US tech sector shake-up could be share price mover

A reshuffle of US sector categories is hugely significant, especially for Google, Facebook and Twitter, writes Tom Bailey who discusses the imminent overhaul.  

Some of the largest US technology and media shares are set to be moved to a new sector on Friday in the biggest shake-up to the S&P 500's Global Industry Classification Standard (GICS) since its launch in 1999.

The telecommunications sector's name will change to the 'communications services' sector. It will henceforth include media giants Walt Disney, News Corp, CBS and Netflix, along with eight other companies moved from 'consumer discretionary' to the new sub-index.

Six information technology sector stocks, including Alphabet (the parent company of Google), Facebook and Twitter, will also join the communications sector. Apple and Microsoft will remain in technology and Amazon in consumer discretionary.

In total, the stocks being moved into new sectors will account for 8% of the total index.

The changes, says Adrian Lowcock, head of personal investing at Willis Owen, reflect how both businesses and the economy are evolving. "It is no longer clear what a pure tech play is and what is a company utilising tech," he says.

Lowcock cites the example of Facebook. "It is more of a social media and news business than a pure technology company. It is not making new chips or [the] fastest computers. The business is really about media and entertainment. Tech is a tool to the end." The rejigging of the index aims to clarify this.

The shake-up has some potential to cause share price movements, with index-tracking funds obliged to change the make-up of their portfolio.

Amazon, for instance, will now have a much larger weighting in the consumer discretionary sector, requiring funds tracking the sector to readjust accordingly.

However, it is unclear how significant or lasting any such price changes will be. 

Active investors, particularly those with a top-down sector approach, may also want to rebalance their holdings.

According to Gerit Smit, head of equity management at Stonehage Fleming Investment Management, with the current stars of the information technology sector being moved to the new sub-index, active managers "may see the potential to top up on their technology holdings, or add another name or two". Likewise, Smit notes, "managers may find themselves with quite an exposure in the new communications services sector and may trim some holdings".

Most share price movement resulting from the sector changes are likely to prove temporary.

However, Smit argues, "true bottom-up active investors are not expected to be affected materially", with their investment choices based on fundamental considerations rather than sector classifications.

The shake-up, however, does potentially open up another risk. Many of the companies being moved into the new sector have come under increasing political pressure in the US and grouping such companies together could, perhaps, make them more vulnerable to regulation.

"We won't be surprised if some investors become more conscious of such risks and adjust their portfolios accordingly," says Smit.

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