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Oxford, May 27, 2004
This letter was published in The Financial Times in response to an article by John Plender in the May 24th edition. 
More information on Oxford Analytica and the Calpers screening policy.
From Mr Michael Bates.
Sir, John Plender questions the wisdom of the Calpers policy of screening emerging markets countries against a range of criteria, including political stability, labour market practices, market liquidity and proficiency of stock market settlement ("And now the pay-off for Calpers aggression", May 24).
This approach to emerging-market countries contrasts oddly, he suggests, with the engagement approach it employs with companies. It is surely unrealistic to think Calpers should seek to influence sovereign governments in the same way a shareholder may engage with a private corporation.
Screening does constitute a form of engagement in that it sets a clear-cut range of criteria for a country to meet, covering (in addition to those already mentioned) economic policy transparency, shareholder and creditor rights, transaction costs, accounting standards, stock exchange listing requirements and the robustness of anti-money-laundering measures.
The Calpers permissible markets exercise is based on research undertaken by independent companies and involves interviews with representatives from government, the private sector and academia in the country under review. By doing so, government officials and private sector representatives can engage in a dialogue with one of the largest and most influential institutional investors in the world. By contrast, many institutional investors make their asset allocation decisions passively on the basis of indices such as FTSE emerging markets and Morgan Stanley Capital International.
Calpers is a pension fund and has a defined investment strategy that is longer-term but nonetheless active, not passive. Over the medium to long-term, all members who trust the Calpers board with their savings will surely be well served by this additional tier of due diligence.
Moreover, the impact of this approach goes well beyond that which could be measured by conventional investments returns; a 2003 McKinsey report, A New Financial Architecture, concluded that: "The investment actions of Calpers - whether you agree with them or not - have resonated throughout the region [of south-east Asia] and had a major impact on standards and investor communications in those countries where they highlighted their concerns."
In this respect, the actions of the Calpers board have been to raise the standards of investor protection and transparency across emerging market economies. As such, they have been to the benefit of all investors, including those investing in indices. This factor alone would be a cause for affirmation rather than criticism from such an eminent champion of investor protection and good governance.
Michael Bates,
Director of Consultancy & Research,
Oxford Analytica
