GICS Consultation 2010
Standard & Poor’s and MSCI Barra Consultation Paper on Potential
Changes to the Global Industry Classification Standard (GICS)I.

INTRODUCTION

MSCI Barra and Standard & Poor’s (S&P), as part of their annual GICS review, are hoping toclarify some of the definitions of Sub-Industries within the GICS structure. Our objective is toensure that GICS continues to clearly and accurately represent the global equity markets and,
thereby, enables asset owners, asset managers and investment research specialists to makeseamless global comparisons by industry.
This consultation paper is designed to serve as a basis for discussion before MSCI Barra andS&P make any final decisions. Any minor definitional changes are expected to be announced by
the end of the first quarter of 2010. Any changes that would result in a structural change will not
be announced until the end of 2010. This consultation may or may not result in anychanges to the GICS structure or definitions.
II.

THE EVOLUTION OF THE GICS STRUCTURE

In August of 1999, Standard & Poor's and MSCI Barra announced their agreement to codevelop the Global Industry Classification Standard (GICS®).
When first introduced GICS was a four tier structure with an eight-digit taxonomy – 10 Sectors,
23 Industry Groups, 59 Industries and 123 Sub-Industries. Through the practice of annual client
consultations the structure has evolved to 10 Sectors, 24 Industry Groups, 68 Industries and 154
Sub-Industries. All of the changes considered direct input from global equity market participants.
Some of the more significant changes over the past 10 years include:•Consumer Discretionary Sector – the addition of a diversified consumer services
Industry, and automotive retail, cable & satellite, education services, homefurnishingretail and specialized consumer services Sub-Industries.

•Energy Sector – the addition of the oil & gas storage & transportation and coal &consumable fuels Sub-Industries.

•Financials Sector – the addition of asset management & custody banks, diversified capital
markets, investment banking & brokerage, regional banks, specialized finance, and thrifts& mortgage finance Sub-Industries. The creation of a real estate investment trust(REIT) Industry and seven REIT-related Sub-Industries.

•Health Care Sector – the addition of life sciences tools & services, health care services,and health care technology Sub-Industries.

•Industrial Sector – the addition of a professional services Industry, and diversified
support services, human resource & employment services, research & consulting
services, and security & alarm services Sub-Industries.

•Information Technology Sector – the promotion of the semiconductors &semiconductor equipment Industry to Industry Group status. The addition of dataprocessing & outsourced services, electronic components, electronic manufacturingservices, home entertainment software, and technology distributors Sub-Industries.

GICS Consultation 2010 (continued)•III.

Utilities Sector – the addition of the independent power producers & energy traders SubIndustry.
SUMMARY OF PROPOSALSThe main proposals set out in this consultation paper are:•Analysis of solar power system and photovoltaic module manufacturers•

Review of the definition of the Independent Power Producers & Energy Traders SubIndustry•

Review of the definitions of the Coal & Consumable Fuels and Diversified Metals &Mining Sub-Industries•

Review of the REITs Industry•

Further feedback from the market. What should we be focusing on over the next threeto-five years?
For a detailed description of the classification standard, please refer to the MSCI Barra web siteat www.mscibarra.com or the Standard & Poor's web site at www.gics.standardandpoors.com.
IV.

ANALYSIS OF SOLAR POWER SYSTEM AND PHOTOVOLTAIC MODULE
MANUFACTURERS

Rationale for the review
Manufacturers of solar power systems and photovoltaic (PV) modules are currently classified in
the Electrical Components & Equipment Sub-Industry (within the Industrials Sector). However,some analysts have indicated it may be more appropriate for all solar related companies to fallunder the Semiconductors or Semiconductor Equipment Sub-Industries (within theInformation Technology Sector), as solar manufacturers share great similarities to semiconductor
manufacturers.
Solar companies may be more accurately classified under an information technology sector subindustry given the close relationship, growth trends, past performance, comparable peers, andcoverage that solar companies share with other technology companies. Solar companies havedemonstrated that they are embarking on the same path that semiconductor and semiconductor
equipment companies have taken over the past 20 years. In addition to fundamental similarities,
solar stocks are extremely volatile in nature and have resembled performance returns (albeit overa short time horizon) closer to technology related securities.
Some supporting rationale is as follows:•The fundamentals of the solar industry have close ties to the IT Sector. Memory
manufacturers have historically often seen periods of strong growth, leading to overinvestment and excess supply, followed by periods of weakness; with the cycle repeatingwhen demand eventually catches up to, and outstrips, supply. Solar companies also often
look like they are prone to the supply/demand boom and bust periods that have been
experienced in the semiconductor memory industry. In addition, chip manufacturers
have historically seen selling prices erode over a long period of time, which is what many
experts anticipate is in store for the solar industry over the next 10 years.

•Solar panels are perceived as large semiconductor devices. Semiconductor devices
include the transistor, many kinds of diodes including the light-emitting diode, the silicon

GICS Consultation 2010 (continued)
controlled rectifier, and digital and analog integrated circuits. Solar panels are essentiallylarge semiconductor devices that directly convert light energy into electrical energy.
Crystalline silicon, which is the primary raw material found in a solar module, is derived
from silicon, a commonly used semiconductor.
•

Solar manufacturer peers include many traditional technology firms that havemigrated into the solar industry. Currently, many of the solar companies competewith semiconductor and other technology driven companies.

•Growth potential of solar is more comparable to that seen in products within thetechnology sector. Expectations are for solar installations to grow at a pace of 30-50%
over the next three to five years. Growth trends are more closely linked to that seen in
the technology sector than those found in the industrial sector.

•Unstable Margins. Memory manufacturers have historically seen wide swings inmargins, witnessing high margins during periods of strong growth and volume, and low(often negative for many companies) margins following periods of over-investment andexcess supply. Rapidly declining (rising) prices also occur during weak (healthy) periods,magnifying the margin swings. Solar companies have thus far demonstrated the same
exact characteristics, and are likely to experience similar supply/demand boom and bustperiods.

•Solar objective similar to Moore’s Law? Moore's Law has been a goal that industry
leaders in both the semiconductor and semiconductor equipment industry have tried tokeep up with over the last few decades. Simply put, Moore's Law means that, for thesame price, a person can purchase twice the processing power and twice the amount ofmemory every couple of years. Many believe some form of Moore’s Law will be needed
for solar to help the industry reach grid parity.

•Most solar stocks are tracked by analysts that cover technology securities. Most ofthe pure solar related stocks are covered by semiconductor equipment sell-side analysts.

Proposal
Reclassify manufacturers of solar modules/cells/materials/equipment in the semiconductor
related Sub-Industries, while keeping those that install such equipment in the ElectricalEquipment Sub-Industry.
The proposed definitions for the new Sub-Industries are:
Semiconductor Equipment
Manufacturers of semiconductor equipment, including manufacturers of the raw material andequipment used in the solar power industry.
Semiconductors
Manufacturers of semiconductors and related products, including manufacturers of solar
modules and cells.

GICS Consultation 2010 (continued)
V.

REVIEW OF THE DEFINITION OF THE INDEPENDENT POWER
PRODUCERS & ENERGY TRADERS SUB-INDUSTRY

Rationale for the Review
While MSCI and S&P have been very consistent about where we have classified companies thatgenerate power through alternative means, given the recent focus on alternative energy sources it
might be appropriate to clarify such classification in our published definitions.
The proposed definitions for the new Sub-Industries are:Independent Power Producers & Energy TradersCompanies that operate as Independent Power Producers (IPPs), Gas & Power Marketing &Trading Specialists and/or Integrated Energy Merchants. Includes producers of solar power andwind power, used to generate electricity. Also includes companies that generate electricity and/orpower through alternative energy sources such as biogas, biomass, clean energy, geothermal,waste, water and waves. Excludes electric transmission companies and utility distribution
companies classified in the Electric Utilities Sub-Industry.
VI.

REVIEW OF THE DEFINITIONS OF THE COAL & CONSUMABLE FUELSAND DIVERSIFIED METALS & MINING SUB-INDUSTRIES

Rationale for the Review
While MSCI and S&P have been very consistent about where we have classified companies thatmine for bituminous coal (used for energy production) and metallurgical coal (used for steelproduction) it might be appropriate to clarify such classification in our published definitions.
The proposed definitions for the new and revised Sub-Industries are:Coal & Consumable Fuels
Companies primarily involved in the production and mining of coal, related products and otherconsumable fuels related to the generation of energy. Excludes companies primarily producing
gases classified in the Industrial Gases sub-industry and companies primarily mining formetallurgical (coking) coal used for steel production.
Diversified Metals & Mining
Companies engaged in the diversified production or extraction of metals and minerals notclassified elsewhere. Including, but not limited to, nonferrous metal mining (except aluminum),salt and borate mining, phosphate rock mining, metallurgical (coking) coal mining used for steel
production, and diversified mining operations. Excludes iron ore mining, classified in the Steel
Sub-Industry and aluminum mining classified in the Aluminum Sub-Industry. Excludes
bituminous (thermal) coal-mining companies classified in the Coal & Consumable Fuels SubIndustry.

GICS Consultation 2010 (continued)
VII.

REVIEW OF THE REITS INDUSTRY

In 2006, the global specialization of companies that are defined as some form of property trust(REIT) and the need for real estate asset owners to conduct performance attribution and analysis
created the opportunity to create a more granular REITs GICS structure that groupedcompanies with more focused business activities in new Sub-Industries. Has the health care
REIT industry, in particular, gained enough critical mass to warrant its own Sub-Industry?
The Proposed Structure
Based on the rationale above, a proposal for the Real Estate Industry Group is outlined below.
In particular, the proposal for the Real Estate Investment Trusts Industry is:404040Financial (Sector)
Real Estate (IndustryGroup)

404020Industry
Real Estate Investment Trusts(REITs)

Sub-Industry
40402010

Diversified REITs

40402020

Industrial REITs

40402030

Mortgage REITs40402040

Office REITs

40402050

Residential REITs

40402060

Retail REITs

40402070

Specialized REITs

40402080

Health Care REITs

The proposed definitions for the new and revised Sub-Industries are:Specialty REITs
Companies or Trusts engaged in the acquisition, development, ownership, leasing, management
and operation of properties not classified elsewhere. Includes trusts that operate and invest inleisure, hotel/resort and storage properties. It also includes REITs that do not generate amajority of their revenues and income from real estate rental and leasing operations.
Health Care REITs
Companies or Trusts engaged in the acquisition, development, ownership, leasing, management
and operation of hospitals, nursing homes, and other health care related properties.

GICS Consultation 2010 (continued)
CLIENT FEEDBACK
To participate in this consultation please contact one of these GICS email addresses:clientservice@mscibarra.com or spgics@standardandpoors.com. Or contact your MSCI Barraor Standard & Poor’s Account Manager or Representative.
As a reminder, this consultation may or may not result in any changes to the GICS
structure or definitions.
NOTICE AND DISCLAIMER
The GICS Consultation Paper 2010 has been prepared by Standard & Poor’s (“S&P”) and MSCI Barra solely for informational
purposes. The Consultation Paper is not a recommendation to participate in any particular trading strategy and may not be reliedon as such. The user of the information contained in the Consultation Paper assumes the entire risk of any use made of theinformation provided herein. None of the proposals or alternatives set forth in the Consultation Paper has been adopted byMSCI Barra or S&P, and there is no assurance that they will be considered or adopted, in whole or in part, by MSCI Barra andS&P.
Neither MSCI Barra, S&P, nor their affiliates makes any express or implied warranties or representations with respect to theinformation contained in the Consultation Paper (or the results to be obtained by the use thereof), and MSCI Barra, S&P andtheir affiliates each hereby expressly disclaim all warranties of accuracy, completeness, merchantability or fitness for a particularpurpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI Barra, S&P, or anyof their affiliates have any liabilities for any direct, indirect, special, punitive, consequential or any other damages (including lostprofits) even if notified of the possibility of such damages.
The Consultation Paper is proprietary to MSCI Barra and S&P and may not be reproduced or re-disseminated in any form
without prior written permission from MSCI Barra and S&P. You may not use or permit the use of any of the information in theConsultation Paper to verify or correct data in any compilation of data or index. Also, you may not use or permit anyone else touse the information in the Consultation Paper in connection with the writing, trading, marketing or promotion of any financial
instruments or to create any indices or securities classifications systems or methodologies.
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