SACRAMENTO, Calif. — The CalPERS board is backing away from its controversial eligible emerging markets policy that bars investments in companies based in countries with poor human rights policies and weak investor protections.
In light of a new $500 million allocation to corporate governance funds that will invest in emerging markets not restricted by the policy and steep opportunity costs incurred during the past five years, board members at the $236.6 billion California Public Employees’ Retirement System are saying they should go back to the drawing board.
Charles Valdes, investment committee chairman, called for a review of the policy, saying he preferred engaging companies and countries on their policies, rather than avoiding them.
New board member Marjorie M. Berte also said the board should “take a step back and reconsider” the existing policy.
The policy might be reviewed at the investment committee’s April 16 meeting, according to a source who asked not to be named.
Former CalPERS staffers applauded review of the policy that consumed hundreds of hours of staff and consulting time.
“I am encouraged by statements of Chuck Valdes and other board members to review the emerging markets policy,” wrote Mark Anson — CalPERS’ former chief investment officer who now is chief executive officer of Hermes Pensions Management Ltd., London — in an e-mail to Pensions & Investments. “Emerging markets are the most dynamic part of the equity markets, where change is rapid and investors must be both prudent and flexible to achieve the best possible long-term returns.”
Mr. Anson added that CalPERS staff has a successful record in engaging companies over their governance policies.
“Let me clap for the review,” said Richard Koppes, a former general counsel at CalPERS and an attorney with the law firm of Jones Day, San Francisco. In general, investment policies should be reviewed periodically, he said.
CalPERS has maintained a permissible emerging markets list since the giant fund first invested in international equity markets 18 years ago. But former California State Treasurer Philip Angelides, backed by strong union support, pushed the board to expand the standards to include such factors as human rights and freedom of the press.
When the board broadened its permissible emerging market policy in November 2000, it had become a carefully designed test that ranked emerging markets on eight standards, from workers’ rights to settlement proficiency. Without such protection, CalPERS might be exposed to unacceptable financial risks, board members maintained.
The policy generated howls of protests from officials in countries being dropped from the list. It spawned hundreds of newspaper articles, sudden market drops and visits by both ambassadors and busloads of Filipino-Americans to CalPERS meetings.
First implementation
In the first implementation of the policy, CalPERS proposed dropping the Philippines, Malaysia, Indonesia and Thailand. The Thai stock market dropped 6.7% over two days when the news hit. However, fund officials had egg on their faces when it turned out that consultant Wilshire Associates Inc., Santa Monica, Calif., relied on outdated information on settlement procedures in the Philippines. The Philippines was restored to the list.
More recently, the board started chipping away at the policy. A year ago, former state Controller Steve Westly suggested CalPERS be permitted to invest in American depository receipts or global depository receipts of companies based in countries that failed to meet the fund’s emerging markets criteria. He and other board members voiced concern that the fund was being excluded from the burgeoning Chinese stock market.
While no action was taken, the board in December adopted a second proposal by Mr. Westly allowing the fund to invest in companies with superior social and economic records, even if their home countries fail to meet CalPERS standards. CalPERS’ external emerging market managers will have to document those investments and ensure the companies meet various international labor and investment standards.
Last month, CalPERS took a further step. It allocated $500 million to a new corporate governance program that would invest in emerging market stocks. Because any corporate governance funds will have to press portfolio companies to change their cultures, there is no reason to be bound by the emerging markets list, CIO Russell Read told the board.
That action came on top of news that the emerging markets list had cost the fund 2.6 percentage points annually in performance — or $401 million in opportunity costs — from Aug. 1, 2002 through Dec. 31.
