Australian Index Compilation

This article outlines the various sub-indices and why they were formulated.

Standard and Poor’s has a joint product with Morgan Stanley Capital International aimed at standardising industry definitions across the world’s markets. To bring Australia in line with the rest of the world, Standard and Poor’s reclassified all ASX listed entities according to Global Industry Classification Standard (GICS).

This system has been the primary index system used by the ASX since July 2002, when the old 23 ASX industry sectors were discontinued. This includes the “All Ordinaries” index being replaced by the much-referred to S&P/ASX200 (XJO). Ultimately, this process allows investors to compare like industries in other countries with Australia.

Sectors

The GICS traditionally has 10 sectors however in Australia, an extra two have been created to tailor it to a unique characteristic of the ASX. The 12 GICS sectors and corresponding ASX Codes in Australia are:

• Consumer Discretionary XDJ
• Consumer Staples XSJ
• Energy XEJ
• Financials XFJ
• Financial-x-Property XXJ
• Health Care XHJ
• Industrials XNJ
• Information Technology XIJ
• Materials XMJ
• Property Trusts XPJ
• Telecommunications XTJ
• Utilities XUJ

The two extra sectors over the original 10 are ‘Financials-x-Property’ and ‘Property Trusts’. Property Trusts under GICS fall under the Financials sector, however Australia has a significant number of listed property trusts. Consequently, a dedicated ‘Property Trusts’ sector has been created and a ‘Financials’ sector without property trusts included, called ‘Financials-x-Property’.

Sector Performance

A traditional investment approach suggests that you purchase shares in the strongest companies in the strongest industry sectors. The strength in this approach is that the share market goes through cycles where certain industry sectors perform well under certain economic conditions while others not so well. Furthermore, if a sector is performing poorly, it is quite common for most if not all companies in that sector to also perform poorly. This is exactly the same for sectors that are performing well.

The performance of a sector can be measured by analysing its corresponding index. A limitation of Australian indices is that they are weighted according to market capitalisation. Therefore the larger a company is the more influence it has on the calculation of the value of the index. This can sometimes provide a distorted view of the performance of an individual sector.