Legal & General Future World ESG Developed Index: June 2020 fund update

Dominic Rowles | Tue 30 June 2020

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• Legal & General is home to an expert team of index tracker fund managers and analysts
• We think this fund offers an attractive blend of responsible and passive investing
• It could be a good addition to a broader responsible investment portfolio
• This fund has been added to the Wealth Shortlist of funds chosen by our analysts for their long-term potential

How it fits in a portfolio

We think this fund 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, 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 Solactive L&G ESG Developed Markets Index. It's made up of around 1,300 companies based across the globe, focused towards sectors such as technology, pharmaceuticals and financials.

The index adopts two methods of ESG analysis; positive and negative screening. For the positive screening, it increases the weighting 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 the allocation 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 (and do) 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 does employ some negative screens on top of this however, and won't invest in tobacco companies, pure coal producers, makers of controversial weapons (such as cluster munitions, anti-personnel mines and chemical and biological weapons) or persistent violators of the UN Global Compact Principles (a UN pact on human rights, labour, the environment and anti-corruption).

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 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 German bespoke index provider Solactive in the case of the Future World ESG Developed Index.

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.

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 managers where necessary.

Cost

The fund is available for an annual ongoing charge of 0.25%. 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 year also applies.

Performance

The fund's tracked its index well since launch in April 2019*, although this is only over a short period of time. Over the long run, we'd expect the fund's performance to fall behind the index due to the costs involved , although that's to be expected from virtually all tracker funds.

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. Like all funds, it can fall as well as rise in value so investors could make a loss.

Past performance is not a guide to the future. Full year performance data prior to 31/05/2019 is unavailable. Source: Lipper IM to *31/05/2020

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

Legal & General Future World ESG Developed Index Key Investor Information