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Style Analytics
Compass
allows users to evaluate manager style using both holdings-based and
returns-based analysis. Wilshire defines four primary investment
styles for domestic equities: large growth, large value, small growth
and small value. Additional styles include mid-cap growth and value,
micro-cap, and also large, mid-cap, and small-cap core which combine
value and growth.
Style
risk is defined as the difference between a portfolio’s style
and that of its benchmark. The larger this style difference, the
greater the variance in returns between the portfolio and its
benchmark, as style differences explain the majority of the return
difference between a manager and their benchmark. The relative
performance of a portfolio with a significant style bias will depend
largely on whether or not the specific style has performed well.
Rarely do managers provide enough alpha (risk-adjusted excess return)
to overcome a bias to an under-performing style.
Holdings-Based
Style Analysis
Wilshire
has developed a proprietary, holdings-based approach to equity style
measurement known as Wilshire Style Metrics. Size and Growth/Value
scores are based on the degree to which a stock is large or small and
the probability that the security is either value or growth given its
financial characteristics. The Style Metric scores for a portfolio
are calculated as the weighted average of the individual security scores.
The
style map below depicts the style of several market indices and four
sample equity products, over the three year period ending
March 2004.
The
Style Drift analytic allows users to monitor changes in manager,
index and/or composite portfolio style over time.
Returns-Based
Style Analysis
Compass
users can also perform returns-based style analysis using Wilshire's
multi-factor attribution model. The attribution model calculates the
product's average exposure to particular investment styles over time
(i.e. the product's normal style benchmark).
The
graph below indicates that over the past five years, Aronson Johnson Ortiz product had an average exposure of
53% to small value, and 47% to large value. The graph legend
shows this product had a style-adjusted alpha (excess return) of
9.06% over this time period. The risk of 6.48% represents the
product's tracking error to the style adjusted, optimal benchmark
depicted in the graph. The R2
measure of .96 indicates that the normal style benchmark explained
96% of the manager's return variability.
While
both holdings- and returns-based style analysis can be good tools
for evaluating equity manager style over time, holdings-based
analysis is more rigorous and a superior tool for detecting style
drift in a timely fashion.
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