Some of the markets in which global custodians are rushing to set up operations are the same one into which some pension funds won't venture.
For example, trustees of the $82 billion California Public Employees' Retirement System, Sacramento, insist some of the younger markets are too risky.
Off-limits for the California fund are the markets of China, Venezuela, Hungary, India, Pakistan, Sri Lanka, Jordan, Egypt, Kenya, Morocco and Nigeria.
Wilshire Associates, Santa Monica, Calif., the general pension consultant for the California Employees', assembled the off-limits list. Wilshire gave 10 countries a high risk score for settlement proficiency. India's rank was only slightly better.
Most of those markets use little or no modern technology in settling market transactions, according to Wilshire.
Without technology, trades can take longer to settle, causing significantly greater risk in volatile markets, some investors argue.
"If I buy a security and I can't settle it for three weeks, that clearly means that I can't sell it for three weeks either, because I don't have it. So, you buy the security at today's price and tomorrow it starts to go south and you want to sell, you're hung," said Bill Imhoff, consultant with Global Opportunities Spectrum, Red Bank, N.J.
Besides the lack of technology, officials at some pension funds and Wilshire are concerned about the liquidity of securities, government market regulation, transaction costs and political risks.
The California fund's view on the risk of emerging markets is shared by most pension funds, said Stephen Nesbitt, senior vice president for pension consulting at Wilshire.
The California fund does invest in the more well-established, less risky emerging markets like Taiwan, Turkey and Greece.
Phil Franey, acting administrator for the $625 million Kern County Employees Fund, Bakersfield, Calif., said his retirement fund also avoids the "fringe" emerging markets.
Despite the risks, emerging markets are popular because they offer high investment returns and low covariance with Western securities markets. Investors favoring the newer emerging markets see the marketplace inefficient as a whole, in modern portfolio theory terms. Information about the new markets isn't widespread and investors who have information reap high rewards in investment returns.
For the almost eight years from Jan. 1, 1985, to Oct. 31, 1993, the return for the investible securities market, in U.S. dollar terms, was 70.92% for Venezuela, 57.71% for Zimbabwe and 40.22% for India, according to total investment return figures from the EnCORR analysis program of Ibbotson Associates, Chicago.
The total returns from these countries are outstanding when compared with returns of established securities.
For example, tThe total return of Germany during the same period was 14.77%.
Standard deviation during the same period however, was 68.38% for Venezuela, 48.48% for Zimbabwe, and 51.82% from India, according to the Ibbotson figures. Standard deviation for Germany during the period was 25.95%.
That sort of volatility is another factor that makes some pension fund executives hesitant to invest in such markets.