Legal & General UK Index: November 2022 fund update

• Legal & General is one of the UK's leading providers of passive funds
• We view this fund as an excellent option for accessing the whole UK market
• A low-cost and simple way to track the FTSE All-Share 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 UK Index fund offers investors broad exposure to the UK market across various sectors. The UK is home to successful businesses that make money domestically, as well as across the globe.

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 portfolio heavily invested in the US or 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 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 team as a whole helps to manage each fund. Alongside the wider team, Konstantins Golovnovs is the primary manager for this fund. He joined Legal & General in 2010 as a member of their graduate scheme and has worked his way up to become a fund manager. The secondary manager is Michel Porte. He joined Legal & General in 2015 from Deutsche Bank Asset & Wealth Management, where he served as an ETF Manager.

Process

The fund aims to track the performance of the FTSE All-Share Index. It does this through full replication by investing in all the stocks in the index and in the same proportion. This helps the fund closely match the performance of the benchmark.

The benchmark is made up of around 590 holdings, however it’s highly concentrated in the top ten companies which increases the concentration risk of the fund. At the end of October those ten companies accounted for 42.49% of the portfolio with Shell and AstraZeneca taking first and second place at 7.98% and 6.87% weightings respectively. The fund also invests in smaller companies which are usually subject to more extreme price movements which can increase risk.

In any index tracker fund, factors like dealing commissions and spreads, and the cost of running the fund, all drag on performance. To keep these costs down the team will minimise trading. For example, they efficiently manage cash flows into the fund, and make large stock purchases in bulk, instead of lots of small transactions.

They’ll also set tracking error targets, which measure how closely it's tracking its benchmark. These are monitored by Legal & General on a daily and monthly basis to ensure the fund is being run efficiently.

The team can also participate in initial public offerings if they know that the company will be added to the index in a few days’ time. This allows them to purchase companies earlier and potentially at a lower price before the rest of the market is involved. It’s another method to help them track the benchmark closely.

Legal & General is a conservative tracker fund manager. For example, they don't lend investments to other investors 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 to create one so they can track it.

The team running this fund works 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. And being a mostly 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 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 production or weapons.

Cost

The fund has an annual ongoing charge of 0.10%, but a discount of 0.06% is available for HL investors, which reduces the charge to 0.04%. We believe this is great value when compared with other UK 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 UK Index fund aims to track the FTSE All-Share Index and has done so well since its launch. Over the last 10 years it’s delivered a return of 78.82%, versus 83.15%* 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 All-Share index currently has large exposures to sectors such as financial services, industrials and real estate. Therefore, these sectors could currently have the biggest impact on the market’s performance, though the makeup of any index can change over time.

Many UK companies earn money from operations across the globe, so while they’re listed in the UK, lots of these businesses also operate around the world. This means they aren’t just reliant on the strength of the UK economy to thrive. However, it also means that the UK market can be sensitive to geopolitical developments.

Over the last year, the FTSE All-Share has returned -2.78% to the end of October 2022. UK oil & gas companies in particular performed well over the year. This is partly down to the ongoing effects of the Ukraine crisis which led to a surge in global oil & gas prices and subsequently higher profits for industry related companies like Shell.

Rising energy costs, constrained food supplies and global supply chain disruptions has pushed inflation in the UK to a 40-year high with prices in October 11.1% higher than a year earlier. This will have a knock-on impact on consumer spending going forward, which may put further strain on UK businesses.

Given Legal & General’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the index well in the future, though there are no guarantees. 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 31/10/2022.

Find out more about Legal & General UK Index, including charges

Legal & General UK Index key Investor Information