Legal & General UK Mid Cap Index Trust: March 2023

• Legal & General is one of the UK’s leading providers of passive funds
• We think this fund is an excellent option for exposure to UK small and medium-sized companies
• The fund is a simple, low-cost way to track the FTSE 250 excluding Investment Trusts
• 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 UK Mid Cap Index invests in small and medium-sized companies. These businesses offer greater potential for growth than their larger counterparts but may experience more price volatility, which can add risk. These companies also make more of their money domestically than the FTSE 100 – the index of the UK’s largest 100 companies. By excluding investment trusts from the portfolio, we think it offers investors a purer exposure to UK businesses than a broader FTSE 250 index tracker.

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 global portfolio or diversify a portfolio focused on larger companies or bonds.

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 closely, 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. Alongside the wider team, Jason Forster is responsible for UK fund management and is the primary manager for this fund. He previously worked on the firm’s index fund management systems before becoming a fund manager in 2002. Michael Porte is the secondary manager. He joined Legal and General Investment Management (LGIM) in 2015 from Deutsche Bank Asset & Wealth Management where he held the title of ETF fund manager.

Process

This fund tracks the performance of UK small and medium-sized companies as measured by the FTSE 250 ex. Investment Trust Index. It’s focused on the industrials, consumer discretionary and the financial sector, with the top 10 companies making up around 14% of the fund. This is determined by the underlying index the fund is tracking.

The fund aims to invest in every company in the FTSE 250 ex Investment trust index and in the same proportion. This is known as full replication and helps it to closely match the performance of the index. 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 the fund in line with the index the team try to keep costs down by keeping trading to a minimum. For example, they efficiently manage cash flows into the fund, and make large stock purchases in bulk, instead of lots of small transactions.

Legal & General is also a conservative tracker fund manager. For example, they don't lend investments 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 Solactive in the case of the Future World ESG UK Index, so they can track it.

The team running this fund work 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 they have woven ESG into their culture. Being a primarily 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 UK Mid Cap index trust 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 annual ongoing annual fund charge of 0.08%. We believe this is good value when compared with other FTSE 250 ex Investment Trusts tracker funds. Our platform charge of up to 0.45% per annum also applies.

Performance

The Legal & General UK Mid Cap Index Trust has done a good job of tracking the FTSE 250 ex. Investment Trust Index. Since launch its returned 21.50%* versus 24.31% 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 FTSE 250 ex investment trust index currently has significant exposure to sectors such as industrials, consumer discretionary and financials. Therefore, these sectors could currently have the biggest impact on the fund’s performance, though the makeup of any index can change over time.

Over the last year to the end of February 2023, the FTSE 250 ex investment Trust Index has fallen 2.34% versus the fund’s return of -1.47%. The FTSE 250 ex Investment Trust Index has a smaller weighting to the oil & gas sector than the FTSE 100 index, an area where companies have performed well over the last year. The lack of exposure to this sector within the medium and smaller companies’ index has meant that it missed some of the returns led by these energy companies which feature in the larger index.

The valuation of smaller companies is more reliant on future earnings growth and cashflows, so inflation and higher interest rates pose bigger headwind to this section of the market than some others.

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. A glance at the five-year performance table below shows in some years the fund has tracked the index closer than others.

Past performance is not a guide to the future. Source: *Lipper IM to 28 February 2023.

Find out more on Legal & General UK Mid Cap Index, including charges

Legal & General UK Mid Cap Index Key Investor Information