UPDATE 1-Calpers to bar investment in Malaysia, Thailand

reuters.com Tue February 18, 2003 05:16 PM ET (Adds background, details, quotes, byline)

By Michael Kahn

SACRAMENTO, Calif., Feb 18 (Reuters) - Calpers, the nation's largest public pension fund, on Tuesday ruled out stock investment in Malaysia, Thailand, India, Russia, and eight other countries and proposed an overhaul of its emerging market policies.

The board of the California Public Employees' Retirement System, or Calpers, backed a proposal by California state treasurer Phil Angelides that excluded stock investment from a total of 12 countries spanning the globe from Colombia to China based on a numerical scoring by an outside consultant.

The countries also include Morocco, Sri Lanka, Egypt, Pakistan, Indonesia and Venezuela.

Calpers, which has some $133 billion in assets, had been expected to put Thailand and Malaysia back on its list of approved emerging markets, but voted for tighter standards than its consultant had recommended. Under the revised standards, investment would be cleared for 14 emerging markets, including South Korea, Poland and Israel. The others are the Czech Republic, Hungary, Taiwan, South Africa, Chile, Mexico, Jordan, Peru, Argentina, Turkey and Brazil.

In another twist, the fund, which has about $1.8 billion in emerging markets, also said it would keep the Philippines on its target investment list pending a further review after officials from that nation appealed the recommendation that it be dropped.

Calpers officials also said the fund would consider a proposal that would allow for more flexibility in implementing its emerging markets guidelines.

'WATCHLIST' PLAN

Specifically, the fund, which has a reputation as a watchdog for corporate governance, said it would consider adding countries to a "watchlist" before it sold off from those markets, allowing governments to respond to perceived problems and saving transaction costs.

Calpers last year began to consider civil liberties, press freedoms and political risk in making investment decisions after board members argued that investing in more stable countries with liberal practices would yield better long-term returns.

Its investment in the markets that made the grade according to a composite score prepared by Santa Monica, California-based Wilshire Consulting underperformed a broader measure of emerging markets since the policy took effect in April last year.

In its report to Calpers this year, Wilshire argued that the policy had limited the benefits of diversification and concentrated the fund's "exposure to the more risky economic sectors" of the markets in which it did have a stake.

While Wilshire had argued for allowing investment in a total of 20 emerging markets, the Calpers board opted to continue its tougher standard under which just 14 qualified.

"I don't see any compelling reason right now to change the policy," Angelides said.

But the Calpers board listened to a presentation from Philippines Finance Secretary Jose Camacho in which he argued that the country deserved better marks in areas such as investor protection, political stability and judicial reform.

Calpers had initially ruled out investment in the Philippines last year, only to reverse course after admitting that decision had been made on the basis of mistaken information about market settlement practices there.

"I do not want to cast any clouds on the Philippines," said Angelides.

Calpers' investment committee will reconsider how to treat lagging countries on its list and the status of the Philippines when it meets again in 60 days.