What is the Conglomerates Sector
BREAKING DOWN Conglomerates Sector
The Conglomerates Sector refers to the area of the market occupied by large corporations 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 market sectors, some analyses find it useful to segment conglomerates into their own sector to interpret performance in order to develop their investment strategies.
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, Coca Cola and General Electric 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 insure against market volatility. In some cases, conglomerates spread their holdings across a wide range of businesses which 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 1960's began to wear thin by the 1980’s. 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, 68 industries and 157 sub-industries. The conglomerate sector is not formally acknowledged in this classification structure.
The 11 top-tier sectors are:
- Consumer Discretionary
- Consumer Staples
- Health Care
- Information Technology
- Real Estate
- Telecommunication Services
Conglomerates focusing on a single industry will tend to be placed with in a single category in this structure, while conglomerates with more widespread holdings will see their holdings allocated to the appropriate sector.