Legal & General UK Index: November 2023 fund update

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.

In this update, Senior Investment Analyst Joseph Hill shares our analysis on the manager, process, culture, ESG integration, cost and performance of the Legal & General UK Index fund.

• Index fund management is at the heart of Legal & General’s business strategy
• We view this fund as a great option for accessing the whole UK market
• It’s one of the lowest cost funds tracking the FTSE All-Share Index
• This fund currently features on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Legal & General UK Index fund offers investors broad exposure to the UK market. The companies that the fund invests in vary widely in terms of their size and the sectors in which they operate.

An index tracker fund is one of the easiest and cheapest ways to invest, and we think this fund could be a good starting point for a portfolio aiming to deliver long-term growth. It could help diversify an investment portfolio that is heavily invested in other areas around the world such as the US or Asia.

Manager

Legal & General are one of the largest providers of index tracker funds in the UK and have offered index funds for over 30 years. They have one of the best resourced and experienced teams in tracker fund management. This enables them to track indices as tightly as possible and keep costs low for investors.

Each equity index fund at Legal & General has a primary and secondary manager, although in practice it is very much a team-based approach. Alongside the wider team, Jason Forster is the primary manager of this fund. Forster heads up the team responsible for the fund management of the UK. He was formerly responsible for the development of the in-house index fund management system before becoming a fund manager in 2002. Konstantins Golovnovs is the fund’s secondary manager. He joined the graduate scheme at Legal & General in 2010 and worked his way up to become a fund manager.

Process

The fund aims to track the performance of the FTSE All-Share Index. It does this by investing in all the stocks in the index and in the same proportion. This is known as full replication and helps the fund closely match the performance of the benchmark.

The benchmark is made up of around 570 holdings, however it’s highly concentrated in the top ten companies which increases the concentration risk of the fund. At the end of October those ten companies accounted for 42.42% of the portfolio with Shell and AstraZeneca taking first and second place with 8.17% and 6.97% weightings respectively. The fund also invests in smaller companies which can increase risk.

The fund has tracking error targets, which measure how closely it’s tracking the benchmark. These are monitored by Legal & General on a daily and monthly basis to ensure the fund is being run efficiently.

In any index tracker fund, factors like dealing commissions and spreads, and the cost of running the fund, all drag on performance. To keep these costs down the team will minimise trading. For example, they efficiently manage cash flows into the fund, and make large stock purchases in bulk, instead of lots of small transactions.

The team can also take part in initial public offerings if they know that the company will soon be added to the index. This enables them to purchase companies earlier and potentially at a lower price before the rest of the market is involved. This is another method to help them track the benchmark closely.

Legal & General don’t lend investments to other investors like some other companies do. This conservative approach removes an element of risk for investors.

Culture

Legal & General has continued to develop their passive fund range over the last three decades. It has just over £470bn invested in this part of the business, allowing it to offer a wide range of index-tracking options.

It’s built a team of experienced passive fund specialists and they’re innovative too. If an index doesn’t exist for a sector they’d like to track, they’ll often work with index providers like FTSE Russell to create one so they can track it.

The team running this fund works closely with various risk departments across the business. We believe this provides support and adds challenge where appropriate.

Employees are also encouraged to participate in Legal & General’s sharesave scheme which should encourage them to be more engaged with the growth of the company. In addition, a portion of portfolio managers’ bonuses are invested into the funds they manage. By doing this, their interests are further aligned with the investors in the fund.

ESG Integration

Legal & General Investment Management (LGIM) is predominantly a passive investor, but we are impressed with the extent to which they have woven Environmental, Social and Governance (ESG) into their culture. Being a mostly passive fund house hasn’t stopped them being innovative when it comes to ESG. In 2019, the firm launched its ‘Future World’ range of funds.

These funds track indices that increase investments in companies that score well on a variety of ESG criteria – from the level of carbon emissions generated, to the number of women on the board and the quality of disclosure on executive pay. They also reduce exposure to companies that score poorly on these measures. The Future World range incorporates LGIM’s ‘Climate Impact Pledge’, which is their commitment to assess and engage with around 1,000 of the world’s largest companies on how well they manage the implications of climate change.

Companies that consistently show a lack of awareness of climate change, and do not respond positively to engagement, are sold from the Future World funds. The funds also recently adopted a decarbonisation pathway. This means they’re now managed to achieve at least a 7% reduction in carbon emissions per year until 2050.

In 2019, LGIM established its Global Research and Engagement Platform, which brings together representatives from the investment and stewardship teams, in order to unify their engagement efforts. Engagement is conducted in line with the firm’s comprehensive engagement policy. A detailed description of the firm’s engagement and voting activity (including case studies) is available in their annual Active Ownership report. LGIM’s Stewardship team is responsible for exercising voting rights globally, both for LGIM’s active and index funds. Voting decisions are publicly available through a tool which allows a user to search for any company to find out how LGIM voted.

As Legal & General UK Index is a passive fund that aims to match the returns of a specific index, it doesn’t incorporate ESG analysis or exclude companies that are considered to be sin stocks, like those involved in the production of oil or tobacco.

Cost

The fund has an ongoing annual fund charge of 0.10%, but a discount of 0.06% is available for HL investors, which reduces the charge to 0.04%. We believe this is excellent value when compared with other UK tracker funds. Our platform charge of up to 0.45% per annum also applies.

Part of the fund discount is provided through a loyalty bonus, which might be subject to tax if held outside of an ISA or SIPP.

Performance

Over the last ten years, the Legal & General UK Index fund has tracked the FTSE All-Share Index well and delivered a return of 50.56%* versus 57.98% for the index. As you would expect from an index tracker fund, it’s fallen behind the benchmark over the long term because of the costs involved in running the fund such as dealing charges and taxes. However, the tools used by the managers have helped to keep performance as close to the index as possible.

The FTSE All-Share Index currently has significant exposure to sectors such as financials, consumer staples and energy. Therefore, these sectors are likely to have the biggest impact on the fund’s performance, though the makeup of any index can change over time.

Over the last year, the fund returned 6.84% compared with the FTSE All-Share return of 5.89%. Large companies make up around 68.4% of the fund and outperformed medium-sized and smaller companies over the period. Lots of the largest companies in the UK are in the banking and energy sectors and have more of a global presence so are less impacted by the health of the UK economy.

The cost-of-living crisis and fears of a recession have impacted investors’ confidence in the UK over the year. Interest rates have risen to 15-year highs and led to increased mortgage rates and higher costs to borrow. This has also affected renters who have suffered a 6.1% average increase in rent in the 12 months to October. With consumers having less disposable income, retail sales have dropped to their lowest level since lockdown which could put pressure on UK businesses.

Despite this, UK inflation has more than halved from the peak it reached in October 2022 with the fall in energy and food prices pushing inflation down to 4.6% in October. This larger than expected fall in inflation has reduced fears that interest rates will rise again this year and saw shares in the UK rise.

Given Legal & General’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the index well in the future, though there are no guarantees. A glance at the five-year performance table below shows that in some years the fund has tracked the index closer than others. Remember, past performance isn’t a guide to future returns.

Past performance is not a guide to the future. Source: *Lipper IM, to 31/10/2023.

Find out more about Legal & General UK Index, including charges

Legal & General UK Index key Investor Information

Important information – Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.

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