CalPERS Clout Carries Overseas

SACRAMENTO —  When it comes to attracting investment dollars from California pension officials, “emerging-market” nations aren’t afraid to practice a little diplomacy.

Today, Philippine Ambassador Albert del Rosario will appear before the board of the California Public Employees’ Retire- ment System to personally plead his nation’s case.

Del Rosario’s goal is to persuade the 13 directors of the nation’s largest pension fund not to withdraw the $67 million they have invested in Philippine companies.

The Philippine government is “aggrieved” that CalPERS is poised to cash out its Philippine investments, concerned that the nation’s political and financial climate is too unstable, Del Rosario said last week. That would send a message to international financial markets “that we are not an attractive investment location.” Del Rosario’s trip to Sacramento is part of a lobbying campaign aimed at preventing that from happening.

CalPERS, which has used its financial clout to press for change at U.S. companies and stock markets -- most recently in the shareholder revolt at Walt Disney Co. -- also carries considerable weight overseas. An endorsement from the giant pension fund, with its $161 billion in assets, represents a gold-standard seal of approval for so-called emerging markets such as the Philippines, which are often shunned by risk-averse investors.

“CalPERS is big because California is big,” said Jose Cerritelli, an emerging-markets analyst with Bear, Stearns & Co. “If you’re a finance minister, you’d pay attention” to whether Cal- PERS invests in your country.

Malaysia is the 12th country to make CalPERS’ list of investment-worthy emerging markets. One government official says the achievement is proof that it has successfully weathered the Asian financial crisis of the late 1990s.

“It’s an indication that investors have confidence in Malaysia and, of course, it affects the markets,” said C.K. Chua, director of the Malaysian Industrial Development Authority’s office in San Jose.

Indeed, word that a CalPERS consultant had recommended removing the Philippines from the “approved” list contributed to a 3.3% drop last week in the $55-billion Manila stock market, analysts said.

The possibility of getting bounced couldn’t come at a worse time for the Asian island nation, said Yolanda Ortega Stern, president of the Berkeley-based Federation of Philippine American Chambers of Commerce. Investors are already nervous about the upcoming May 10 presidential election pitting incumbent Gloria Macapagal Arroyo against movie star Fernando Poe Jr.

“The country is awash in cash,” Stern said, because Filipinos “tend to hoard it when there is even a hint of chaos.”

What’s more, a negative ruling by the CalPERS board could “earn more ill will” from California’s 1 million Filipino Americans and, possibly, harm U.S.-Philippine relations, Stern warned in a recent letter to the CalPERS board.

Philippine officials have expressed frustration with the complex rating system CalPERS uses to decide which emerging markets it will invest in.

Developed by CalPERS consultant Wilshire Associates Inc. of Santa Monica, the system evaluates a country according to a long list of factors. To get a passing grade of 2.0 or better, a country must give evidence of political stability, humane labor laws, a fair and functional legal system and financial transparency, which encompasses such things as consistent and reliable financial reporting by public companies.

The Philippines scored 1.46 in 2002 and was put on probation for a year. Its latest score was 1.87 -- a substantial improvement but still short of the threshold. Wilshire’s negative recommendation followed.

The Philippine government, which has been arguing with CalPERS staff about the country’s investment scores since the system was created in 2002, put on a full-court lobbying press. It hired a politically wired consulting firm, California Strategies, to talk to board members. A partner in the firm, former Democratic Assemblyman Rusty Areias, accompanied Ambassador Del Rosario and a delegation of Philippine officials to the Feb. 17 CalPERS Investment Committee meeting, where Wilshire presented its annual report on the performance of the pension’s emerging-market investments.

Del Rosario contended that Wilshire had failed to consider the latest information about changes in Philippine market regulation, judicial reform, intellectual property rights, labor practices and taxes.

“If we are looked upon objectively, and we are hoping this will happen, we would surely have a passing grade,” the ambassador insisted last week.

The CalPERS board opted to give the Philippines an extra month to back up Del Rosario’s claim. But on March 1, Wilshire Managing Director Roz Hewsenian wrote the board that “there is no change in the Philippines’ score and it remains below the 2.0 threshold for a second year.”

The Wilshire conclusions are “pretty cut and dried,” said CalPERS Investment Committee Chairman Rob Feckner. If the board concurs, as he expects it to, CalPERS will begin selling its stock in Philippine firms.

In the meantime, Feckner said, the Philippines have a good shot at getting back on the list next year if it continues to improve its investment climate. He noted that India and Thailand, which scored 1.99 this year, also are likely to be eligible for CalPERS investments in 2005.

“The whole idea is to bring everybody up to the market standard,” Feckner said.

For CalPERS, investing in emerging markets -- generally defined as fast-growing but volatile economies -- has been a success. Its $2.6-billion emerging-markets fund was its top-performing portfolio in 2003, with a return of 52.3% after fees. Annualized returns since the fund was launched almost two years ago are 34%.

State Treasurer Phil Angelides, a CalPERS board member, says the giant pension agency has done well financially while doing good for developing nations’ economies by encouraging the growth of free-market, transparent capitalism.

“Our goal is long-term positive returns,” he said. “But there’s an ancillary benefit of having countries think about what they have to do to be places where international capital feels comfortable.”

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Making the grade

The California Public Employees’ Retirement System uses a grading scale to determine which “emerging-market” nations it will invest in. Twelve countries now qualify. Four others are on probation; they will be dropped if their scores don’t reach a specified threshold after one year.

Qualify: Brazil, Chile, Czech Republic, Hungary, Israel, Jordan, Malaysia, Mexico, Poland, South Africa, South Korea, Taiwan

On probation: Argentina, Peru, the Philippines, Turkey

Source: Wilshire Associates

Los Angeles Times