Legal & General US Index: June 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 US companies

• The fund is a simple, low-cost way to track the FTSE USA Index

• This fund 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 US Index fund provides exposure to large and medium-sized companies in the US. Given that the fund tracks the US stock market, it’s more heavily weighted towards large technology companies such as Microsoft, Apple and Amazon.

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 exposure to the US market. It could be used to diversify an investment portfolio focused on other regions like Europe and Asia.

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 index fund at Legal & General has a primary and secondary manager, though in practice the team as a whole helps to manage each fund. Tunde Oladimeji is the primary manager responsible for this fund. He joined Legal & General in 2018 after previously working at Vanguard where he spent six years as a Portfolio Manager & Trader on the Equity Index Team. The secondary manager for this fund is Robert Dowling who joined Legal & General in 2010 after working at State Street Global Advisors as a fund manager, specialising in Asia-Pacific and global emerging markets.

Process

This fund tracks the performance of the US stock market, as measured by the FTSE USA Index. It aims to invest 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 its benchmark.

The fund is currently made up of around 580 companies spread across a range of sectors such as technology, consumer discretionary, industrials and health care. While the fund diversifies across the US, it’s still heavily weighted in technology companies which made up 35% of the fund at the end of April 2024. This is determined by the underlying index the fund is tracking.

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 reduce the tracking difference between the fund and the index, the team will keep trading to a minimum which helps to reduce costs.

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 £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.

Legal & General US Index is a passive fund designed to track an index that doesn’t specifically 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 annual fund charge of 0.10%, but we've secured HL clients an ongoing saving of 0.05%. This means you pay a net ongoing charge of 0.05%. We believe this is good value when compared with other US tracker funds. Our platform charge of up to 0.45% per year also applies, except in the HL Junior ISA, where no platform fee applies

Performance

The fund has done a good job of tracking the FTSE USA Index over the long term. As expected from an index tracker fund, it’s lagged the benchmark because of the costs involved in running the fund. However, the tools used by the managers have kept performance tight to the index. In the last 10 years, the fund has performed particularly well, returning 310.59%*. Remember past performance isn’t a guide to future returns.

Over the past year, the fund rose 23.19% which is in line with the performance of the underlying index. Technology companies have dominated market returns in the US due to the significant advancements in Artificial Intelligence (AI) and have been the biggest contributor to the fund’s performance during this time.

Nvidia, the world’s most valuable computer chipmaker, designs the software and other materials necessary for the computer power required by AI. Its share price has more than doubled so far this year after more than tripling in 2023. Nvidia recently became only the third company ever to reach $3trn in market value, behind Microsoft and Apple.

The US Federal Reserve (Fed) have kept interest rates steady since it raised rates to a 23 year high in July 2023 and the market is anticipating that the Fed will cut interest rates next rather than raise them. Growth companies, like those in the technology sector, are sensitive to interest rate movements and have performed well with the expectation of rate cuts, despite the uncertainty of timing.

Financial companies also delivered strong returns over the year. Banks have benefitted from the increased cost of borrowing due to higher interest rates, with JPMorgan Chase, the largest bank in the US, reporting record profits in 2023.

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.