CalPERS staff recommended adopting a country selection policy for investing in emerging-market debt based on credit ratings issued by major ratings agencies. Staff required that debt issued in developed markets carry a minimum rating of BB-, while local-currency debt and debt issued by local governments and corporations carry a higher BBB- minimum rating as an extra precaution.
Staff of the $186 billion California Public Employees' Retirement System, Sacramento, along with consultant Wilshire Associates agreed that deciding which country's debt to invest in is significantly different from how CalPERS picked its eligible emerging-markets list for equities. Unlike equities, independent agencies rate foreign debt for default risk and closely follow developments in those markets. Also, the major ratings agencies — Standard & Poor's, Moody's and Fitch — look at various factors, including political risk, transparency and labor practices, in evaluating credit risk, staff and Wilshire argued.
In a memo to CalPERS CIO Mark Anson, Rosalind Hewsenian, managing director at Wilshire, noted that seven countries that do not pass muster for the fund's approved emerging-market equities list would qualify for globally issued debt: China, Colombia, Egypt, Indonesia, Morocco, Peru and Russia.
Currently, CalPERS has $496 million invested in emerging-market debt, but that figure could increase substantially under current guidelines. For example, emerging-market debt investments could increase to $3 billion if the fund's internally managed sovereign portfolio held its emerging-market debt steady at 1.8% while externally managed non-dollar portfolios increased allocations to emerging-market debt to their maximum limit, a staff memo said.
The CalPERS investment committee will consider the recommendation at its June 13 meeting.