Wilshire Associates has launched the Wilshire Risk Parity Index, the first in a family of risk parity indexes now broadly available in the marketplace, as a custom index solution for Public Employees Retirement Association of New Mexico (PERA).
The index family is designed to provide a more representative benchmark of risk parity strategies than solutions currently available. New Mexico PERA plans to allocate up to 10 per cent of its portfolio to a strategy that combines the benefits of the Wilshire risk parity approach with a robust passive implementation that helps significantly reduce fees. Mellon Investments Corporation (Mellon), a global investment manager with a full spectrum of single and multi-asset investment solutions, has been retained to execute a replication of the Wilshire index strategy on behalf of New Mexico PERA.
The Wilshire Risk Parity Index allocates risk equally among three risk baskets (equity, rates and inflation), while targeting a 15 per cent ex-ante volatility. Each basket contains a diverse, yet representative, set of liquid futures to capture main asset risk drivers and minimise index turnover.
A key driver for the development of the Wilshire Risk Parity Index was New Mexico PERA’s lack of available options in the marketplace for a definitive robust and pragmatic benchmark solution. The new index fills that gap by capturing main performance drivers of risk parity and is differentiated along three lines: structural, investment selection and short-term responsiveness. Structurally, an optimized variance-covariance matrix streamlines allocation to the risk drivers. Investments chosen include highly liquid representative instruments designed to improve efficiency and reduce index turnover, including U.S. Treasury Inflation-Protected Securities, which are the definitive gauge for rates and inflation, and fewer commodities than are typically leveraged in similar solutions. Lastly, while volatility is anchored to both long- and short-term measures, Wilshire collaborated with New Mexico PERA to significantly enhance short-term responsiveness via a VIX-based equity dampener.
“Identifying a viable index to integrate into policy was very important for us,” says Kristin Varela, Deputy Chief Investment Officer at New Mexico PERA. “We recognised the inefficiencies in indexing such strategies and believed there could be a more robust solution available. Identifying providers that could partner with us to turn a vision into a solution was key in this process, and we believe the work done with Wilshire and Mellon has the potential to change how investors allocate to similar strategies going forward. The index is an innovative solution that will allow New Mexico PERA to enhance its policy portfolio through a low-cost replication strategy, while also serving as a prudent index to appropriately measure the success of active management.”
Wilshire also collaborated with experienced managers in the risk parity space, including Mellon, to ensure the index accurately reflected exposures taken by active managers. Roberto Croce, PhD and senior portfolio manager for the risk parity team at Mellon, provided essential input throughout the index construction process.
“Mellon was pleased to collaborate with Wilshire, a leading index provider, to create this customised solution for New Mexico PERA,” says Roberto Croce, Managing Director and Senior Portfolio Manager at Mellon. “The Wilshire Risk Parity Index is the first index to capture the key diversification and risk management features of risk parity strategies in an investable format. This index means risk parity is finally accessible to investors with a passive philosophy or very tight tracking error constraints.”
Jason Schwarz (pictured), president of Wilshire Analytics and Wilshire Funds Management, says: “We are proud to have crafted a solution, in collaboration with both New Mexico PERA and Mellon, which addresses a clear gap in the marketplace. In keeping with Wilshire’s deep knowledge of both the pension market and complex world of providing scalable risk analytics and relevant benchmarks, we were uniquely positioned to deliver. We look forward to future collaboration with both organisations.”
