Calpers Will Pull Out Of Some South Asian Mkts

By Sarah McBride

AWSJ 02/22/2002

Just when most investors thought it was safe to get back into Asian waters, a giant U.S. pension fund is crying, "Shark."

The California Public Employees' Retirement System, or Calpers, said it would pull out of Indonesia, Malaysia, the Philippines and Thailand because those countries don't meet its new investment guidelines. Those guidelines now take into account political stability, labor standards and transparency, including a free press and good accounting.

The move could affect emerging Asian markets over the long term by discouraging other big pension funds that currently aren't in the region from investing in the countries blacklisted by Calpers. Although Calpers's action upset many investors, it also could accelerate an already growing trend toward better corporate governance in Asia.

In a statement, Calpers said it believes its review is "the first of its kind ever done by a public pension plan that looks beyond traditional economic factors and considers basic democratic principles."

The markets in three of the four countries fell Thursday in reaction, not so much on what Calpers might do on its own, but because of the trend it might set among other big fund managers. Calpers is considered "a market leader that does things very well," said Stewart Aldcroft, Hong Kong-based director of Investec Asset Management. "They are the standard others aspire to."

Bangkok's main stock index suffered the most, closing down nearly 4%. Indexes in Kuala Lumpur and Manila each lost less than 1%, and Jakarta managed to eke out a tiny gain of 0.2%.

Calpers, the U.S.'s largest pension fund with some $151 billion under management, made it clear the pullout was subject to revision as the underlying markets changed. The investment committee voted 9-3 to accept the new
guidelines, indicating the dissenters might soon push for reinclusion of the shunned countries.

Calpers also said it would exit the four countries gradually. Helping to pick up the slack from the Asian divestments will be Hungary and Poland, two emerging markets in which Calpers hasn't previously invested.

While Calpers's assets in Asia are small -- believed to be well under $100 million each in Indonesia, the Philippines and Thailand, with somewhat more than that in Malaysia -- the fund recently had appeared to take a somewhat more bullish view on the region.

Late last year, Calpers announced a $75 million investment in a Thai private equity fund. At the time, William Crist, the head of Calpers's administration board, said Asia's weak economic condition had "created an unprecedented investment opportunity." He added that the fund would allow Calpers "to participate in the renewed growth of Thailand's leading enterprises while securing a good long-term investment for our members."

A Hong Kong-based investment officer at Lombard Investments Inc., which co-sponsors the fund, said he didn't yet know the fate of the Calpers pledge. The fund hasn't yet started investing the $250 million pledged.

Had Calpers built on its emerging-Asia investments, the inflows might have encouraged other big funds to move into the same markets, fund managers said, further lifting exchanges that already have done well this year. However, Calpers's withdrawal is unlikely to encourage funds already in those markets to pull out, they said.

 

In 1999, Calpers invested $75 million in Carlyle Asia Partners, a fund run by Carlyle Group of the U.S. David Tung, Singapore-based head of investor relations, said Carlyle concentrated on northern Asia, and the fund had no investments in the four countries singled out by Calpers. Calpers also owns a 5% equity stake in Carlyle.

Calpers's apparent about-face puzzled some investors. "I'm rather surprised by the move, particularly in the context of what is clearly an improving scenario for several of these countries in Southeast Asia," said Ray Jovanovich, head of institutional asset management at Credit Agricole Asset Management in Hong Kong and a long-time investor in Southeast Asia. "I would argue that we are seeing improvements in working conditions and in pay and other benefits."

While some fund managers predicted the move by Calpers would encourage countries to speed their reforms and companies to improve corporate governance, others said it would harm companies that were trying to do a good job.

"There's an element of encouraging best practice as well as punishing offenders," said Jeremy Hall, a Tokyo-based fund manager with Henderson Investors, widely regarded as one of the leading practitioners of socially responsible investment.

If Calpers's steps "triggered more funds to pull out of these countries, it could undermine the development process further and foster isolationism," said Tessa Tennant, Hong Kong-based chairwoman of the Association for Sustainable and Responsible Investment in Asia. "The policy could generate real resentment."

Calpers's report detailing the changes shows that Indonesia ranked poorly in areas such as political stability, transparency and labor practices, along with market liquidity, market regulation, the legal system and investor protection.

In Malaysia, the problems were political stability, transparency and labor practices. In the Philippines, Calpers cited market-related factors such as liquidity. In Thailand, the weaknesses were a combination of transparency and market-related factors such as liquidity and transaction costs.

The Philippines' finance secretary told Reuters News Service that the country's economic prospects were improving, and that he hoped Calpers would reconsider its decision. In Malaysia, the government's National Economic Action Council said other investors wouldn't be swayed by Calpers's decision.

In Thailand, a finance-ministry official, Sathit Limpongpan, said the country would try to sort out the differences with Calpers. A spokesman for the Thai government said that Thailand had good social policies and that the giant fund's managers had "no grounds to sell off its assets."

Others had suggestions for Calpers. "They should come to these countries and tell them what they are doing wrong rather than just pulling out," said Lee Leok Soon, executive director of the Malaysian Institute of Corporate Governance.

Emerging markets make up only about $1 billion of Calpers's total investments, so its pullback won't be significant in percentage terms. But the move is expected to play well at home, where Calpers already has a high reputation for ethical investment. In addition, Wilshire Associates, the Santa Monica, California, investment consultancy that drew up the new guidelines, could win attention for its work.

Calpers uses a complicated system that ranks 27 emerging markets on "country factors," such as political stability, and "market factors," such as market regulation. Malaysia was ranked 24th out of 27 on country factors, and the Philippines was 24th out of 27 on market factors. The worst performers were countries that Calpers already doesn't invest in, such as Russia and Venezuela.

For the poor performers, there is a silver lining. "It gets the [political and transparency] issues on the table," said Ms. Tennant of the responsible-investment group in Hong Kong. And it "makes governments sit up and realize that they can't ignore this dimension of corporate activities and the functioning of civil society."