Legal & General UK Mid Cap Index Trust: June 2021

Alexander Watkins | Fri 25 June 2021

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• Legal & General is one of the UK’s leading providers of passive funds
• We think this fund is an excellent option for exposure to UK small and medium sized companies
• The fund is a simple, low-cost way to track the FTSE 250 excluding Investment Trusts
• This fund 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 Mid Cap Index Trust invests in small and medium-sized companies. They offer greater potential for growth than their larger counterparts but may experience more price volatility, which can add risk. These companies also make more of their money domestically than the FTSE 100 – the UK’s largest 100 companies. By excluding investment trusts from the portfolio, we think it offers a purer exposure to UK businesses than a broader FTSE 250 index tracker.

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 more global portfolio or to diversify a portfolio focused on larger companies or bonds.

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 its got the resources and expertise to track indices as closely as possible, and the scale to keep charges to a minimum.

Each 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, Jason Forster is responsible for UK fund management and is the primary manager for this fund. He previously worked on the firm’s index fund management systems before becoming a fund manager in 2002. Konstantins Golovnovs is the secondary manager. He joined Legal & General’s graduate scheme in September 2010, completing various rotations across the business and moved into his current role in 2011.

Process

This fund tracks the performance of UK small and medium-sized companies as measured by the FTSE 250 ex. Investment Trust Index. It’s focused towards the consumer discretionary, industrials and financial sectors and the top 10 companies make up around 14%. The fund aims to invest in every company in the index and in the same proportion. This is known as full replication and helps to closely match the performance of the index over time.

Legal & General will try to reduce trading within the fund as it drives up costs. Higher costs can lead to a bigger tracking difference between the fund and its benchmark – not what they want to happen.

Legal & General is also a conservative tracker fund manager. For example, they don't lend investments like some other companies do.

Culture

Legal & General has continued to develop their passive fund range over the last 30 years. It has around £400bn invested in this part of the business, allowing it to offer a wide range of index-tracking options. Its 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 risk departments across the business. We believe this provides support and adds challenge where appropriate.

Cost

The fund has an annual ongoing annual fund charge of 0.08%. We believe this is good value when compared with other FTSE 250 ex Investment Trusts tracker funds. Our platform charge of up to 0.45% per annum also applies.

Performance

The Legal & General UK Mid Cap Index Trust aims to track the FTSE 250 ex. Investment Trust Index and has done a good job since launch. As you would expect from an index tracker fund, its fallen behind the benchmark over the long term because of the costs involved in running the fund such as dealing charges and spreads. 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 underlying index and fund have rebounded strongly from last year’s market lows returning over 36%*, though there are no guarantees that this will continue. UK medium and small sized companies were hit particularly hard during the pandemic amid concerns over profits and the reduced consumer activity. However, after a strong vaccine rollout and support schemes from the government, they’ve seen their share prices return to pre-pandemic highs.

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. Remember, past performance isn’t a guide to future returns.

A glance at the five-year performance table below shows that in some years the fund has tracked the index closer than others. Please note charges can be taken from capital, which can increase the yield but reduces the potential for capital growth.

Past performance is not a guide to the future. Source: *Lipper IM to 31/05/2021.

** Performance data not available.

Find out more on Legal & General UK Mid Cap Index, including charges

Legal & General UK Mid Cap Index Key Investor Information