The action was based on a report from CalPERS pension consultant Wilshire Associates, which reviewed country and financial market factors of 27 emerging market countries.
The permissible markets analysis is based on a seven-factor model defined by the Investment Committee of CalPERS. There are three country factors (Political Stability, Transparency, and Productive Labor Practices) and four market factors (Market Liquidity and Volatility, Market Regulation/Legal System/Investor protection, Capital Market Openness, and Settlement Proficiency/Transaction Costs).
Under the pension fund’s permissible equity policy, CalPERS may invest in Argentina, Brazil, Chile, the Czech Republic, Hungary, India, Indonesia, Israel, Jordan, Malaysia, Mexico, Morocco, Peru, the Philippines, Poland, South Africa, South Korea, Taiwan, Thailand and Turkey.
However, CalPERS will not permit public equity investments in China, Colombia, Egypt, Pakistan, Russia, Venezuela, and Sri Lanka. Sri Lanka already had been granted a one-year “cure” period to improve its score before exclusion from the permissible list in 2007. Sri Lanka’s 2007 score improved but still fell short of the qualifying threshold, according to a press release. CalPERS had $359,267 invested in Sri Lanka public equity as of June 30, 2006.
Wilshire Associates reported that several countries achieved slightly higher scores than in the past, including some countries that still failed to qualify. The Philippines had the greatest gain, from 2.1 to 2.3 in 2007, compared with the permissible list threshold of 2.0.
The pension fund’s list of potential emerging markets uses the World Bank’s definition of low- and middle-income countries based on per capita income, as well as the potential for investment returns. Developing countries generally include all nations in Latin America, Africa and Eastern Europe, Russia, and Asia – except for Japan, Australia and New Zealand.
The CalPERS investment threshold of 2.0 is a composite of scores ranging from 1 to 3 for country and market factors, which are political stability, including civil liberties; transparency, including press freedom and accounting standards; productive labor practices that prohibit abuse and offer legal recourse; market liquidity and volatility, including the health of the country’s stock market; market regulation, regulatory and legal protections for investors; openness to foreign investment; and the proficiency and cost of financial transactions.
CalPERS had approximately $5.2 billion invested in emerging markets as of December 31, 2006.
A copy of the Wilshire Associates report is online HERE