Legal & General Global Inflation Linked Bond Index: April 2025 fund update

• Legal & General is one of the UK’s leading providers of passive funds

• The fund provides broad exposure to a mixture of global inflation-linked bonds

• It’s a simple, low-cost way to track the Bloomberg World Government Ex UK Inflation Linked Bonds Index

• This fund doesn’t feature on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

Inflation-linked bonds are different to conventional bonds as their returns and income payments are linked to a measure of inflation. They are designed to help protect investors from the risk of price increases and should retain their real value over time.

The Legal & General Global Inflation Linked Bond Index fund invests in a range of inflation-linked bonds issued by governments all over the world, excluding the UK. They are issued in the local currency of the country and are linked to the rate of inflation in that country. Currency exchange rate risk is removed through the use of derivatives.

An index tracker fund is one of the simplest ways to invest, and this fund could be a low-cost option for investors seeking protection from the risk of inflation over the long term. However please note that over shorter time periods the performance of this fund can be very different to rates of inflation. It could be a good addition to a more conservative investment portfolio or could diversify one that is focused on shares or corporate bonds.

Manager

Legal & General has run index tracker funds for over 30 years and is one of the largest providers of index funds 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 fixed income 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, Tim Beaven is the primary manager responsible for this fund. He started his career with Legal & General in 1980 and has over 30 years’ experience covering all aspects of cash, currency and bond fund management. Malcolm McCabe is the secondary manager. He joined Legal & General in 2011 from Capital Group Research, where he was a Senior Assistant Fixed Income Portfolio Manager.

Process

This fund tracks the performance of the Bloomberg World Government Ex UK Inflation Linked Bonds Index (Hedged GBP). It does this by investing in every bond in the index and in the same proportion. This is known as full replication and helps the fund to closely match the performance of the index.

The fund currently invests in around 120 government bonds with varying maturities. Two thirds of the fund is invested in the US, with the rest made up of bonds issued by governments in countries such as France, Italy and Germany, but excluding the UK. The fund may invest more than 35% in bonds issued by a single government, which can increase concentration risk.

The team uses currency hedging to convert overseas currency bonds back to sterling. The prices and income of global bonds can go up and down with foreign currency movements, adding volatility for UK investors. By hedging, investors could experience less extreme price movements over time, which could help smooth potential returns. That said, currency hedging can be expensive and is done through derivatives which adds risk.

In any index tracker fund, costs drag on performance and higher costs can lead to a bigger tracking difference between the fund and its benchmark. Legal & General use different strategies in an attempt to keep costs as low as possible. For example, they will try to reduce trading within the fund as it drives up costs.

If a new government bond is added to the underlying index, the team may wait before buying it for the fund. Not buying on the day a bond is issued can reduce costs which helps keep the fund in line with its benchmark.

Legal & General is a conservative tracker fund manager. They don't lend investments in their fixed income funds like some other companies do.

Culture

Legal & General has developed its passive fund range over the last three decades. The company manages around £500bn in tracker funds, 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 to create a suitable index for them to track.

The team managing 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 fund 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 Environmental, Social and Governance (ESG) into their culture. Being a mostly passive fund house hasn’t stopped them being innovative when it comes to ESG. In May 2019, the firm launched its ‘Future World’ range of funds, though the Global Inflation Linked Bond Index isn’t part of this range.

These funds track indices that increase 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. They also reduce exposure to companies that score poorly on these measures. The funds also adopt a decarbonisation pathway. This means they’re managed to achieve at least a 7% reduction in carbon emissions per year until 2050.

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 its annual Active Ownership report. Quarterly Engagement reports are also available.

LGIM’s Stewardship team is responsible for exercising voting rights globally, both for LGIM’s active and index funds. Voting decisions are publicly available through a tool which allows a user to search for any company to find out how LGIM voted, and a detailed rationale is provided for votes against management and abstentions.

As the Legal & General Global Inflation linked Bond Index fund tracks an index of government bonds, it doesn’t specifically integrate ESG considerations into its investment process.

Cost

The fund has an ongoing annual fund charge of 0.23%, but a discount of 0.10% is available for HL investors, which reduces the charge to 0.13%. Our platform charge of up to 0.45% per annum also applies, except in the HL Junior ISA, where no platform fee applies.

Performance

Since the fund launched in August 2013, it’s tracked the Bloomberg World Government Ex UK Inflation Linked Bonds Index (Hedged GBP) well. As expected of index funds, it’s fallen behind the benchmark over the long term because of the costs involved in running the fund. However, the management tools used by the team have helped to keep performance tight to the index.

It’s been a volatile year for bond markets. Over the last 12 months to the end of March, the fund gained 4.68%*. Remember, past performance isn’t a guide to the future.

There was a strong rally in bonds at the end of 2023 led by the expectation that interest rate cuts were on the horizon. But bonds sold off in the first half of 2024 as most major central banks held off on lowering rates.

Bond yields move in the opposite direction to prices. Usually, when interest rates are cut, bond yields fall, and prices rise. But in 2024 yields fell in anticipation of rate cuts and rose when cuts didn’t come.

The fund invests in inflation-linked bonds, which are sensitive to changes in inflation rates in the countries in which they are issued. Their values may fall when inflation rates fall, as the protection they provide becomes less attractive. That said, expectations about longer-term rates of inflation and interest rates can have a bigger impact on today’s prices, compared to current rates of inflation.

The relationship between these factors is complicated and can make the fund perform differently in the short term. For example, if inflation is high today, it doesn’t mean that the returns from this fund will be large. It’s even possible that returns in the short term could be negative. This is what happened in 2022 when inflation rates across the world were higher than usual, but this fund lost 11.80% over the year.

Over the last 12 months, with inflation on a downward trend in most developed countries, central banks were able to start lowering interest rates. The European Central Bank was among the first to cut rates in June. The US Federal Reserve also cut rates in September, for the first time in four years, but went with a bigger cut than most other major central banks.

Central banks have continued to lower rates, but most are taking a gradual approach as inflation remains above target and Trump’s tariffs have the potential to push inflation higher. Interest rates could therefore stay higher, and for longer, than initially expected. Despite interest rate cuts, yields have risen, and prices have fallen.

The yields on offer from inflation-linked government bonds are typically lower when compared to conventional bonds as investors also receive the benefit of inflation protection. The yield for the Legal & General Global Inflation Linked Bond Index was 3.4% as of the end of February 2025. Yields aren’t guaranteed and shouldn’t be considered a reliable indicator of future income.

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.