Legal & General European Index: January 2024 fund update

• Legal & General is one of the UK’s leading providers of passive funds

• We think this fund is an excellent option for accessing a broad range of European stock markets

• A simple, low-cost way of tracking the FTSE World Europe ex UK Index

• The fund is 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 European Index fund offers broad exposure to larger European companies, excluding the UK. Europe is home to successful businesses that make money domestically, as well as across the globe, which means their prospects aren't always reliant on Europe's economy.

An index tracker fund is one of the simplest ways to invest, and we think this fund could be a great, low-cost starting point for a portfolio aiming to deliver long-term growth. It could be a good addition to a global portfolio or could diversify an investment portfolio already focused on areas such as the US or emerging markets.

Manager

Legal & General has been running index tracker funds longer than most. It’s also one of the largest providers of tracker funds and has the biggest index team in the UK. That means it’s got the resources and expertise to track indices as closely as possible, and the scale to keep charges to a minimum.

Each equity index fund at Legal & General has a primary and secondary manager, though in practice the whole team help to manage each fund. Tom Hammond is the primary manager for this fund, with Sacha Mirza as secondary manager. Hammond has over 20 years of experience at Legal & General, with 16 of those within their index team.

Process

This fund aims to track the performance of the broader European stock market, as measured by the FTSE World Europe ex UK Index.

The benchmark is currently made up of 560 companies concentrated in sectors like financials, industrials and health care. France, Switzerland and Germany make up a large part of the index, accounting for 22.7%, 18.7% and 16.8% respectively.

The fund invests in every company in the FTSE World Europe ex UK Index and in the same proportion. This is known as full replication and helps to closely match the performance of the index. In any index tracker fund, factors like withholding taxes, dealing commissions and spreads, and the cost of running the fund all drag on performance.

To keep the fund in line with the index the team try to keep costs down by keeping trading to a minimum. 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 participate in initial public offerings if they know that the company will be added to the index in a few days’ time. This allows them to purchase companies earlier and potentially at a lower price before the rest of the market is involved. It’s another method to help them track the benchmark closely.

Legal & General is also a conservative tracker fund manager. For example, it doesn’t lend investments like some other companies do.

Culture

Legal & General has continued to develop their passive fund range over the last 30 years. 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 Environment, 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 May 2019, the firm launched its ‘Future World’ range of funds which increase investments in companies that score well on a variety of ESG criteria and reduce exposure to companies that score poorly on these measures.

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.

The Legal & General European index is a passive fund designed to track an index, so it doesn’t integrate ESG analysis or exclude companies deemed to be sin stocks, like those involved in tobacco or weapons.

Cost

The fund has an annual ongoing fund charge of 0.12%, but a discount of 0.06% is available for HL investors, which reduces the charge to 0.06%. We believe this is good value. Our platform charge of up to 0.45% per annum also applies, except in the HL Junior ISA.

Performance

The Legal & General European Index has done a good job of tracking the FTSE World Europe ex UK Index. Over the last 10 years, the fund has delivered a return of 115.05%*, compared with the benchmark return of 122.14%. 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. However, the techniques used by the managers have helped to keep performance as close to the index as possible and reduced the fund’s tracking difference.

Over the last year to the end of December 2023, the FTSE World Europe ex UK index has returned 15.68%, versus the fund’s return of 15.01%. The FTSE World Europe ex UK index currently has large exposures to sectors such as industrials, health care and financials. Therefore, these sectors could currently have the biggest impact on the market’s performance, though the makeup of any index can change over time.

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. Past performance isn’t a guide to future returns. Investments rise and fall in value, so you could get back less than you invest.