Legal & General ICAV (An umbrella type Irish collective asset-management vehicle

Transcription

1 (An umbrella type Irish collective asset-management vehicle with segregated liability between Funds) for the year ended 31 December 2017 NTAC:3NS-20

2 Table of Contents Table of Contents 2 General Information 4 Page Investment Manager s Report Directors Report Report of the Depositary to the Shareholders Independent Auditors Report Statement of Financial Position 35 Statement of Comprehensive Income 38 Statement of Changes in Net Assets Attributable to Holders of Redeemable Participating Shares 41 Notes to the Financial Statements 44 Portfolio Listing L&G Diversified EUR Fund 123 Portfolio Listing L&G Diversified USD Fund 128 Portfolio Listing L&G North American Equity Index Fund 132 Portfolio Listing L&G Multi-Index EUR III Fund 151 Portfolio Listing L&G Multi-Index EUR IV Fund 153 Portfolio Listing L&G Multi-Index EUR V Fund 156 Portfolio Listing L&G Europe Ex. UK Equity Index Fund 158 Portfolio Listing L&G Asia Pacific ex. Japan Equity Index Fund 168 Portfolio Listing L&G Euro Treasury Bond Index Fund 173 Portfolio Listing L&G Emerging Markets Equity Index Fund 182 Portfolio Listing L&G Emerging Markets Government Bond (Local Currency) Index Fund 202 Portfolio Listing L&G World Equity Index Fund Portfolio Listing L&G Global Small Cap Equity Index Fund Statement of Significant Changes in Composition of Portfolio (Unaudited) L&G Diversified EUR Fund 316 Statement of Significant Changes in Composition of Portfolio (Unaudited) L&G Diversified USD Fund 319 Statement of Significant Changes in Composition of Portfolio (Unaudited) L&G North American Equity Index Fund 321 Statement of Significant Changes in Composition of Portfolio (Unaudited) L&G Multi-Index EUR III Fund 323 Statement of Significant Changes in Composition of Portfolio (Unaudited) L&G Multi-Index EUR IV Fund 325 Statement of Significant Changes in Composition of Portfolio (Unaudited) L&G Multi-Index EUR V Fund 327 Statement of Significant Changes in Composition of Portfolio (Unaudited) L&G Europe Ex. UK Equity Index Fund 329 2

3 Table of Contents (continued) Legal & General ICAV Page Statement of Significant Changes in Composition of Portfolio (Unaudited) L&G Asia Pacific ex. Japan Equity Index Fund 331 Statement of Significant Changes in Composition of Portfolio (Unaudited) L&G Euro Treasury Bond Index Fund 333 Statement of Significant Changes in Composition of Portfolio (Unaudited) L&G Emerging Markets Equity Index Fund 335 Statement of Significant Changes in Composition of Portfolio (Unaudited) L&G Emerging Markets Government Bond (Local Currency) Index Fund Statement of Significant Changes in Composition of Portfolio (Unaudited) L&G World Equity Index Fund Statement of Significant Changes in Composition of Portfolio (Unaudited) L&G Global Small Cap Equity Index Fund 341 Unaudited Appendix 343 3

4 General Information Directors Tom Finlay (Irish) * David Dillon (Irish) * Brian Wilkinson (Irish) * Lee Toms (British) ** Eve Finn (Irish) **(Appointed 7 February 2018) * Independent non-executive directors ** Non-executive director Audit Committee Investment Manager/Distributor Legal & General Investment Management Limited One Coleman Street London EC2R 5AA United Kingdom Manager LGIM Corporate Director Limited One Coleman Street London EC2R 5AA United Kingdom Depositary Northern Trust Fiduciary Services (Ireland) Limited George s Court Townsend Street Dublin 2 Ireland Administrator Northern Trust International Fund Administration Services (Ireland) Limited George s Court Townsend Street Dublin 2 Ireland Secretary Tudor Trust Limited 33 Sir John Rogerson s Quay Dublin 2 Ireland Legal Advisers Dillon Eustace 33 Sir John Rogerson s Quay Dublin 2 Ireland Registered Office of the ICAV 33 Sir John Rogerson s Quay Dublin 2 Ireland Independent Auditors PricewaterhouseCoopers Chartered Accountants and Registered Auditors One Spencer Dock North Wall Quay Dublin 1 Ireland Registered Number C

5 L&G Diversified EUR Fund Investment Manager s Report Performance Review During the year under review the Fund returned 6.30%. The performance of the long-term comparator of the strategy, Developed Equities (50% hedged to EUR), was a return of 13.53% (Source: Bloomberg). The Manager doesn t expect the Fund to match equity returns in an extended market rally given the Fund s diversified composition and in general expects the Fund to outperform equities in a downmarket given its diversified asset allocation. The Manager s long-term return expectation (for both developed equities as well as for the Fund) is around risk-free rates % p.a. Market Review Equities recorded double-digit percentage gains as a combination of an improving global economic outlook, low inflation and supportive central bank policies underpinned markets worldwide. In recent months, there has been marked decline in equity market volatility, while markets have also been supported by companies buying back their own shares. Investors favoured technology stocks in 2017, with earnings from a number of leading US companies exceeding expectations. Basic materials also performed well, led by mining stocks. Energy stocks weakened before retrieving some lost ground as the reporting year ended, rallying in line with the oil price in recent months on evidence that a supply squeeze from OPEC is now finally impacting on inventories. Among developed markets, Europe outperformed on the back of encouraging corporate earnings announcements and clear signs of a recovery in economic activity. Emerging markets also outperformed the World Index as international investors became less concerned about the risk of protectionist US trade policies, with the emerging Asian markets outperforming the broader MSCI Index. Returns from bond markets have been disappointing over the review year. In the US, investors discounted the Federal Reserve s ( Fed ) rate hikes and looser fiscal policy. Similarly, emerging bond markets have attracted substantial inflows from international investors looking for higher levels of income, outperforming major government bond markets over Fund Review During the year under review the target asset allocation of the Fund was adjusted to incorporate a new allocation to Euro denominated listed properties. This has been implemented through a direct holding of listed property vehicles and was funded predominantly by a reduction in the global property allocation. Beyond the change, the Manager rebalanced the portfolio to manage the effects of market movements. For example, ongoing Euro strength in the first half of 2017 drove gains in currency hedges which were invested on a regular basis to keep the cash down. Fund flows through the year were used to tighten the allocation further towards targets, and an overall increase in Fund size allowed for additional granularity in selected asset classes, such as the spread of overseas government bond holdings. The Fund is using a combination of various instruments to achieve the desired market exposure. Collective investment schemes (UCITS funds) were used to implement equities, investment grade credit, alternative credit (high yield, emerging market debt), commodities and global real estate. Other asset class exposure was implemented through a combination of securities and derivatives. Outlook We believe the near-term global growth outlook remains strong and broad-based with recruitment difficult and capacity utilization high. The outlook for global manufacturing is robust as inventories appear lean and final goods demand buoyant. Confidence surveys remain remarkably high although we expect some moderation towards levels consistent with current hard data. Medium-term we see some increase in interest rates, but a high chance of another downturn well before normalization is complete. With US tax cuts passed, our base case is four Fed hikes in The Eurozone is booming, but little prospect of the European Central Bank ( ECB ) changing course unless inflation surprises to the upside. We expect the UK to continue growing around its weak trend with one UK interest rate hike during We expect Japan to continue to be a major beneficiary from above-trend global growth whilst in China we expect a gradual managed slowdown. Legal & General Investment Management Limited 24 January

6 L&G Diversified USD Fund Investment Manager s Report (continued) Performance Review During the year under review the Fund returned 15.01%. The performance of the long-term comparator of the strategy, Developed Equities (50% hedged to USD), was a return of 21.10% (Source: Bloomberg). The Manager doesn t expect the Fund to match equity returns in an extended market rally given the Fund s diversified composition and in general expects the Fund to outperform equities in a downmarket given its diversified asset allocation. The Manager s long-term return expectation (for both developed equities as well as for the Fund) is around risk-free rates % p.a. Market Review Equities recorded double-digit percentage gains as a combination of an improving global economic outlook, low inflation and supportive central bank policies underpinned markets worldwide. In recent months, there has been marked decline in equity market volatility, while markets have also been supported by companies buying back their own shares. Investors favoured technology stocks in 2017, with earnings from a number of leading US companies exceeding expectations. Basic materials also performed well, led by mining stocks. Energy stocks weakened before retrieving some lost ground as the reporting year ended, rallying in line with the oil price in recent months on evidence that a supply squeeze from OPEC is now finally impacting on inventories. Among developed markets, Europe outperformed on the back of encouraging corporate earnings announcements and clear signs of a recovery in economic activity. Emerging markets also outperformed the World Index as international investors became less concerned about the risk of protectionist US trade policies, with the emerging Asian markets outperforming the broader MSCI Index. Returns from bond markets have been disappointing over the review year. In the US, investors discounted the Federal Reserve s ( Fed s ) rate hikes and looser fiscal policy. Similarly, emerging bond markets have attracted substantial inflows from international investors looking for higher levels of income, outperforming major government bond markets over Fund Review During the year under review the target asset allocation of the Fund has not changed. However, the Manager rebalanced the portfolio to manage the effects of market movements. Additional Fund flows were used to tighten the allocation further towards targets. The Fund is using a combination of various instruments to achieve the desired market exposure. Collective investment schemes (UCITS funds) were used to implement equities, investment grade credit, alternative credit (high yield, emerging market debt), commodities and global real estate. Other asset class exposure was implemented through a combination of securities and derivatives. Outlook We believe the near-term global growth outlook remains strong and broad-based with recruitment difficult and capacity utilization high. The outlook for global manufacturing is robust as inventories appear lean and final goods demand buoyant. Confidence surveys remain remarkably high although we expect some moderation towards levels consistent with current hard data. Medium-term we see some increase in interest rates, but a high chance of another downturn well before normalization is complete. With US tax cuts passed, our base case is four Fed hikes in The Eurozone is booming, but little prospect of the European Central Bank ( ECB ) changing course unless inflation surprises to the upside. We expect the UK to continue growing around its weak trend with one UK rate hike during We expect Japan to continue to be a major beneficiary from above-trend global growth whilst in China we expect a gradual managed slowdown. Legal & General Investment Management Limited 24 January

7 L&G North American Equity Index Fund Investment Manager s Report (continued) Performance Review During the year under review, the Fund returned 21.21%, compared with the MSCI North American Index return of 20.89% (Source: Bloomberg), producing a tracking difference of +0.32%. Information on Tracking Error The `Tracking Error` of a Fund is the measure of the volatility of the differences between the return of the Fund and the return of the benchmark Index. It provides an indication of how closely the Fund is tracking the performance of the benchmark Index after considering things such as Fund charges and taxation. Using monthly returns, over the review period, the annualized Tracking Error of the Fund is 0.02%. The annualized Tracking Error of the Fund since launch is 0.02%. These Tracking Errors are within the anticipated Tracking Errors levels set out in the Fund`s Prospectus of +/- 0.20% per annum. Market Review The global economic background improved in 2017, led by solid growth in the major developed economies. Despite a rise in commodity prices that saw the oil price end the year at an 18-month high, inflationary pressures worldwide have remained subdued. Economic activity accelerated in the US, with output growing at an annualised rate of over 3% during both the second and third quarters. Growth was underpinned by improving consumer and business sentiment, a stronger labour market and a recovery in the energy sector. The Federal Reserve ( Fed ) sanctioned a gradual tightening of monetary policy, raising interest rates three times. It also began unwinding its asset purchase programme, known as quantitative easing (QE), in October. As the year drew to a close, Congress approved the Trump administration s tax reforms, which include a cut in the main rate of corporation tax from 35% to 21%. Investors favoured technology stocks in 2017, with earnings from a number of leading US companies exceeding expectations. Basic materials also performed well, led by mining stocks. Energy stocks weakened before retrieving some lost ground as the reporting year ended, rallying in line with the oil price in recent months on evidence that a supply squeeze from OPEC is now finally impacting on inventories. Fund Review The quarterly Index review in February 2017 resulted in one addition; Advanced Micro Devices (US), and two deletions; Spectra Energy and Endo International (both US). There were also changes to the free share capital of 465 constituents, the largest of which was an increase to Enbridge (Canada). The two-way Index turnover was 1.4%. At the May 2017 semi-annual Index review, there were 23 additions, the largest being SVB Financial, CBOE Holdings and Vail Reports (all US). There were also 10 deletions; Valspar, Tegna and Calpine (all US). In addition, 485 companies had changes to their free share capital, the largest of which was a decrease in Apple (US). The two-way Index turnover was 2.4%. A quiet review in August saw no additions or deletions, just 535 companies with changes to their free share capital. The two-way Index turnover was 1.58%. The November 2017 Index review saw 15 additions of which Alnylam Pharma, Cognex and Take-Two (all US) were the largest and 15 deletions, with the largest being Dexcom, Mednax and Murphy Oil (all US). There were 493 changes to companies free share capital. The two-way Index turnover was 1.79%. The largest event outside of the Index reviews was British American Tobacco cross border acquisition of Reynolds American. The Cash and stock deal was valued at USD 54 billion and completed in July. The other large deletion in the period was Verizon s purchase of the US listing of Yahoo in a cash deal worth USD 4.5 billion. At the end of the review period, the three largest stocks in the Index were Apple (3.4%), Microsoft (2.5%) and Amazon (1.9%). 7

8 Investment Manager s Report (continued) L&G North American Equity Index Fund (continued) Outlook US equities ended 2017 at an all-time high after the Trump administration s tax reforms were passed by the Senate, paving the way for them to be signed into law. The headline measure is a reduction in the main rate of US corporation tax from 35% to 21%. As expected, the Federal Reserve ( Fed ) raised interest rates by 0.25% for the third time this year to 1.5%. It also upgraded its 2018 growth forecast for the US economy from 2.1% to 2.5%, with outgoing chair Janet Yellen commenting that the Trump administration s tax reforms were the driving force behind the revised growth forecast. At the sector level, telecommunications, energy and consumer discretionary stocks were strongest. Telecommunications rose after the Federal Communications Commission rolled back Obama-era neutrality rules designed to ensure that all internet services are treated equally. The oil price rose to an 18-month high, boosting shares in suppliers such as Marathon Oil and ConocoPhillips. Stronger labour market data, with unemployment remaining at a 17-year low, drove consumer stocks with hopes that retailers would benefit from a strong Christmas trading season. Utilities were the weakest sector in December, on expectations the sector would benefit less from corporation tax changes than other areas of the market. The Fund remains well positioned to capture the market performance. Legal & General Investment Management Limited February

9 L&G Multi-Index EUR III Fund Investment Manager s Report (continued) Performance Review During the year under review, the Fund produced a return of 2.26% (Source: Bloomberg). Market Review The global economic background improved in 2017, led by solid growth in the major developed economies. Despite a rise in commodity prices that saw the oil price end the year at an 18-month high, inflationary pressures worldwide have remained subdued. Economic activity accelerated in the US, with output growing at an annualised rate of over 3% during both the second and third quarters. The Federal Reserve ( Fed ) sanctioned a gradual tightening of monetary policy, raising interest rates three times. It also began unwinding its asset purchase programme, known as quantitative easing (QE), in October. As the year drew to a close, Congress approved the Trump administration s tax reforms, which include a cut in the main rate of corporation tax from 35% to 21%. Equities recorded double-digit percentage gains as a combination of an improving global economic outlook, low inflation and supportive central bank policies underpinned markets worldwide. In recent months, there has been marked decline in equity market volatility, while markets have also been supported by companies buying back their own shares. Investors favoured technology stocks in 2017, with earnings from a number of leading US companies exceeding expectations. Basic materials also performed well, led by mining stocks. Energy stocks weakened before retrieving some lost ground as the reporting year ended, rallying in line with the oil price in recent months on evidence that a supply squeeze from OPEC is now finally impacting on inventories. Among developed markets, Europe outperformed on the back of encouraging corporate earnings announcements and clear signs of a recovery in economic activity. Emerging markets also outperformed the World Index as international investors became less concerned about the risk of protectionist US trade policies, with the emerging Asian markets outperforming the broader MSCI Index. Returns from bond markets have been disappointing over the review year. The European Central Bank ( ECB ) announced further tapering but it will continue its bond-buying programme at least until September In the US, investors discounted Fed s rate hikes and looser fiscal policy. In the UK, the sharp devaluation of Sterling following the EU referendum has fed through to inflation, which has accelerated above the Bank of England s ( BoE s ) 2% target to record a five-year high in recent months. Income-seeking investors continued to purchase corporate bonds, as yields on government bonds remained unattractively low. Similarly, emerging bond markets have attracted substantial inflows from international investors looking for higher levels of income, outperforming major government bond markets over Fund Review The Fund produced a positive return over the course of the year. Credit and high yield spreads finished the year at tight levels, which meant our holdings in these markets were the strongest contributions to performance. We also benefitted from our holding in global inflation-linked bonds. This all helped offset negative contributions from our small holding in global REITs. The Fund had a relatively smaller exposure to equities, but as equity markets saw significant gains, with European equities being the stand out performer, they also added to the overall returns. In terms of allocation changes, we increased our exposure to our bespoke proxy for global infrastructure assets by raising the portfolio allocation to the European utilities sector. In addition, we decreased our exposure to global high yield bonds as spreads tightened. The Fund s fixed income allocation was diversified further as we added a position in Australian government bonds using futures, and within European government bonds we added to those from the periphery such as Portugal at the expense of core countries like Germany. We reduced the Fund s Euro exposure prior to the first round of the French presidential election and added to the US Dollar, in order to manage political event risk more effectively. We subsequently, reversed this hedge when the result became clear. We also reduced Sterling exposure prior to the UK general election again in favour of the US Dollar. In the second half of the year, we reduced our cash and bond holdings in favour of equities and mid-risk assets. Within these, we favour both hard and local currency emerging market debt as well as infrastructure, and in the fourth quarter we introduced an exposure to small-cap US equities. 9

10 L&G Multi-Index EUR III Fund (continued) Investment Manager s Report (continued) Outlook Equities have continued to perform well over the last couple of years thanks to a synchronised economic recovery combined with subdued inflation. This is consistent with mid-economic cycle dynamics. Although we do not predict a recession in 2018, we need to stay vigilant as the economy inches closer to one. There are many potential sources of downside risk in 2018 as current factors combine with our long-standing views on structural headwinds for growth like debt and demographics. Timing is difficult but crucial for successful investment outcomes as market returns may stay strong until just before a correction. Therefore, as macro investors, we spend a lot of resources on analysing market risks and mapping them into our asset allocation. While there is little visibility on what would be the next catalyst for a large asset price correction, we stay prudent in our investment strategy. We remain vigilant in assessing equity risk. If markets and economic data progress as we expect, we will be gradually reducing the equity exposure as we go deeper into 2018, but if inflation stays subdued and other risks do not build we will be more inclined to stay closer to neutral positioning. In addition, we also hold some specific hedges in the portfolio, namely US inflation-linked bonds amongst our diversified fixed income assets and a larger allocation to the US Dollar. Legal & General Investment Management Limited 19 January

11 L&G Multi-Index EUR IV Fund Investment Manager s Report (continued) Performance Review During the year under review, the Fund produced a return of 4.22% (Source: Bloomberg). Market Review The global economic background improved in 2017, led by solid growth in the major developed economies. Despite a rise in commodity prices that saw the oil price end the year at an 18-month high, inflationary pressures worldwide have remained subdued. Economic activity accelerated in the US, with output growing at an annualised rate of over 3% during both the second and third quarters. The Federal Reserve ( Fed ) sanctioned a gradual tightening of monetary policy, raising interest rates three times. It also began unwinding its asset purchase programme, known as quantitative easing (QE), in October. As the year drew to a close, Congress approved the Trump administration s tax reforms, which include a cut in the main rate of corporation tax from 35% to 21%. Equities recorded double-digit percentage gains as a combination of an improving global economic outlook, low inflation and supportive central bank policies underpinned markets worldwide. In recent months, there has been marked decline in equity market volatility, while markets have also been supported by companies buying back their own shares. Investors favoured technology stocks in 2017, with earnings from a number of leading US companies exceeding expectations. Basic materials also performed well, led by mining stocks. Energy stocks weakened before retrieving some lost ground as the reporting year ended, rallying in line with the oil price in recent months on evidence that a supply squeeze from OPEC is now finally impacting on inventories. Among developed markets, Europe outperformed on the back of encouraging corporate earnings announcements and clear signs of a recovery in economic activity. Emerging markets also outperformed the World Index as international investors became less concerned about the risk of protectionist US trade policies, with the emerging Asian markets outperforming the broader MSCI Index. Returns from bond markets have been disappointing over the review year. The European Central Bank ( ECB ) announced further tapering but it will continue its bond-buying programme at least until September In the US, investors discounted Fed s rate hikes and looser fiscal policy. In the UK, the sharp devaluation of Sterling following the EU referendum has fed through to inflation, which has accelerated above the BoE s 2% target to record a five-year high in recent months. Income-seeking investors continued to purchase corporate bonds, as yields on government bonds remained unattractively low. Similarly, emerging bond markets have attracted substantial inflows from international investors looking for higher levels of income, outperforming major government bond markets over Fund Review The Fund achieved a positive return over the course of the year. Equity markets saw significant gains, with European equities being the stand out performer and the largest contributor to Fund performance. However the unparalleled strength of the Euro in the first half of the year was detrimental to the Fund s unhedged overseas currency exposure. More recently, Sterling reversed some of the earlier losses against the Euro, reflecting the Bank of England ( BoE ) hawkish stance and some hope of a transitional Brexit deal with the EU. Despite higher interest rates in the US, the US Dollar declined against most other major currencies, including the Euro. Credit and high yield spreads finished the year at tight levels, which meant our holdings in these markets were the strong contributors to performance. This helped offset negative contributions from our holdings in global REITs. In terms of allocation changes, we increased our exposure to our bespoke proxy for global infrastructure assets over the quarter by raising the portfolio allocation to the European utilities sector. In addition, we decreased our exposure to global high yield bonds gradually over the quarter as spreads tightened. Further to this, we re-allocated a portion of our broad emerging market equity exposure into Indian equities where we see encouraging progress in the country s structural reforms. The Fund s fixed income allocation was diversified further as we added a position in Australian government bonds using futures, and within European government bonds we added to those from the periphery such as Portugal at the expense of core countries like Germany. We reduced the Fund s Euro exposure prior to the first round of the French presidential election and added to the US Dollar, in order to manage political event risk more effectively. We subsequently, reversed this hedge when the result became clear. We also reduced Sterling exposure prior to the UK general election again in favour of the US Dollar. 11

12 L&G Multi-Index EUR IV Fund (continued) Investment Manager s Report (continued) Fund Review (continued) In the second half of the year, we reduced our cash and bond holdings in favour of equities and mid-risk assets. Within these, we favour both hard and local currency emerging market debt as well as infrastructure, and in the fourth quarter we introduced an exposure to small-cap US equities. Outlook Equities have continued to perform well over the last couple of years thanks to a synchronised economic recovery combined with subdued inflation. This is consistent with mid-economic cycle dynamics. Although we do not predict a recession in 2018, we need to stay vigilant as the economy inches closer to one. There are many potential sources of downside risk in 2018 as current factors combine with our long-standing views on structural headwinds for growth like debt and demographics. Timing is difficult but crucial for successful investment outcomes as market returns may stay strong until just before a correction. Therefore, as macro investors, we spend a lot of resources on analysing market risks and mapping them into our asset allocation. While there is little visibility on what would be the next catalyst for a large asset price correction, we stay prudent in our investment strategy. We remain vigilant in assessing equity risk. If markets and economic data progress as we expect, we will be gradually reducing the equity exposure as we go deeper into 2018, but if inflation stays subdued and other risks do not build we will be more inclined to stay closer to neutral positioning. In addition, we also hold some specific hedges in the portfolio, namely US inflation-linked bonds amongst our diversified fixed income assets and a larger allocation to the US Dollar. Legal & General Investment Management Limited 19 January

13 L&G Multi-Index EUR V Fund Investment Manager s Report (continued) Performance Review During the year under review, the Fund produced a return of 8.54% (Source: Bloomberg). Market Review The global economic background improved in 2017, led by solid growth in the major developed economies. Despite a rise in commodity prices that saw the oil price end the year at an 18-month high, inflationary pressures worldwide have remained subdued. Economic activity accelerated in the US, with output growing at an annualised rate of over 3% during both the second and third quarters. The Federal Reserve ( Fed ) sanctioned a gradual tightening of monetary policy, raising interest rates three times. It also began unwinding its asset purchase programme, known as quantitative easing (QE), in October. As the year drew to a close, Congress approved the Trump administration s tax reforms, which include a cut in the main rate of corporation tax from 35% to 21%. Equities recorded double-digit percentage gains as a combination of an improving global economic outlook, low inflation and supportive central bank policies underpinned markets worldwide. In recent months, there has been marked decline in equity market volatility, while markets have also been supported by companies buying back their own shares. Investors favoured technology stocks in 2017, with earnings from a number of leading US companies exceeding expectations. Basic materials also performed well, led by mining stocks. Energy stocks weakened before retrieving some lost ground as the reporting year ended, rallying in line with the oil price in recent months on evidence that a supply squeeze from OPEC is now finally impacting on inventories. Among developed markets, Europe outperformed on the back of encouraging corporate earnings announcements and clear signs of a recovery in economic activity. Emerging markets also outperformed the World Index as international investors became less concerned about the risk of protectionist US trade policies, with the emerging Asian markets outperforming the broader MSCI Index. Returns from bond markets have been disappointing over the review year. The European Central Bank ( ECB ) announced further tapering but it will continue its bond-buying programme at least until September In the US, investors discounted Fed s rate hikes and looser fiscal policy. In the UK, the sharp devaluation of Sterling following the EU referendum has fed through to inflation, which has accelerated above the BoE s 2% target to record a five-year high in recent months. Income-seeking investors continued to purchase corporate bonds, as yields on government bonds remained unattractively low. Similarly, emerging bond markets have attracted substantial inflows from international investors looking for higher levels of income, outperforming major government bond markets over Fund Review The Fund achieved a positive return over the course of the year. Equity markets saw significant gains, with European equities being the stand out performer and the largest contributor to Fund performance. However the unparalleled strength of the Euro in the first half of the year was detrimental to the Fund s unhedged overseas currency exposure. More recently, Sterling reversed some of the earlier losses against the Euro, reflecting the Bank of England ( BoE ) hawkish stance and some hope of a transitional Brexit deal with the EU. Despite higher interest rates in the US, the US Dollar declined against most other major currencies, including the Euro. High yield spreads finished the year at tight levels, which meant our holdings in these markets were the strong contributors to performance. This all helped offset negative contributions from our holdings in global REITs. In terms of allocation changes, we increased our exposure to our bespoke proxy for global infrastructure assets by raising the portfolio allocation to the European utilities sector. In addition, we decreased our exposure to global high yield bonds gradually in favour of US energy stocks that currently exhibit attractive valuations, and re-allocated a portion of our broad emerging market equity exposure into Indian equities where we see encouraging progress in the country s structural reforms. We reduced the Fund s Euro exposure prior to the first round of the French presidential election and added to the US Dollar, in order to manage political event risk more effectively. We subsequently reversed this hedge when the result became clear. We also reduced Sterling exposure prior to the UK general election again in favour of the US Dollar. 13

14 L&G Multi-Index EUR V Fund (continued) Investment Manager s Report (continued) Outlook Equities have continued to perform well over the last couple of years thanks to a synchronised economic recovery combined with subdued inflation. This is consistent with mid-economic cycle dynamics. Although we do not predict a recession in 2018, we need to stay vigilant as the economy inches closer to one. There are many potential sources of downside risk in 2018 as current factors combine with our long-standing views on structural headwinds for growth like debt and demographics. Timing is difficult but crucial for successful investment outcomes as market returns may stay strong until just before a correction. Therefore, as macro investors, we spend a lot of resources on analysing market risks and mapping them into our asset allocation. While there is little visibility on what would be the next catalyst for a large asset price correction, we stay prudent in our investment strategy. We remain vigilant in assessing equity risk. If markets and economic data progress as we expect, we will be gradually reducing the equity exposure as we go deeper into 2018, but if inflation stays subdued and other risks do not build we will be more inclined to stay closer to neutral positioning. In addition, we also hold some specific hedges in the portfolio, namely a larger allocation to the US Dollar. Legal & General Investment Management Limited 19 January

15 L&G Europe Ex. UK Equity Index Fund Investment Manager s Report (continued) Performance Review Over the year under review, the Fund returned 11.75%, compared with the MSCI Europe excluding UK Index return of 11.40% (Source: Bloomberg), producing a tracking difference of +0.35%. Information on Tracking Error The `Tracking Error` of a Fund is the measure of the volatility of the differences between the return of the Fund and the return of the benchmark Index. It provides an indication of how closely the Fund is tracking the performance of the benchmark Index after considering things such as Fund charges and taxation. Using monthly returns, over the review period, the annualized Tracking Error of the Fund is 0.03%. The annualized Tracking Error of the Fund since launch is 0.03%. These Tracking Errors are within the anticipated Tracking Errors levels set out in the Fund`s Prospectus of +/- 0.20% per annum. Market Review The global economic background improved in 2017, led by solid growth in the major developed economies. Throughout the year equities recorded double-digit percentage gains as a combination of an improving global economic outlook, low inflation and supportive central bank policies underpinned markets worldwide. In recent months, there has been marked decline in equity market volatility, while markets have also been supported by companies buying back their own shares. Despite a rise in commodity prices that saw the oil price end the year at 18-month high, inflationary pressures worldwide have remained subdued. In recent months, the recovery in economic activity has been most pronounced in the Eurozone, with economic confidence recording its highest level for more than a decade. The European Central Bank ( ECB ) announced it would reduce its monthly asset purchase programme with effect from 2018, but with inflation remaining subdued, the ECB has signalled monetary policy will remain accommodative. Among developed markets, Europe outperformed on the back of encouraging corporate earnings announcements and clear signs of a recovery in economic activity. Fund Review During the review year there were two semi-annual Index rebalances to note. The first, in May resulted in 5 additions and 4 deletions. The largest additions were Gamesa Corporación Tecnológica (Spain), Straumann Holdings (Switzerland) and Ipsen (France). The largest deletions were Aryzta (Switzerland) and SFR Group (France). There were also 80 changes to the free share capital of constituents. Two-way Index turnover was approximately 2.0%. The second semi-annual Index review in November resulted in 13 additions and 6 deletions. The largest additions were Wirecard and MTU Aero Engines (both German). The largest deletion was Gemalto from the Netherlands. There were also 69 changes to the free share capital of constituents. Two-way Index turnover was approximately 2.7%. Outside the Index reviews, Syngenta (Switzerland) was deleted following its acquisition by ChemChina in a deal worth $46.3 billion. Another significant Swiss company, Actelion, was deleted following its acquisition by Johnson & Johnson for $29.7 billion. Dong Energy (Denmark), Covestro and E.ON (both Germany) all completed significant share placements during the reporting period resulting in increases to the weights of these stocks within the Index. Elsewhere Spanish companies including: Repsol SA, Banco Santander and Telefonica distributed Bonus shares resulting in Index weight increases. Total SA (France) and EDF (France) both offered a Script option dividend with 10% DRP discount. 15

16 Investment Manager s Report (continued) L&G Europe Ex. UK Equity Index Fund (continued) Outlook Despite the positive performance throughout the year European equities underperformed the MSCI World Index in December. Political concerns returned to the fore, with German coalition talks stalling and constitutional uncertainty lingering in Catalonia. In terms of individual markets, Greece was the top performer while Italy was weakest. The Greek economy finally returned to growth in 2017, while incremental reforms, particularly in the banking sector, also boosted investor sentiment. In contrast, Italy faces elections in March with anti-eu parties, most notably the Five Star movement polling strongly and unsettling investors. Legal & General Investment Management Limited 18 January

17 L&G Asia Pacific ex. Japan Equity Index Fund Investment Manager s Report (continued) Performance Review Over the year under review, the Fund returned 25.99%, compared with the MSCI Pacific excluding Japan Index return of 25.88% (Source: Bloomberg), producing a tracking difference of +0.11%. Information on Tracking Error The `Tracking Error` of a Fund is the measure of the volatility of the differences between the return of the Fund and the return of the benchmark Index. It provides an indication of how closely the Fund is tracking the performance of the benchmark Index after considering things such as Fund charges and taxation. Using monthly returns, over the review period, the annualized Tracking Error of the Fund is 0.02%. The annualized Tracking Error of the Fund since launch is 0.03%. These Tracking Errors are within the anticipated Tracking Errors levels set out in the Fund`s Prospectus of +/- 0.20% per annum. Market Review Equity markets recorded double-digit percentage gains as a combination of an improving global economic outlook, low inflation and supportive central bank policies underpinned the rally. In recent months there has been marked decline in equity market volatility, while markets have also been supported by companies buying back their own shares. Since the turn of the calendar year, however, there has been a cooling of the so-called reflation trade that dominated equity markets in the latter half of 2016 when commodity-related sectors and financials performed relatively well. Instead, investors have favoured technology stocks with earnings from a number of leading US companies exceeding expectations. Energy stocks weakened before retrieving some lost ground as the reporting year ended, rallying in line with the oil price in recent months on evidence that a supply squeeze from OPEC is now finally impacting on inventories. Among developed markets, Europe outperformed on the back of encouraging corporate earnings announcements and clear signs of a recovery in economic activity in the region. Emerging markets also outperformed the MSCI World Index as investors became less concerned about the risk of protectionist US trade policies, while returns have also been enhanced by the broad-based rally in local currencies since the beginning of Fund Review Over the year under review there were two semi-annual Index reviews; in May and November, and two quarterly Index reviews in February and August. The quarterly Index review in February 2017 resulted in one addition, Jardine Strategic (Hong Kong), and no deletions. There were also changes to the free share capital of 34 constituents, the largest of which was an increase to HKT Trust & HKT Ltd (Hong Kong). At the May 2017 semi-annual Index review, there was one addition, Bluescope Steel (Australia). There were also 2 deletions; Cathay Pacific Airways (Hong Kong) and Vocus Group (Australia). In addition, 34 companies had changes to their free share capital, the largest of which was a decrease in Jardine Matheson (Hong Kong). The quarterly Index review in August 2017 resulted in no additions and no deletions. There were also changes to the free share capital of 31 constituents, the largest of which was a decrease in Cheung Kong Property (Hong Kong). At the November 2017 semi-annual Index review, there were three additions, Fisher & Paykel Health (New Zealand), Kingston Financial Group (Hong Kong) and Minth Group (Hong Kong). There were also 2 deletions; Qantas Airways (Australia) and Contact Energy (New Zealand). In addition, 32 companies had changes to their free share capital, the largest of which was an increase in WH Group (Hong Kong). Outside the Index reviews, there were a number of acquisitions which affected the Index composition. DUET Group (Australia) was deleted from the Index after being acquired for AUD 3 per share by a consortium comprised of CK Infrastructure Holdings, Power Asset Holdings and Cheung Kong Property Holdings in a deal worth 13 billion AUD. Tatts Group (Australia) was also deleted from the Index after being acquired by Tabcorp Holdings (Australia) in a cash and stock deal worth AUD 6.8 billion. Wharf Real Estate Investment Company (Hong Kong) was added to the Index after it was spun off by Wharf Holdings (Hong Kong). 17

18 Investment Manager s Report (continued) L&G Asia Pacific ex. Japan Equity Index Fund (continued) Fund Review (continued) At the end of the year, the Fund had holdings spread across 4 countries, with Australia accounting for 57.7%, Hong Kong 29.8%, Singapore 11.1% and New Zealand accounting for 1.4%. The three largest stocks in the Index were Commonwealth Bank of Australia (6.023%), AIA Group Ltd (5.697%) and Westpac Banking Corp (4.606%). Outlook In 2017, despite low nominal GDP growth, loose monetary policy has kept volatility low, asset valuations high and structural problems such as poor demographic trends and high debt at bay. The key difference in 2018 is that central banks are now removing their support. As long as economic growth and corporate earnings remain robust, then equity markets may maintain their lofty valuations, but as the withdrawal of quantitative easing takes hold, we could see downside risks. The Fund is well placed to capture the returns of the region. Legal & General Investment Management Limited 15 January

19 L&G Euro Treasury Bond Index Fund Investment Manager s Report (continued) Performance review During the period under review, the Fund rose by 0.24%, compared with the Bloomberg Barclays Euro Treasury Index rise of 0.17% (Source: Bloomberg), producing a tracking difference of +0.07%. Information on Tracking Error The Tracking Error of a Fund is the measure of the volatility of the differences between the return of the Fund and the return of the benchmark Index. It provides an indication of how closely the Fund is tracking the performance of the benchmark Index after considering things such as Fund charges and taxation. Using monthly returns, over the review year, the annualised Tracking Error of the Fund is 0.06%, whilst over the period since inception on 8 December 2016 the annualised Tracking Error of the Fund is also 0.06%. These Tracking Errors are within the anticipated Tracking Error levels set out in the Fund s Prospectus of +/-0.25% per annum. Market Review The major international bond markets have struggled to make headway over the review year as central banks began to embark on withdrawing the extraordinary monetary support that has been in place since the global financial crisis. However, inflationary pressures have remained subdued, which has supported demand for bonds. Economic activity accelerated in the US, with output growing at an annualised rate of over 3% during the third quarter. Growth was underpinned by improving consumer and business sentiment, a stronger labour market and a recovery in the energy sector. The Federal Reserve ( Fed ) sanctioned a gradual tightening of monetary policy, raising interest rates to 1.5% in December and signalling three further rate hikes in The Fed also began unwinding its asset purchase programme, known as quantitative easing (QE), in October. In recent months, the recovery in economic activity has been most pronounced in the Eurozone, with economic confidence recording its highest level for more than a decade. The European Central Bank ( ECB ) announced it would reduce its monthly asset purchase programme with effect from 2018, but with inflation remaining subdued, the ECB has signalled monetary policy will remain accommodative and stood ready to extend QE beyond next September if necessary. The Bank of Japan s ( BoJ ) negative interest rate policy, as well as its announcement that it will intervene if necessary to keep the yield on benchmark 10-year bonds at around 0%, underpinned Japanese government bonds. German bond yields were little changed over the period falling by only 4 basis points (bps). Fund Review During the review year there were 54 new issues from 10 countries joining the benchmark Index whilst 17 bonds from 10 countries left the Index. At the end of the reporting year the portfolio held 319 out of the 373 Index constituents with at least one bond held for 15 out of the 16 countries represented in the Index. The remaining country that the Fund didn t hold was Malta which represented only 0.02% of the Index. This was distributed over the 15 countries held. Outlook Rising inflation and easier fiscal and regulatory policies should allow central banks to continue to tighten monetary policy. In the Eurozone ongoing above-trend economic growth and higher realised inflation should allow the ECB to move towards signalling interest rate hikes at some point in the future, most likely in The dialling back of asset purchases is a step in this direction but they will remain observant of how economic indicators behave and will probably err on the side of caution should growth and inflation begin to stall. Political events in Europe have recently been taken in the market s stride but these remain a headline risk for European government bonds, most notably the Brexit negotiations which have a long time still to run. Legal & General Investment Management Limited 11 April