Legal & General European Index: May 2020 fund update

Kate Marshall | Mon 11 May 2020

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• Legal & General is one of the UK’s best index tracker fund providers
• We view this fund as a great index tracker option for adding European exposure to a globally diverse portfolio
• It's one of the lowest cost European tracker funds available, which could help the fund track the index closely

How it fits in a portfolio

This fund invests in a broad spread of European companies, based in countries including Switzerland, France, Germany, Sweden, Spain and Italy. We think it's a convenient way to access companies across the continent, and could be used as a way to diversify a long-term, global investment portfolio.

Manager

Legal & General has been running index tracker funds longer than most, with a record spanning more than 30 years. It's one of the largest providers of tracker funds and is home to the biggest index tracker 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. We think Legal & General is one of the best providers of index trackers around.

Process

This fund aims to track the performance of the broader European stock market, as measured by the FTSE World ex UK Index. It's currently made up of around 500 companies, focused towards sectors such as financials, consumer goods, healthcare, and industrial firms. While these companies are based in European countries, many of the market's largest firms sell their products and services across the globe, so they're not solely reliant on their domestic economies to be successful.

The fund invests in every company in the FTSE World Europe ex UK Index and in the same proportion. This is called full replication and could help the fund track the performance of the index closely. Legal & General is a fairly conservative tracker fund manager and the European Index fund doesn’t lend investments. They look for other opportunities to reduce costs though, like when they rebalance the fund to match the index, or by reinvesting dividends.

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 £400bn 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 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.

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.

Cost

The fund is available for an annual ongoing charge of 0.07% after a 0.05% saving negotiated by HL. This is lower than the standard 0.12% charge. The fund discount is partly achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. We think this is excellent value for a European tracker option run by a provider we rate highly. Our platform charge of up to 0.45% per year also applies.

Performance

The fund has tracked the FTSE World Europe ex UK Index well since it launched in 1989. It's also tracked the index very closely over shorter periods, though over the long run it’s fallen behind the benchmark due to the costs involved. This is to be expected from an index tracker fund.

Given Legal & General’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the index well in future, though there are no guarantees how it will perform.

A glance at the five-year performance table below shows in some years the fund tracked the index closer than others. On occasion it has even ended up slightly ahead of the index due to the strategies used by the team, although this won't necessarily happen in future and isn’t an aim of the fund.

Past performance is not a guide to the future. Source: Lipper IM to 30/04/2020.

More on Legal & General European Index, including charges

Legal & General European Index Key Investor Information