smart beta retreat lgi 2012

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


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


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


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


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


General methods of indexation

• Full Replication

• Sampling

– Optimisation

– Stratified Sampling

• Synthetic Replication

• The Legal & General approach: Pragmatic Replication:


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


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


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


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


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


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


Appendix


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


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


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



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


Index Announcement Date

26 September

Effective Date

2 October


Placing price 25 September

MXN 31.25


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


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


Index Effective Date

1 October


Issue Announcement Date

19 September


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

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