Legal & General International Index Trust: November 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 for over 30 years and is one of the largest providers of index funds 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 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. Prior to joining Legal & General in 2022, Choi worked at Samsung Asset Management where she was an ETF (exchange traded fund) portfolio manager. The secondary manager for this fund is Jason Forster. He previously worked on the firm’s index fund management systems before becoming a fund manager in 2002.

Process

This fund tracks the performance of the FTSE World ex UK Index. As expected from a global fund, it’s heavily invested in US companies which make up around 70% of the index. The rest is diversified across a range of global markets, like Japan, Canada and France, while excluding the UK. The technology sector accounts for the largest portion of the fund at nearly 30%. Other key sectors include financials, consumer discretionary and industrials.

There are roughly 2,200 holdings in the fund versus 2,440 in the index. The team would preferably invest in every company in the benchmark and in the same proportion. However, this is not always possible as it can be more 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, which could help the fund track the index closely without incurring the cost of holding every company.

In any index tracker fund, factors like withholding taxes, dealing commissions and spreads, and the cost of running the fund all drag on performance. The team try to keep turnover in the portfolio, the frequency at which shares are bought and sold, as low as possible to reduce some of these costs.

Legal & General cross trades shares internally across all its own funds when there’s an index rebalance. Trading efficiently like this helps to minimise costs and reduce the tracking difference between the fund and the index.

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

Culture

Legal & General has developed its passive fund range over the last three decades. The company manages around £500bn in tracker funds, allowing it to offer a wide range of index-tracking options.

Legal & General has built a team of experienced passive fund specialists and is innovative too. If an index doesn’t exist for a sector the team would like to track, they’ll often work with index providers 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) matters 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 the world’s largest companies on how well they manage the implications of climate change. Engagement is carried out with reference to comprehensive ‘sector guides’, which outline best practice and LGIM’s expectations for companies in each key sector. 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 adopt a decarbonisation pathway. This means they’re 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 its annual Active Ownership report. Quarterly Engagement reports are also available.

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, and a detailed rationale is provided for votes against management and abstentions.

The Legal & General International Index Trust doesn’t specifically track a benchmark that considers ESG factors or excludes companies in industries such as tobacco or oil and gas.

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, except in the Junior ISA, where no platform charge applies.

Performance

Global markets have done very well over the last 10 years. Over this period, the fund has returned 221.22%* and tracked the index closely. This strong performance is partially down to the inclusion of technology companies in the index whose share prices have seen a rally in recent years. But remember, past performance isn’t a guide to the future.

Over the last 12 months, the fund has tracked the benchmark tightly, gaining 26.49% versus 26.51% for the index. The US market performed particularly well due to strong earnings growth from technology companies, like Nvidia, involved in the development of Artificial Intelligence (AI). Growth companies, like those in the technology sector, are sensitive to interest rate movements so the anticipation of interest rate cuts throughout the year also boosted performance.

With inflation falling closer to target in most countries around the world, many major central banks were able to lower interest rates during the year. The European Central Bank and Bank of Canada were among the first major central banks to cut rates in June. The US Federal Reserve followed in September, lowering rates for the first time in four years, but went with a bigger cut of 0.5%. These central banks have continued to lower interest rates, although it’s becoming less clear how far these rate cuts will go.

Despite global stock markets performing well, it’s been a volatile year with ongoing conflicts in Ukraine and the Middle East and uncertainty around the US election amongst many other national elections.

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.