Legal & General European Index: November 2020 fund update

Alexander Watkins | Mon 07 December 2020

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• Legal & General is one of the UK’s leading providers of passive funds
• An excellent option for accessing a broad range of European stock markets
• A low-cost and simple way to track the FTSE World Europe ex UK 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 European Index fund offers broad exposure to larger European companies, excluding the UK. Europe is home to successful businesses that make money domestically, as well as across the globe, which means their prospects aren't always reliant on Europe's economy. We view the fund as a simple and low-cost option to access European businesses. It could be used to diversify a global, long-term investment portfolio, including those already focused on areas such as the US, UK 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, Tom Hammond is the primary manager for this fund and has over 20 years of experience at Legal & General, with 16 of those within their index team. The secondary manager for this fund is Chris Tydeman who joined the Legal & General index team in 2011 after working at L&G as a performance analyst, specialising in fixed income and derivatives.

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. Countries including Switzerland, France and Germany make up a large part of the fund, currently accounting for 20.6%, 20.7% and 19.8% of the fund.

The fund invests in every company in the FTSE World Europe ex UK Index and in the same proportion. This is known as full replication and helps to closely match the performance of the index. In any index tracker fund, factors like withholdings taxes, dealing commissions and spreads, and the cost of running the fund all drag on performance. To keep the fund in line with the index the team try to keep costs down by keeping trading to a minimum. For example, they efficiently manage cash flows into the fund, and make large stock purchases in bulk, instead of lots of small transactions.

Legal & General is a conservative tracker fund manager, looking to reduce risks where possible. For example, they don't lend investments like some other companies do.

Culture

Legal & General has developed their passive fund range over the years. It has around £400bn invested in this part of the business, allowing it to offer a wide range of index-tracking options. It has 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 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.

The team running this fund works closely with various equity and risk departments across the business. We believe this provides support and adds challenge where appropriate.

Cost

The fund has an ongoing annual fund charge of 0.12%, but a discount of 0.05% is available for HL investors, which reduces the charge to 0.07%. We believe this is good value when compared with other European passive funds. Our platform charge of up to 0.45% per annum also applies.

Performance

The Legal & General European Index fund aims to track the FTSE World Europe ex UK and has done so well for over 40 years since its launch in 1989. 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 tools used by the managers have helped to keep performance as close to the index as possible and reduced the fund’s tracking error to an average of 0.36% per annum since launch.

Given Legal & General’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the index well. Past performance isn’t a guide to future returns.

Past performance is not a guide to the future. Source: Lipper IM to 31/10/20.

More on Legal & General European Index, including charges

Legal & General European Index Key Investor Information