Legal & General UK Mid Cap Index: June 2022 fund update

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.

• 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

Legal & General UK Mid Cap Index invests in small and medium-sized companies. These businesses 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 index of the UK’s largest 100 companies. By excluding investment trusts from the portfolio, we think it offers investors 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 global portfolio or 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 it’s 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 on the industrials, financials and consumer discretionary sectors and the top 10 companies make up around 14% of the fund.

The fund aims to invest in every company in the FTSE 250 ex Investment Trust Index and in the same proportion. This is known as full replication and helps it to closely match the performance of the index. In any index tracker fund, factors like withholding 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 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 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 Solactive 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 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, Legal & General established its Global Research and Engagement Group, 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 is available in their annual Active Ownership report.

The 17-strong stewardship team is responsible for exercising voting rights globally, both for their 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 Legal & General voted.

The Legal & General UK Mid Cap 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 tobacco or weapons.

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 has done a good job of tracking the FTSE 250 ex. Investment Trust Index since launch. 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 250 ex Investment Trust Index currently has significant exposure to sectors such as Financial Services, Industrials and Consumer Discretionary. Therefore, these sectors could currently have the biggest impact on the market’s performance, though the makeup of any index can change over time.

Over the last year to the end of May 2022, the FTSE 250 ex Investment Trust Index has fallen 8.83%* versus the fund’s return of -8.84%. The FTSE 250 ex Investment Trust Index has a smaller weighting to the oil & gas sector than the FTSE 100 index, an area where companies have performed well over the last year. The lack of exposure to this sector within the medium and smaller companies’ index has meant that its missed some of the returns led by these energy companies which feature in the larger index.

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. Investments rise and fall in value, so you could get back less than you invest.

Past performance is not a guide to the future. Source: *Lipper IM to 31/05/2022.

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

Legal & General UK Mid Cap Index Key Investor Information

Important information – Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.