Legal & General US Index: April 2023 fund update

How it fits in a portfolio

The Legal & General US Index fund offers investors broad exposure to a range of companies and sectors in the US. Given that the fund tracks the US market, it’s more heavily weighted towards large technology companies such as Apple, Microsoft 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 provide diversification to an investment portfolio already focused on Europe and Emerging Markets.

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 equity 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, Tunde Oladimeji is the primary manager responsible for a range of index funds. Oladimeji 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 for State Street Global Advisors as a fund manager, specialising in Asia-Pacific and global emerging markets.

Process

This fund tracks the performance of a basket of companies, as measured by the FTSE USA Index. It's currently made up of around 610 companies, focused on sectors such as technology, consumer discretionary and health care. While the fund diversifies across the US, it’s still heavily weighted in technology companies which make up around 27% of the portfolio. This is determined by the underlying index the fund is tracking.

The fund aims to invest in every company in the FTSE USA Index and in the same proportion. This is known as full replication and helps 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 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 FTSE Russell, 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 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 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 US 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 oil or weapons.

Cost

The fund has an ongoing annual fund charge of 0.10%, but a discount of 0.05% is available for HL investors, which reduces the charge to 0.05%. We believe this is good value when compared with other US passive funds. Our platform charge of up to 0.45% per annum also applies.

Performance

The Legal & General US Index Fund aims to track the FTSE USA index and has done a good job since launch. Since launch it's returned 234.96% *versus 250.47% 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 such as taxes and dealing charges. However, the tools used by the managers have helped to keep performance as close to the index as possible.

The FTSE USA Index has done particularly well in the last 10 years returning 285.51%*. This is partially down to the performance of technology companies in the index whose stock prices have rallied in recent years. Over the same timeframe, the Legal & General US Index Fund has returned 264.62% to investors. Remember, past performance isn’t a guide to future returns.

Technology companies have had a tougher time over the last year with the US Federal Reserve raising interest rates to try to combat inflation. With US inflation currently around 6%, higher interest rates could persist throughout 2023. That said, it’s possible the rate rise may be paused, as the central bank balances controlling inflation and the risk of tipping the economy into a deep recession.

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 31/03/2023.

More on Legal & General US Index, including charges

Legal & General US index key investor information