Legal & General ICAV Interim Report and Unaudited Financial Statements for the period ended 30 ...

299 Pages·2017·1.6 MB·English

Legal & General ICAV
(
An umbrella type Irish collective asset-management vehicle
)
with segregated liability between Funds

Interim Report and Unaudited Financial Statements
for the period ended
30 June 2017
Legal & General ICAV
Interim Report and Unaudited Financial Statements
for the period ended 30 June 2017

Table of Contents
Page
Table of Contents 2
General Information 4
Investment Manager’s Report 5
Condensed Statement of Financial Position 29
Condensed Statement of Comprehensive Income 31
Condensed Statement of Changes in Net Assets Attributable to Holders of Redeemable Participating Shares 33
Condensed Statement of Cash Flows 35
Condensed Notes to the Financial Statements 37
Portfolio Listing – L&G Diversified EUR Fund 84
Portfolio Listing – L&G Diversified USD Fund 88
Portfolio Listing – L&G North American Equity Index Fund 91
Portfolio Listing – L&G Multi-Index EUR III Fund 109
Portfolio Listing – L&G Multi-Index EUR IV Fund 111
Portfolio Listing – L&G Multi-Index EUR V Fund 113
Portfolio Listing – L&G Europe Ex. UK Equity Index Fund 115
Portfolio Listing – L&G Asia Pacific ex. Japan Equity Index Fund 126
Portfolio Listing – L&G Euro Treasury Bond Index Fund 132
Portfolio Listing – L&G Emerging Markets Equity Index Fund 140
Portfolio Listing – L&G Emerging Markets Government Bond (Local Currency) Index Fund 159
Portfolio Listing – L&G World Equity Index Fund 164

Portfolio Listing – L&G Global Small Cap Equity Index Fund 198

Statement of Significant Changes in Composition of Portfolio (Unaudited) – L&G Diversified EUR Fund 263
Statement of Significant Changes in Composition of Portfolio (Unaudited) – L&G Diversified USD Fund 266
Statement of Significant Changes in Composition of Portfolio (Unaudited) – L&G North American Equity Index Fund 268

Statement of Significant Changes in Composition of Portfolio (Unaudited) – L&G Multi-Index EUR III Fund 270
Statement of Significant Changes in Composition of Portfolio (Unaudited) – L&G Multi-Index EUR IV Fund 272
Statement of Significant Changes in Composition of Portfolio (Unaudited) – L&G Multi-Index EUR V Fund 274
Statement of Significant Changes in Composition of Portfolio (Unaudited) – L&G Europe Ex. UK Equity Index Fund 276

2
Legal & General ICAV
Interim Report and Unaudited Financial Statements
for the period ended 30 June 2017

Table of Contents (continued)
Page
Statement of Significant Changes in Composition of Portfolio (Unaudited) – L&G Asia Pacific ex. Japan Equity Index 278
Fund

Statement of Significant Changes in Composition of Portfolio (Unaudited) – L&G Euro Treasury Bond Index Fund 280

Statement of Significant Changes in Composition of Portfolio (Unaudited) – L&G Emerging Markets Equity Index
Fund 282

Statement of Significant Changes in Composition of Portfolio (Unaudited) – L&G Emerging Markets Government
Bond (Local Currency) Index Fund 284

Statement of Significant Changes in Composition of Portfolio (Unaudited) – L&G World Equity Index Fund 286

Statement of Significant Changes in Composition of Portfolio (Unaudited) – L&G Global Small Cap Equity Index Fund 288

Unaudited Appendix 290
3
Legal & General ICAV
Interim Report and Unaudited Financial Statements
for the period ended 30 June 2017

General Information

Directors Administrator
Tom Finlay (Irish) *† Northern Trust International Fund Administration
David Dillon (Irish) *† Services (Ireland) Limited
Brian Wilkinson (Irish) *† George’s Court
Lee Toms (British) ** 54-62 Townsend Street
Dublin 2
* Independent non-executive directors Ireland
** Non-executive director
† Audit Committee Secretary
Tudor Trust Limited
Investment Manager/Distributor 33 Sir John Rogerson’s Quay
Legal & General Investment Management Limited Dublin 2
One Coleman Street Ireland
London EC2R 5AA
United Kingdom Legal Advisers
Dillon Eustace
Manager 33 Sir John Rogerson’s Quay
LGIM Corporate Director Limited Dublin 2
One Coleman Street Ireland
London EC2R 5AA
United Kingdom Registered Office of the ICAV
33 Sir John Rogerson’s Quay
Depositary Dublin 2
Northern Trust Fiduciary Services (Ireland) Limited Ireland
George’s Court
54-62 Townsend Street
Dublin 2
Ireland

Independent Auditors
PricewaterhouseCoopers
Chartered Accountants and Registered Auditors
One Spencer Dock
North Wall Quay
Dublin 1
Ireland

Registered Number
C154249

4
Legal & General ICAV
Interim Report and Unaudited Financial Statements
for the period ended 30 June 2017

Investment Manager’s Report
L&G Diversified EUR Fund

Performance review

During the period under review the Fund returned +3.28%. The performance of the long-term comparator of the
strategy, Developed Equities (50% hedged to EUR), was +5.61% over the same period (Source: Northern Trust). The
Manager doesn’t expect the Fund to match equity returns in an extended market rally given the Fund’s diversified
composition and in general expects the Fund to outperform equities in a downmarket given its diversified asset
allocation.

The Manager’s long-term return expectation (for both developed equities as well as for the Fund) is around risk-free
rates +3.5-4% p.a.

Market Review

Equity markets have made significant gains over the review period, reflecting a steady improvement in global economic
indicators and growing optimism amongst investors for prospects in 2017.The strongest areas in Euro terms were
Continental Europe and the Asia Pacific markets excluding Japan. Corporate results in Europe have highlighted
improving earnings momentum with expectations for 2017 being revised higher, while indicators suggest regional
economic activity is regaining momentum. In the French presidential election, centrist candidate Emmanuel Macron
won the second round by a convincing majority, reinforcing the prevailing mood of optimism amongst investors.
Emerging markets have outperformed the World Index as concerns over the risk of a protectionist approach to US trade
policy have abated in recent months.

The major international bond markets have struggled to make headway over the review period, as investors began to
discount an end to the low growth, low inflation environment that has prevailed since the global financial crisis. The
Federal Reserve (Fed) signalled a gradual tightening of monetary policy, raising interest rates twice over the review
period. The Fed also signalled it would begin unwinding its asset purchase programme, known as quantitative easing
(QE), in the autumn. As the second quarter ended, bond markets were unsettled by indications from the European
Central Bank that it may taper its QE programme sooner than anticipated in response to stronger regional economic
indicators. However, the Bank of Japan’s (BOJ) negative interest rate policy, and its announcement that it will intervene
if necessary to keep the yield on benchmark 10-year bonds at around 0%, underpinned Japanese government bonds.
Emerging markets outpaced the major government bond markets, as international investors continued to favour the asset
class with new sovereign issues in countries as diverse as Egypt, Russia and Argentina oversubscribed.

Fund Review

During the period under review the target asset allocation of the Fund has not changed. However, the Manager
rebalanced the portfolio to manage the effects of market movements. For example, ongoing Euro strength in the first
half of 2017 drove gains in currency hedges which were invested on a regular basis to keep the cash all down. Fund
flows through the first half of the year were used to tighten the allocation further towards targets, and an overall increase
in fund size allowed for additional granularity in selected asset classes, such as the spread of overseas government bond
holdings.

The Fund has been using a combination of various instruments to achieve the desired market exposure. Collective
investment schemes (UCITS funds) were used to implement equities, investment grade credit, alternative credit (high
yield, emerging market debt), commodities and global real estate. Other asset class exposure was implemented through
a combination of securities and derivatives.

Outlook

The near-term global growth outlook appears steady and we expect global unemployment to continue falling and wage
growth to pick up. Medium-term we see some increase in rates, but a high chance of another downturn well before
normalisation is complete. Global industrial production growth appears to have peaked and inventories have risen and,
at this stage, we expect only a modest slowing. We have seen some softening in the euphoric confidence surveys with
little change in momentum in actual growth.

5
Legal & General ICAV
Interim Report and Unaudited Financial Statements
for the period ended 30 June 2017

Investment Manager’s Report (continued)
L&G Diversified EUR Fund (continued)

Outlook (continued)

The US is moving late cycle and if tax cuts are delivered, this could add to overheating pressure next year. We expect
one further rate hike this year and the start of balance sheet run-off. In the Eurozone, credit conditions are supportive for
growth and the ECB is likely to announce 2018 tapering later in 2017.

Legal & General Investment Management Limited
1 August 2017

6
Legal & General ICAV
Interim Report and Unaudited Financial Statements
for the period ended 30 June 2017

Investment Manager’s Report (continued)
L&G Diversified USD Fund

Performance review

During the period under review the Fund returned +7.77%. The performance of the long-term comparator of the
strategy, Developed Equities (50% hedged to USD), was +9.81% over the same period (Source: Northern Trust). The
Manager doesn’t expect the Fund to match equity returns in an extended market rally given the Fund’s diversified
composition and in general expects the Fund to outperform equities in a downmarket given its diversified asset
allocation.

The Manager’s long-term return expectation (for both developed equities as well as for the Fund) is around risk-free
rates +3.5-4% p.a.

Market Review

Equity markets have made significant gains over the review period, reflecting a steady improvement in global economic
indicators and growing optimism amongst investors for prospects in 2017. The strongest regions in US Dollar terms
were Continental Europe and the Asia Pacific markets excluding Japan. Corporate results in Europe have highlighted
improving earnings momentum with expectations for 2017 being revised higher, while indicators suggest regional
economic activity is regaining momentum. In the French presidential election, centrist candidate Emmanuel Macron
won the second round by a convincing majority, reinforcing the prevailing mood of optimism amongst investors.
Emerging markets have outperformed the World Index as concerns over the risk of a protectionist approach to US trade
policy have abated in recent months.

The major international bond markets have struggled to make headway over the review period, as investors began to
discount an end to the low growth, low inflation environment that has prevailed since the global financial crisis. The
Federal Reserve (Fed) signalled a gradual tightening of monetary policy, raising interest rates twice during the review
period. The Fed also signalled it would begin unwinding its asset purchase programme, known as quantitative easing
(QE), in the autumn. As the second quarter ended, bond markets were unsettled by indications from the European
Central Bank that it may taper its QE programme sooner than anticipated in response to stronger regional economic
indicators. However, the Bank of Japan’s (BOJ) negative interest rate policy, and its announcement that it will intervene
if necessary to keep the yield on benchmark 10-year bonds at around 0%, underpinned Japanese government bonds.
Emerging markets outpaced the major government bond markets, as international investors continued to favour the asset
class with new sovereign issues in countries as diverse as Egypt, Russia and Argentina oversubscribed.

Fund Review

During the period under review the target asset allocation of the Fund has not changed. However, the Manager
rebalanced the portfolio to manage the effects of market movements. Additional Fund flows were used to tighten the
allocation further towards targets.

The Fund is using a combination of various instruments to achieve the desired market exposure. Collective investment
schemes (UCITS funds) were used to implement equities, investment grade credit, alternative credit (high yield,
emerging market debt), commodities and global real estate. Other asset class exposure was implemented through a
combination of securities and derivatives.

Outlook

The short-term global growth outlook appears steady and we expect global unemployment to continue falling and wage
growth to pick up. Medium-term we see some increase in rates, but a high chance of another downturn well before
normalisation is complete. Global industrial production growth appears to have peaked and inventories have risen and,
at this stage, we expect only a modest slowing. We have seen some softening in the euphoric confidence surveys with
little change in momentum in actual growth.

7
Legal & General ICAV
Interim Report and Unaudited Financial Statements
for the period ended 30 June 2017

Investment Manager’s Report (continued)
L&G Diversified USD Fund (continued)

Outlook (continued)

The US is moving late cycle and if tax cuts are delivered, this could add to overheating pressure next year. We expect
one further rate hike this year and the start of balance sheet run-off. In the Eurozone, credit conditions are supportive for
growth and the ECB is likely to announce 2018 tapering later in 2017.

Legal & General Investment Management Limited
1 August 2017

8
Legal & General ICAV
Interim Report and Unaudited Financial Statements
for the period ended 30 June 2017

Investment Manager’s Report (continued)
L&G North American Equity Index Fund

Performance Review

During the period under review, the Fund’s return was +9.01%, compared with the MSCI North American Index
performance of +8.86% (Source: Bloomberg), producing a tracking difference of +0.15%.

This Fund is not sponsored, endorsed, sold or promoted by MSCI Inc. (“MSCI”), any of its affiliates, any of its
information providers or any other third party involved in, or related to, compiling, computing or creating any MSCI
Index (collectively, the “MSCI Parties”).

Information on Tracking Error

The `Tracking Error' of a Fund is the measure of the volatility of the differences between the return of the Fund and the
return of the benchmark Index. It provides an indication of how closely the Fund is tracking the performance of the
benchmark Index after considering things such as Fund charges and taxation.

Using monthly returns, over the review period, the annualised Tracking Error of the Fund is 0.04%. This Tracking Error
is within the anticipated Tracking Error levels set out in the Fund’s Prospectus of +/- 0.20% per annum.

Market Review

Equity markets have made significant gains over the review period, reflecting a steady improvement in global economic
indicators and growing optimism amongst investors for prospects in 2017. Donald Trump’s unexpected victory in the
US presidential election led investors to discount the prospect of fiscal stimulus in the form of increased infrastructure
spending and tax cuts. The latest quarterly earnings season in the US has been broadly encouraging with results from
leading technology stocks exceeding forecasts. In June, the Federal Reserve increased interest rates by a further 0.25%,
while indicating it will begin unwinding its asset purchase programme in the autumn. With other central banks sending
signals about the need to normalise monetary policy, investors switched out of technology stocks on valuation grounds
while higher yielding utilities and telecommunications stocks sold off as bond markets reacted to a change in tone on
policy guidance. Financials and healthcare were the beneficiaries of this rotation away from technology and high
dividend stocks.

Fund Review

The quarterly Index review in February 2017 resulted in one addition; Advanced Micro Devices (US), and two
deletions; Spectra Energy and Endo International (both US). There were also changes to the free share capital of 465
constituents, the largest of which was an increase to Enbridge (Canada). The two-way Index turnover was 1.4%.

At the May 2017 semi-annual Index review, there were 23 additions, the largest being SVB Financial, CBOE Holdings
and Vail Reports (all US). There were also 10 deletions; the largest being Valspar, Tegna and Calpine (all US). In
addition, 485 companies had changes to their free share capital, the largest of which was a decrease for Apple (US). The
two-way Index turnover was 2.4%.

Index changes outside of the reviews were relatively quiet for the review period. In January, Abbott Laboratories
acquired a fellow Index constituent, St Jude Medical in a cash and stock offer worth approximately USD 30.1 billion.
The most significant takeover during the review period occurred when the Canadian firm Enbridge purchased the US
Index constituent Spectra Energy, which at the time was weighted at 0.13%. The deal, the largest deal in the pipeline
industry for 2016, was completed at the end of February and was worth USD 42.2 billion and was paid for in Enbridge
stock. Additionally Technip (France) and FMC (US) merged to form a new addition, TechnipFMC (US).

Several spin offs and demergers dominated the resulting Index changes. In January, Hilton Worldwide spun off Hilton
Grand Vacations and Park Hotels & Resorts, neither of which were added to the Index. Additional spin offs included
Varian Medical spin off from Varex Imaging, Citrix spun off GetGo, Biogen spun off Bioverativ and Ashland spun off
Valvoline.

At the end of the review period, the three largest stocks in the Index were Apple (3.3%), Alphabet (2.4%) and Microsoft
(2.2%).
9
Legal & General ICAV
Interim Report and Unaudited Financial Statements
for the period ended 30 June 2017

Investment Manager’s Report (continued)
L&G North American Equity Index Fund (continued)

Outlook

We see steady global growth and reflation continuing, aided by increasingly supportive US fiscal policy. So far risk
assets have been buoyed by diminishing deflation concerns, but the perception of a ‘goldilocks’ economy might prove
short lived. With several economies at full employment, most notably the US, the sharp move higher in headline
inflation could lead to a more rapid increase in wage growth, stronger core inflation and a faster-than-expected pace of
Fed hikes.

The Trump presidency raises the spectre of increased protectionism which could further damage already weak
productivity growth. There is also increased concern about the direction of US foreign policy. Across Europe,
meanwhile, there are a number of important elections in 2017, including Germany in September.

With overstimulation and accelerating Fed hikes, markets could be well on their way to anticipating the next recession
by year end. It is equally likely that the market’s current focus on ‘Good Trump’ underprices the risk that he follows
through on his anti-trade and anti-immigration campaign slogans. We would also not discount the risk of ill-advised
comments causing a few geo-political risks over the course of 2017. In the US alone, there are plenty of reasons to
expect anything but a boring year for equities.

The Fund remains well positioned to capture the performance of the benchmark Index.

Legal & General Investment Management Limited
19 July 2017

10