Aleksey Mironenko, Premia Partners
A majority of equity indices implemented changes last month in sector allocations following a reclassification of three major sectors under the Global Industry Classification Standard (GICS).
The first big change is that the telecommunications services sector will be renamed as communications services, explained Aleksey Mironenko, partner and chief distribution officer at Hong Kong-based ETF manager Premia Partners.
“In this sector, in addition to telecommunications companies, it will include media companies from consumer discretionary and home entertainment companies from IT,” he said at a webinar organised by the firm.
Source: Premia Partners
On the stock level, for example, Facebook and Google, which were part of the IT sector, as well as Netflix, which was previously consumer discretionary, will fall under communication services. In Asia, Alibaba, which was previously under IT, will now fall under consumer discretionary.
Because of the reclassification, communications services will increase at the expense of the IT and consumer discretionary sectors for the MSCI AC World and S&P 500 indices, according to David Lai, Premia Partner’s co-chief investment officer.
Source: Premia Partners
However, looking at Asia, emerging markets and China, the changes are more pronounced and slightly different from the US and global indices.
“You can see that across Asia, emerging markets and China, there is an increment in both communication services and consumer discretionary at the expense of IT. So the reduction in IT is more obvious,” he said.
The change is particularly huge in China, where IT drops to just 3% from 37%.
Source: Premia Parnters
Tech ETFs in trouble?
Because of the changes, investors have become concerned if China has become less of a technology market, according to Lai, noting that after the changes, China has become the largest consumer discretionary market globally.
Source: Premia Partners
“People may ask if China has become less technology involved. The answer is no. If we look at technology right now, it’s running across a lot of different sectors, such as consumer discretionary, healthcare or industrials,” Lai said.
However, the problem lies in whether investors are invested in investment products that closely follow the GICS classification.
“Many of our clients in Asia use a tech-sector ETF to get exposure to the high growth part of the economy in the US and globally. What investors are under-appreciating is that starting October, their tech ETF is not going to have [Google, Facebook or Amazon] in it, and the same goes for Asia,” Mironenko said.
Lai explained that sector fundamentals have significantly changed after the reclassification. IT, which used to have a high beta exposure, is now similar with the overall market.
Source: Premia Partners
“I would guess many clients will continue to hold technology ETFs for a few more weeks and months, until they realise there’s a dispersion in performance that they need to deal with,” Mironenko added.
No rebalancing
Mironenko noted that there will be no changes or rebalancing in its technology-focused ETFs, particularly the China New Economy and Asia Innovative Technology ETFs.
For the China New Economy ETF, which invests in China A-shares, the firm used the China Securities Regulatory Commission’s (CSRC) industry classification.
The CSRC classification has at least 450 sub-sectors versus the GICS’ 150, according to Mironenko.
The firm then identified sub-sectors that require skill talents, advanced technology and are asset light. They also chose that have sustainable growth profile and are projected to grow for the next five-to-10 years.
Those sub-sectors may fall under different industries, such as technology, e-commerce and healthcare, Mironenko said, noting that while healthcare is a defensive play in the US, it’s a growth area in China.
Turning to the Asia Innovative Technology ETF, Mironenko said the firm also did not use the GICS classification but instead worked with Factset to use its “revere business and industry classification system (RBICS)”.
“The RBICS goes to a granular level of 1,500 sub-industries,” he said, adding that the RBICS makes use of revenues to classify a company. We look at companies that generate at least 20% of their revenue from [technology-related] sub-industries.”
The firm identified 132 innovative technology industries, with 330 stocks in Asia.
Mironenko illustrated Alibaba as an example. Although the stock was previously IT and now consumer discretionary under GICS, 84% of its revenue comes from internet department stores under the RBICS sub-category.
“So it was always an e-commerce stock from our view even though it used to be called tech by the GICS,” he said.
