Philippines Could Be Off CalPERS List Again

February 11, 2003 ( - The nation's largest public pension fund could be rethinking its approach to some emerging market investments, based on its consultant's recommendations.

Wilshire Associates has recommended that the $133 billion California Public Employees Retirement System (CalPERS) put Thailand and Malaysia back on its list of approved emerging markets investments in the wake of improved regulation, but the consultant has recommended dropping the Philippines due to political instability.  

While Thailand’s market regulation has improved, market liquidity/volatility, transparency and transaction costs still posed a challenge for the nation, according to Wilshire.   Malaysia still has problems with transparency, labor practices and capital markets openness, but the consultant raised the country’s rating for political stability, market liquidity/volatility, regulation and settlement proficiency.

Second Thoughts

Last February the fund announced a decision to withdraw investments from the Phillippines, based on Wilshire’s determination of that nation’s stock market efficacy.   That stance was reversed in May, after a CalPERS review determined that the Philippine stock exchange could, in fact, settle stock exchange transactions within three days of the trade date (see  Philippines Back on CalPERS List ).

Next Monday the CalPERS board will also decide whether to add Morocco, Sri Lanka, Colombia and Jordan to the list of those markets in which it currently invests some $1.8 billion.

A year ago the pension fund’s board adopted a new permissible country review process that takes into account broad financial factors as well as transparency, political stability and labor practices/standards (see  New Emerging Market Standard Emerges at CalPERS ).   At that time the fund shook markets in the Philippines, Thailand, Indonesia and Malaysia, when it followed  Wilshire’s advice to divest from those markets.

Under Diversified?

So far, the new policy hasn’t paid off for the fund.   The markets that made the grade last year have underperformed since the new policy took effect in April of last year, according to Wilshire.   An investment in CalPERS’ list of approved emerging markets lost 19.8% between last April, when CalPERS instituted the new policy, and the end of the year – compared with a 16.4% loss for a fully diversified emerging markets basket, according to Wilshire.  

By limiting the number of countries permitted for investment, CalPERS appeared to have lost some of the potential benefit of diversification, the consultant noted in its  report .

Cut Offs

Wilshire reviewed 27 countries and deemed investment permissible in 20 of them, including Argentina, Brazil, Chile, Colombia, Czech Republic, Hungary, India, Israel, Jordan, Malaysia, Mexico, Morocco, Peru, Poland, South Africa, South Korea, Sri Lanka, Taiwan, Thailand and Turkey.

China, Egypt, Pakistan, Indonesia, Russia and Venezuela were considered but not approved.   Among the markets recommended for exclusion, most received their lowest scores for country-specific factors except for the Philippines, which was worse on the market side of the equation, both for political instability and market practices.