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.

Russell 1000 Growth Index rankings (%) within Morningstar large-growth universe (12-month rolling periods ending September 30, 2015)

Today we have a guest post by the Heritage Growth Equity team of Wells Capital Management.

During some periods of the past few years, the Russell 1000 Growth Index (the index) outperformed the median return of the Morningstar large-growth category, which led some investors to question whether active management can add value in this asset class. While much has been written recently on the active versus passive debate, we think it might be better to discuss the reason why the index outperformed and question if the reason behind that passive outperformance still holds true today.

We believe the large-cap growth space has undergone a unique dislocation over the past several years driven largely by the influence of the Federal Reserve’s (the Fed’s) historically low interest-rate policy. Going forward, as Fed policy becomes less accommodative (in other words, as the Fed raises the short-term borrowing rate), the advantages it brings to passive investing in large-cap growth stocks may wane.

Without question, the index recently has shown strength versus actively managed funds; over the longer term, though, this dynamic has not been the case. In fact, over the past 20 years, the index on average has delivered only middle-of-the-road results even before adjusting for fees, as shown in Chart 1 below.