There are no overriding institutional restrictions preventing pension funds from getting exposure to Central Europe and Russia, according to Howard Crane, a senior consultant with The Frank Russell Co., Tacoma, Washington.
Mr. Crane says local market infrastructure is sufficient throughout the more developed countries of the region.
Even restrictions that subject pension funds to the prudent expert rule wouldn't disqualify investment in the region. A fund manager behaving as a prudent expert, though, would be required to evaluate the risk-return profile of the investment within the context of emerging markets.
Because pension managers rarely invest directly in foreign markets -- General Motors Corp. and GE Capital are notable exceptions -- most pension sponsors rely on outside managers for their regional exposure.
"A lot of our clients have invested in Central Europe through managers they retain, who address the legal issues and transactional issues, such as custody of assets and how trades clear," said Bruce Kosakowski, with the pension advisory firm Watson Wyatt Investment Consulting, Boston.
One reason for lack of pension fund activity in the region is that, given their funds' low weightings and the region's volatility, there is very little for board members to gain from the exposure, and much to lose personally if their investments head south, said Howard Golden, manager of the New York-based Central European Privatization Fund.
If a fund typically invests 30% of its investments overseas, for example, and 10% of that in emerging markets, and then only 5% of the emerging market portfolio in Central Europe and Russia, then only 0.15% of the entire fund would be invested in the region.
Despite the fact that investing in Central Europe should provide uncorrelated diversification, said Mr. Golden, "a lot of board members are there to sponsor their own best interests and not those of their shareholders."