Legal & General International Index Trust: February 2024 fund update

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

• We view this fund as an excellent option for accessing a broad range of global markets

• A low-cost and simple way to track the FTSE World (ex UK) 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 International Index Trust offers investors broad exposure to global markets and sectors while excluding the UK. This includes a range of companies in both developed and advanced emerging markets, although these can still be higher risk.

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 used to provide international diversification to a portfolio already focused on the UK.

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 closely, 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 team as a whole helps to manage each fund. Alongside the wider team, Hailey Choi is the primary manager responsible for this fund. Choi joined Legal & General in 2022 after previously working at Samsung Asset Management where she held the title of ETF (exchange traded fund) portfolio manager. The secondary manager for this fund is Jason Forster, who heads up the team responsible for the fund management of the UK.

Process

This fund tracks the performance of a basket of global markets, as measured by the FTSE World ex UK Index. It's currently made up of around 2250 companies versus the index’s 2500, focused on sectors such as Technology, Consumer Discretionary and Financials. While the fund diversifies across global markets, it’s heavily invested in US companies which make up approximately 68% of the portfolio. This is determined by the underlying index the fund is tracking.

The fund would preferably invest in every company in the FTSE World ex UK Index and in the same proportion. However, this is not always possible because it's difficult to buy and sell the smallest companies quickly or at low cost, and this could ultimately impact performance. This is known as partial replication and helps to closely match the performance of the index.

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.

Legal & General is a conservative tracker fund manager. For example, they don'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 £445bn 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 to create one so they can track it.

The team running this fund work 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 corporate 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.

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 1000 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.

Cost

The fund has an annual ongoing annual fund charge of 0.13%, but a discount of 0.05% is available for HL investors, which reduces the charge to 0.08%. We believe this is good value when compared with other global passive funds. Our platform charge of up to 0.45% per annum also applies.

Performance

The Legal & General International Index Fund since launch has returned 383.40%* and generally tracked the index very well. However, 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 taxes and dealing charges. However, the tools used by the managers have helped to keep performance closer to the index.

In general, global markets have done very well over the last 10 years. With the strong performance partially being down to the inclusion of technology companies in the index whose stock prices have seen a rally in recent years. In this time period, the Legal & General International Index Fund has returned 218.87% to investors. Past performance is not a guide to the future.

Over the last 12 months the fund returned 14.99%. The fund saw a strong bounce back after the market fell in 2022. The fund’s exposure to technology companies in the US has been beneficial because investors moved back towards growth companies as interest rate expectations peaked. The fund has also seen positive contributions to performance from companies who could benefit from the advancements of AI.

Given Legal & General’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the index closely in the future, though there are no guarantees.