Bean-sprout fund bears home-grown risk
Is there a more annoying American state than California? I am not sure if my United States citizenship puts me in a uniquely good or poor position to judge.
The people who made bean sprouts famous, exported aerobics and were first to ban smoking in bars have got people's teeth again. Their state pension fund Calpers - California Public Employees' Retirement System - has decided to send a puritan message to four countries in Southeast Asia.
There has been almost universal irritation at Calpers' decision to withdraw most of its investment dollars from Indonesia, Malaysia, the Philippines and Thailand.
The decision was announced last week after a review of emerging markets under new criteria that take in not just pure financial issues, but 'country' issues such as a fair judiciary, civil rights, political freedom and democratic process.
Here is a particularly annoying - and Californian - aspect of the process that did not get much attention. Calpers does not just drop markets that fall below a certain absolute standard of risk, which would be more understandable.
Instead, Calpers operates on a 'relative' basis. In other words it scores all 27 emerging markets in its considered universe, then draws a line across the middle.
Those in the top tier get to enjoy California's pension bucks, those in the bottom half do not.
Thus if all 27 markets made flying leaps in corporate governance, or human rights, or any other of the countless criteria Calpers examines (bean sprout consumption?), still only half of them would be 'permissible'.
The message has a cloying American ring: 'If we're not satisfied, we'll take our money elsewhere'.
And where is elsewhere, as far as Calpers is concerned? At the moment, the fund can buy stocks in Argentina, Turkey and Peru - will those markets really provide more protection for California's retired school teachers and cops than the currently booming markets of Southeast Asia?
One has to question choosing a market where bank accounts were frozen ahead of a devaluation over ones where this has not happened.
Then there are of course the risks in one's own backyard. With the accounting storm in the US, is it really time to be lecturing markets elsewhere?
Not only did Calpers lose US$62.2 million from its ownership of Enron Corp shares, but the fund has a long-term association with the company now considered corporate evil incarnate.
Since 1993, Calpers has been in one of Enron's special purpose entities (SPE), otherwise known as 'off-balance sheet' partnerships called Jedi. Calpers put up $250 million and earned 23 per cent per annum. No wonder it was willing to stump up an additionaL $500 million in 1997 to invest in another SPE but Calpers first wanted to get out of Jedi. Enron agreed but instead of buying out the fund and damaging its earnings, the Texan energy trader reportedly found someone to replace Calpers, thus keeping $500 million in debt off its books.
We are not blaming Calpers. But maybe it should have used the similar squeaky-clean criteria it is looking for in emerging markets when it gave Enron's partnerships the investment once-over.
The rationale behind its new screening criteria is that countries that violate basic political and human rights are likely to be riskier.
Enron's record could have raised a few eyebrows as well, such as its relationship with a regional government in India over its handling of opposition to its power plant in Dobhal. It certainly raised the eyebrows at Human Rights Watch in New York which, in 1999, released a detailed report outlining human rights abuses near the plant, which were allegedly committed at the behest of Enron.
Calpers needs to learn that people in glass markets should not throw stones.