Legal & General Global Technology Index Trust: January 2024 fund update

• Index fund management is at the heart of Legal & General’s business strategy

• This fund gives investors access to the largest technology companies in the world

• It’s a simple and low-cost way to track the FTSE World Technology index

• This fund does not currently feature 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 Global Technology Index Trust invests in technology companies from all around the world, but is heavily weighted towards the US with 85% of the fund invested there.

An index tracker fund is one of the easiest and cheapest ways to invest and this fund could be a good way to gain exposure to the rapidly growing technology sector or it could help diversify a portfolio that is focused on other regions like Asia and Europe. Funds which invest in specific sectors may carry more risk so we think it should only form a small part of a well-diversified investment portfolio.

Manager

Legal & General are one of the largest providers of index tracker funds in the UK and have offered index funds to investors 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, Tasos Kontos is the primary manager of this fund. Kontos manages a number of international equity index funds that focus on alternative methods of investing. Prior to joining Legal & General in 2010, he spent more than five years as the Head of Index Design at the FTSE Group. The secondary manager for this fund is Tom Hammond who has been on the index team for nearly two decades. Hammond joined Legal & General in 2000 and worked his way up to become a fund manager.

Process

The fund aims to track the performance of the FTSE World Technology index. It does this by investing in every company 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 currently made up of around 250 companies, however it’s highly concentrated in the top ten companies which increases the concentration risk of the fund. At the end of December, those top ten companies accounted for 65.2% of the portfolio. Apple and Microsoft held the most sizeable positions, at 17.4% and 17.1% respectively.

Nearly 85% of the fund is invested in the US, with the rest spread across Japan, Europe and some higher risk emerging markets like Taiwan and Korea. This is determined by the underlying index the fund is tracking.

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 when they initially float on the stock market 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 a conservative tracker fund manager, so they don’t lend investments like some other companies do. This 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 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 – 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.

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 Global Technology Index Trust is a passive fund designed to track an index, it doesn’t incorporate ESG analysis or exclude companies deemed to be sin stocks, like those involved in weapons or oil.

Cost

This fund has an ongoing annual charge of 0.32%, but we've secured HL clients an ongoing saving of 0.12%. This means you pay a net ongoing charge of 0.20%. The HL platform fee of up to 0.45% per year also applies, except in the HL Junior ISA.

Performance

Over the last 10 years, the Legal & General Global Technology Index Trust and the FTSE World Technology index have delivered significant returns of 556.94%* and 623.60% respectively. Remember, past performance isn’t a guide to future returns. 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. The benchmark is priced when the market closes whereas the fund is priced earlier in the day. The movement in share prices in this period in between can increase the tracking error.

Despite this, over the last five years the fund has done a good job of tracking the FTSE World Technology index, returning 191.40% versus the benchmark’s return of 200.94%. The tools used by the managers have helped to keep performance as close to the index as possible.

The past 12 months have been an especially strong period of performance for the technology sector, with the fund gaining 52.77% compared to the benchmark’s gain of 53.16%. Resilient profits of large technology companies and falling interest rates were among the main factors that boosted returns over the year. The growth investing style coming back into favour with investors also provided a tailwind.

The companies known as the ‘Magnificent Seven’ – Google parent Alphabet, Amazon, Apple, Meta (previously Facebook), Microsoft, Nvidia and Tesla – dominated the market in 2023. These companies more than doubled in value over the year, driven mainly by the significant developments in Artificial Intelligence (AI). The five technology companies in the magnificent seven make up over half of the fund so were key contributors to performance.

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.