A Different Class(ification): Distinguishing Diversification in My Portfolio

Diversification is a very important element in my current investment activity. By spreading my investing funds across a number of industries and sectors I hope to "iron out" some of the markets intriguing movements and insulate myself from any particularly poor period in any one sector or industry.

As a result, I want to be able to accommodate some of the more cyclical industries with their potential for bigger gains (and losses). However, I also want to steady the ship with some of the more resilient and stable industries.


I have originally used the Global Industry Classification Standard (GICS) in order to classify my investments. It appealed to me due to its simplicity. However, as I have moved on it has become clear that it simplicity does result in some disadvantages.

1. Its simplicity often seems to result in it inadequately (and sometimes crudely) classify some companies.
2. My favoured financial information source (FT.com) does not use GICS. Consequently, it takes a little more effort to use the classification of my portfolio to guide me to "underweight" industries.

As a result (the eagle-eyed amongst you may have already noticed), I have chosen to switch the classification breakdown of my portfolio on my "Holdings" page to the Industry Classification Benchmark.

For me the ICB classification system has the benefit of being more "specific" but not too unwieldy with it. It also is used (slightly modified, it seems) by the FT.

However, I have chiefly used only down to the sector level rather than sub-sector (that is drilling down deeper than I need currently or anticipate to need in the future).

Eventually I will use this to slowly but surely uncover some of the key industries and sectors* where I am "underweight" and then investigate companies in that sector to see if there are any appealing stocks.

As a result, this is how my classification table looks:

Industry		Supersector		Sector
0001	Oil & Gas	0500	Oil & Gas	0530	Oil & Gas Producers
				0570	Oil Equipment, Services & Distribution
				0580	Alternative Energy
1000	Basic Materials	1300	Chemicals	1350	Chemicals
		1700	Basic Resources	1730	Forestry & Paper
				1750	Industrial Metals & Mining
				1770	Mining
2000	Industrials	2300	Construction & Materials	2350	Construction & Materials
		2700	Industrial Goods & Services	2710	Aerospace & Defense
				2720	General Industrials
				2730	Electronic & Electrical Equipment
				2750	Industrial Engineering
				2770	Industrial Transportation
				2790	Support Services
3000	Consumer Goods	3300	Automobiles & Parts	3350	Automobiles & Parts
		3500	Food & Beverage	3530	Beverages
				3570	Food Producers
		3700	Personal & Household Goods	3720	Household Goods & Home Construction
				3740	Leisure Goods
				3760	Personal Goods
				3780	Tobacco
4000	Health Care	4500	Health Care	4530	Health Care Equipment & Services
				4570	Pharmaceuticals & Biotechnology
5000	Consumer Services	5300	Retail	5330	Food & Drug Retailers
				5370	General Retailers
		5500	Media	5550	Media
		5700	Travel & Leisure	5750	Travel & Leisure
6000	Telecoms	6500	Telecoms	6530	Fixed Line Telecoms
				6570	Mobile Telecoms
7000	Utilities	7500	Utilities	7530	Electricity
				7570	Gas, Water & Multiutilities
8000	Financials	8300	Banks	8350	Banks
		8500	Insurance	8530	Nonlife Insurance
				8570	Life Insurance
		8600	Real Estate	8630	Real Estate Investment & Services
				8670	Real Estate Investment Trusts
		8700	Financial Services	8770	Financial Services
		8900	Investment Instruments	8980	Equity Investment Instruments
				8990	Non-Equity Investment Instruments
9000	Technology	9500	Technology	9530	Software & Computer Services
				9570	Technology Hardware & Equipment

Notes

*Incidentally, to add a little confusion. GICS uses as its highest classification level "sector". In contrast, ICB uses "industry". This is somewhat annoying but not a great issue.

[Creative Commons image reproduced from Flickr user Glynlowe]

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