Performance Analysis
The fund's tracked its index well since launch in April 2019. Over the long run, we'd expect the fund to fall behind its benchmark because of the costs involved in running the fund. Although that's to be expected from virtually all tracker funds. The techniques used by the managers have helped to keep performance close to the index and reduced the tracking difference.
Due to the exclusions and tilting mechanism within the fund, we would expect its performance to differ slightly from the broader UK stock market.
The fund has a relatively short track record, but Legal & General's team has a longer one managing a range of other tracker funds. Their size, experience and expertise running index tracker funds gives us confidence the fund will track its index tightly and efficiently over the long term, although there are no guarantees.
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 L&G Enhanced ESG UK Index. It's made up of around 340 companies spread across the whole of the UK market, including the consumer staples, financials and energy sectors. The fund invests in the same companies as the index, which is known as full replication . This helps the fund stay close to the performance of the benchmark.
The index increases 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. It also reduces exposure to companies that score poorly on these measures. The fund also invests in smaller companies in line with the benchmark, which are usually subject to more extreme price movements, and this can increase risk.
The advantage of reducing investments in poorly-scoring companies, rather than selling their shares completely, is that the Legal & General team can 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 won't invest in persistent violators of the UN Global Compact Principles (a UN pact on human rights, labour, the environment and anti-corruption) or companies involved in tobacco and controversial weapons (such as cluster munitions, anti-personnel mines and chemical and biological weapons).
The fund's exclusions include companies that earn more than 20 of their revenues from the mining and extraction of thermal coal, as well as companies that derive more than 20% of their revenues from thermal coal power generation and oil sands.
The fund also adopts a decarbonisation pathway. This means it aims to reduce emissions by 50% relative to the unadjusted benchmark as at 2021 and thereafter achieve at least a 7% reduction in carbon emissions per year until 2050. The goal is to align the fund with the Paris Agreement, which aims to limit the temperature rise caused by global emissions to 1.5 degrees celsius above pre-industrial times. We think this is a positive step overall, but it increases the fund's complexity.