STAKING out the moral high ground in Asia has been expensive for the California Public Employees' Retirement System (CalPERS). It kept the largest US pension fund out some of the world's top performing markets in 2002.
A year ago, CalPERS pulled out of stock markets in Indonesia, Malaysia and Thailand, citing concerns about corporate governance, political instability and labour standards. CalPERS' holier-than-thou withdrawal rankled many. The US$130 billion fund felt that emerging-market countries not on its investment list would see it “as an incentive to improve” things.
But the biggest losers were not the economies CalPERS vacated – they were its own shareholders. The fund's investors missed out on last year's 17 per cent surge in Thai stocks and an 8 per cent jump in Indonesian shares. Malaysian stocks fell in 2002, but their losses paled in comparison to declines in the US, Europe and Japan.
CalPERS announced last week that it would continue avoiding economies like Malaysia and Thailand. Odd thing, considering that the adviser that helped CalPERS make its decision a year ago – Wilshire Associates Inc – thinks that it should again buy Malaysian and Thai shares. Members of the CalPERS board say it is too soon to reverse its investment plans in Asia.
“What we do here has serious implications for these countries,” Sidney Abrams, a member of the fund's board, said last week. (Abrams is an actuary who has more than 30 years' experience providing actuarial and consulting services to large multi-employer Taft-Hartley pension, health and welfare, and other employee benefit plans in California and other Western states).
That is CalPERS's right, but its board members should know that some in Asia are buzzing about how the fund is becoming a giant, contrarian indicator. If it opts not to invest somewhere, that market may actually be a buy. And so it goes that markets in countries on CalPERS's investment list might best be avoided.
“The Philippines, which was included, was down” last year, said Anton Periquet, managing director of Deutsche Regis Partners Inc, the Philippines' biggest broker. “Malaysia and Thailand, which were thrown out, were up. What does that tell you?”
The fund's handling of the Philippines only buttressed the perception that it is a contrarian indicator. CalPERS initially announced that it was pulling out of the Philippines, too. A few months later, it decided to stay invested here, while still leaving Indonesian, Malaysian and Thai markets. The Philippines, as fate would have it, was the worst performing of the four last year. Its stocks fell 16 per cent.
Investors who piggybacked on CalPERS' market calls in 2002 probably are not happy, either. Paying attention to the “smart money” and doing what it does is one of the oldest practices in investing.
And when the largest US pension fund writes off a country, markets tend to listen. At this point, they may wish they had not.
Ditto for some of the fund's corporate investments. Even as CalPERS hoped that abandoning some markets would instil a sort of discipline in developing economies, it had no qualms investing in companies like WorldCom and Enron that proved to be poster-children of bad corporate governance.
CalPERS would have been much better off investing here in Asia – even in nations it says lack transparency and stability – than in WorldCom. CalPERS had some US$565 million on investments in the company. Where exactly was the transparency there? Even though Wall Street analysts wondered for some time if WorldCom was cooking the books, CalPERS and others invested giddily.
Asia, for obvious reasons, watched the Enron, WorldCom and Global Crossing debacles with a mix of fascination and satisfaction. Fascination that some of the world's most celebrated companies turned out to be houses of cards; satisfaction that the US suddenly looked a bit hypocritical.
For years, the US lectured Asia about crony capitalism, dodgy corporate governance and poor transparency. The criticism reached a fever pitch during the 1997-1998 Asian crisis. The Treasury Department and the International Monetary Fund wagged their fingers at governments in Bangkok, Jakarta, Kuala Lumpur, Manila and Seoul. Not anymore.
Investors in Asia also are caring less about what CalPERS does. Unlike the situation a year ago, when the fund's pullout shocked markets, news that it will not change course is not swaying investors. Folks who used to think that CalPERS was on top of economic trends in Asia say they are not going to be influenced this time. It has not escaped investors that CalPERS seems to be looking at Southeast Asia in pre-1997 terms. In the years before and after the Asian crisis, investors grouped the region's economies together.
More recently, however, markets have viewed them independently. Even if investors steer clear of Indonesia or Malaysia, they may be putting money in Thailand. Or investing in Manila, if they are not impressed with Bangkok's policies.
CalPERS seems to be sticking with the lazy-person's way of understanding international economies. Anyone looking for a reality check on events in Asia might be wise to look beyond CalPERS's views. With or without its money, emerging-economy stocks in Asia may rise more this year than the most developed markets. – Bloomberg