âThe Wilshire 5000 was developed in 1974 to provide an accurate, up-to-date reflection of the combined holdings of all U.S. equity money managers and to serve as the ideal tool and benchmark for institutional investors to evaluate their managers,â said Dennis A.
Tito, founder, chairman and chief executive officer of Wilshire Associates and the individual credited with developing the Wilshire 5000. âThe initial definition of the Wilshire 5000 stated that all U.S. listed common stocks were to be included in the index. Common stocks were deemed the best way to ensure that the securities were equity investments, not equity proxies or equities from other markets such as ADRs. Though U.S. REITs were created by Congress in 1960, relatively few existed before the passage of the Tax Reform Act of 1986 permitted REITs to both own and manage their properties as vertically integrated companies. This set the stage for a wave of equity REIT IPOs in the mid-1990s,â Tito added.
Tito noted that at the time, previously listed real estate operating companies were changing their corporate structure to something other than common stocks. These investment trusts had equity exposures similar to their former operating company stock that was not represented elsewhere. This corporate equity structure differed from common stocks primarily because of incentives in the U.S. tax code which made them exempt from paying corporate trust taxes.
âIn 1991, Wilshire evaluated the inclusion of these equity styled investment vehicles in the Wilshire 5000 and determined that they needed to be included,â noted David Hall, senior managing director of Wilshire Associates and head of Wilshire Equity Analytics, a division of Wilshire Analytics, the firmâs investment technology business . âExtending the logic to limited partnerships, it was natural to enhance the composition of the Wilshire 5000 from all listed common stocks to all listed equities.â
Accordingly, REITs and MLPs became part of the index effective December 31, 1992. However, REITs and MLPs are treated differently when it comes to taxes and associated paperwork. Though there are a number of ways for a tax-free entity to invest in MLPs without jeopardizing its status, most choose not to, deciding it is not worth the risk, or simply to avoid the administrative issues involved.
âAs part of the research that led to the decision to exclude these partnerships from the Wilshire 5000, the December 31, 2008 holdings of all U.S. equity portfolios from the Wilshire CooperativeSM system were evaluated to measure the institutional investorâs use of MLPs,â said Robert âBobâ Waid, vice president, Wilshire Associates and head of Wilshire Index Research. âOf the 4,025 analyzed portfolios, fully 10 percent contained at least one MLP. Interestingly, of the 432 portfolios with MLPs, 333 included only one MLP. A similar result is found when looking at the 2,409 institutional portfolios with under 100 U.S. equity investments,â according to Waid.
Removing the MLPs from the Wilshire 5000 float and sub-indexes with the September 18, 2009 semi-annual rebalance minimizes the effects on the Wilshire U.S. size and style indexes.