Others may follow CalPERS’ return

BY K.P. LEE

FUND managers are confident that the return of CalPERS to Malaysia, should it decide to do so at its meeting next week, will boost the KLSE and may encourage other large global investment funds to consider Malaysia in their investment horizons. Current geopolitical concerns, however, could cloud the issue in the short term, they said. 

Michael AuyeungThe CalPERS decision, if favourable, would follow recent reassessments of Malaysia by a number of other global funds and rating agencies such as Standard & Poor's and Moody's which have upgraded their weightings and outlook on Malaysia following its success in tackling the Asian financial crisis of 1997–98 and its economic recovery. 

Before the Asian financial crisis, foreign funds had accounted for an estimated 20% share of the equities held in the KLSE. After the crisis, foreign holdings fell to as low as 3% to 4 % before improving to some 7%–8% now. 

“Obviously, if CalPERS makes the decision to reinvest in Malaysia, it would be a vote of confidence for the local market,” said Michael Auyeung, chief executive officer of Pacific Mutual Fund Bhd. “But any real impact will be seen in the medium to longer term.” 

The California Public Employees’ Retirement System, or better known as CalPERS, is the world’s second largest and America’s biggest pension fund with assets totalling US$132.6bil. It exited the Malaysian market a year ago in February 2002. 

Yeoh Keat SengA CalPERS board meeting scheduled for Feb 18 will decide whether to act on a report by its investment adviser Wilshire Consulting, which has recommended a return to certain emerging markets, including Malaysia and Thailand, deemed to have met the fund's investment criteria. These criteria include country and market factors such as political stability, transparency and capital market liquidity and openness. 

Fund managers contacted by StarBiz yesterday were generally optimistic that a positive decision by CalPERS would result in improved sentiment on the KLSE. 

“The move is positive in terms of sentiment. It shows that we are deemed to be investment grade by foreigners again,” said CMS Dresdner Asset Management Sdn Bhd executive director Raymond Tang. 

Thomas Yong of Fortress Capital said a decision in favour of Malaysia would stimulate foreign interest in the country as a viable destination for funds headed for this region. 

The fund managers, however, cautioned that even if CalPERS did return to Malaysia, the impact may not be immediate and prospects for the KLSE would be better in the longer term. 

”There will not be an immediate cash inflow although there might be some short-term support for the market,” said Pacific Mutual’s Auyeong, who said the positive news of CalPERS’s return could be mitigated by the current geopolitical concerns of an impending war in Iraq. 

Commerce Trust Bhd chief executive officer Yeoh Keat Seng said he expected the impact of CalPERS’s return to be “negligible” as the amounts invested may not be significant. He expected not more than RM100mil to come in. 

CMS Dresdner’s Tang agreed that the initial investment of CalPERS may not be large. “In the Philippines, for example, it had only invested about US$30mil (RM114mil),” he said. (The Philippines is one of the emerging markets that Wilshire has recommended to be dropped in favour of Malaysia and Thailand.) 

Tang added that, as a comparison, Valuecap Sdn Bhd’s commitment of RM10bil (US$2.63bil) in new money to the local equity markets already far exceeded the entire CalPERS emerging markets portfolio of US$1.8bil. 

Nevertheless, the fund managers were upbeat about the positive signals for investing in Malaysia should CalPERS return.  

“It helps to build a credible case for investing in Malaysia,” said Tang. “We are aware of a number of other foreign funds that have returned to or increased their weightings in Malaysia, although I cannot disclose their names.” 

Fortress Capital’s Yong said although the outlook for the KLSE had been muted since last year, selling pressure was easing off, especially for large cap stocks. “This indicates that the fear factor is not there,” he said. 

Yong was confident that when stability returned after resolution of the Iraq crisis, the KLSE would not miss out on the rally in the regional stock markets. 

Last year CalPERS stunned Asian markets when it followed Wilshire's recommendation to divest from a number of emerging markets, including Malaysia. It adopted rigorous new standards that included consideration of the degree of civil liberties, press freedom and political risk after board members argued that investing in more stable countries with liberal practices would provide better returns over the long term. 

However, the markets that met their investment criteria had actually underperformed between last April, when CalPERS instituted the new policy, and the end of the year. An investment in CalPERS’ target list of emerging markets lost 19.8% over that period, compared with a 16.4% loss for a fully diversified basket of emerging markets. 

Wilshire said limiting the number of countries permitted for investment appeared to have restricted CalPERS' ability for diversification. 

The consultancy's latest report recommends investments in 20 countries – Argentina, Brazil, Chile, Colombia, the Czech Republic, Hungary, India, Israel, Jordan, Malaysia, Mexico, Morocco, Peru, Poland, South Africa, South Korea, Sri Lanka, Taiwan, Thailand and Turkey. Among the countries excluded were China, the Philippines, Pakistan, Indonesia, Venezuela, Russia and Egypt.