smart beta retreat lgi 2012
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Classic beta: Simple can still be smart
Classic beta: Simple can still be smart
LEGAL & GENERAL INVESTMENTS
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.
Classic beta: Simple can still be smart 2
Passive fund provision in the UK
A supply side failing? More an opportunity!
Passive AUM by IMA Sector (£m)
UK Equity Income
Japan
Global
UK Gilt
UK Index Linked Gilts
North America
UK All Companies
Global Emerging Mkts
£ Corporate Bond
Asia Pacific Ex Japan
Global Bonds
Europe Excluding UK
0 5000 10000 15000 20000 25000 30000
AUM (£m) Source: Lipper FMI as at end September 2012
Classic beta: Simple can still be smart 3
Index funds business overview
Legal & General Investment Management
• Total assets under management - £381 billion*
• Total index assets - £237 billion*
• UK pooled index fund market leaders
• More S&P platinum ratings than any other UK
index fund provider.
• No conflicts of interest (No affiliates involved in
broking, banking or custody activities)
Total UK pension funds under management †
* LGIM internal data as at 30 June 2012.
† Source: Hymans Robertson Market Briefing - as at 31 December 2011
0
40
80
120
160
200
240
280
LGIM BlackRock Insight M&G Standard
Life
State
Street
£bn
Classic beta: Simple can still be smart 4
Growth of index funds at LGIM
Pension and Non Pension Funds as at 30 June 2012 in £ in billions
LGIM internal AUM data as at 30 June 2012. May not total due to rounding.
• Shift from active to
passive
• Largest provider of
pooled index funds
to UK pension
schemes
• Over 20 years’
experience in
managing index
funds 9 10 11 16
2436
57 62 65 6578
97
120
139
189
155
181
201 201 207
3 3 56
7
8
1013
13 12
14
14
17
23
25
21
27
29 2931
12 13 16
237
21
31
45
6875
78
230230
214
176
208
162
138
111
92
77
0
20
40
60
80
100
120
140
160
180
200
220
240
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Q2
£b
n
Pension Non Pension
180 280 401 591 835 1,121 1,448 1,715 1,909 2,126 2,339 2,490 2,687 2,730 2,838 2,868 2,993 2,950 2,885 2,830
Number of Index Pension Fund Clients
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In £bn
UK Index-Linked Bonds £ 36
UK Fixed Interest £ 36
Europe ex UK Equities £ 25
Japan Equties £ 10
Overseas bonds £ 7
North American Equities
£ 34
Emerging Markets Equities
£ 9
Pacific ex Japan Equities £ 8
Multi Asset £ 0.3
Cash £ 2
UK Equities £ 70
• Total index assets - £237
billion*
• £207 billion index
corporate pension assets*
• 66% equities, 34% bonds
Source: LGIM internal data as at 30 June 2012.
Index funds
Breakdown of assets under management
Classic beta: Simple can still be smart 6
The role of passives from a client’s
perspective?
• Active or passive? An age old debate.
• Is using passive already seen as
‘innovation’?
• The ‘News at 10 effect’.
• Tactical vs. strategic
• Education gap to be filled first
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General methods of indexation
• Full Replication
• Sampling
– Optimisation
– Stratified Sampling
• Synthetic Replication
• The Legal & General approach: Pragmatic Replication:
Classic beta: Simple can still be smart 8
Close index tracking
• Pragmatic replication
• Portfolio operating parameters coded into bespoke fund management systems
– Control tolerances – country, sector and securities
– Futures/liquidity guidelines
Maximising returns:
• Implementation of index changes
• Corporate actions
• Dividend enhancement
Income/cash flow management
• Low-cost rebalancing opportunity
• Use of listed futures for efficient portfolio management
LGIM index methodology
Classic beta: Simple can still be smart 9
Trading strategy
Index change implementation
• Responsible management of index changes
• Phasing strategy based on consideration of
– cash flows
– risk parameters
– tracking error/duration profile
– security liquidity
– transaction costs
• High index entry prices lowers subsequent fund return
• Low cost objective – including market impact
• All within strict risk parameters
Classic beta: Simple can still be smart 10
FTSE Index Change – Pacific Index Trust
AIA Group (Hong Kong): Investibility Weight Change - March 2012
26.0
26.5
27.0
27.5
28.0
28.5
29.0
29.5
06/03/12 06/03/12 07/03/12 08/03/12 09/03/12 09/03/12 12/03/12 13/03/12 14/03/12 14/03/12 15/03/12 16/03/12 19/03/12 20/03/12 20/03/12
Pri
ce (
HK
D)
AIA Group Price Trade Av. Price
Source: Bloomberg / LGIM
Secondary Share Placing
6 Mar 12
Index Effective Date
16 Mar 12
Average traded Price = HKD 27.95
Benchmark Price = HKD 28.40
Secondary Placing Price = HKD 27.15
0.0043% added to Pacific ex Japan Index Trust
Classic beta: Simple can still be smart 11
Legal & General’s index funds
A straightforward proposition
VALUE
0.20% AMC for single country
and regional funds
0.30% AMC for global funds
SIMPLICITY
We invest directly in physical
stocks wherever possible
We do not have a stock
lending programme
EXPERTISE
Over 20 years’ experience
of close index tracking
Individually tailored trading
strategies provide
opportunities to add value
More S&P Platinum fund
ratings than any other UK
index fund provider
Classic beta: Simple can still be smart 12
Depleting
Resources
International
regulations to
reduce pollutants
PRESSURE ON
GLOBAL RESOURCES
Increasing
global wealth
Population
explosion
12
Identifying new opportunities:
Global Megatrends
Urbanisation
Consumption
Over-population
Resource scarcity,
security and depletion
INVESTMENT
OPPORTUNITY
Classic beta: Simple can still be smart 13 13
Capturing the global megatrends
Three megatrend investment themes:
Energy
efficiency
Capturing
megatrend
beta
Low carbon
energy
Water, waste
and pollution
control
Flexible
diversified
global
exposure that
focuses on
‘pure play’
companies
Classic beta: Simple can still be smart 14 14
An unprecedented opportunity
Finding new ways of tracking growth
Market cap.
method
• Large companies
• US dominated
• Overweight in solar and energy efficiency
Skewed risk
Osmosis
Investment
Management
• Specialist asset manager and independent index provider
• Deep understanding of environmental factors and how they
impact investment portfolios
The Osmosis Environmental Enterprises Index
Classic beta: Simple can still be smart 15
Summary
• Proven track record as responsible and trusted index fund provider
• Firm commitment to index funds business
• Twin track approach: Close index tracking and maximising returns
• Providing access to key asset classes at the right price
• Straightforward high quality beta products
• Translating long term investment themes into investable products
Classic beta: Simple can still be smart 16
Appendix
Classic beta: Simple can still be smart 17
Fund Name Charges (%)
Fund / Unit Class Name AMC OCF
Legal & General UK Index Trust I Class (Acc / Inc) 0.20 0.22
Legal & General All Stocks Gilt Index Trust (Acc / Inc) 0.20 0.23
Legal & General All Stocks Index Linked Gilt Index Trust (Acc / Inc) 0.20 0.23
Legal & General Sterling Corporate Bond Index Fund (Acc / Inc) 0.20 0.23
Legal & General UK 100 Index I Trust I Class (Acc / Inc) 0.20 0.25
Legal & General US Index Trust I Class (Acc / Inc) 0.20 0.23
Legal & General Japan Index Trust I Class (Acc / Inc) 0.20 0.24
Legal & General European Index Trust I Class (Acc / Inc) 0.20 0.25
Legal & General Pacific Index Trust I Class (Acc / Inc) 0.20 0.27
Legal & General Global 100 Index Trust I Class (Acc / Inc) 0.30 0.31
Legal & General Global Health & Pharmaceuticals Index Trust I Class (Acc / Inc) 0.30 0.31
Legal & General Global Technology Index Trust I Class (Acc) 0.30 0.31
Legal & General International Index Trust I Class (Acc / Inc) 0.30 0.38
Legal & General Global Emerging Markets Index Fund I Class (Acc / Inc) 0.30 0.57
*NEW* Legal & General Global Emerging Markets Government Bond (US$) Index I (Acc/Inc)** 0.30 Estimated 0.36
**Subject to FSA approval
Classic beta: Simple can still be smart 18
LGIM index equity management
Experience – 13 people covering global equities
Average industry experience of 11 years
Operating systems
In-house fund management system (IFOS)
Strong risk framework covers:
Multi-dimension risk monitoring approach covering:
• Portfolio risk
• Operating risk
Source: LGIM
Classic beta: Simple can still be smart 19
FTSE Index Change - Global Technology Trust
Facebook Inc. (USA): Fast Entry - May 2012
30.0
32.0
34.0
36.0
38.0
40.0
42.0
18/05/12 21/05/12 22/05/12 23/05/12 24/05/12 25/05/12 26/05/12
Pri
ce (
US
D)
Facebook Price Average Price
Placing price = USD 38.00 (close 17 May)
Average Price = USD 32.73
Index Entry Price = USD 33.03
0.0046% added to fund value
Index Announcement
18 May
Effective Date
25 May
Source: Bloomberg / LGIM
Classic beta: Simple can still be smart 20
FTSE Index Change – Global Emerging Markets Index Trust
Grupo Financiero Santander (Mexico): Fast Entry - October 2012
31.0
31.5
32.0
32.5
33.0
33.5
34.0
34.5
35.0
35.5
21/09/12 27/09/12 26/09/12 27/09/12 28/09/12 01/10/12 02/10/12 02/10/12 03/10/12 04/10/12 05/10/12 05/10/12
Pri
ce (
MX
N)
Grupo Financiero Santander Trade Av. Price
Average Price = MXN 34.86
Index Entry Price = MXN 35.34
0.0018% added to fund value
Index Announcement Date
26 September
Effective Date
2 October
Source: Bloomberg / LGIM
Placing price 25 September
MXN 31.25
Classic beta: Simple can still be smart 21
LGIM Index Bond Management
Experience – 9 people covering global bonds
Average industry experience of 13 years
Operating systems
In-house fund management system (BFOS)
Strong risk framework covers:
Multi-dimension risk monitoring approach covering:
• Portfolio risk
• Operating risk
Source: LGIM
Classic beta: Simple can still be smart 22
iBoxx Index Change – AAA-AA-A All Stocks Index Fund
BHP Billiton Finance Ltd 3.25% 25/09/24 : Index Addition - October 2012
98.6
98.8
99.0
99.2
99.4
99.6
99.8
100.0
100.2
100.4
19/09/12 20/09/12 21/09/12 24/09/12 25/09/12 26/09/12 27/09/12 28/09/12 01/10/12 02/10/12
BHP Billiton Fin Trade Average Price
Average Trading Price = 99.94
Index Entry Price = 100.18
0.001% added to fund value
Index Effective Date
1 October
Source: Bloomberg / LGIM
Issue Announcement Date
19 September
Classic beta: Simple can still be smart 23
Important Information
Issued by Legal & General (Unit Trust Managers) Limited, authorised and regulated by the Financial Services Authority. This document should
not be taken as an invitation to deal in Legal & General investments or the stated investments.
The views expressed within this document are those of Legal & General (Unit Trust Managers) Limited, who may or may not have acted upon
them. Legal & General (Unit Trust Managers) Limited is the Investment Manager of the stated funds.
Investments of this type and any income from them may rise and fall in value. Investors may get back less than they invest. Some of the stated
funds invest in companies in specialist areas. In addition, some of these investments will be in smaller companies or companies from emerging
markets. This means that these funds are higher risk than other more general equity funds. Exchange rate changes may cause the value of any
overseas investments to rise or fall. Details of the specific and general risks associated with these funds are contained within the Key Investor
Information documents.
Past performance is not a guide to future performance.
Call our Broker Desk 080000000 Lines are open Monday to Friday, 9am to 5pm. Call charges will vary. We may record and monitor calls.
Legal & General (Unit Trust Managers) Limited. Registered in England number: 1009418.
Registered office: One Coleman Street, London EC2R 5AA.
Disclaimer