GICS

Before an analyst can compare a company with its rivals, somebody has to decide which industry it is in. Classification systems do that job.

GICS is the one global investors use most. It sorts the world's listed companies into a tree with 4 levels, running from broad sectors at the top down to narrow sub-industries at the bottom.

India has its own system, the National Industry Classification. The United States has NAICS. GICS is the one built for investors rather than for government statistics.

All 3 share a weakness the workbook is keen to point out. A standard label does not always match how a business actually competes.

The structure, and its 4 counts. The workbook describes GICS as "a four-tiered, hierarchical industry classification system where the four tiers are: Sectors, Industry Groups, Industries and Sub-Industries divided into 11 sectors, 25 industry groups, 74 industries and 163 sub-industries." Its exhibit illustrates the Energy sector and is sourced to MSCI, March 2023.

Learn the 4 numbers in that order. They are the most directly examinable facts in chapter 6.2.

Where it sits among the alternatives. The workbook names 3 standard systems: the National Industry Classification (NIC) in India, GICS, and the North American Industry Classification System (NAICS) in the US. It then warns that they "may not necessarily capture the substance of the industry."

Why that warning matters. The workbook's illustration is NIC: it "has a single classification for manufacture of passenger cars," so an entry-level compact car maker and a high-end luxury car maker share one industry code even though their dynamics are completely different. An analyst may reasonably treat them as separate industries.

A dating caveat. The 11/25/74/163 structure is the one the workbook attributes to MSCI as at March 2023. MSCI revises the GICS structure from time to time, so a current count published elsewhere may differ. The exam is set from the workbook, so answer with the workbook's 4 figures.

Illustrative, following the workbook's own passenger-car illustration. An analyst is asked for a peer comparison of 2 Indian car makers.

Under NIC both are "manufacture of passenger cars" — one code, one industry. Yet Maker B earns twice the margin on a car that costs 11.5 times as much, and sells 1.3% of the volume. A price cut by Maker A costs Maker B nothing.

Putting them in one peer set and averaging their multiples would produce a valuation benchmark that describes neither company.

GICS goes 4 levels deep instead of 1, which helps. But 163 sub-industries have to cover every listed company on earth — roughly 15 sub-industries per sector — so even its finest tier groups businesses an analyst would still separate by hand. That is the workbook's point: a classification is where industry definition starts, not where it ends.

Chapter 6.2 (Defining the industry) opens the industry analysis chapter, and GICS is the only classification system in it that the workbook describes in numeric detail.

The near-certain question is the 4-tier recall: name the tiers, or match the counts 11, 25, 74 and 163 to them. A second question tests which system belongs where — NIC for India, NAICS for the US, GICS for global investors. A third, more conceptual one asks why a standard classification can mislead an analyst, with the passenger-car example as the model answer.

• Four tiers, not three. Sectors, Industry Groups, Industries, Sub-Industries. Dropping "Industry Groups" is the usual slip.
• Keep the 4 counts in order: 11, 25, 74, 163. They increase down the tree, which is the sanity check if you can only remember 2 of them.
• NIC is Indian, NAICS is American, GICS is the global-investor standard. All 3 are named in the same paragraph and all 3 get swapped in answer options.
• The workbook's figures are dated March 2023 and sourced to MSCI. If you meet a different count elsewhere, answer the paper with the workbook's.
• A classification is not a peer group. The workbook's whole point in 6.2 is that a single code can hold businesses an analyst should not compare — and that a company competing in many industries may not fit one code at all.