After the market closes on Friday, September 28, S&P Dow Jones Indices and MSCI will implement structural changes to the Global Industry Classification Standard (GICS)—the classification standard they use to categorize companies by sector, industry, and sub-industry within their market indices. Only 3 of the 11 GICS sectors will be affected, but changes to those 3 will be significant. It’s important for equity investors—especially those who use index-tracking strategies—to learn what’s changing and understand the impact of the changes on key characteristics of these sectors.

Valuations for New Software companies (Past 10 years through 4-30-16)

Today we have a joint blog post by Michael Thomas, CFA, and Dr. Brian Jacobsen, CFA, CFP®.

When market certainty is in short supply and scant growth seems to be on the horizon, it helps to focus on the future—specifically on identifying sources of future growth. In the information technology (IT) industry, this means identifying a strong, secular trend that’s robust to market shocks and can lead to growth in a variety of economic scenarios. It also means looking for opportunities, not just within but outside the traditional definition of IT.

New Software calls for new thinking

Investors should dig deeper into IT to study what we call New Software companies, which benefit from both company-specific drivers and strong, secular trends in areas such as cloud services, data analytics, network security, and online/mobile advertising. Companies fitting this profile have been experiencing much stronger growth compared with the broad economy and the overall IT sector.

In a limited economic growth environment, we believe that tech companies like these—with the potential to deliver solid, long-term growth—may command premium valuations. This is especially relevant for investors with longer-term investment time horizons that could allow them to capitalize on the ever-morphing technology landscape.