Competing Systems for Industry Classification

July 27, 2018
Competing Systems for Industry Classification

When you’re investing in securities, there can be a baffling range of sectors. It helps if you narrow your choices down to ones that are most likely to suit you. A good place to start is to decide which sectors offer the right characteristics. For example, if you are looking for income, you might want to consider sectors that specialise in delivering a high or growing income. Alternatively, you might want a good general investment company that invests globally and which aims to deliver both income and capital growth.

If you already have a reasonably well-balanced portfolio, you might be looking for something more specialists. We have sectors which focus on particular parts of the world, or individual countries. Some focus on particular types of assets (e.g. property, private equity). Bear in mind that specialist investment companies can be more risky as they focus on one particular investment area.

Sector investment strategies have been around for decades. However, while corporate business models evolve, the methodologies that determine sector classifications have largely remained consistent. Most classification frameworks are backward-looking, grouping companies with historically similar businesses under a single umbrella. Xoriant evolved sector approach uses pre decided guidelines and techniques to respond to shifts in the fast-changing business landscape.

Xoriant CDi significantly advances solutions for reference data by investing in a state-of-the-art industry utility to source cleanse and enrich client reference and sector data. There is notable time lag in updating classifications because it required thorough research about the primary business of the establishment/company.

Sectors keeps on changing therefore need cyclic maintenance to review them. It could be due to corporate action of sector shift of primary business of establishment/company.

Sector/Industry classifications are often used to divide companies into industry groups. SIC is the best known, and companies have a Primary SIC code, and additional secondary ones.

Short-formFull NameSponsorSize
SICStandard Industrial ClassificationGovernment of United States4 digits
NAICSNorth American Industry Classification SystemGovernment of United States, Canada & Mexico6 digits
NACEStatistical Classification of Economic Activities in the European CommunityEuropean Community6 digits
ISICInternational Standard Industrial Classification of All Economic ActivitiesUnited Nations Statistics Division4 digits

Despite the fact that the economy and the companies in it have continued to evolve, the traditional methods for sector classification have remained relatively unchanged for decades.

Traditional classifications tend to group companies with historically similar characteristics into a single sector, often overlooking some of the likely drivers of those companies in the future.

Xoriant CDi’s sector approach seeks to provide a more fully detailed sector classification framework through the use of data science techniques, including machine learning and text analysis.

Our technology-driven approach can capture a more forward-looking view of companies and redraw the boundaries of the modern economy.

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