Malaysian investors expecting the return of CalPERS - a major United States pension investment fund - had their hopes dashed early this week as the fund continued to shun key Southeast Asian emerging markets.

According to a Feb 19 Reuters report, CalPERS was expected to put Malaysia and Thailand back o­n its list of approved emerging markets this year but market watchers were surprised with the tightening of its policy.

Based o­n its latest directive, CalPERS will not be investing in 12 countries, a list which also included India, China and Russia.

Only 14 emerging markets worldwide qualified based o­n stringent criteria adopted by the fund last year.

CalPERS, or the California Public Employees' Retirement System, first withdrew from Malaysia, Indonesia and the Philippines last year o­n grounds that the countries ranked unfavourably in a country assessment process.

The influential fund created unease in developing nations when it added criteria such as civil liberties, press freedom and independence of the judiciary as factors to be considered in its investment policies.

Analysts have expressed concerns that other major investment funds could follow CalPERS' example.

CalPERS, which is the largest public pension fund in the US, has an estimated US$133 billion (RM505 billion) in total assets. Some US$1.8 billion (RM6.8 billion) of the fund's capital is currently invested in emerging markets.

Evaluation framework

Prior to CalPERS' decision this week, hopes were raised for Malaysia to be readmitted into the list of eligible countries after the fund's investment adviser Wiltshire Consultancy published a report recommending investments in 20 countries, including Malaysia and Thailand.

However, in an unprecedented move, CalPERS' board backed a proposal by California

state treasurer Phil Angelides to exclude stock investment in both countries along with 10 others.

But the board decided to keep the Philippines o­n its target investment list although it was not recommended by Wiltshire.

The CalPERS board was reported to have agreed to review its initial decision to drop the Philippines after an appeal was made by the republic's Finance Secretary Jose Camacho, who urged that the country's marks be improved in areas such as investor protection, political stability and judicial reform.

A check at CalPERS' website (www.calpers.ca.gov) showed its emerging market investment policy was based o­n an evaluation framework created by Wiltshire which takes into equal weightage a series of country and market factors.

The country factors that are taken into consideration include the state of civil liberties, independence of the judiciary, freedom of the press and labour standards.

The market factors, o­n the other hand, include criteria such as the level of market capitalisation, market volatility, adequacy of financial regulation and the country's trade policy.

KLSE unaffected

CalPERS' decision to stay out of Malaysia was likely to have dealt a severe blow to local fund managers who had expected the positive development to buoy the Kuala Lumpur Stock Exchange (KLSE).

According to a report last Thursday in The Star , fund managers interviewed said a comeback by CalPERS would indicate strongly Malaysia's viability as a destination for funds.

The fund managers added that should CalPERS return, the prospects for the KLSE would be better in the longer term, although the short-term effect may be less visible.

According to o­nline report of The Edge yesterday, local investors were said to be ignoring the negative effects of CalPERS' decision to stay out of Malaysia, as stocks rose in early trading boosted by strong overnight gains o­n Wall Street.

The KLSE Composite Index closed 3.51 points higher at 660.96.

The Edge report also quoted a research head as saying that investors should not over-emphasise CalPERS' move since it was not a major investor in the KLSE.

CalPERS began looking beyond traditional economic factors and considering additional criteria such as civil liberties and press freedom last year after board members argued that investing in stable countries with liberal practices would yield better long-term returns.

However, the fund was reported to have said it would consider another proposal to allow more flexibility in implementing the emerging markets guidelines after its investments under performed since the policy came into effect in April last year.

CalPERS' adviser, Wiltshire, was also said to have argued that the policy had limited the fund from the benefits of diversification and concentrated its "exposure to the more risky economic sectors" of the market in which it had a stake.