Performance Analysis
The fund's tracked its index well since launch in April 2019, although this is only over a short period of time. Over the long run, we'd expect the fund's performance to fall behind the index due to the costs involved , although that's to be expected from virtually all tracker funds. Given Legal & General's size, experience and expertise running index tracker funds, we expect the fund to continue to track the index well in future, though there are no guarantees how it will perform. Like all funds, it can fall as well as rise in value so investors could make a loss.
Investment Philosophy
Legal & General has become synonymous with passive funds. It has around £470bn invested in this part of the business, allowing them to offer a wide range of index-tracking options. It has also built a team of experienced index tracker fund specialists.
We also admire Legal & General's commitment to encouraging good corporate practices among the companies they invest in. They proactively engage with businesses and use proxy voting rights to highlight important matters like environmental, social and governance issues.
Legal & General's Future World range of funds also incorporates their 'Climate Impact Pledge', focused on speeding up the progress companies are making in addressing climate change and transitioning to a world powered by renewables rather than mainly oil and gas. They have identified the companies that are critical to the shift to a low-carbon economy and pay special attention to their actions, engaging with managers where necessary.
Process and Portfolio Construction
This fund aims to track the performance of the Solactive Legal and General ESG Developed Markets Index. It's made up of around 1,500 companies based across the globe, focused towards sectors such as technology, pharmaceuticals and financials.
The index adopts two methods of ESG analysis; positive and negative screening. For the positive screening, it increases the weighting 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. It also reduces the allocation to companies that score poorly on these measures.
The advantage of reducing investments in poorly-scoring companies, rather than selling their shares completely, is that the Legal & General team can (and do) engage with poorly-scoring companies to help them improve. An increased investment in exchange for improvement on various factors is a good incentive, so investors' money makes a positive difference.
The fund does employ some negative screens on top of this however, and won't invest in tobacco companies, pure coal producers, makers of controversial weapons (such as cluster munitions, anti-personnel mines and chemical and biological weapons) or persistent violators of the UN Global Compact Principles (a UN pact on human rights, labour, the environment and anti-corruption).
In any index tracker fund, things like withholdings taxes, dealing commissions and spreads, and the cost of running the fund all drag on performance. To try and bring it back more in line with the index, the team can use derivatives. The use of derivatives adds risk.