This article is part of Morningstar's Guide to Passive Investing, helping investors make smart choices to meet their long-term investment goals.
Emma Wall: Hello, and welcome to Morningstar. I'm Emma Wall and I'm joined today by Justin Onuekwusi, Manager of the Legal & General Multi Index Fund range.
Hi, Justin.
Justin Onuekwusi: Hi, Emma.
Wall: So what's the fund that you'd like to highlight today?
Onuekwusi: The first one I'd like to highlight is the Global Real Estate Index Dividend Fund, bit of a mouthful. But overall we believe the Fed is likely to err on the side of caution in terms of increasing rates and that is likely to be tailwind for the U.S. property. Now, 65% of that fund is made up of U.S. property, mainly in commercial property. So we think the Fed be err on the side of caution not increasing rates very quickly should be a tailwind for commercial property, particularly in the U.S.
Wall: And of course, commercial property has been in the news in the last six months quite negatively because a lot of U.K. commercial property funds closed their doors to trading, temporarily suspended trading because of Brexit. Presumably, when you go global with this kind of investment, you don't have that Brexit risk?
Onuekwusi: Of course. We are investing globally in global real estate securities. We actually do hold some U.K. property as well to provide some diversification. But I think it's important that at times of stress, at times of uncertainty, you increase the liquidity in your funds and that's what we've done over the last year, over the last 18 months for the multi index strategy.
Wall: And what's the second fund that you'd like to highlight today?
Onuekwusi: The second fund I'd like to highlight is the Legal & General Emerging Markets Government Bond Fund. Now, importantly, it's denominated in dollars rather than local currency. Emerging markets have accumulated FX reserves over time. So compared to where they were in the Asian crisis in the late 90s, they have got a lot more foreign FX which means that they are unlikely to default on their dollar debt. And with yields of north of 5% in this low-yielding world with low default risk emerging market debt for us looks particularly attractive.
Wall: Now, a lot of emerging market debt did become very popular a few years ago because this hunt for yield that investors in the U.K., certainly in developed markets have, but there seems to be a lot of hot cash going in and out of this sector. How does that affect the returns?
Onuekwusi: There's a concern of that. I mean, we have seen – again year-to-date we've seen big inflows into emerging market debt because yields are likely to be lower for longer, the Fed is erring on the side of caution, you see more stimulus from Japan, Europe and the U.K. But our view is that that's likely to continue, that even the home field will continue. But it's so important to focus on fundamentals and if you look at fundamentals, the yield pickup you get on emerging market debt for the default risk is particularly attractive.
Wall: And what's the third and final fund?
Onuekwusi: The third and final fund is the Legal & General Global Corporate Bond Fund and this is invested in multi index funds and it shows that we have flexibility to not be indexed for the sake of it. This is an active strategy and it really follows the theme that we have since the start of the multi index funds to diversify bond holdings over different geographies but also over different bond asset classes.
Many of our peers – or many of our competitors have sold down all of their bonds completely; however, we feel that bonds provide an important role in the portfolio, particularly for the lower-risk funds and therefore we've been unwilling to sell our bonds completely and we've preferred instead to diversify over the bond spectrum and be active in terms of asset allocation across different bond funds.
Wall: And that is a really interesting point because you are known as a passive fund investor, an asset allocator into index strategies. But you're saying here actually that you've made the decision that an actively-managed fund is the better way to get exposure.
Onuekwusi: Yeah. Importantly, the multi index funds, they can go active and will go active. If there is an asset class that's simply can't be managed on index basis, we'll go active and a great example would be U.K. commercial property. But also, if we think the market lends itself to active management, global high yield, global corporate bonds, again will go active and that's something that we'll continue for the multi index funds going forward.
Wall: Justin, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
