Legal & General Global Technology Index: November 2022 fund update

• Legal & General is one of the UK’s leading providers of passive funds
• An excellent option for investing in companies from developed markets and advanced emerging markets that are engaged in information technology
• A low-cost way to invest into the FTSE World-Technology Index
• This fund does not currently 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 Global Technology Index fund invests in stocks from the FTSE World-Technology Index offering investors exposure to some of the biggest household names in software, computer services and technology. Due to its technology focus it’s highly concentrated in companies based in the US.

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 a good addition to a portfolio with little invested in the US or a lack of exposure to the technology sector. However, as it’s a sector specific fund, we think it should only make up a small part of the total portfolio.

Manager

Legal & General has been running index tracker funds longer than most. It’s also one of the largest providers of tracker funds and has the biggest index team 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.

Tom Hammond manages the fund and has over 20 years of experience at Legal & General, with 16 of those within their index team. Each equity index fund at Legal & General has a primary (Hammond in this case) and secondary manager, who each have the ability to run the fund, along with the wider index team. The secondary manager for this fund is Tasos Kontos who joined Legal & General in 2010 after more than five years as Head of Index Design at the FTSE Group.

Process

The fund aims to track the performance of the FTSE World-Technology Index. It does this through full replication by investing in all the stocks in the index and in the same proportion. This helps the fund closely match the performance of the benchmark.

The benchmark is made up of around 260 holdings, however it’s highly concentrated in the top ten companies which increases the concentration risk of the fund. At the end of September those ten companies accounted for 62.4% of the portfolio with Apple and Microsoft taking first and second place at 20.7% and 17% weightings respectively. The fund also has the flexibility to invest in higher risk emerging markets.

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 keep these costs down the team will minimise trading. For example, they efficiently manage cash flows into the fund, and make large stock purchases in bulk, instead of lots of small transactions.

They’ll also set tracking error targets, which measure how closely it's tracking its benchmark. These are monitored by Legal & General on a daily and monthly basis to ensure the fund is being run efficiently.

The team can also participate in initial public offerings if they know that the company will be added to the index in a few days’ time. This allows them to purchase companies earlier and potentially at a lower price before the rest of the market is involved. It’s another method to help them track the benchmark closely.

Legal & General is a conservative tracker fund manager. For example, they don't lend investments to other investors like some other companies do.

Culture

Legal & General has continued to develop their passive fund range over the last 30 years. It has just over £470bn invested in this part of the business, allowing it to offer a wide range of index-tracking options. It’s built a team of experienced passive fund specialists and they’re innovative too. If an index doesn’t exist for a sector they’d like to track, they’ll often work with index providers like FTSE Russell 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 share save 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 evnironmental social governance (ESG) into their culture. And being a mostly passive fund house hasn’t stopped them being innovative when it comes to ESG.

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 their annual Active Ownership report.

The 22-strong stewardship team is responsible for exercising voting rights globally, both for LGIM’s active and index funds. Voting decisions are publicly available through an industry-leading tool which allows a user to search for any company to find out how LGIM voted.

The Legal & General Global Technology Index is a passive fund designed to track an index, so it doesn’t integrate ESG analysis or exclude companies deemed to be sin stocks, like those involved in tobacco or weapons.

Cost

The fund has an ongoing charge of 0.20%. We believe this is reasonable when compared with other technology tracker funds in this sector. Our platform charge of up to 0.45% per annum also applies.

Performance

The Legal & General Global Technology Index fund aims to track the FTSE World-Technology Index and has done since its launch. Over the last 10 years it’s delivered a return of 497%, versus 530.10%* for the index.

As you would expect from an index tracker fund, it’s fallen behind the benchmark over the long term because of the costs involved in running the fund. However, the techniques used by the managers have helped to keep performance as close to the index as possible and reduced the fund’s tracking difference.

The fund has provided strong returns for its investors over the last 10 years, though it’s struggled more recently. Many companies in the technology sector benefited from the acceleration of existing trends as a result of forced changes to our lives from coronavirus.

However, the current general economic environment continues to be very difficult for the technology sector and growth stocks. With inflation at 40-year highs in the US and the UK, both the Bank of England and the US Federal Reserve Bank are committed to taming inflationary forces by hiking interest rates. When interest rates go up, it devalues the future projections of businesses, as their future stream of cash flows may be worth less today. This subsequently has a negative impact on their share price.

While this is a global technology tracker fund, around 80% of the fund’s assets are invested in the US. This means it’s likely to be more responsive to economic and policy changes in the US than elsewhere.

Given Legal & General’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the index well in the future, though there are no guarantees.

A glance at the five-year performance table below shows that in some years the fund has tracked the index closer than others. Remember, past performance isn’t a guide to future returns.

Past performance is not a guide to the future. Source: *Lipper IM to 31/10/2022.

More on Legal & General Global Technology Index fund, including charges

Legal & General Global Technology Index fund key Investor Information