In finance and investing, sector classification plays a vital role in helping investors analyse and understand the performance of different industries. By categorising companies into specific sectors based on their primary business activities, investors can make informed decisions about where to allocate their capital. Sector classification provides a framework for organising and analysing financial markets, enabling investors to identify market trends, manage risk, and diversify their portfolios.

There are various sector classification systems used around the world, each with its unique approach and criteria for grouping companies. In this article, we will explore some of the top sector classification systems in use today. These systems are widely recognized and utilised by financial professionals, investors, and regulatory bodies to provide a standardised framework for analysing and comparing companies across different industries. By familiarising themselves with the various approaches used in these systems, investors can gain valuable insights into the performance and trends of different sectors and make more informed decisions about where to invest their money.

Sector classification is an essential tool to navigate the complex world of finance and investing. By understanding various systems, investors can gain valuable insights into the performance and trends of different industries and make more informed decisions about where to allocate their capital.

 

Global Industry Classification Standard (GICS)

The Global Industry Classification Standard (GICS) is a widely adopted and crucial system developed by MSCI and Standard & Poor’s in 1999 to categorise publicly traded companies globally. Comprising 11 sectors and 158 sub-industries, GICS offers a hierarchical structure for consistent company classification, facilitating analysis and comparison across industries. Its sectors include Energy, Materials, Industrials, Consumer Discretionary, Information Technology etc.

GICS plays a pivotal role in the financial market, providing a framework for investors, analysts, and portfolio managers to assess and compare companies, identify investment opportunities, and manage risk. The system underlies various financial indices, exchange-traded funds (ETFs), and investment products, contributing to standardised company classification and analysis. GICS covers over 58,000 publicly traded companies globally, representing 95% of the market capitalization.

Beyond the financial sector, GICS is utilised by governments, regulatory bodies, and researchers to analyse economic trends and industry performance. Its extensive coverage makes it valuable for equity investing, industry categorization, data analysis, and risk management. Portfolio managers and investment analysts use GICS to develop effective investment strategies by categorising companies into sectors and sub-industries, allowing for the identification of growth or decline areas. Additionally, GICS aids market research, enabling consistent analysis of industry performance and trends over time, facilitating the identification of emerging opportunities. In summary, GICS is a critical and widely accepted tool that enhances transparency, efficiency, and comparability in the global financial market, benefiting investors and analysts worldwide.

 

Industry Classification Benchmark (ICB)

The Industry Classification Benchmark (ICB), developed by FTSE Russell, is a globally recognized standard for categorising companies and industries. Featuring a detailed breakdown of 11 main sectors, 20 supersectors, 45 sectors, and 173 subsectors, ICB provides a comprehensive framework for comparing and contrasting industries on a global scale. This classification system spans various equity asset classes, making it a powerful tool for investors, analysts, and businesses seeking consistency in sector and regional analyses.

ICB’s significance in the financial industry is underscored by its applications in index construction, investment analysis, and risk management. Its global scope and nuanced industry categorization distinguish it from other systems like the Global Industry Classification Standard (GICS) and the North American Industry Classification System (NAICS). Unlike GICS, which primarily focuses on equities in collaboration with MSCI and Standard & Poor’s, ICB covers a broader range of asset classes and regions. Additionally, ICB surpasses NAICS, specific to North America, in terms of comprehensive categorization.

Beyond equities, ICB extends its coverage to include other financial instruments like fixed income securities and derivatives. This expansive reach enhances its utility for investors and analysts, making ICB an indispensable tool for industry analysis, investment research, equity portfolio management, asset allocation, risk management, and market trend assessments within the financial sector. In summary, the Industry Classification Benchmark stands out as a globally applicable and comprehensive system, contributing to precise and consistent analyses in the financial industry.

 

Standard Industrial Classification (SIC)

The Standard Industrial Classification (SIC) system, introduced by the U.S. government in the 1930s, organised hierarchically into major industry groups using four digits. Despite its age, the SIC system maintains relevance in specific contexts such as tracking employment trends, regulatory compliance, and historical analysis. The hierarchical structure involves the first two digits representing major industry groups, with the last two digits specifying particular industries, making it an extensive classification system.

While the SIC system offers utility in understanding the historical evolution of industries, it has notable limitations. One key drawback is its failure to accurately reflect changes in technology and contemporary industry trends. In comparison to more modern systems like the North American Industry Classification System (NAICS), which is preferred for its greater detail and precision in reflecting current industry dynamics, the SIC system may not be as effective for financial reporting, market research, and business strategy.

Despite its limitations, the extensive classification it provides makes it a valuable tool for industry categorization, business classification, and historical reference. However, caution is necessary when applying it to the modern economic financial landscape due to its inherent limitations. In essence, while the SIC system serves as a historical legacy and has specific use cases, more contemporary classification systems are generally favoured for their accuracy in representing current industry trends and dynamics.

 

North American Industry Classification System (NAICS)

The North American Industry Classification System (NAICS) is a widely utilised industry classification system spanning Canada, Mexico, and the United States. Jointly developed by the statistical agencies of these countries, NAICS serves as a comprehensive framework for classifying businesses and industries. With 20 sectors, it organises establishments based on a production-oriented approach, facilitating a more accurate representation of their economic contributions. This structure also eases cross-border comparisons, enabling the exchange of economic data and collaboration on policy initiatives among the three nations.

A key advantage of NAICS is its compatibility with other global industry classification systems like ISIC, NACE, and ANZSIC. This facilitates broader international comparisons of economic data. The standardised system ensures accurate cross-country data comparisons, making NAICS an invaluable tool for classifying establishments and industries, contributing to a detailed and precise representation of economic activity in North America.

In summary, NAICS is pivotal for classifying businesses and industries across North America. Its production-oriented approach and standardised framework not only provide an accurate representation of economic activity in the region but also enable seamless cross-border comparisons and cooperation. With its extensive coverage and compatibility with global systems, NAICS stands as a widely applicable tool for understanding and analysing economic trends on a broader scale.

 

United Kingdom Standard Industrial Classification of Economic Activities (UK SIC)

The United Kingdom Standard Industrial Classification of Economic Activities (UK SIC) is a comprehensive hierarchical system developed and maintained by the Office for National Statistics (ONS) to classify businesses based on their primary economic activities. With 21 sections, 88 divisions, 272 groups, 615 classes and 191 subclasses, the UK SIC serves as the national classification system, providing an accurate representation of the country’s economic structure. Originating in the early 20th century, the UK SIC has undergone revisions, with the latest version being the UK SIC (2007), ensuring its relevance to emerging industries and economic shifts.

Crucially, the UK SIC facilitates national economic analysis by consistently categorising businesses, assigning unique SIC codes for easy access to information by policymakers, researchers, and analysts. This capability supports informed decision-making and trend monitoring. Aligned with international standards like the International Standard Industrial Classification of All Economic Activities (ISIC), the UK SIC allows for global comparisons and collaboration.

The UK SIC offers an organised framework for identifying and categorising industrial activities and economic sectors. It aids market and statistical analysis, contributing to data-driven policy development and providing insights into the structure and performance of the UK’s economy.

 

Australian and New Zealand Standard Industrial Classification (ANZSIC)

The Australian and New Zealand Standard Industrial Classification (ANZSIC) is a joint classification system employed by Australia and New Zealand to categorise businesses and industries. Introduced before 1993, with the initial version released in 1993 (ANZSIC 93), the system has undergone updates to align with economic changes, ensuring its relevance. Covering 19 divisions, 86 subdivisions, and 214 classes, the ANZSIC spans common industries and those important to the economies of Australia and New Zealand.

Used for economic data collection, policy development, and industry trend evaluation, the ANZSIC system is pivotal for cross-country comparisons and regional economic analyses. It provides a standardised framework adopted not only in Australia and New Zealand but also by countries like Papua New Guinea, Fiji, and the Solomon Islands.

In conclusion, ANZSIC is a vital tool for comprehending and assessing the structure and performance of the Australian and New Zealand economies. Its regular updates reflect its adaptability to economic shifts, ensuring continued utility for researchers, policymakers, and businesses. The system’s widespread adoption beyond its originating countries underscores its significance in international economic analysis and comparison.

 

Japan Standard Industrial Classification (JSIC)

The Japan Standard Industrial Classification (JSIC) is a classification system dating back to 1949, with 14 revisions, the latest decided in June 2023 and effective on April 1, 2024. Categorising Japanese businesses into 14 divisions, 74 groups, and 149 classes based on their primary economic activities, JSIC plays a crucial role in organising economic data, aiding research, and facilitating industry analysis in Japan. Divisions span areas like Agriculture, Forestry, and Fisheries, while the hierarchical structure allows for detailed business categorization.

JSIC significantly impacts economic research and investment strategies in Japan. Providing a standardised framework, it allows researchers and investors to compare and analyse data across industries and time periods, informing investment decisions and policy-making. Widely used by government agencies, research institutions, and private companies, JSIC codes streamline economic data collection and dissemination.

The system brings multiple benefits to those analysing the Japanese economy, enhancing data collection, economic analysis, and informed investment decisions. JSIC’s standardised classification simplifies data comparison across industries and timeframes, empowering researchers and investors to make informed decisions amid economic changes. In conclusion, JSIC stands as an essential tool for categorising Japanese businesses, fostering economic research, and enabling detailed industry analysis, contributing significantly to the informed decision-making process in the Japanese market.

 

China Industry Classification (CIC)

The China Industry Classification (CIC) is a crucial system for categorising Chinese companies based on their primary business activities, providing essential insights into the Chinese market. For investors, analysts, and businesses navigating the complexities of the Chinese market, understanding the CIC is vital. It enables informed investment decisions by identifying trends, growth potential, and risks associated with specific sectors. The categorization also facilitates comparisons with global peers, aiding benchmarking and performance evaluation.

Comprehensive market research and business intelligence on China’s economy benefit significantly from a nuanced understanding of the CIC. The detailed sub-industry breakdown provides insights into industry trends and supports competitive analysis, aiding in market segmentation strategies. In summary, the CIC serves as an indispensable tool in comprehending the Chinese market landscape, contributing to informed decision-making for investors, analysts, and businesses. Its recognition as one of the top 10 sector classification systems globally underscores its importance in the global financial market.

 

Dow Jones Industrial Average (DJIA)

While not a classification system itself, the Dow Jones Industrial Average (DJIA), comprising 30 significant stocks from NYSE and Nasdaq, serves as a key indicator of the U.S. economy’s health. The index reflects diverse sectors crucial to economic well-being, including Industrials, Financials, Technology, Healthcare, and Consumer Goods.
Industrials, covering aerospace, defence, construction, and transportation, dominate the DJIA, impacting industrial output and economic health. Financials, representing banks, investment firms, and insurers, reflect financial industry health and consumer confidence.

Technology, healthcare, and consumer goods sectors, with varying components, signify growth potential in emerging technologies, medical advancements, and consumer spending trends. The historical performance of these sectors influences the DJIA’s trajectory, with financials and industrials potentially underperforming during economic downturns.

Understanding sector representation is vital for investors, influencing portfolio diversification and risk management. The evolving distribution of sectors in the DJIA necessitates analysis of historical sector performance to inform investment decisions. By identifying top-performing and worst-performing sectors, investors can formulate a diversified strategy considering market trends and sector weightage, enhancing their ability to navigate changing economic landscapes and make informed investment choices. In conclusion, the DJIA sectors offer a comprehensive view of the U.S. economy, guiding investors in adapting their portfolios to dynamic market conditions.

 

Dynamic Company Sector Classification (DCSC)

DCSC, or Dynamic Company Sector Classification solves some limitations of traditional sector classification systems, and it acts as both a classification system as well as a platform based on the initial classification data. DCSC is integrated with the CityFALCON platform and all its tools, enabling better due diligence and market research.

Main features of DCSC include 3-part dynamic relevance scores, smart portfolios, portfolio analysis, and private company screeners (currently for the UK market only).

For finance and investment professionals, DCSC enables in-depth industry analysis, trend identification, and informed investment decisions. It allows for the assessment of relative performance within specific industries and asset allocation accordingly. For example, an investor interested in building a portfolio in the UK with exposure to the Artificial Intelligence and Technology sectors – because perhaps they like the UK’s macroeconomic policies and government support of AI – can leverage DCSC to identify relevant companies, even if they have no familiarity with the AI sector or the UK landscape.

DCSC also serves as a valuable tool for knowledge management. Its relevance scores indicate how relevant sectors are to companies, and they update in real-time. This enables better-informed strategic decisions and the tracking of industries, while the seamless integration with CityFALCON provides more associated and relevant content. It is particularly useful for consulting and advisory firms, strategy teams, and senior management.

In terms of business development, DCSC helps identify companies in specific industries or newly-emerging, high-growth sectors. It facilitates exploring potential new markets and discovering related companies. Competitive analysis within sectors can inform partnerships, licensing deals, and M&A strategies. Sales and business development teams, as well as freelancers, can benefit from DCSC in these areas.

DCSC is more than just a classification system though. The platform and its tools offer several advantages over traditional classification systems:

Relevance scores: DCSC’s relevance scores allow investors to identify companies most involved in specific sectors, and these scores use a 3-part model that recalculates continuously.

Smart portfolios: DCSC can suggest portfolios based on an investor’s preferences for sector exposure and intuitive filters, simplifying investment-by-sector approaches.

Private company screeners: DCSC provides private company screeners for investment and research, allowing investors to uncover promising private companies before they go public.

Portfolio Analyser: using the relevance score data and other information, portfolios can be categorised to improve diversification and show where sector exposure may be lacking

Overall, DCSC offers a modern economic classification system that uses AI and Big Data to provide dynamic industry classification. Its applications span across various sectors, including finance, investment, knowledge management, and business development.

If you are looking to know more details about how DCSC can help your work, please reach us on [email protected].