Conglomerates Sector

What Is the Conglomerates Sector?

The conglomerates sector refers to the group of stocks in the market that consist of large corporations holding a variety of diverse and sometimes unrelated subsidiary companies. Because many conglomerates hold unrelated businesses among one another and may not be direct competitors, the sector itself is quite difficult to analyze as a peer group.

Understanding the Conglomerates Sector

Conglomerates are large holding companies comprised of diverse and unrelated business units. Although conglomerates and the companies that comprise them may participate in one or more of the Global Industry Classification Standard (GICS) market sectors, some analyses find it useful to segment conglomerates into their own sector to interpret performance in order to develop their investment strategies.

Taking part in many different businesses can help a conglomerate diversify the risks posed from being in a single market. Doing so may also help the parent lower total operating costs and require fewer resources. But there are also times when such a company grows too large that it loses efficiency. In order to deal with this, the conglomerate may divest. This is known as the conglomerate "curse of bigness."

There are many different types of more specialized conglomerates in the world today, ranging from manufacturing to media to food. A media conglomerate may start out owning several newspapers, then purchase television and radio stations, and book publishing companies. A food conglomerate may start by selling potato chips. The company may decide to diversify, buying a soda pop company, then expand even more by purchasing other companies that make different food products.

The performance of the conglomerate sector mirrors the performance of large indexes such as the S&P 500 Index, in part because conglomerates such as 3M (MMM), Berkshire Hathaway (BRK.A, BRK.B), and General Electric (GE) are well-represented.

Decreasing Popularity of the Conglomerate Sector

Conglomerates rose to worldwide prominence in the mid-20th century as national and international commerce expanded, and as larger corporations began to diversify their business holdings, ostensibly as a means to hedge against market volatility. In some cases, conglomerates spread their holdings across a wide range of businesses that have little to no relationship to each other, but many conglomerates focus on companies serving a single industry, such as energy, food products, or aerospace.

In recent decades, the prominence of conglomerates has declined for a number of reasons, including the breakup value of a conglomerate's subsidiaries and the variance of dividend yields that result from exposure in a range of different industries.  

In many cases, the financial advantages that gave rapid rise to the formation of many conglomerates in the 1960s began to wear thin by the 1980s. Especially as interest rates were adjusted in response to steadily rising inflation, and the performance of conglomerate holdings did not especially improve, companies began to divest their holdings and narrow the focus of the sectors in which they participated.

Additionally, the size of a conglomerate can also hurt its stock performance, and is subject to a conglomerate discount, which results in a conglomerate being valued at less than than the sum of its holdings.

The Conglomerates Sector and the Global Industry Classification Standard

The Global Industry Classification Standard established a system of classifying industries, identifying 11 top-tier sectors, which are subcategorized into 24 industry groups, 69 industries, and 158 sub-industries. The conglomerate sector is not formally acknowledged in this classification structure.

The 11 top-tier GICS sectors are:

• Energy
• Materials
• Industrials
• Consumer Discretionary
• Consumer Staples
• Health Care
• Financials
• Information Technology
• Communication Services
• Utilities
• Real Estate

Conglomerates focusing on a single industry will tend to be placed within a single category in this structure, while conglomerates with more widespread holdings will see their holdings allocated to the appropriate sector.