CalPERS Adopts Emerging Market Debt Investment Policy - Pool Of Five Investment Managers Added

The California Public Employees’ Retirement System (CalPERS) has adopted a policy for investing in emerging market debt that is based on credit ratings issued by major credit rating agencies. CalPERS’ debt investments in emerging markets will hinge on ratings issued by Moody’s, Standard & Poor’s and Fitch rating agencies, which look at country economic factors as well as political risk, transparency and labor practices in evaluating credit risk.

The pension fund will invest in debt issued by national governments in their local, emerging markets, and in any debt of emerging market subnational governments and corporations, wherever issued, only if it carries a BBB- rating or higher. A minimum rating of BB- is required for debt of these countries’ national governments that is issued in developed markets.

“The use of credit rating systems is an effective and sound process for investing in foreign debt because ratings reflect a full evaluation of countries’ sovereign risk,” said Rob Feckner, President of the CalPERS Board of Administration.

Relying on rating agencies offers distinct advantages because the agencies maintain frequent contact with emerging market borrowers and are well attuned to the countries’ fixed income risk. Reliance on the rating agencies will also provide advance warning to countries of falling off CalPERS’ debt list since the ratings-based process takes into account agencies’ watchlists and market outlooks.

There are no costs associated with adopting the new policy since CalPERS already subscribes to the agencies’ country ratings and research.

Under the debt policy, CalPERS investment managers will be able to invest in global debt of the national governments of China, Colombia, Egypt, Indonesia, Morocco, and Russia, countries that do not qualify for emerging market equity investments.

“Our debt investment country list will be a living policy,” said Charles Valdes, Chair of CalPERS Investment Committee. “Countries can be assured that we will continually update our list as rating agencies update ratings.”

In other actions, CalPERS staff reported that a pool of five investment advisors has been established for the System’s second Manager Development Program – a program designed to recruit talented emerging money management firms.

The pool of advisors includes: Strategic Investment Management, Progress Colchester Ventures, The Rock Creek Group, Bear Stearns Asset Management and Legato Capital Management.

The firms will help CalPERS with due diligence, selection and performance monitoring of emerging stock, high yield, and hedge fund-of-fund managers.

CalPERS is the nation’s largest public pension fund with assets totaling $182 billion. The System provides retirement and health benefits to more than 1.4 million State and local public employees and their families. For more on CalPERS, visit www.calpers.ca.gov.