INDEX FUNDS
LGIM’s business has been built on its core capability – our intelligent approach to index fund management which can also be described as low risk indexation with a high information ratio.
As a responsible index asset management provider, LGIM has two equally important objectives: close tracking and maximisation of investment returns. Maximising investment returns is an integral part of our index fund management process. Unlike our major competitors, all profits from return enhancing strategies such as stock lending and dividend enhancement are reinvested in the pooled fund from which they originated for the exclusive benefit of unit holders.
This philosophy has enabled us to consistently produce investment returns superior to those of our main index fund rivals as evidenced by the CAPS Pooled Pension Fund Updates. Indeed, we believe the returns from our pooled index funds set the appropriate benchmark for conventional active managers, as they represent what is in practice available to intelligent passive investors.
Rationale:
- Consistent returns in line with markets for a lower management fee
- Reduced risk of below average returns from poor stock selection
- Low costs
Performance
The most common method of judging the success of a fund
manager has been to compare their results with those of
similar managers in a league table. This comparison can be
made for each individual asset class, a measure of the
manager's stock selection capabilities, and for the total
fund return, which also reflects the impact of market
selection on asset allocation.
At the stock selection level, a number of pension fund
trustees have expressed their disappointment that active
managers seem unable to beat the market, as measured by a
published index, on a consistent basis.
Analysis of past performance suggests, particularly for UK
and overseas equity markets that index returns can compare
satisfactorily over the medium to long term with the median
returns achieved by active managers.
The conclusion is that funds which track indices should
enable investors to achieve results close to the median for
the major asset classes over the longer term. This
consistency of results at low costs has proved attractive
for those looking for an alternative to the volatility of
performance and high management fees typically associated
with traditional active management.
Reduced Risk
The risk of under performance against the market through poor stock selection is minimised through index tracking. Moreover, the volatility experienced by those investing in actively managed funds is reduced through tracking market indices since active management can under perform or out perform the median by a significant margin from year to year. Index fund returns tend to be consistently closer to the median and therefore do not subject pension fund trustees to unpleasant surprises. Trustees are also able to spend less time worrying about the abilities of their investment manager and more time on their other important decisions.
Low costs
The management of an index tracking fund gives rise to
substantially lower on-going costs. Index fund managers
avoid buying and selling stocks unless absolutely necessary
with the result that dealing costs associated with managing
the portfolio can be less than ten per cent of those
experienced by active managers. These cost savings are
effectively passed on to investors through enhanced
performance as is the benefit of management fees which are
perhaps only one-half or one-third of the level of those
charged by active managers.
Restructuring costs can also have a significant impact on
the performance of the fund and index tracking managers with
large pooled funds are well positioned to minimise those
costs.
