China's market is off the Calpers investment screen

Calpers to forgo China, India markets

asia.cnn.com Wednesday, February 19, 2003 Posted: 10:37 AM HKT (0237 GMT)

SACRAMENTO (Reuters) -- U.S. pension fund Calpers has ruled out investing in some of the world's largest countries, including China, India, Indonesia and Russia.

It also dealt a blow to stock markets in Malaysia and Thailand, keeping them off a list of approved markets.

In a move that set the stage for an overhaul of its emerging markets investment policies, the board of the California Public Employees' Retirement System, or Calpers, voted against stock investment in 12 developing countries.

The decision, which came in response to a proposal by California state treasurer Phil Angelides, was based on an assessment of the stability and transparency of those countries, including such criteria as accounting standards and labor law.

Also banned for investment were Morocco, Sri Lanka, Egypt, Pakistan, Colombia and Venezuela.

Tighter standards

Calpers, which has some $133 billion in assets, had been expected to put Thailand and Malaysia back on its list of approved markets, but voted for tighter standards than an outside consultant had recommended.

Under the revised standards, investment was cleared for 14 emerging markets, including South Korea and Taiwan.. The others are the Czech Republic, Hungary, Israel, Poland, South Africa, Chile, Mexico, Jordan, Peru, Argentina, Turkey and Brazil.

The fund, which has about $1.8 billion in emerging markets and can set the tone for other institutional investors, also said it would keep the Philippines on its target investment list after officials from that nation appealed a 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.

Specifically, the fund 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.

Market losses

Market data showed the 14 markets Calpers cleared for investment have lost an average of 8 percent in dollar terms since end-2001 compared with an average gain of more than 13 percent from the countries shunned by the fund.

The excluded list also featured markets that have seen out-sized gains, such as Pakistan, where the stock index more than doubled, and Russia, which posted a 42 percent return. The Thai market was up also up nearly 29 percent.

Of the countries cleared for investment, the Czech Republic has been the best performing since end-2001 with a gain of 46 percent, while Brazil, Argentina, Chile, Turkey and Israel have all posted double-digit losses.

In its report to the fund this year, Wilshire argued that Calpers' 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, arguing that the guidelines should be maintained over a longer term before their success can be judged.