Index experience you can count on Building well-diversified client portfolios

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1 For Professional Advisors Retail Index funds Index experience you can count on Building well-diversified client portfolios Constructing a low-cost, client-focused portfolio requires the right materials. As one of the UK s largest providers of index funds, we use our scale and expertise to deliver simple, high-quality and cost-effective building blocks.

2 As one of the UK s leading investment managers, LGIM offers scale and expertise that can add genuine value for index investors through our pragmatic approach to index replication. We look after 951 billion across a range of asset classes, including 332 billion of index funds (as at 30 June 2017).* A trusted parent LGIM began managing index funds in the 1980s, and we launched our first retail index fund in Since then, we ve expanded our offering to cover a comprehensive range of index funds, from developed and emerging market equities to fixed income and now alternative solutions such as factor-based investing. We look to provide our index investors with a variety of choices to meet their evolving needs of diversification, capital growth and income. Legal & General is one of the UK s largest financial institutions. Established in 1836, the Legal & General Group is a trusted provider to nearly eight million customers in the UK across insurance, pensions and investment services. Legal & General Investment Management ( LGIM ) is the asset management subsidiary of Legal & General and works with a wide range of global clients, including pension schemes, sovereign wealth funds, fund distributors and retail investors. *Source: LGIM internal data as at 30 June These figures include assets managed by LGIMA, an SEC Registered Investment Advisor. Data excludes derivative positions. 2

3 Scale 2018 Index funds A UK powerhouse with a global reach Our scale means that we are able to generate significant efficiencies and cost savings, which we can then pass on to our clients. FOCUS ON OUR CLIENTS We are not part of a bank, nor do we offer custodial services. Our sole focus is asset management. Our unconflicted business model allows us to manage clients assets in a way that makes sure we re free to use our extensive relationships in the market to get the best deals for our investors. WE VE GOT THE RESOURCES TO GET RESULTS Efficiency is at the heart of any successful index investing team. At LGIM, we make sure that all our index trading is centralised to maximise efficiencies. Our approach enables us to devise trading strategies which make trading more efficient, helping to reduce costs and potentially enhance returns. LGIM s Index fund management process benefits from a collegiate and team-based approach in all our activities. Our index funds team has over 30 investment professionals based predominantly in London. A GLOBAL INDEX CAPABILITY No matter which region of the world you want to invest in, we have index capabilities tailored to your needs. 60bn Global* UK equities 61bn 57bn Japanese equities 94bn 66bn 43bn 35bn 16bn 12bn North American equities 20bn 15bn European equities (ex-uk) 15bn 12bn Emerging market equities Pacific equities (ex Japan) 73bn 38bn Index-linked bonds 32bn 76bn Government bonds 36bn 22bn Corporate bonds Source: LGIM internal data as at 31 Dec Assets shown refer to passively managed funds split by fund mandates excluding cross holdings in other funds. These figures include assets managed by LGIMA, an SEC Registered Investment Advisor. Data excludes derivative positions. May not total due to rounding. * Global includes global equity, global bond aggregate, listed infrastructure, listed private equity and others. 3

4 Expertise Going the extra mile for investor returns For any fund manager, tracking an index closely incurs a number of costs, such as taxes or trading costs, which can be a drag on investors returns. As a result, investors may receive less than the stated return of the index they are looking to track. A PRAGMATIC SOLUTION We adopt a value-add philosophy. We aim to use our expertise not only to make up for this external cost drag, but where possible, to deliver additional returns for our investors as well. Published index performance Dividend enhancement Index changes Enhancing returns LGIM added value Cost drag of replicating the index Turnover reduction Efficient trading Reducing costs ENHANCING RETURNS In order to deliver that little bit extra for our investors, we believe that our pragmatic replication approach is critical. Not blindly following the index allows us to bring a more common sense approach to implementing index events into our funds. For example, indices always assume dividend payments are taken as cash yet many companies offer shares instead, in the form of a scrip issue. In these cases, it can often be better for our investors to receive these shares. Our pragmatic replication approach applies to index reviews as well. Index providers regularly review index holdings, adding in new stocks, removing others and rebalancing to reflect the current market cap weights. With index investing rapidly gaining popularity, particularly with the rise of exchange traded funds (ETFs), all of these investment strategies buying and selling at the same time can create short-term price distortions for investors. For example, if every index manager is looking to add to their holding of a particular company, due to a change in the index weights, it can squeeze liquidity and may increase the price over the short term. HOW DOES LGIM EXPLOIT INDEX INEFFICIENCIES IN REALITY? (CASE STUDY) In April 2017, Groupe Arnault announced the acquisition of Christian Dior in a public offer amounting to 12 billion. This acquisition was part of the consolidation of the entire Dior brand within the Louis Vuitton Moet Hennessy (LVMH) group which also has holdings in the French supermarket Carrefour and luxury retailer Hermes International. Christian Dior shareholders were offered the option of exchanging their shares for Hermes International shares, a cash payment or a mixture of the two. All variations of the offer were at a premium to the prevailing Christian Dior share price. In July 2017, the LGIM portfolio participated in this voluntary corporate action and exchanged Christian Dior shares for Hermes International shares and the cash distribution, capturing a final premium of 7.2% over the market price of Christian Dior. As a result, an outperformance versus the index of 0.02% was realised for our investors. 4

5 Simplicity 2018 Index funds Simple, transparent solutions We believe in keeping things simple when it comes to our index funds. NO SURPRISES Wherever possible, we prefer to invest in and hold the underlying physical securities of an index. Derivatives are only used sparingly, and only for efficient portfolio management or currency hedging in funds where applicable. 5

6 Responsible investing Taking an active approach to index investing As the biggest provider of index-tracking investments in the UK, we want all the companies we invest in to do well. This is why we are active owners, using our size and influence to bring about real, positive change to the individual companies and raise the standards across entire markets and sectors. As the world changes, huge shifts in energy, technology and demographics are reshaping the investment landscape. To protect and enhance our clients assets, we seek to ensure that the companies we invest in are resilient, and that their boards and management are best equipped to deliver long-term growth. We believe that companies which create sustainable value understand that their environmental impact, labour standards and governance structures are significant drivers of performance. We work to improve the companies we own, through direct engagements or by collaborating with regulators and other investors. Every year, we talk to hundreds of companies about the issues our clients care about, from action on climate change and gender diversity to curbing excessive executive pay. If we see insufficient progress, we will use our shareholder power to vote against companies or their board of directors. We haven t abstained from voting in the last five years in the UK, so our clients can be sure that we are always working and voting on their behalf. ACTIVE ENGAGEMENT IN % meetings held companies met companies based outside of the UK 293 of meetings discussed environmental and social issues 39% 23% UK companies voted against (at least one resolution) UK board directors voted against: 89 Effecting corporate governance means caring about our clients future by empowering the companies in which we invest to create sustainable long-term value Given our scale as a significant shareholder in thousands of companies worldwide, active ownership improves not just individual companies, but the entire markets. Sacha Sadan Director of Corporate Governance 6

7 Why use index funds? Investors typically use index funds as a cost-effective, simple way to access market returns. They can be the basic building blocks of a broader diversified portfolio or a standalone investment. COST EFFICIENT Index funds can often be an inexpensive way of accessing market returns. The higher the fund cost, the more this tends to affect an investor s total long-term returns. TRANSPARENCY Every index has a set of rules about what securities it will hold and how these are weighted. This allows investors to always know what kind of securities are in their fund and why. DIVERSIFICATION Holding an index fund often means that an investor is less exposed to stock-specific risk. CAPACITY With index s diversified underlying holdings, index funds provide investors with greater capacity compared with traditional active managers. SIMPLICITY Index funds offer investors simplicity. They have easily understood objectives to track indices performance before fees and expenses. 7

8 Expanding the investment toolkit using factors When most investors think of index funds, they often default to those which track market cap-weighted indices. Nonetheless, there are alternative ways of constructing an index aiming to improve risk-adjust returns by incorporating factors. FACTOR-BASED INVESTING Factor-based investing is nothing new. Decades of academic research have been undertaken to identify common characteristics, or factors that help to explain the drivers of risk and return of financial securities. Strategies based on this premise are known by multiple names across the industry including smart beta or alternative beta. Rather than constructing the index purely based on the basis of company size (as with market cap-weighted indices), we can construct one that identifies groups of companies with shared characteristics that align with a targeted factor. For example, a dividend index-tracking fund offers investors the chance to track an index comprised of higher-yielding stocks. Alternatively, a value index fund has exposure to relatively undervalued stocks based on their fundamentals. Alternative risk premia Exotic beta Smart beta Quant investing Risk factor investing Style premia Alternative beta Many names, same underlying premise... 8

9 WHAT ARE SOME COMMON FACTORS? The most commonly available single factor-based indices are: Quality Stocks with strong fundamentals (higher profitability, lower leverage) relative to market peers Stocks with lower historic volatility relative to market/peers Volatility Value Stocks that are undervalued relative to market/peers based on company fundamentals Stocks with a positive share price trend Momentum Size Focusing investment in small or mid cap stocks Stocks with higher dividend yields relative to market peers Dividend 9

10 Going further for you We believe that our approach to managing index funds sets us apart. Our commitment to investors is to provide the most cost-effective index solution we can, and we also go that little bit further on your behalf to add additional value. When considering your next index investment, LGIM is well-placed to provide you with more than just market replication. Our index approach: Scale: Expertise: Simplicity: Responsible investing: A UK powerhouse with a global reach Going the extra mile for investor returns Simple, transparent index solutions Doing the right thing for the long term 10

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12 CONTACT US For further information about our Index fund range please contact us: lgim.com Important information This is not a consumer advertisement. It is intended for professional financial advisers and should not be relied upon by private investors or any other persons. The views expressed within this document are those of Legal & General Investment Management, who may or may not have acted upon them. Legal & General Investment Management is authorised and regulated by the Financial Conduct Authority and is the Investment Adviser to Legal & General s UK authorised index-tracking unit trusts. Issued by Legal & General (Unit Trust Managers) Limited. This document should not be taken as an invitation to deal in Legal & General investments or any of the stated investments. Remember, the value of investments and any income taken may fall as well as rise and investors may get back less than they invest. Past performance is not a guide to future performance. Exchange rate changes may cause the value of any overseas investments to rise or fall. Details of the specific and general risks associated with the funds mentioned are contained within the Key Investor Information document for each fund. *Call charges will vary. Legal & General (Unit Trust Managers) Limited. Registered in England and Wales No Registered office: One Coleman Street, London EC2R 5AA. Authorised and regulated by the Financial Conduct Authority. Q /18