Index investment approach

We aim to fully replicate an index by buying all the index securities in the same proportions as the index. But full replication isn’t always in the best interests of investors. So we take a pragmatic approach driven by a keen focus on achieving the best outcome for investors in a given market. Our approach aims to balance the key client outcomes: reducing costs and tracking error while enhancing returns.

Implemention of index changes

LGIM often avoids the artificial price squeezes that can occur when index changes are effected by using a spreading strategy or anticipating the index change. Each index event is analysed on a case-by-case basis and appropriate actions taken accordingly.

Corporate actions

Placings, initial public offerings and mergers and acquisitions create opportunities for LGIM to add value. LGIM also participates in cross-border corporate activities where we believe this can deliver client benefits.

Expertise matters

Achieving this balance goes beyond an automated process as advanced indexing techniques require expertise, experience and scale, all of which LGIM has in abundance.

Enhancing returns

Our index management approach goes beyond beta to seek opportunities to enhance returns through the following strategies. Our policy of enhancing returns whenever practical has resulted in a modest, yet financially significant, improvement in long-term tracking performance across the funds we manage.*

Approach Implementation
Enhanced index change process
  • Index changes entail both risk and a potential opportunity. We carefully analyse each event and formulate a trading strategy to spread the implementation of index changes around the change date to avoid price distortions that might affect investor returns.
  • We also participate in new issues and placings where possible, to further reduce the impact of a change in the index on our funds, as well as enhance returns were possible.
Securities lending income
  • Index funds are a natural source of securities lending, although not appropriate for every mandate.
  • Combined with LGIM’s strict risk framework and guidelines, securities lending can produce additional incremental returns.
  • All profits generated by securities lending go back to the client, not LGIM.
Value from corporate actions
  • Corporate activity, such as placings, IPOs, new bond issues and M&A, create opportunities to add value.
  • Cross-border corporate activities also tend to increase potential to generate added value as the index treatment of these types of events is not always optimal.
Dividend enhancement
  • Where feasible, we aim to increase the net dividend entitlement for equity investors.
  • We use listed derivatives to implement such strategies. Scrip dividends can also generate opportunities to enhance returns.

*LGIM’s flagship equity fund composites demonstrated consistent positive performance bias over 3, 5 and 10 years as at 30 June 2015, gross of fees. More details available on request. Past performance is not a guide to future returns