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California and the West

Plan Seeks More Curbs on CalPERS Investing

Finances: Six nations would join list of countries off-limits to the massive state pension fund.


SACRAMENTO — In a move rife with foreign policy implications, state Treasurer Phil Angelides is floating a plan that would bar the state's massive pension fund from purchasing stocks in Egypt, Brazil, Indonesia, Malaysia, Peru and Turkey.

Angelides is calling for the investment committee of the $172-billion California Public Employees' Retirement System, of which he is a member, to strengthen its standards for investing in foreign emerging markets.

CalPERS had $2.5 billion invested in such markets as of Dec. 31.

Under Angelides' proposal, not only would a country need to meet stricter financial criteria, but it would also have to pass a screening process establishing that it offers political freedom, basic workers rights and a free press.

Angelides contends that such factors are essential ingredients in a nation's stability and capacity for long-term growth.

"If we are operating in a country where the political system is unstable and has no free press . . . then we are not in an environment where our investments are protected," he said.

CalPERS already prohibits stock purchases in 15 countries. Under the Angelides proposal, Brazil, Indonesia, Malaysia, Peru and Turkey--a member of NATO--would be added to the banned list. Egypt was already on the prohibited list, but CalPERS staff last year recommended allowing equity investments there. The Angelides proposal would cancel that.

As of the end of 1999, CalPERS had about $608 million invested in the six countries.

Additional countries could land on the list if they failed to pass the screening process for workers rights or the tougher financial standards, which are based on income distribution and exchange rate stability, among other criteria.

Angelides' proposal does allow for exceptions, such as strong indications that a nation would be a prudent investment. It also calls on CalPERS to monitor investments in emerging markets and as a shareholder to push to improve the corporate practices of companies doing business in the emerging markets in which CalPERS invests.

But the proposal also raises an array of sticky foreign policy questions.

Gary Hufbauer, a senior fellow at the Institute for International Economics in Washington, described the plans as regrettable for financial and political reasons.

"You've got a lot of countries that are potentially going to think California is not a friendly place even though the amount of investment that CalPERS holds in them is relatively small," Hufbauer said. "If they turn out to be a source of high return, pension fund members are the ones that will be hurt."

Added Gregg Wolper, an international fund analyst for Morningstar Inc.: "If one of these smaller countries does feel a pinch from this move and they associate it with . . . the state, it certainly wouldn't help their relationship. But it's also possible they would see beyond that."

CalPERS currently prohibits its investment managers from making stock purchases in Egypt, but last June the fund's staff recommended that investments in the Mideast nation be reclassified from "prohibited" to "limited exposure," which would have allowed CalPERS to buy stocks in Egypt. The change was put on hold pending a review of the fund's investment standards, however.

The treasurer's move comes after Gov. Gray Davis met with Egyptian President Hosni Mubarak in the fall during a six-nation business development tour. Davis wrapped up the visit by vowing to return to Egypt and inviting Mubarak to come to California.

Egypt, Brazil, Indonesia and Turkey are among 13 countries where CalPERS prohibits its investment managers from purchasing bonds.

Pension funds such as CalPERS invest in emerging markets because of the potential for large returns there. But, according to Angelides, the hefty returns don't always materialize.

A report prepared by his office that was presented to investment committee members this week, says CalPERS' annualized three-year returns ending Dec. 31 were minus 28.7% in Indonesia, minus 24.4% for Malaysia and minus 25.1% in the Philippines.

The CalPERS investment committee, which has been studying its standards since last spring, is scheduled to discuss the matter at its May 15 meeting.

Angelides said he will make a similar proposal later this year for the $114-billion State Teachers' Retirement System, which has $2.44 billion invested in emerging markets.

In calling for the change, Angelides also is ratcheting up the debate on whether money from public pension funds should be invested with a social conscience or solely to make the maximum return for retirees.

Already he has joined teachers groups in pressuring the teachers fund to study its investment policy toward tobacco holding. The CalPERS investment committee agreed last month to conduct a similar study at Angelides' request.

This summer, the U.S. Supreme Court is expected to decide a case involving the 1996 Massachusetts Burma Act, which sought to penalize companies that did business with Myanmar, formerly called Burma, by making it difficult for them to be awarded any of the $2 billion a year in state procurement contracts.

The move by Massachusetts was followed by a wave of other cities and states passing their own "Burma laws," all of which, it would appear, will be affected by the Supreme Court case.

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