Officials at the Philippines' Government Service Insurance System, which manages Ps205 billion ($3.9 billion) of assets on behalf of 1.4 million member civil servants, say it is looking at outsourcing part of its investments to external fund managers.

According to Fernando Gaite, vice president in the GSIS' corporate finance accounts management department, "The present management is receptive to the idea, and a decision could be nearer than expected."

Gaite would like to see parts of the investments in domestic equities and fixed-income instruments handed to third parties, including locals and foreigners with a Philippine presence, in order to compare performance and force in-house managers to become more competitive. The concept is not new, but volatile national politics have led to new managers, which delays any big decisions.

Gaite would also welcome the opportunity to diversify abroad, but this is a more contentious issue. The GSIS, along with its private-sector counterpart, the Social Security System, is allowed to invest overseas, but has found it difficult for political reasons, and also since the Asian financial crisis because of currency weakness. Gaite would like to shift up to 5% of GSIS assets offshore because returns on local investments have declined, but will not be able to do so until the peso "stabilizes".

Actually, from 1994 to 1996, GSIS had mandated a small amount to be invested offshore via Salomon Smith Barney Asset Management (now part of Citigroup). The experiment ended, however, when GSIS was attacked for not using national savings for local investments.

"Unfortunately, newspapermen, politicians and bureaucrats don't understand the concept of diversification," Gaite says.

GSIS is only nominally a retirement system. It is also a source of patronage for politicians and mandarins. By law, GSIS must invest at least 40% of its assets in direct housing and personal loans to members. It also finances construction of schools and hospitals, and invests in real estate. Sending assets offshore could mean less for such purposes, in which achieving a return for GSIS members is not the primary objective.

So while managers such as Gaite recognize the value of diversification, unless the trustees decide to push the issue, diversification will have to await sunnier economic circumstances.

Moreover, GSIS, unlike the Social Security System, is not in financial straits. In 1997 its contribution rates were raised, so it does not face a funding crunch. And although Gaite declined to comment on the organization's asset-liability situation, he said its investment target this year was a modest P157 million gain, and he has so far traded his way to being P500 million up so far.

The GSIS idea of risk management is simply to invest conservatively, and it has no personnel dedicated to risk. But this may be sufficient in the closed environment in which it operates. And Gaite is confident his equities positions will pay off over time, noting that many of the local stocks he holds, such as PLDT or Manila Electric, are currently selling far below their book value.

In the meantime, Gaite has reigned in lending to private companies and is sticking mainly with investments in government bonds and the more liquid blue chip stocks. GSIS has also increased its member-loans programme.