Legal & General Short Dated Sterling Corporate Bond Index: May 2024 fund update

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

• This fund provides broad exposure to short-term Sterling corporate bonds

• It’s a simple, low-cost way to track the Markit iBoxx GBP Corporates 1-5 Index

• This fund doesn’t 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 Short Dated Sterling Corporate Bond Index fund invests in a range of short-term fixed income corporate debt, also known as corporate bonds. Its benchmark, the Markit iBoxx GBP Corporates 1-5 Index, includes bonds issued in Sterling by UK or overseas companies with less than 5 years to maturity.

An index tracker fund is one of the simplest ways to invest and this fund could be a low-cost way to add exposure to short-term corporate bonds to an investment portfolio. It could also help diversify a portfolio focused on other assets, such as shares, or other types of bonds.

Short-term bonds are typically less volatile than bonds with a longer time until maturity –this is partly because they are less sensitive to changes in interest rates. This means they could add a more conservative element to a bond portfolio, though the yield on offer may be less than a more traditional corporate bond fund.

Manager

Legal & General has been running index tracker funds for over 30 years and is one of the largest providers of tracker funds. 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 fixed income index fund at Legal & General has a primary and secondary manager, though in practice the whole team helps to manage each fund. Steven Grieve is the primary manager responsible for this fund. Grieve joined Legal & General in 2022 from Allianz Global Investors where he was an Associate Portfolio Manager. Daniel King is the secondary manager. King has worked at Legal & General for two decades and has responsibility for managing a range of fixed income funds.

Process

This fund aims to track the performance of the Markit iBoxx GBP Corporates 1-5 Index. It doesn’t buy bonds issued by every single company in the index. At the end of March 2024, there were 194 issuers in the index versus 180 in the fund. Companies can issue multiple bonds at one time and the fund doesn’t invest in every single bond that an individual company issues. This is known as partial replication, which helps to keep costs down but should still allow the fund to track the performance of the index closely.

The fund mainly invests in bonds issued by UK companies, which made up 42.1% of the fund at the end of March. It also invests in bonds issued in Sterling by overseas companies in countries like the US, France and Germany. The fund currently has a bias towards the financial, consumer goods and utilities sectors which made up 58.8%, 10.6% and 9.1% of the fund respectively at the end of March.

In any index tracker fund, costs drag on performance and higher costs can lead to a bigger tracking difference between the fund and its benchmark. Legal & General use different strategies to keep costs as low as possible. For example, they try to reduce trading within the fund as it drives up costs.

Each bond is given a credit rating, and only investment grade bonds are included in the index. These bonds are deemed to be more likely to pay off their debts than higher-risk high yield bonds. When the team anticipate that a bond’s rating will be raised so that it transitions from a high yield to an investment grade bond, they may buy the bond early and when a bond’s rating is lowered, they may not sell straight away. They avoid trading close to when a rating is changed to try and get a better price for the fund.

Legal & General is a conservative tracker fund manager. They don't lend investments in their fixed income funds like some other companies do. The team has the flexibility to use derivatives though, which adds risk.

Culture

Legal & General has developed its passive fund range over the last three decades. The company manages around £482bn 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 it has woven Environmental, Social and Governance (ESG) factors into its culture. Being a mostly passive fund house hasn’t stopped it 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.

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.

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 the Legal & General Short Dated Sterling Corporate Bond Index is a passive fund that aims to match the returns of a specific index, it doesn’t incorporate ESG analysis.

Cost

The fund has an annual ongoing annual fund charge of 0.14%, but a discount of 0.06% is available for HL investors, which reduces the charge to 0.08%. Our platform charge of up to 0.45% per annum also applies, except in the HL Junior ISA, where no platform fee applies.

Please note that charges are taken from capital. This can increase the income paid by the fund, but it might reduce the potential for capital growth.

Performance

Since launch in May 2014, the fund has tracked the Markit iBoxx GBP Corporates 1-5 Index well. As is typical of index tracker funds, it’s fallen behind the benchmark over the long term because of the costs involved. However, this difference has been reduced due to strategies used by Legal & General.

Bonds have faced many headwinds over the past few years, such as high inflation and big increases in interest rates, both of which make the future value and income paid by bonds less attractive. These headwinds have negatively impacted performance.

However, over the last 12 months, inflation has fallen more than expected and interest rates have stabilised. Bond markets have been volatile during this period but the rise at the end of 2023 boosted returns and saved the market from another year of losses. This was led by the expectation that the next move for interest rates will be down rather than up in most countries. Over the last year to the end of March 2024, the fund returned 7.24%*.

Bond yields move in the opposite direction to prices, so it was no surprise that yields fell sharply when bond markets rose at the end of the year. Since then, yields have gone back up to attractive levels which haven’t been seen in the UK since 2008. The yield for the Legal & General Short Dated Sterling Corporate Bond Index was 3.8% as of the end of March. Yields aren’t guaranteed and shouldn’t be considered a reliable indicator of future income.

A glance at the five-year performance table below shows that the fund has seen both positive and negative returns. This reflects the performance of the underlying benchmark, which the fund aims to match. Given Legal & General’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the Markit iBoxx GBP Corporates 1-5 Index closely in the future, though there are no guarantees.