Index Plus: Capturing the Missed Opportunities of Standard Passive Investing

Passive investing continues to grow at a fervent pace and for good reason. Index returns have been strong, and fees continue to come down; naturally, allocations have increased. But, despite the growth, benchmarks continue to be inefficient which can expose index investors to uncompensated risks. As such, the marketplace has evolved to exploit these inefficiencies in an attempt to maximize performance, but not all investors are aware.

Our Index Plus strategy seeks to exploit these inefficiencies by implementing a low active risk approach to passive investments. For large, long-term institutional investors with a core passive strategy, Index Plus offers a step forward by unlocking the potential to add increased performance while maintaining low base index fees. This innovative approach aims to enhance the performance of passive assets by following two core principles.

1. Focusing on micro inefficiencies: Traditional index funds, although cost-effective, adhere to rules-based construction methodologies. These methodologies prioritize investability and often reactively implement corporate events. However, this adherence can inadvertently create micro inefficiencies within the portfolio. Our Index Plus strategy takes a different approach. By more thoughtfully managing passive investments, we seek to exploit these inefficiencies and deliver modest alpha—typically ranging from 5 to 30 basis points per annum depending on the benchmark—while maintaining a low active risk profile targeting an information ratio close to one.
2. Utilizing four pre-defined opportunity sets: To capture outperformance created by index micro inefficiencies, we implement our low active risk approach across four buckets.
   • Event-driven opportunities: These arise from events such as IPOs/SPOs, pairs trading, reweights, mergers and acquisitions (M&A), and spin-offs. By actively monitoring and reacting to these events, we aim to capture value.
   • Rebalance prediction: We model widely followed methodologies to predict index additions and deletions. This predictive capability allows us to optimize portfolio adjustments before official index announcements, potentially enhancing returns.
   • Synthetic asymmetries: We continuously monitor implied funding rates to identify opportunities in synthetic equity markets. When relevant, we capture these asymmetries to enhance returns.
   • Risk inefficiencies: Our approach capitalizes on specific risk factors that create various opportunities over time. We leverage our data and analytical tools to capture several inefficiencies, including:
     • Stranded asset pricing dislocations
     • Idiosyncratic volatility (e.g., meme stocks)
     • Smart sustainability for achieving better risk-adjusted returns
     • Quality vs. Junk
     • Geopolitical risks and mispricings

In summary, for large institutional investors with a core passive strategy, Index Plus may offer a compelling proposition as it combines the best of both worlds: the cost-effectiveness of passive investing with the potential for added performance. Whether you’re seeking to optimize your long-term institutional portfolio or simply explore new avenues, Index Plus offers a strategic solution tailored to your needs. Our commitment lies in delivering value while minimizing risk at a fee that is aligned to positive outcomes, making your passive assets work harder for you.

Disclosures

The material in this presentation regarding Legal & General Investment Management America, Inc. (“LGIMA”) is confidential, intended solely for the person to whom it has been delivered and may not be reproduced or distributed. The material provided is for informational purposes only as a one-on-one presentation, and is not intended as a solicitation to buy or sell any securities or other financial instruments or to provide any investment advice or service. LGIMA does not guarantee the timeliness, sequence, accuracy or completeness of information included. The information contained in this presentation, including, without limitation, forward looking statements, portfolio construction and parameters, markets and instruments traded, and strategies employed, reflects LGIMA’s views as of the date hereof and may be changed in response to LGIMA’s perception of changing market conditions, or otherwise, without further notice to you. Accordingly, the information herein should not be relied on in making any investment decision, as an investment always carries with it the risk of loss and the vulnerability to changing economic, market or political conditions, including but not limited to changes in interest rates, issuer, credit and inflation risk, foreign exchange rates, securities prices, market indexes, operational or financial conditions of companies or other factors. Past performance should not be taken as an indication or guarantee of future performance and no representation, express or implied, is made regarding future performance or that LGIMA’s investment or risk management process will be successful. These investment strategies are designed only for sophisticated investors who are able to bear the risk of capital loss.

In certain strategies, LGIMA might utilize commodity interests and derivative contracts which inherently present substantial risk of loss and a higher risk than other investments strategies. Investors should consider these risks with the understanding that the strategy may not be successful and work in all market conditions.

Reference to an index does not imply that an LGIMA portfolio will achieve returns, volatility or other results similar to the index. You cannot invest directly in an index, therefore, the composition of a benchmark index may not reflect the manner in which an LGIMA portfolio is constructed in relation to expected or achieved returns, investment holdings, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility, or tracking error targets, all of which are subject to change over time.

No representation or warranty is made to the reasonableness of the assumptions made or that all assumptions used to construct the performance provided have been stated or fully considered.

LGIM America advises a collective investment trust which is offered pursuant to 3(c)(11) of the Investment Company Act and is solely distributed for investment by eligible trusts. LGIM America advises private funds which are offered pursuant to 3(c)(7) of the Investment Company Act and are solely distributed for investment by accredited investors and qualified investors.

Unless otherwise stated, references herein to "LGIM", "we" and "us" are meant to capture the global conglomerate that includes Legal & General Investment Management Ltd. (a U.K. FCA authorized adviser), LGIM International Limited (a U.S. SEC registered investment adviser and U.K. FCA authorized adviser), Legal & General Investment Management America, Inc. (a U.S. SEC registered investment adviser) and Legal & General Investment Management Asia Limited (a Hong Kong SFC registered adviser). The LGIM Stewardship Team acts on behalf of all such locally authorized entities.