Legal & General European Index: December 2021 fund update

• Legal & General is one of the UK’s leading providers of passive funds
• We think this fund is an excellent option for accessing a broad range of European stock markets
• A simple, low-cost way to track the FTSE World Europe ex UK Index
• This fund currently 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 European Index fund offers broad exposure to larger European companies, excluding the UK. Europe is home to successful businesses that make money domestically, as well as across the globe, which means their prospects aren't always reliant on Europe's economy. We view the fund as a simple and low-cost option to access European businesses.

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 could diversify an investment portfolio already focused on areas such the US or emerging markets.

Manager

Legal & General has been running index tracker funds for over 30 years. 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.

Each equity index fund at Legal & General has a primary and secondary manager, though in practice the whole team help to manage each fund. Tom Hammond is the primary manager for this fund and has over 20 years of experience at Legal & General, with 16 of those within their index team. The secondary manager for this fund is Chris Tydeman who joined the Legal & General index team in 2011 after previously working in the business as a performance analyst, specialising in fixed income and derivatives.

Process

This fund aims to track the performance of the broader European stock market, as measured by the FTSE World ex UK Index. The benchmark is currently made up of around 515 companies concentrated in sectors like health care and industrial goods and services. France, Switzerland and Germany make up a large part of the index, accounting for 21.4%, 19.7% and 17.6% respectively.

The fund invests in every company in the FTSE World Europe ex UK 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 also a conservative tracker fund manager. For example, it doesn’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 around £400bn invested in this part of the business, allowing it to offer a wide range of index-tracking options. They’ve 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 to create one so they can track it.

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.

The team running this fund works closely with various risk departments across the business. We believe this provides support and adds challenge where appropriate.

Cost

The fund has an ongoing annual fund charge of 0.12%, but a discount of 0.05% is available for HL investors, which reduces the charge to 0.07%. We believe this is good value when compared with other European passive funds. Our platform charge of up to 0.45% per annum also applies. Part of the fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP.

Performance

The Legal & General European Index fund aims to track the FTSE World Europe ex UK and has done so well for the last 10 years. In this time, the fund achieved 185.85% versus 188.91%* 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 dealing charges and spreads. 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 index has rebounded strongly from market lows in March last year returning over 48.95%*, though there are no guarantees that this will continue and this is a relatively short time period to look at performance. European countries were hit hard during the pandemic amid concerns over profits and the reduced consumer activity. Although after strong vaccine rollouts from governments, they’ve seen their share prices return to pre-pandemic highs and above.

However, Europe’s not out of the woods yet. Covid-19 is still prevalent, and so are the repercussions. Last month, we saw rioters clash with police in Netherlands over new restrictions and Austria become the first country to announce that vaccines would be a legal requirement from February 2022.

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 30/11/21.

More on Legal & General European Index, including charges

Legal & General European Index Key Investor Information