Wilshire’s top retail execs talk NT ETFs, interval funds and DC shifts

Jason Schwarz, Nate Palmer and Josh Emanuel, of Wilshire Funds Management, sat down with Fund Intelligence in Santa Monica

Wilshire Funds Management has a growing interest in interval funds and expects to be more active both in terms of evaluating products and manufacturing them in conjunction with partners, according to the unit’s top executives.

The retail-focused arm of Santa Monica-based Wilshire Associates has around $180bn in assets under advice, and now makes more money for the firm than its trillion-dollar institutional consulting business.

In looking at interval funds to house less liquid strategies, the firm sees a gap not served by its $12bn private markets business, Jason Schwarz, president of WFM, told Fund Intelligence.

“Historically, that has been a limited partner-based business for institutions … interval funds are attractive for a relatively untapped part of the market, serving accredited investors — the space in between qualified purchasers, traditional institutions and mass affluent retail,” he said.

Delivering a private equity-type strategy in an interval fund format to that group is an attractive opportunity, he explained, and said that Wilshire will be active in that space in 12 to 24 months time. This would involve Wilshire serving as an allocation subadviser, responsible for determining asset class and underlying manager allocations, and working in partnership with a firm with strong retail relationships.

One area of product development garnering attention at present that the firm is more hesitant on is nontransparent ETFs, where CIO Josh Emanuel said he believed it will take a long time for the market to come to fruition.

“The growth of [transparent] actively managed ETFs has not been significant. There have been some successes, particularly in the bond market, but not much traction outside of that,” he said. “If you tie that to the notion of nontransparent, it just creates another hurdle.”

He argued that for investors, the primary benefits of ETFs are tradability and transparency, and that there is an additional layer with nontransparent ETFs as investors also have to become comfortable with the independent pricing source being used.

Schwarz said that Wilshire will respond to client interest, but added that there will need to be palpable demand before the firm will spend significant amounts of time on the structures.

“There are a lot of entrenched interests in the way things work today … it’s another area like clean shares, that were going to ‘revolutionize’ the industry,” he said. “Things change, some don’t.”

Defined contribution trends

Of WFM’s $180bn, around $90bn sits in retirement and college savings, $40bn with broker-dealers and $35bn in the insurance channel, Nate Palmer head of the portfolio management group, said, with other channels making up the rest.

In the defined contribution channel, he highlighted several current shifts affecting the work Wilshire does.

Two big trends are the reduction in the lineup of core products being offered as part of menus for plan participants, alongside the addition of new diversifier options.

“It used to be you would have maybe five or six large cap offerings. We are assisting many plans in narrowing the number of options in traditional asset classes while at the same time introducing better diversifiers,” Palmer explained. “Many retirement plans don’t have emerging market equities, high yield, real estate, Treasury inflation protected securities.”

The more we can drive activities into a more manageable subset of portfolios, that lends to greater efficiencies and a greater ability to add value, because we’re not spread so thinly managing thousands of portfolios

Another shift underway in the DC channel is occurring between product structures, with collective trusts and separate accounts being used more frequently.

“Collective trusts used to be the preserve of the billion dollar-plus mega plan, and across many of our recordkeeper relationships we are increasingly now using separate accounts and collective trusts in the adviser-sold marketplace, which is typically sub $50m plans,” he said.

For Wilshire, dealing with more than a dozen large recordkeepers on investment platforms, building product lineups for retirement plans, and building models from those lineups, has led to a significant push on automation, which Palmer described as “mission critical.”

He said that push has been toward mass customization, and Schwarz added that there has been a broad drive to move assets into a discretionary framework using centralized investment models.

“The more we can drive activities into a more manageable subset of portfolios … that lends to greater efficiencies and a greater ability to add value, because we’re not spread so thinly managing thousands of portfolios,” he said.

Technology headcount has been an area of investment, with around 10 staff now focused on dealing with the issue of implementing and delivering client solutions at scale.

Broker-dealers and manager research

In the broker-dealer channel, a recently implemented change was the incorporation of foreign small cap exposure into almost all of the models Wilshire manages for the channel.

This has been achieved through an all cap investing design, rather than with dedicated foreign small cap exposure, partly to deal with capacity constraint issues.

“Domestic small caps are now generally used by every investor, adviser and the like. Foreign small caps are twice the number of securities, twice the size, and far less correlated with domestic large caps than either foreign large caps or domestic small caps are. You can build better portfolios, with higher returns, which are less correlated,” Palmer said.

For core exposures such as domestic large blend, Wilshire tends to use passive exposure, with active managers who specialize in specific styles used around that.

A significant area of buildout on the manager research front over the years has been adding quantitative investment professionals with programming skills and deep finance knowledge; typically PhDs or masters in financial engineering.

In addition to conducting factor analyses to establish the sensitivity of strategies to different factors, and other manager research work, these individuals also produce much of the capital markets research that Wilshire uses as the basis for asset allocation decisions

“We take the strategic asset allocation policy that is a much longer approach, and we adjust based on capital markets research generated by this group,” Emanuel explained. “It is then assessed and evaluated by a governing body that decides how we spend our active risk budget.”