Technology sector and benchmark changes – what does it mean for investors?



With MSCI reclassifying Technology sector constituents at the end of November, Richard Clode, Alison Porter and Graeme Clark, portfolio managers in the UK-based Janus Henderson Global Technology Team, explain why the new index is not fit for purpose, what the change means for investors and the adjustment being made by the team at a benchmark level.​ 
  • The MSCI ACWI Information Technology (IT) index will be changing at the end of November to reflect the GICS reclassification of some technology stocks.
  • Janus Henderson’s UK-based Global Technology Team believes the new MSCI ACWI IT Index will be unrepresentative of the technology sector with the exclusion of internet companies.
  • After client consultation, they are changing their benchmark to a more representative composite covering the IT and Communication Services sectors.
  • The strategy’s investment philosophy and approach - built around a commitment to high conviction active management - will not change.
What’s happening?
MSCI’s Global Industry Classification Standard (GICS) is creating a new Communication Services sector. This will lead to the reclassification of many internet companies, including Alphabet, Facebook and Tencent, which will move from the Technology sector to Communication Services. Game software companies will also move to this new sector while Alibaba and eBay will join Amazon in Consumer Discretionary.
In our view, the remodelled MSCI ACWI IT Index is no longer fit for benchmarking purposes. Not only will it be unrepresentative of the Technology sector but concentration issues that already exist will be exacerbated. For example, Apple will comprise 15% of the new index and Microsoft will have a 12% weighting. For UCITS vehicles like ours, this will be unworkable for portfolio construction or performance measurement purposes, with it being impossible to replicate the benchmark given that no more than 10% of the portfolio is permitted in a single holding.
What are we doing about it?
Following consultation both internally and with clients, we are moving our Global Technology strategy’s benchmark to a composite MSCI ACWI Information Technology + Communication Services Index. We have considered a broad range of alternatives but believe that this change provides the best outcome for clients, with minimal impact to the strategy or our approach. 
This benchmark change will ensure that the majority of internet stocks - a long-held overweight and historic source of alpha for the strategy - remain as part of the core benchmark. This will allow us to continue to invest in, and communicate views on, names such as Alphabet, Facebook and Tencent. 
Does this have any impact on the team’s investment approach?
Our investment process and philosophy will not change. The stocks we hold will not change and we will continue to take a high conviction1, relatively concentrated2 approach. Our strategy will continue to be a core technology vehicle and we have created this custom benchmark in order to minimise disruption to this approach.
We have never used GICS to define our investment universe3 or to tell us what a technology company is. For example, neither Amazon nor Netflix have ever been classified as technology companies nor appeared in the MSCI ACWI IT Index but that has not stopped us from owning them. We will continue to implement our existing investment process to reflect our high conviction, active management4 style being index aware but not constrained.
What will change at a metrics level?
The only changes investors should expect to see will be tracking error* and active share* looking slightly higher with the new index. However, the underlying volatility* and beta* will be broadly similar as our stocks will not change and the weightings of those stocks will see only minor changes. The risk profile of the strategy and the underlying risk awareness of the investment process will not change.  
When will these changes take place?
MSCI will reflect these GICS reclassifications in its index weightings at the end of November 2018 as part of its semi-annual index review. The team’s portfolio construction will immediately reflect these changes and the benchmark quoted on the fund's web page and factsheet will be changed accordingly, with effect from 1 December 2018. 
Janus Henderson Global Technology Fund:
*Index (target & comparator): MSCI ACWI Information Technology + Communication Services Index
Index description: the MSCI ACWI Information Technology + Communication Services Index is a measure of the combined performance of large and medium sized information technology and communication services companies from developed and emerging market stock markets around the world. It is the performance target for the fund and provides a useful comparison against which the fund’s performance can be assessed over time.
Peer group (comparator): IA Technology and Telecommunications Equity
Peer group description: the Investment Association (IA) groups funds with similar geographic and/or investment remit into sectors. The fund’s ranking within the sector (as calculated by a number of data providers) can be a useful performance comparison against other funds with similar aims.
*Please see Janus Henderson Glossary, link below
1conviction: conviction equates to the fund manager’s confidence in investing in a particular stock, sector or country and would normally be reflected in a significant overweight or underweight position in the fund.
2concentrated: a concentrated fund typically holds fewer stocks - less than 50 holdings - relative to the size of the universe, and may have very large positions or a concentration towards certain sectors or countries.
3investment universe: a specific group or category of investments that share certain characteristics. Investment managers typically specify a universe of securities that defines some of the investing parameters for a particular fund.
4active management: an investment approach where a fund manager actively takes decisions about which and what proportion of investments to hold, often with a goal of outperforming a specific index. It relies on a fund manager’s investment skill. The opposite of passive investing.

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