Building a manager-of-managers portfolio is not simply a matter of choosing products with the highest alpha potential. We need to simultaneously consider the alpha of the managers, the correlation and risk among alphas, and the risk characteristics of the asset allocation benchmark. Wilshire understand the technique of optimizing all these factors to produce portfolios that seek to maximize alpha for a given level of active risk. Wilshire employs a dedicated team of portfolio managers to ensure each portfolio is taking full advantage of its return and risk forecasts. Each portfolio manager regularly tracks each fund using advanced proprietary tools to identify changes in portfolio holdings that seek to improve future performance. The portfolio manager also monitors risks using Wilshire’s market-leading risk analytic tools.
The foundation of our multi-manager structure is our manager research expertise. The idea that past performance does not predict future results is an industry truism. To understand a manager's skill requires the ability to strip out returns attributable to the market, style effects and other factors. What remains is alpha. Wilshire's manager research process is designed to identify the attributes of managers who are able to produce alpha consistently on a forward-looking basis.
Our process screens approximately 5,000 products based on quantitative factors to arrive at a list of approximately 2,000 managers. These are subject to further qualitative evaluation. Wilshire's manager research team conducts rigorous in-person interviews with more than 1,500 managers each year. The result is an evaluation of six key factors: organizational stability, information gathering, forecasting, portfolio construction, implementation and attribution.
The qualitative evaluation provides a score for each manager's long-term alpha potential. Wilshire also uses quantitative techniques to forecast each manager's expected short- to medium-term alpha. We call this measure the Leading Performance Indicator (LPI). LPI uses advanced econometric techniques to transform portfolio and return characteristics into a numerical score indicating potential alpha. We also use LPI to provide early signals of performance problems.
We begin with a wide universe of managers encompassing all asset classes. We then employ qualitative and quantitative analysis and assign scores for each candidate to arrive at a short list of managers we believe will potentially generate the highest expected alpha for each investment product. These multi-manager portfolio construction techniques can be deployed through Wilshire's Fund Management Asset Allocation Program services.