Legal & General’s Asset Management Division has today announced the launch of the Legal & General S&P 500 US Equal Weight Index Fund, offering investors the opportunity to limit the risk of over-concentration to single stocks in the primary US index. The Fund will track the S&P 500 Equal Weight Index.
Targeting investors in UK wholesale markets, the Fund provides clients with equal weight exposure to issuers in the S&P 500. It will seek to mitigate risks among the handful of stocks that have dominated the weighting of the S&P 500 in recent years, through improved diversification.
The rise of the ‘Magnificent seven’ in the S&P 500 index referring to the seven largest companies in the US by market capitalisation, (namely Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) has resulted in concentration being at its highest level in decades with these stocks comprising almost a third of the S&P 500[1]. Such dominance has come at the expense of diversification, leading some investors to be over-exposed to volatility in the mega-cap tech sector.
Welcoming this launch, Ben Cherrington, Head of UK Wholesale at Legal & General’s Asset Manager, commented: “L&G has been vocal about this concentration risk for a number of years and following increasing interest from our clients and prospective investors, we are excited to launch this fund to satisfy that demand. We see this as a highly compelling proposition for investors seeking improved risk management, whilst retaining a diversified sector allocation and potentially lower volatility.”
The Fund will seek to reduce the concentration risk by taking a full replication approach to exposure and improving portfolio diversification. While an underweight to the largest names in the index is a common trait amongst active US equity managers, over the longer term actively managed US equity funds underperformed the S&P Equal Weight over 20 years[2].
The ‘Magnificent seven’ became so large that the Nasdaq 100 index had to implement a ‘special rebalance’[3] to ensure that funds tracking the index did not breach industry-wide concentration limits set by regulators. There are early signs of a divergence in the risk characteristics between the equal weight and market-cap weighted versions of the S&P 500; which represents the primary opportunity the fund aims to capture.
Russell Jones, Head of Index Equities at Legal & General’s Asset Manager, added: “Over the past two-and-a-half decades US benchmarks have never been as concentrated as they are today. We know that this is a growing concern as single stock momentum trends and volatility in the mega-cap tech sector continues. This launch of our equal weight strategy is in response to this, seeking to provide investors with balanced exposure to both the risk and return profile of the entire S&P 500, rather than the seven stocks that have dominated the index in recent years.”
The Fund will be managed by Russell Jones, supported by LGIM’s deeply experienced Index Fund Management team, which manages over $100bn[4] in Assets under Management and comprises 25 managers, with an average industry experience of 15 years.
