Legal & General Short Dated Sterling Corporate Bond Index: April 2025 fund update

• Legal & General is one of the UK’s leading providers of passive funds

• This fund provides broad exposure to short-term Sterling corporate bonds

• It’s a simple, low-cost way to track the Markit iBoxx GBP Corporates 1-5 Index

• This fund doesn’t feature on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Legal & General Short Dated Sterling Corporate Bond Index fund invests in a range of short-term fixed income corporate debt, also known as corporate bonds. Its benchmark, the Markit iBoxx GBP Corporates 1-5 Index, includes bonds issued in Sterling by UK or overseas companies with less than 5 years to maturity.

An index tracker fund is one of the simplest ways to invest and this fund could be a low-cost way to add exposure to short-term corporate bonds to an investment portfolio. It could also help diversify a portfolio focused on other assets, such as shares, or other types of bonds.

Short-term bonds are typically less volatile than bonds with a longer time until maturity – this is partly because they are less sensitive to changes in interest rates. This means they could add a more conservative element to a bond portfolio, though the yield on offer may be less than a more traditional corporate bond fund.

Manager

Legal & General has run index tracker funds for over 30 years and is one of the largest providers of index funds in the UK. That means it’s got the resources and expertise to track indices as closely as possible, and the scale to keep charges low.

Each fixed income index fund at Legal & General has a primary and secondary manager, though in practice the whole team helps to manage each fund. Steven Grieve is the primary manager responsible for this fund. Grieve joined Legal & General in 2022 from Allianz Global Investors where he was an Associate Portfolio Manager. Daniel King is the secondary manager. King has worked at Legal & General for two decades and has responsibility for managing a range of fixed income funds.

Process

This fund aims to track the performance of the Markit iBoxx GBP Corporates 1-5 Index. It doesn’t buy bonds issued by every single company in the index. There’s 193 issuers in the index versus 188 in the fund as at the end of February. Companies can issue multiple bonds at one time and the fund doesn’t invest in every single bond that an individual company issues. This is known as partial replication, which helps to keep costs down but should still allow the fund to track the performance of the index closely.

The fund focuses on bonds issued by UK companies, which make up around 40% of its assets. It also invests in bonds issued in Sterling by overseas companies in countries like the US, France and Germany. The fund currently has a bias towards the financial, consumer goods and utilities sectors which made up 55.9%, 9.6% and 9.2% of the fund respectively at the end of February.

In any index tracker fund, costs drag on performance and higher costs can lead to a bigger tracking difference between the fund and its benchmark. Legal & General use different strategies to keep costs as low as possible. For example, they try to reduce trading within the fund as it drives up costs.

Each bond is given a credit rating, and only investment grade bonds are included in the index, which are deemed to be more likely to pay off their debts than higher-risk high yield bonds. When the team anticipate that a bond’s rating will be upgraded so that it transitions from a high yield to investment grade, they may buy the bond early and when a bond’s rating is downgraded, they may not sell straight away. They avoid trading close to a rating change to manage this.

Legal & General is a conservative tracker fund manager. They don’t lend investments in their fixed income funds like some other companies do. The team has the flexibility to use derivatives though, which adds risk.

Culture

Legal & General has developed its passive fund range over the last three decades. The company manages around £500bn in tracker funds, allowing it to offer a wide range of index-tracking options.

It’s built a team of experienced passive fund specialists and they’re innovative too. If an index doesn’t exist for a sector they’d like to track, they’ll often work with index providers to create a suitable index for them to track.

The team managing this fund work closely with various risk departments across the business. We believe this provides support and adds challenge where appropriate.

Employees are also encouraged to participate in Legal & General’s share save scheme which should encourage them to be more engaged with the growth of the company. In addition, a portion of fund managers’ bonuses are invested into the funds they manage. By doing this, their interests are further aligned with the investors in the fund.

ESG Integration

Legal & General Investment Management (LGIM) is predominantly a passive investor, but we are impressed with the extent to which they have woven Environmental, Social and Governance (ESG) into their culture. Being a mostly passive fund house hasn’t stopped them being innovative when it comes to ESG. In May 2019, the firm launched its ‘Future World’ range of funds, though the Short Dated Sterling Corporate Bond Index fund isn’t part of this range.

The Future World funds track indices that increase investments in companies that score well on a variety of ESG criteria – from the level of carbon emissions generated, to the number of women on the board and the quality of disclosure on executive pay. They also reduce exposure to companies that score poorly on these measures. The funds also adopt a decarbonisation pathway. This means they’re managed to achieve at least a 7% reduction in carbon emissions per year until 2050.

In 2019, LGIM established its Global Research and Engagement Platform, which brings together representatives from the investment and stewardship teams, in order to unify their engagement efforts. Engagement is conducted in line with the firm’s comprehensive engagement policy. A detailed description of the firm’s engagement and voting activity (including case studies) is available in its annual Active Ownership report. Quarterly Engagement reports are also available.

LGIM’s Stewardship team is responsible for exercising voting rights globally, both for LGIM’s active and index funds. Voting decisions are publicly available through a tool which allows a user to search for any company to find out how LGIM voted, and a detailed rationale is provided for votes against management and abstentions.

As the Legal & General Short Dated Sterling Corporate Bond Index is a passive fund that aims to match the returns of a specific index, it doesn’t incorporate ESG analysis.

Cost

The fund has an annual ongoing annual fund charge of 0.14%, but a discount of 0.06% is available for HL investors, which reduces the charge to 0.08%. Our platform charge of up to 0.45% per annum also applies, except in the HL Junior ISA, where no platform charge applies.

Please note that charges are taken from capital. This can increase the income paid by the fund, but it might reduce the potential for capital growth.

Performance

Since launch in May 2014, the fund has tracked the Markit iBoxx GBP Corporates 1-5 Index well. As is typical of index tracker funds, it’s fallen behind the benchmark over the long term because of the costs involved. However, the tools used by the managers have helped to keep performance tight to the index.

It’s been a volatile year for bond markets. Over the last 12 months to the end of March, the fund has gained 5.39%*. Remember, past performance isn’t a guide to the future.

There was a strong rally in bonds at the end of 2023 led by the expectation that interest rate cuts were on the horizon. But bonds sold off in the first half of 2024 as most major central banks held off on lowering rates.

Bond yields move in the opposite direction to prices. Usually, when interest rates are cut, bond yields fall, and prices rise. But in 2024 yields fell in anticipation of rate cuts and then rose when cuts didn’t come.

The European Central Bank was among the first to lower interest rates in June, followed by the Bank of England who lowered rates in August after holding them at a 16 year high for a full year. The US Federal Reserve also cut rates in September, for the first time in four years, but went with a bigger cut of 0.5%.

Even though central banks have continued to lower rates, bond yields have risen, and prices have fallen. This is partly because Trump’s policies have the potential to cause inflation and bond markets are now expecting fewer rate cuts.

The yield for the Legal & General Short Dated Sterling Corporate Bond Index fund was 4.4% as of the end of February 2025. Yields aren’t guaranteed and shouldn’t be considered a reliable indicator of future income.

Given Legal & General’s size, experience and expertise running index tracker funds, we expect the fund to continue to track the Markit iBoxx GBP Corporates 1-5 Index closely in the future, though there are no guarantees.