A taxonomy is a system of classification that helps to organize and categorize information. In the context of investing, a taxonomy can be used to categorize the wide variety of assets that are open for investment. This can be helpful for investors in a number of ways.

Firstly, a taxonomy can help investors to understand the wide variety of assets that are available to them. This includes individual stocks, individual bonds, ETFs, mutual funds, and other asset types across geographies and both public and private markets. Secondly, a taxonomy can help investors to compare different assets. By grouping assets together based on their risk-return profiles, investors can more easily see how different assets compare to each other. Thirdly, a taxonomy can help investors to track their investments over time. By tracking the performance of different asset classes, investors can see how their portfolio is
performing relative to the market as a whole.

There are a number of different taxonomies that are used in investing. Some of the most common taxonomies include:

• MSCI Barra Global Industry Classification Standard (GICS)

• FTSE Russell Global Equity Country Classifications

• FTSE Russell Industry Classification Benchmark (ICB)

These taxonomies all use different criteria to classify assets. However, they all share the common goal of helping investors to understand the different types of assets that are available and to compare different assets to each other. In addition to these standard taxonomies, there are also a number of other taxonomies that are used in investing. These taxonomies may be more specialized, focusing on a particular asset class or investment strategy. For example, there are taxonomies that focus on sustainable investing, impact investing, and other types of alternative investments.

While the most widely known taxonomy in asset management and investing is the distinction between equities, fixed income, and other asset classes, the Fabric taxonomy provides a more comprehensive classification system that spans asset classes, geographies, and public and private markets. We define the different levels of the Fabric Taxonomy below.

Fabric Taxonomy 

The Fabric Taxonomy, similar to other taxonomies, is constructed in a hierarchical fashion. The three levels of the taxonomy are: Fabric Broad Asset Class, Fabric Asset Class, and Fabric Sub-Asset Class. The subdivisions within each level are summarized in Figure 1.

In the taxonomic tree shown in Figure 1, we summarize the thinking behind the different levels of the Fabric Taxonomy. At the top-most level — Fabric Broad Asset Class — we have a specific asset type. In the next level — Fabric Asset Class — we distinguish assets based on geography. Thus, the distinction at this level is between U.S., Non-U.S., and Global assets. The latter category is added within the fabric taxonomy to encompass ETFs, or other assets that provide exposure to a wide variety of global markets.

Finally, at the lowest level — Fabric Sub-Asset Class — we further categorize assets based on the type of exposure they provide an investor. At this most granular level, we separate assets based on the type of fixed income security or type of hedge fund strategy. Further categorizations and sub-divisions are possible, but Fabric’s taxonomy is limited to three levels.

Figure 1: A visual summary of the X taxonomy methodology for categorizing assets across different levels, with each level becoming more granular until the final level encompasses specific types of exposures or strategies.

Fabric Broad Asset Class

This is the broadest level of the taxonomy and corresponds to the division of assets into the major asset classes. Thus, at this level we have the categories: Equity, Fixed Income, Alternatives, and Real Assets. These broad asset classes can be further segmented to form the next level — Fabric Asset Class.

Fabric Asset Class

At the Fabric Asset Class level, we categorize assets based on their geographic exposure in line with the view presented in Figure 1. Within equities, we have the categories of U.S. Equity and Global Equity. Given the highly developed nature of the U.S. Fixed Income market, we provide an extra layer of granularity at the Fabric Asset Class level for Fixed Income assets. Rather than being split into U.S. and Non-U.S. Fixed Income, we separate Fixed Income into the following categories: U.S. Investment Grade, U.S. High Yield, Other U.S. Fixed Income, and Global Fixed Income.

For Alternatives and Real Assets, we prefer a different categorization. Within the Alternatives bucket, the asset types present are commodities, hedge fund strategies, and private assets including private equity and private credit. Real Estate assets are found within the Real Assets category.

Fabric Sub-Asset Class

This is the most granular level of the Fabric taxonomy. At this level, assets are categorized according to the type of exposure they provide. Within U.S. Equities, we distinguish between large-cap, small and mid-cap, and hedged equity assets. Global Equity gets further categorized into developed markets, emerging markets, and global equity funds.

The case for Fixed Income is a little different: within the Investment Grade asset class, we categorize assets into U.S. Government Bonds, U.S. Municipal Bonds, U.S. Corporate Bonds, and TIPS. We add a separate category of Blended Funds within U.S. Investment Grade. These are funds that invest in investment grade U.S. corporate and government bonds. Within the High Yield class, we have the distinction between High-Yield Municipal Bonds and High-Yield Corporate Bonds. There is a special category for other types of fixed income assets called Other U.S. Fixed Income. This asset class encompasses assets such as MBS/ABS, Bank Loans, Convertible Bond Funds, and Preferred Securities. Finally, we have Global Fixed Income which is further categorized into International Fixed Income — encompassing the debt issued by non-U.S. countries and Global Equity Funds — encompassing funds that invest in the fixed income markets of multiple countries.

Alternatives that are split into Hedge Funds, Private Assets, and Commodities are further categorized as follows. Hedge Funds are distinguished based on the strategy employed. Thus a distinction is made between Long/Short Equity Funds, Managed Futures Funds, and other strategies. Private Assets are further categorized as Private Equity and Private Credit investments. Finally, Commodities are separated into Diversified Commodity Funds, Precious Metals, and Specific Commodities.

Real Estate is subdivided into Public Real Estate and Private Real Estate investments.

Cash and Multi-Asset Funds

Cash irrespective of the currency is categorized as Cash at all three levels of the Fabric Taxonomy. We have another category called Multi-Asset Funds, i.e. funds that invest across different asset classes. These typically include Target Allocation Funds.

A complete breakdown of the Fabric Taxonomy along with examples is provided in Table 1.