MAKING WAVES; MAKERS OF THE WILSHIRE 5000 INDEX TAKE ON - AND BEAT - THE S&P'S 500.

Byline: Deborah Adamson Daily News Staff Writer

Like waves at high tide that roll with ever increasing strength onto the shores of Santa Monica beach, Wilshire Associates is striving to make inroads directly into the world of the individual investor.

Who?

A recognized name among institutional investors - Wilshire's clients include the California Public Employees Retirement System, the nation's largest retirement fund - the company behind the Wilshire 5000 Index is nonetheless not a household brand like the Fidelitys and Vanguards of the individual investors' world.

But if Santa Monica-based Wilshire plays its ticker tape right, that could very well change.

``We want to build a family of funds that combines our quantitative strategy . . . with a focused style to meet the needs of specific types of investors,'' said Hal Reynolds, vice president of Wilshire's asset management group.

Wilshire's shift in strategy comes at a time when the growth of traditional pension plans, in which employers direct the investment process, is being outpaced by defined contribution programs such as 401(k) plans in which workers make the call. As such, there's less need for institutional services upon which Wilshire has built its reputation over 26 years.

``Institutional money has not been a growth area,'' said Geoff Bobroff, president of Bobroff Consulting, a Rhode Island mutual fund consulting firm.

That's why Wilshire has started to offer its quantitative style of analysis and other services to individuals where before it was only accessible to institutions such as large pension funds. It's banking on four stock funds that it hopes will catch the public's eye and money: Wilshire Target Large Company Growth, Large Company Value, Small Company Growth and Small Company Value.

But unlike other funds that attract investors by trumpeting their latest returns in big, splashy ads, Wilshire executives for now say that's not their style.

``We don't pitch performance,'' said Tom Stevens, who co-manages the four equity funds. ``We believe in structure and discipline.''

That's not to say performance is shabby.

One no-load fund in particular, the Wilshire Target Large Company Growth, has beaten the Standard & Poor's 500 index every year since its 1992 inception, according to Lipper Analytical Services, a New York fund-ranking service.

The fund has an annual total return of 19.40 percent since it was founded in 1992, compared with 13.06 percent for the S&P's 500. It also beat the index in the five-, three- and one-year performances. From Dec. 31, 1997, to Oct. 22, 1998, the fund has returned 18.76 percent vs. 12.48 percent for the index.

That puts the fund in a rare category, since the market has beaten 90 percent of mutual funds in the past few years, said Peter Walker, publisher of Money Manager Review in San Francisco.

Stevens said the secret to the fund's performance is sticking to its investment strategy: ``It's not because we're brilliant, or because we have stock-picking skills that are unique and different.''

He said managers that focus on performance tend to deviate from strategy to chase the newest trends and time the market - but both can hurt fund returns.

``Performance is continually held back by excessive trading and flip-flopping. They chase performance and jump on the bandwagon'' of the most popular stocks, he said. But ``it's difficult to determine when to shift and very difficult to determine when to get to cash. Very few people can make that call accurately.''

That's why Wilshire's managers don't do it. Instead, they rely on a quantitative model they've developed to identify the best investments.

First, they take the 2,500 largest companies in the Wilshire 5000 Index, which actually has ballooned to reflect 7,000 U.S.-based companies, and divide them into the top 750 for large stocks and the next 1,750 for smaller stocks.

These two groups are screened to identify the most promising companies. The Large Company Growth funds invest in more than 200 firms in the group of 750.

``We eliminate companies that are weak financially or have weak earnings,'' Stevens said.

He and co-manager David Borger look for companies that better the S&P's 500 in various measures, such as return on equity, and earnings and sales growth. But they don't interview company management because a manager's subjectivity can be his or her worst enemy.

``It's easy to be swayed by a good story, and they all sound good,'' Borger said.

That's a difficult lesson Stevens has learned.

In the early 1990s, the company's investment model signaled a sell on IBM, which had hit the $100 range. But Stevens, who had followed IBM since his early days as a bank analyst, loved the company and didn't agree.

``Earnings were deteriorating, and the price was coming down. The company wasn't growing,'' he said. ``But it had been everyone's growth stock for a decade.''

So the company's funds sold the stock, but Stevens bought some for himself and his family. Soon after, IBM plunged to low as $40 a share.

For Wilshire's funds, the numbers tell the story.

The company's decision to invest in a greater number of stocks than the usual 50 or 60 by other funds lets its funds take on index-fund qualities as well.

``It's a hybrid or intended to be an enhanced index product,'' Bobroff said. ``(Wilshire's funds) are passive investors for the most part. However, this (strategy) has been successful for certain managers like Vanguard.''

But the challenge remains for Wilshire's funds to gain wide acceptance in a universe of more than 7,200 mutual funds.

``It's an uphill battle for new entrants,'' Bobroff said.

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Photo

Photo: (Color) Tom Stevens, left, and David Borger co-manage equity funds for Wilshire Associates, one of which consistently beats S&P's 500 index.

David Sprague/Daily News