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April 30, 2001 01:00 AM

DRASTIC CHANGE: Wilshire Asset suffers big drop

Falling markets, loss of Bell Atlantic account and move away from indexing cited as firm's assets decline by 49%

Dave Kovaleski
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    SANTA MONICA, Calif. - Wilshire Asset Management suffered a 49% decline in its overall asset base in 2000, and a 63% drop in U.S. institutional tax-exempt assets.

    The Santa Monica-based money manager saw overall assets drop to $5 billion through Dec. 31, from $9.9 billion at the end of 1999, according to Pensions & Investments data. Assets managed for U.S. tax-exempt clients fell to $3.2 billion from $8.6 billion.

    Several factors played into the declining asset base, said Chief Investment Officer Hal Reynolds.

    One was market depreciation - the Wilshire 5000 index declined 10.9% and the Wilshire 4500 dropped 15.7% last year. The firm's largest separate account, the $1.9 billion large company growth fund, suffered as a result, returning -17.3% in 2000, according to the Pensions & Investments' Performance Evaluation Report. The fund invests in the 750 largest stocks in the Wilshire 5000 stock index.

    Another major factor was the loss of one of its largest institutional clients, the former Bell Atlantic Corp. The firm's large mandate with Bell Atlantic was terminated in 2000 as a result of Bell Atlantic's merger with GTE Corp. to form Verizon Communications Inc. Mr. Reynolds wouldn't disclose the size of the portfolio; Verizon officials did not return phone calls. Verizon decided to manage Wilshire's portion of the indexing mandate, which was primarily in the large company growth style fund, in-house, said Mr. Reynolds.

    The third reason is a move by Wilshire Asset away from the indexing business toward actively managed investment portfolios. "There's been a shift in our business," he said. According to P&I data, the firm's passively managed U.S. institutional tax-exempt equities dropped to $2.2 billion at the end of 2000 from $7.2 billion a year earlier. U.S. tax-exempt institutional assets managed actively rose to $1.5 billion at the end of 2000, up from $215 million in 1999. Total actively managed assets, including retail, are $2 billion.

    In addition, because of declining fixed-income assets, the firm folded its bond tent in 2000 and its only client transferred assets to another money manager (P&I, Feb. 7, 2000).

    Movement into active

    Clients have been migrating out of the style-specific indexed accounts into actively managed portfolios during the past year, Mr. Reynolds said.

    The active investment portfolios, which Wilshire calls dynamic alpha models, were launched in 1998 and will reach the three-year track record mark in June. There are two models, one for large-cap stocks and one for small caps.

    Mr. Reynolds said Wilshire has attracted about $2 billion in assets in its two dynamic alpha models, most coming from existing clients shifting assets into the active portfolios from Wilshire's style-specific index funds.

    Mr. Reynolds said Wilshire officials are pleased with the growth in assets of the active models. But he noted clients generally make smaller allocations to active mandates than to passive ones.

    Wilshire Asset is not getting out of the indexing business, said Mr. Reynolds, adding firm officials hope to maintain or increase the $3 billion asset base in indexed portfolios. But the focus clearly has shifted to active management, as most of the research is focused on the dynamic alpha models.

    "The fact that they're index managers in a bear market doesn't bode well for their business model right now," said Kent Novell, chief operating officer at consultant Boston Research Group, Woburn, Mass.

    Mr. Novell said it's difficult for Wilshire to compete against its "big brothers" in the index business - Barclays Global Investors, State Street Global Advisors and Vanguard Group Inc. "Wilshire is a product of no longer having the critical mass to compete at the same level," he said.

    Indexing `oligopoly'

    Of Wilshire's indexing competitors, Mr. Reynolds said, "It's gotten to the point where it's an oligopoly. We've decided we want to focus our efforts in an area that hasn't been commoditized."

    He said the move to actively managed quantitative models is a natural progression from the firm's indexing roots and the launch of the flagship Wilshire 5000 Index portfolio in 1983. The style index portfolios followed in 1987 and the actively managed portfolios are an extension of those funds. Portfolio managers make shifts based on short-term market and factor trends. "Our goal is to stay ahead of the pack and try and introduce new products that we think make sense for our clients," said Mr. Reynolds.

    For the one-year period ended March 31, the dynamic alpha model portfolios outperformed their benchmarks by about five percentage points, said Mr. Reynolds. Because they are tailored for each client, the dynamic alpha models use nine different benchmarks.

    Tony Lotruglio, consultant with Quan-Vest Consultants Inc., Manhasset, N.Y., said the actively managed models are the logical next step in the evolutionary process for index managers, largely because of the anomalies in the indexes. Indexes have developed to the point where rebalancing can drastically affect their construction from year to year.

    Mr. Reynolds believes Wilshire's dynamic alpha quantitative models are uniquely constructed because they focus on six-month factor forecasts as opposed to longer- term market trends. "We're really focused on short-term factor returns," he said.

    The firm uses six-month forecasts because market conditions change more rapidly than they have in the past, which means favorable conditions for a given style may likewise shift more abruptly, particularly as investors pile more money into a style or asset class and it becomes overpriced, he said.

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