MKini: Ignore Calpers at our own peril
By M Bakri Musa
24/3/2002 2:02 am Sun
By M Bakri Musa - Mar 16th, 2002
The responses in Malaysia to California Public Employees
Retirement System's (Calpers) withdrawal from the local
market reveal how far detached our leaders are from the
realities of international capital markets.
One minister dismissed the decision of the giant fund as
inconsequential. A former top Treasury official, now a
major corporate figure, in an op-ed piece of a mainstream
paper suggested that Calpers is playing politics. He then
went on with great pretension to lecture Calpers that it
should stick strictly to business!
Meanwhile our deputy prime minister angrily denounced
Calpers, presumably in the naive belief that the best way
to win and influence people is to get mad at them! He got
his emotions right, but his actions were woefully wrong.
A more sensible reaction would have been to analyse why
Calpers decided to withdraw. That would have led Malaysia
to revisit its policies and make the necessary
modifications so as to make its market attractive not only
to Calpers but also others.
Calpers's decision came after a year-long review of all
emerging markets. The particular reason for the
re-evaluation was very practical: The fund was doing
terribly in such markets. In the last five years its
average annual returns in Malaysia, for example, was a
horrifying 18.3 percent.
In its review, Calpers concluded that it was not enough to
focus only on the market. Rather it must take a broader
look at the supporting economic and political structures.
In effect Calpers realised that you could not have a
'good' company in a 'bad' country. Thus it decided to
weigh equally what it calls the 'country factors' in
addition to the usual 'market factors'.
Previously Calpers, like many investors, was concerned
only with the market's performance and potential. This
attitude is best encapsulated by the ancient Chinese
observation to the effect that as long as you can milk the
cow, it matters not who controls it. That strategy works only when the milk is flowing freely.
Now Calpers is hit with the reality that whoever controls
the leash, also controls the udder. The California pension
fund realises that it has to pay attention to what's going
on to other parts of the cow, especially the head.
That strategy works only when the milk is flowing freely. Now Calpers is hit with the reality that whoever controls the leash, also controls the udder. The California pension fund realises that it has to pay attention to what's going on to other parts of the cow, especially the head.
For Malaysia, Calpers found that a previously juicy udder
is now fast drying up. As it looks around, it finds that
the cow is being lead by its unenlightened tender away
from the nutritious pasture into the dry barren terrain.
It is time to abandon the cow.
Calpers considers a nutritious investment pasture (country
factors) to be one where there is political stability,
financial transparency, and productive labour practices.
The criteria for the first include the presence of civil
liberties, an independent judiciary, and governmental
stability. The elements for financial transparency include
a free press. And productive labor practices would be
those that subscribe to the International Labour
Organisation convention. In all three counts, Malaysia had
the lowest score of 1, with 3 being the best.
In the 'market factors', it scored low (1) on 'market
openness'; intermediate (2) on market liquidity and
volatility, regulatory environment, and settlement
proficiency. Its only best score (3) was in transaction
These results do not or should not surprise Malaysians.
The surprise is that it took the Californians this long to
figure this out. These elements have not improved; in fact
they have worsened especially since the 1997.
And so has the performance of the Malaysian market. When
the profits were flowing, there was no incentive to
discover what made it so. When it dried up, one looked for
explanations. It is to Malaysia's misfortune that Calpers
now considers these 'country factors'.
Malaysia may presume to differentiate between different
kinds of investors, welcoming long-term and direct
investors while disparaging the short-term 'hot money'.
In truth investors are all the same. They have the same
objectives: To maximise their returns and minimise the
risks. When conditions are favourable, short-term
investors become long-term, and portfolio investments get
converted to direct ones. When conditions head south,
patient investors become short-term, and direct investors
liquidate their holdings.
Prudent investors wisely diversify; between short-term and
long term, and between direct and portfolio investments.
When Malaysia denounced 'hot money' managers, it forgot
that those investors were also investing directly and long
Further, other investors took note. When Malaysia
instituted capital controls, investors assumed that it is
closing its doors to all investments. Malaysian leaders'
strenuous attempts to dispel this image fall on deaf ears.
With so many other attractive markets, why should
investors listen to Malaysia's pleas and sophistry?
Malaysians should be under no illusion to think that
foreigners would invest in Malaysia for the love of the
country. Nor is it because they are enchanted with things
Malaysian or that they share our values.
They invest because there are profits to be made. And as
they profit, so does Malaysia. This is true of all
investors, native or foreign. Resorting to nationalistic
exhortations rarely works; enhancing the returns on
Listen, not lecture
Malaysia should listen to and not lecture at Calpers. Its
sheer size, being the largest, makes it a force to be
reckoned. Calpers also has a deserved reputation for being
a trendsetter. Its initiative to revamp corporate
governance and executive compensation, for example,
quickly became accepted as the norm in America. We ignore
Calpers at our own peril.
Malaysian leaders have it wrong; it is presumptuous of
them to dictate to investors. It is for investors to
consider whether Malaysia is an attractive place to put
their money. Competition for investment funds today is
intense for two reasons.
One, there are more new countries, especially after the
breakup of the Soviet empire, and they are all eager for
foreign investments. Two, also with the collapse of the
communism, many countries are no longer enamored with
socialism but are discovering the wonders of free market
and foreign investments.
Malaysia's greatest competitors for foreign investments
are China and India, because of their huge domestic
markets. China is effectively exploiting that potential,
paying only lip service to the ideals of communism. Its
new mantra is, 'To get rich is glorious' India on the
other hand is smug, believing that its huge market is
Our leaders are deluding themselves if they think that
foreign investors owe it to Malaysia to invest in our
country. Malaysia has to earn their confidence; it has to
aggressively attract them. Being angry at and endlessly
pontificating to them are not effective ways for enticing