Legal & General Future World ESG Developed Index: July 2022 fund update

How it fits in a portfolio

The Legal & General Future World ESG Developed Index is a good option for broad exposure to global stock markets, while being mindful of environmental, social and governance (ESG) issues. An index tracker fund is one of the simplest ways to invest, and we think this fund could be a good addition to a broader investment portfolio aiming to deliver long-term growth in a responsible way. It could also be a good addition to a portfolio of other tracker funds.

Manager

Legal & General has been running index tracker funds longer than most. It's one of the largest providers of tracker funds and is home to one of the biggest index tracker teams 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. We think Legal & General is one of the best providers of index trackers around.

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, Sacha Mirza is the primary manager responsible for this fund. Mirza joined Legal & General in 2013 after previously working at UBS for 10 years and has significant index fund management experience. 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 aims to track the performance of the Solactive L&G ESG Developed Markets Index. It's made up of more than 1,500 companies based across global developed markets, such as the US, the UK and Japan, and diversified across lots of sectors, including technology, healthcare and financials. The fund invests in the same companies as the index.

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 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, controversial weapons (such as cluster munitions, anti-personnel mines and chemical and biological weapons) or civilian firearms. The fund’s exclusions were recently expanded to include companies that earn more than 20% of their revenues from the mining and extraction of thermal coal (formerly 30%), as well as companies that derive more than a fifth of their revenues from thermal coal power generation and oil sands.

The fund also recently adopted a decarbonisation pathway. This means it’s now managed to achieve at least a 7% reduction in carbon emissions per year until 2050. The aim is to align the fund with the Paris Agreement, which aims to limit the temperature rise caused by global emissions to 1.5°C above pre-industrial times. We think this is a positive development overall, but it does increase the fund’s complexity.

In any index tracker fund, things like withholdings taxes, dealing commissions and spreads, and the cost of running the fund all drag on performance. To try and bring it back more in line with the index, the team can use derivatives. The use of derivatives adds risk.

Culture

Legal & General has become synonymous with passive funds. It has around £430bn 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, and they're prepared to be innovative. If an index doesn’t exist for an area they’d like to track, they’ll work with index providers to create one so they can track it, just like they did with Solactive in the case of the Future World ESG Developed Index.

ESG Integration

We 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 (ESG) 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 company managers where necessary.

US Real Estate Investment Trust Invitation Homes was recently removed from the fund under the Climate Impact Pledge for failing to make sufficient progress on emissions disclosure following a period of engagement. In contrast, Japan Post, a huge logistics company, was reinstated after implementing a thermal coal policy and disclosing the level of emissions created by its investments.

Cost

The fund has an ongoing annual charge of 0.18%. This is more expensive than many other global trackers, but we think it's a reasonable price to pay given the additional ESG analysis that takes place. Our platform charge of up to 0.45% per annum also applies.

Performance

The fund’s tracked the Solactive L&G ESG Developed Markets Index well since launch in April 2019. However, due to the exclusions and tilting mechanism, we would expect the fund’s performance to differ from that of the broader global stock market. Since the beginning of 2022, for example, the fund’s lower exposure to strongly performing areas of the stock market, such as oil & gas, and higher exposure to weaker areas like technology, held back returns.

The fund has a relatively short track record, but Legal & General’s team has a longer record managing a range of other tracker funds. Its 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. Over the long run, we expect the fund's performance to fall behind the index, as with any tracker fund, because of the costs involved in running the fund such as taxes and dealing charges.

Past performance is not a guide to the future. Source: Lipper IM to 30/06/2022.

N/A= performance data for this period is not available.

More on Legal & General Future World ESG Developed Index, including charges

Legal & General Future World ESG Developed Index Key Investor Information