Calpers, the largest US pension fund, on Tuesday ruled out investing in some of the world's largest countries, including China, India, Indonesia and Russia, and decided against returning to Malaysia and Thailand.
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.
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.
Also banned for investment were Morocco, Sri Lanka, Egypt, Pakistan, Colombia and Venezuela.
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, Poland and Israel. The others are the Czech Republic, Hungary, Taiwan, 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 list after officials from that nation appealed a recommendation that it be dropped.
Markets in Malaysia, the Philippines and Thailand, which were stunned by Calpers' decisions to quit last year, showed no reaction to the latest one during Asian trade on Wednesday.
Malaysian fund managers said Calpers had lost its shock value, with investors more focussed on a possible war in Iraq.
In California, Calpers officials said the fund would consider a proposal that would allow for more flexibility in implementing its emerging markets guidelines.
'Watchlist' plan
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.
Calpers last year began to consider civil liberties, press freedom 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.
There is no sign yet that policy is working.
An investment in the markets that made the grade according to a composite score prepared by Santa Monica, California-based Wilshire Consulting lagged a broader measure of emerging markets since the policy took effect last April.
Market data showed the 14 markets Calpers cleared for investment have lost an average of 8 per cent in dollar terms since end-2001 compared with an average gain of more than 13 per cent 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 per cent return. The Thai market was up also up nearly 29 per cent.
Of the countries cleared for investment, the Czech Republic has been the best performing since end-2001 with a gain of 46 per cent, while Brazil, Argentina, Chile, Turkey and Israel have all posted double-digit losses.
Argument rejected
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.
The Calpers board listened with interest 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.
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.
"We are confident we will be able to provide persuasive facts that will allow them to reevaluate their ratings on the Philippines," Camacho said on Wednesday.
Thai Finance Minister Suchart Jaovisidha said the decision not to re-invest in his country would not spoil the local bourse's improving outlook thanks to higher corporate earnings and robust economic growth.
