From March 22 this year, all FTSE branded Indexes from FTSE Russell will adopt the new Industry Classification Benchmark (ICB) classifications and index names. The transition was due to take place last year, but was delayed in order to allow firms more time to prepare following the disruption caused by COVID-19.
ICB has updated its structure to better reflect today’s global economy and to address the needs of investment professionals. Changes include increasing the number of groupings across the four levels of classification and assigning companies to aggregate industry grouping and to detailed sectors and subsectors. The new ICB classification scheme has already been implemented for the Russell indexes within the FTSE Russell product list, along with other major index vendors such as NASDAQ and STOXX.
These changes have a significant impact on the client portfolios of firms, and on funds that track the FTSE Equities Indexes. Firms may well find they will need to rebalance certain sectors to meet client mandates, asset allocations and compliance rules.
For example, just by extending the top-level classification – Industry – from 10 sectors to 11, the reclassification drives a large number of changes to FTSE Equity Indexes. RIMES’ analysis of the FTSE Developed World Index reveals that 21% of companies will transition to different sectors. The financial sector grouping will see its overall weighting drop by around a quarter as companies are moved into the new top-level category of Real Estate.
Meanwhile, companies in the Consumer Goods grouping will be moved to Consumer Staples, although a significant proportion of these firms will be reclassified and migrated to Consumer Discretionary. As a result of this transition, Consumer Staples will be around 45% lighter than the Consumer Goods weighting.
Steve O’Brien, Head of Sales Engineering at RIMES, provides some further context: “As this one example shows, portfolio managers need to have an advanced view of what’s likely to change with regard to index compositions so they can prepare well in advance. Firms will also need to set up the new sectors in their internal systems so they can cope with the new codes from day one.
“RIMES can help by providing proforma views on how the rebalance will impact the indexes in question, enabling portfolio managers to prepare. We also provide sample files, mapping and test feeds to give firms peace of mind that they’re ready to work with the new ICB classifications the moment they go live.”
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