Transitioning to a New Global Industry Classification Standards Structure

Helping clients make a seamless transition as sector classifications undergo re-alignment.

Greg Mello, Head of Product Management

Sometimes small changes create big headaches. Take the recent decision by MSCI and Standard & Poor’s to alter the Global Industry Classification Standard, or GICS®. While the update may seem relatively mundane, particularly compared to the heavy lifting that came out of Dodd-Frank and other financial reform efforts, the fact is, for those operating internal systems or still running dated platforms, it is these small changes that often best highlight the challenges of working with a legacy system.

MSCI and Standard & Poor’s created GICS® in 1999 to provide a consistent industry classification system for companies around the world. As part of the announced changes, all listed equity Real Estate Investment Trusts (REITs) as well as real estate management and development companies—with the exception of mortgage REITS—will be promoted to their own real estate sector. Currently, these companies are being classified as financials.

This re-alignment is an acknowledgement that institutional investors now view global real estate as a distinct asset class. With interest rates at record lows, real estate has become a key source of yield and diversification, and has grown considerably in terms of market capitalization. In an effort to encourage the development of new real estate investment products, the industry believes the GICS® reclassification will further support the demand for REITs. Besides improving the visibility of the sector, it should also lower volatility by reducing the correlation of real estate to riskier financials.

Standard & Poor’s and MSCI concluded that giving equity REITs their own sector classification would also support financial analysis by enabling asset managers and investment professionals to make consistent global comparisons by industry and track their portfolios more accurately. While this long-term benefit makes perfect sense, in the near term, the reclassification has created some anxiety among performance and data management professionals tasked with accommodating the change.

Indeed, the reclassification will have a far-reaching impact and likely require the revision of innumerable analytical systems that utilize GICS® and incorporate these classifications into their performance measurement systems and benchmarks. Many asset managers, together with their data vendors, may have to restructure their security master history and performance models. They may also have to re-evaluate all their interfaces and reports, and redesign their daily workflows.

The reclassification is scheduled to go into effect on August 31, 2016. We are anticipating that there will be a smooth transition for our clients due to a couple of factors. First, is the fact that we have been focused on the transition and working with clients to mitigate the potential impact. Second, given the flexibility of our data management and performance systems—characterized by our data-centric model and the open architecture of the Eagle platform—clients can readily implement the new classifications as part of their operational and performance workflow.

For instance, we already enable clients to create their own proprietary classifications, in addition to the industry standards, such as GICS®. As such, there will not be any changes or updates to Eagle’s underlying architecture.

In contrast, these reclassifications may require users of legacy systems to work closely with data vendors, review security master restructuring, re-create performance models, and re-evaluate all interfaces and reports.

To further facilitate the transition, Eagle’s Global Professional Services organization can also be engaged to conduct an operational review or provide feedback on any potential downstream/upstream areas that would be impacted by the new GICS® structure. Our services team can also evaluate external processes, as clients will need to ensure their index data providers’ data files reflect these new structures.

When we refer to ourselves as a solutions provider, this is precisely the kind of holistic approach that we have in mind. Besides giving clients peace of mind and increasing the likelihood of a smooth and timely transition, the operational efficiencies ultimately allow asset managers to focus on what they do best: investing.

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