 11 Sectors (Level 1), 24 Industry Groups (Level 2), more than 60 Industries (Level 3) & more than 150 Sub-Industries (Level 4), as presented below.
|Level 1||Level 2||Level 3||Level 4|
|Energy||Energy||Energy Equipment & Services||Oil & Gas Drilling|
|Oil & Gas Equipment & Services|
|Oil, Gas & Consumable Fuels||Integrated Oil & Gas|
|Oil & Gas Exploration & Production|
|Oil & Gas Refining & Marketing|
|Oil & Gas Storage & Transportation|
|Coal & Consumable Fuels|
|Fertilizers & Agricultural Chemicals|
|Construction Materials||Construction Materials|
|Containers & Packaging||Metal & Glass Containers|
|Metals & Mining||Aluminium|
|Diversified Metals & Mining|
|Precious Metals & Minerals|
|Paper & Forest Products||Forest Products|
|Industrials||Capital Goods||Aerospace & Defense||Aerospace & Defense|
|Building Products||Building Products|
|Construction & Engineering||Construction & Engineering|
|Electrical Equipment||Electrical Components & Equipment|
|Heavy Electrical Equipment|
|Industrial Conglomerates||Industrial Conglomerates|
|Machinery||Construction Machinery & Heavy Trucks|
|Agricultural & Farm Machinery|
|Trading Companies & Distributors||Trading Companies & Distributors|
|Commercial & Professional Services||Commercial Services & Supplies||Commercial Printing|
|Environmental & Facilities Services|
|Office Services & Supplies|
|Diversified Support Services|
|Security & Alarm Services|
|Professional Services||Human Resource & Employment Services|
|Research & Consulting Services|
|Transportation||Air Freight & Logistics||Air Freight & Logistics|
|Road & Rail||Railroads|
|Transportation Infrastructure||Airport Services|
|Highways & Railtracks|
|Marine Ports & Services|
|Consumer Discretionary||Automobiles & Components||Auto Components||Auto Parts & Equipments|
|Tires & Rubber|
|Consumer Durables & Apparel||Household Durables||Consumer Electronics|
|Housewares & Specialties|
|Leisure Products||Leisure Products|
|Textiles, Apparel & Luxury Goods||Apparel, Accessories & Luxury Goods|
|Consumer Services||Hotels, Restaurants & Leisure||Hotels, Resorts & Cruise Lines|
|Diversified Consumer Services||Education Services|
|Specialized Consumer Services|
|Cable & Satellite|
|Movies & Entertainment|
|Internet & Direct Marketing Retail||Internet & Direct Marketing Retail|
|Multiline Retail||Department Stores|
|General Merchandise Stores|
|Specialty Retail||Apparel Retail|
|Computer & Electronics Retail|
|Home Improvement Retail|
|Consumer Staples||Food & Staples Retailing||Food & Staples Retailing||Drug Retail|
|Hypermarkets & Super Centers|
|Food, Beverage||Beverages||Soft Drinks|
|Food Products||Agricultural Products|
|Packaged Foods & Meats|
|Household & Personal Products||Household Products||Household Products|
|Personal Products||Personal Products|
|Health Care||Health Care Equipment & Services||Health Care Equipment & Supplies||Health Care Equipment|
|Health Care Supplies|
|Health Care Providers & Services||Health Care Distributors|
|Health Care Services|
|Health Care Facilities|
|Managed Health Care|
|Health Care Technology||Health Care Technology|
|Pharmaceuticals, Biotechnology & Life Sciences||Biotechnology||Biotechnology|
|Life Sciences Tools & Services||Life Sciences Tools & Services|
|Thrifts & Mortgage Finance||Thrifts & Mortgage Finance|
|Diversified Financials||Diversified Financial Services||Other Diversified Financial Services|
|Consumer Finance||Consumer Finance|
|Capital Markets||Asset Management & Custody Banks|
|Investment Banking & Brokerage|
|Diversified Capital Markets|
|Financial Exchanges & Data|
|Mortgage Real Estate Investment (REITs)||Mortgage REITs|
|Life & Health Insurance|
|Property & Casualty Insurance|
|Information Technology||Software & Services||Internet Software & Services||Internet Software & Services|
|IT Services||IT Consulting & Other Services|
|Data Processing & Outsourced Services|
|Home Entertainment Software|
|Technology Hardware & Equipment||Communications Equipment||Communications Equipment|
|Technology Hardware, Storage & Peripherals||Technology Hardware, Storage & Peripherals|
|Electronic Equipment, Instruments & Components||Electronic Equipment & Instruments|
|Electronic Manufacturing Services|
|Semiconductors & Semiconductor Equipment||Semiconductors & Semiconductor Equipment||Semiconductor Equipment|
|Telecommunication Services||Telecommunication Services||Diversified Telecommunication Services||Alternative Carriers|
|Integrated Telecommunication Services|
|Wireless Telecommunication Services||Wireless Telecommunication Services|
|Utilities||Utilities||Electric Utilities||Electric Utilities|
|Gas Utilities||Gas Utilities|
|Water Utilities||Water Utilities|
|Independent Power and Renewable Electricity Producers||Independent Power Producers & Energy Traders|
|Real Estate||Real Estate||Equity Real Estate Investment Trusts (REITs)||Diversified REITs|
|Hotel & Resort REITs|
|Health Care REITs|
|Real Estate Management & Development||Diversified Real Estate Activities|
|Real Estate Operating Companies|
|Real Estate Development|
|Real Estate Services|
The GICS methodology aims to enhance the investment research and asset management process for financial professionals worldwide.
Companies are allocated to Sub-Industries. Sub-Industries are grouped into Industries in such a way that general industrial and economic themes are common to all companies in the Industry. The Industries themselves will be aggregated into Industry Groups, which are in turn aggregated into Sectors.
GICS classification approach is both quantitative and qualitative. Each company is classified in the Sub-Industry whose definition describes the main business activities that generate the majority of the company’s revenues.
The primary source of information used to classify a company is its Annual Reports/ Financial Statements. New companies are classified according to the activities mentioned in the prospectus.
NEW TADAWUL MARKET STRUCTURE
Tadawul ‘s listed equities were previously classified into 16 sectors; however, current Tadawul’s market structure has 20 sectors (Industry Groups), representing Level 2 under GICS hierarchical classification system.
These 20 sectors (Industry Groups under GICS at Level 2), representing the distribution of current listed companies, are presented as follows:
|4||Commercial & Professional Svc|
|6||Consumer Durables & Apparel|
|10||Food & Staples Retailing|
|11||Food & Beverages|
|12||Health Care Equipment & Svc|
|13||Pharma, Biotech & Life Science|
|20||Real Estate Mgmt & Dev't|
What is the Global Industry Classification Standard (GICS)?
The Global Industry Classification Standard (GICS) was developed by Morgan Stanley Capital International (MSCI) and Standard and Poor’s (S&P) in 1999 in response to the global financial community’s need for a reliable, complete and standard industry classification system. The GICS methodology is widely accepted as the industry analysis framework for investment research, portfolio management and asset allocation. Its universal approach to industries worldwide has contributed to increased transparency and efficiency in the investment process. The GICS has become an industry model widely recognized by market participants worldwide.The GICS structure has four levels of detail: 11 sectors, 24 industry groups, more than 60 industries, and more than 150 sub-industries.
Why is this global classification system important?
The GICS was developed and is maintained by two leading global index providers. It has been specifically designed to classify companies globally – in both developed and developing economies. The GICS is designed to meet the needs of the investment community for a classification system that reflects a company’s financial performance. GICS provides global coverage of over 44,000 + active, publicly traded companies.
Who uses the GICS and how pervasive is the GICS in the international investment community?
There has been significant adoption of the GICS standard across all major groups involved in the investment process, including: Asset Managers, Brokers (institutional and retail), Consultants, Research, and Stock Exchanges. Globally the Investment community uses the GICS across the full spectrum of equity market management – including asset management, sector research, portfolio strategy, peer analysis, and client account reporting. The use of the GICS enables market participants to identify and analyze companies using a common global standard.
Which particular advantages do strategists, analysts and investors draw upon in applying the GICS across their analysis and global benchmark selection?
The use of this global standard helps strategists, analysts and investors compare companies outside of their local markets.The GICS establishes a common standard that enables asset owners, asset managers and investment research specialists to make local and global comparisons by sectors. The standardized classification system permits foreign investors to look into local markets and local investors to look out at the rest of the world when comparing stocks within the same sector. The GICS defines peer groups tightly and avoids grouping unlike companies together.
What does it mean that GICS is a "market-oriented" classification system? Why does that matter?
There are two approaches to industry classification: production-oriented and market-oriented. The emergence of the service era and the availability of global communications have changed the market focus from producers to consumers. In today’s economy, for example, drawing the line between goods and services is increasingly difficult and arbitrary, as almost all goods are sold with a service. Thus, the distinction between consumer goods and services has been replaced by the more market-oriented sectors of “Consumer Discretionary” and “Consumer Staples,” which both contain goods and services sub-industries.
Describe the hierarchical categories of the GICS.
The GICS structure currently has four levels of detail: 11 sectors, 24 industry groups, more than 60 industries, and more than 150 sub-industries. Since the classification is hierarchical, at each of the four levels a company can only belong to one grouping.
How companies are allocated to its relevant sectors?
Companies are allocated to Sub‐Industries according to the definition of its principal business activity that generate the majority of the company’s revenues. Sub‐Industries are grouped into Industries in such a way that general industrial and economic themes are common to all companies in the Industry. The Industries themselves are aggregated into Industry Groups, which in turn are aggregated into Sectors.
How frequently are companies reviewed for potential GICS changes and how often does a company's GICS classification generally change?
Companies are reviewed annually upon publishing their annual reports to ensure that a company’s allocation is still relevant to its main line of business. Companies are also under constant surveillance for corporate actions. In general, a company’s classification will change owing to either changes in revenue sources or due to a major corporate action that redefines a company's primary line of business.
How adaptable is the GICS structure over time to Economic Changes?
The four-level GICS structure reflects equities in today’s global investment environment, yet is flexible enough to capture tomorrow’s developments. As the global economy changes, sectors, industry group, industries and sub-industries can be added or divided.
How will Tadawul’s Equity Market look like after the GICS adoption?
Previously Tadawul equity market consisted of 16 Sectors. After the GICS adoption Tadawul equity market will be based on 20 Industry Groups, which is Level 2 (Industry Group) in GICS hierarchical classification system.
How will New Sector Indices be created?
New Tadawul Sector Indices will be created based on GICS Level 2 (Industry Group). The base date will be 8th of January. Pre Open value for New Sector Indices will be 5000 points (Base Value), to allow for better performance comparability given one unified starting point. For more info availability, New Sectors Indices will have a calculated history for 1 year backwards. As they are new, Change and Change % for New Sector Indices will start being published on the 2nd day of the creation of these indices.
What will happen to Tadawul’s old Sector indices?
Old sector indices will be discontinued. However, historical values will still be available for any historical analysis.
Will Tadawul equity market be mapped to all 4 GICS levels?
Yes, however, only sector (Level 1) and industry groups (Level 2) will be published on the website.