Sectors

General discussions about equity high-yield income strategies
foundone
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Joined: November 5th, 2016, 8:58 pm

Sectors

Postby foundone » December 20th, 2016, 9:59 pm

I understand the need to spread investments across sectors and have seen shares in the same sector move in unison, but some of the groups seem bizarre, for instance I hold four shares in the Media sector ITV, ITE, Rightmove and Moneysupermarket. I'd have put them in media, sales & marketing?, construction/property and sales & marketing.

Are there any good sector classifications out there?

tjh290633
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Re: Sectors

Postby tjh290633 » December 20th, 2016, 10:24 pm

Some of the allocations are bizarre. I prefer to use my own, based on commonsense, but I can see some logic in that media attribution. Television, Exhibitions, online Estate Agency and online Financial Advice (for want of a better word) all fit neatly in that sector, even if they all have different focuses.

TJH

Breelander
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Re: Sectors

Postby Breelander » December 20th, 2016, 11:06 pm

tjh290633 wrote:Some of the allocations are bizarre. I prefer to use my own...


So do I, unfortunately if we all talked in terms of our own private classifications we'd never agree on anything (no change there, then :) ). For all its flaws (from the HYP perspective) the FTSE Russell Industry Classification Benchmark is a globally recognised standard with a strict rules-based method of classification.
Industry Classification Benchmark (ICB) rules wrote:1.1 The Industry Classification Benchmark (ICB) is a detailed and comprehensive structure for sector and industry analysis, facilitating the comparison of companies across four levels of classification and national boundaries. The classification system allocates companies to the subsector whose definition closely describes the nature of its business as determined from the source of its revenue or the source of the majority of its revenue where available, as detailed in Rule 5.2.1.
http://www.ftse.com/products/downloads/ICB_Rules.pdf

FTSE Russell wrote:Global reach - ICB is adopted by stock exchanges representing over 65% of the world’s market capitalization, including NYSE Euronext, NASDAQ OMX, London Stock Exchange, Taiwan Stock Exchange, Johannesburg Stock Exchange, Borsa Italiana, Singapore Stock Exchange, Athens Exchange, Cyprus Stock Exchange and Kuwait Stock Exchange.
http://www.icbenchmark.com/home

If we're going to talk about sectors, then at least if we stick to the ICB then we're all on the same page.

tjh290633
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Re: Sectors

Postby tjh290633 » December 20th, 2016, 11:21 pm

Breelander wrote:If we're going to talk about sectors, then at least if we stick to the ICB then we're all on the same page.


That's very true, but I was thinking more of viewing housebuilders as different from other consumer goods manufacturers. There are some nonsences in the classifications.

TJH

Raptor
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Re: Sectors

Postby Raptor » December 21st, 2016, 7:37 am

As a starting point the sectors work, but a company that starts in sector and grows into another really gets changed. Financial services is, imo, a catch all.

I have changed a few of mine to so I can see more accurately their purpose in life as it helps me.

Raptor

Gengulphus
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Re: Sectors

Postby Gengulphus » December 21st, 2016, 8:52 am

Breelander wrote:
tjh290633 wrote:Some of the allocations are bizarre. I prefer to use my own...


So do I, unfortunately if we all talked in terms of our own private classifications we'd never agree on anything (no change there, then :) ). For all its flaws (from the HYP perspective) the FTSE Russell Industry Classification Benchmark is a globally recognised standard with a strict rules-based method of classification.
...

And unfortunately, if we use it we get nonsenses like regarding Marks & Spencer as being in the same sector as Halfords and a different sector to Tesco. But walk into the shops and it's easy to see that the types of products sold by Marks & Spencer are basically the same as those sold by Tesco - a different mix of them, with more emphasis on clothing, but both sell food, clothing and household goods - and very different from those sold by Halfords.

And "never agree on anything" is putting it very strongly - anyone wish to argue that AstraZeneca and GlaxoSmithKline are not in the Pharmaceuticals sector, for instance? ;-) Also, disagreement is IMHO healthy - I want to see a range of viewpoints (and to present my own). The thing that is much less desirable is letting the disagreements grow into long, unresolvable arguments (*) - once people have expressed their various viewpoints and any factual errors have been corrected, it's time to agree to disagree and let each HYPer make up their own mind.

So I'm going to continue to use my own sector classifications - which are based on the ICB classification and follow it where I don't have problems with it, but I don't hesitate to deviate from it where I feel it is producing nonsense. Basically, out of encountering some disagreements and basing my investment strategy on nonsense, I regard the former as much the lesser evil!

(*) And yes, I've been guilty of that in the past, and doubtless will again the future. Adhering to principles in the heat of the moment isn't easy... :-(

Gengulphus

Gengulphus
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Re: Sectors

Postby Gengulphus » December 21st, 2016, 9:29 am

foundone wrote:I understand the need to spread investments across sectors and have seen shares in the same sector move in unison, but some of the groups seem bizarre, for instance I hold four shares in the Media sector ITV, ITE, Rightmove and Moneysupermarket. I'd have put them in media, sales & marketing?, construction/property and sales & marketing.


As a comment on just one of those, I would look at what they earn the money from: property companies earn theirs from the returns (rental income and capital gains) on land, while construction companies earn theirs from constructing buildings on land. Rightmove are instead a sort of 'land/building broker' - they earn their money by helping buyers and sellers of land and buildings get into contact with each other and do deals, but they neither benefit directly from investment returns on the land/buildings involved nor undertake any construction involving them.

I haven't worked out for certain where they would fit in my own sector classification - I only do that 'on demand', i.e. when a company looks like a plausible purchase candidate, and there's no way Rightmove's yield can be described as 'high'! But the closest I've got at present is "Property Services" - which is neither "Property" nor "Construction", but is one of the two sectors I've got besides those in the "property-related" group of related sectors (*). There is however the issue that they earn their money quite differently from the existing companies that I've got in that sector - ones like Mitie which provide maintenance services for land/buildings - so it would definitely make the sector a bit of a catch-all one... One has to have catch-all sectors at some level - otherwise every company ends up in a sector of its own! - so the question I would have to decide is whether this is the right level or whether I want to put in a further sector distinction. But I'll only decide on that if and when the issue actually comes up in practice!

(*) The other one being "Housebuilders", which I distinguish from "Property" and "Construction" partly because they're a bit of a hybrid of the two - they do have substantial investments in building land, but are also constructing buildings on it - but mainly because of their greater political sensitivity than either of them.

Gengulphus

Lootman
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Re: Sectors

Postby Lootman » December 21st, 2016, 4:03 pm

Gengulphus wrote:anyone wish to argue that AstraZeneca and GlaxoSmithKline are not in the Pharmaceuticals sector, for instance?

I would not argue that. But even within the healthcare sector there can be significant differences in the underlying products and businesses that cause the performance to vary greatly.

I hold both of them, plus Smith and Nephew, and GW Pharma. All four are considered healthcare shares. But GW Pharma is an out-and-out biotech share (interestingly based out of Porton Down and specialising in research based on the medical benefits of marijuana) and S&N is in medical equipment.

Or in the US, Johnson and Johnson is considered a healthcare share, but actually has a large consumer staples component (plasters, nappies, baby-wipes etc) and a medical equipment business as well as a significant array of drugs. Then, and unlike the UK, there are also listed healthcare management companies, healthcare insurers, hospital REITs and so on.

These companies are all in the broader healthcare sector but will behave very differently from each other. Which comes back to why you want sectors in the first place, since the presumption is that you think all securities in a sector share the same characteristics and will behave similarly.


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