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What are the risks to performance?
Capital is at risk.
Our philosophy in developing the Fund’s strategy has been to gain factor exposure and to improve its climate profile, while maintaining appropriate levels of diversification. However, we would note the following possible risks that could lead to underperformance relative to a market capitalisation-based global equity index (e.g. FTSE All-World Index):
- While deviations from the market-cap index in terms of industries and countries may cause underperformance on a relative basis, constraints are applied to the index to limit the impact
- For the climate component, one of the key risks is a rise in the price of oil or coal, which would benefit stocks less represented in this index than in the market-cap index. The factor component counteracts the oil & gas sector underweight in the climate component at present, but this could change in the future
- While historically the factors chosen (value, quality, low volatility and small size) have demonstrated relatively low correlations, these could move higher in future which would reduce diversification and potentially increase risk
The Fund is constructed on the assumption that the market will correct its valuation of some high-carbon stocks over time, as a result of changes in government policy and consumer demand. However, the valuations of such companies are not just affected by climate polices, but also broader government policies on energy security, domestic employment, health, subsidies and wider geopolitics.
If big carbon polluters, such as China and India, fail to address carbon reduction targets and continue to support fossil fuels at the expense of renewables, the climate tilt could be a cause for underperformance. The amount of underperformance should be limited, however, because the Fund's exposure to different sectors and countries is capped to avoid such an eventuality.
Legal and General Assurance (Pensions Management) Limited (“PMC”) is a life insurance company and carries on the business using a linked policy (“the Policy”), it is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
The policy is divided into a number of sections (“the Funds”). Legal & General Investment Management Limited (LGIM), which provides investment and marketing services to PMC, is authorised and regulated by the Financial Conduct Authority.
The views expressed within this video are not necessarily those of Legal & General Investment Management.
Specific advice should be taken when dealing with specific situations; investment decisions should be based on a person’s own goals, time horizon and tolerance for risk.
Legal & General Investment Management, One Coleman Street, London, EC2R 5AA Registered in England and Wales no. 2091894
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