In May, Wan Kamaruzaman took over as chief executive of KWAP, one of Malaysia’s state pension funds, replacing Azian Binti Mohd Noh.

Kamaruzaman was previously head of treasury at another government entity, the $170 billlion Employees Provident Fund. His appointment came a month after Ahmad Norhisham Hassan became KWAP’s first chief investment officer.

Azian Mohd Noh had previously held the CIO duties while she was CEO. Wan has also worked at Malaysia’s Affin Group and at Maybank, mostly in treasury. KWAP had RM89 billion ($29.8 billion) in assets under management at end-2012, a 12.4% year-on-year increase.

It expects that to hit RM100 billion by the end of 2013.

Q How much of your growth comes from contributions and how much from the market?

A The contribution side sees consistent growth of up to about RM4-4.5 billion each year; the other growth depends on the markets. Last year we had a very good year (with an AUM increase of 12.4%). In 2013 we’re about 14% up year-to-date.

We’re outgrowing our domestic market – it’s increasingly difficult to stay put, and we obviously need to diversify. But the limit [on how much of the portfolio can be in foreign assets] is 10%, and we are now at 8-9%. Our asset allocation strategy is for a three- to five-year horizon.

Q How are you responding to this?

A We have revised our asset allocation recently, and, subject to board and Ministry of Finance approval, we want to be able to invest more overseas. We expect to get approval this financial year to go up to 15% or 20% foreign exposure.

We started overseas investment soon after the previous review in 2010. We usually conduct an asset allocation review every two to three years.

Q What is your portfolio breakdown?

A The rough breakdown is 30-35% in equity, domestic and international; 50-55% in fixed income, 98% domestic and 2% international; and 2-6% in alternatives, a combination of private equity, real estate and infrastructure; and the balance in cash. We don’t have any hedge funds, and that will remain the case after the recent review.

Q Can you talk about how you use external managers?

A Our biggest foreign exposure is to equities. Some 85% of our domestic equity allocation is managed in-house and 15% externally.

For international equities, 40% is internal and 60% external. Most of the domestic fixed income exposure (97%) is managed in-house and 43% of the foreign exposure is run externally.

We have roughly 12 managers in total for equities, 10 for domestic stocks and two for international mandates. Unlike EPF [Employees Provident Fund, Malaysia’s biggest state retirement body], we are not restricted to using managers that have a local Malaysian licence.

We have two international equity mandates – one active and one passive – one of which is managed by our subsidiary company, Prima Ekuiti (UK).

We’re trying to outsource more to external managers for both equities and fixed income, and also seeking to build our in-house capabilities.

Q How do you manage your alternatives exposure?

A Up to 2% of our total portfolio is in private equity, entirely in commingled funds – we use around 15 PE firms. Our local private equity allocation is very, very small; 90% of our PE exposure is provided by international managers.

All of our international real estate allocation is invested via international managers. And we have a small amount of infrastructure exposure, but it’s all domestic right now – it comes within our PE allocation.

Q Can you give details of your fixed income allocation?

A It’s a combination of sovereign debt and corporate credit. The lowest grade foreign debt we are mandated to buy is BBB-, but we can look below investment-grade – for example, for emerging market strategies – although we need special approval to do so.

Q So have you been moving down the credit spectrum in terms of rating level, to boost yield?

A No, because our main goal is the protection of capital. We won’t compromise on that; we don’t want to put money at that much risk.

Q Have you increased your debt exposure in the past couple of years?

A No. The bigger allocation has been into equity and alternatives in recent years – our percentage of fixed income exposure has dropped in the past three years. The current fixed income exposure is 63%, compared with 64% in 2012 and 67% in 2011.

Q How much do you invest in Asian assets?

A We have around $700 million invested in Asia via Asia ex-Japan and Asia-Pacific ex-Japan mandates, and we use MSCI Asia ex-Japan as a benchmark. The mandates allocate to six countries: Australia, Hong Kong, Indonesia, Korea, Singapore and Thailand.

We also run a $100 million global emerging-market [GEM] mandate, mainly in fixed income with a very small proportion in equities. But we expect our EM exposure to grow.

Q What exposure do you have to Chinese securities?

A We have Hong Kong-listed Chinese shares, which are not performing so well due to the recent corrections. But if there are further corrections, it will be an opportune time to buy more. We don’t have any CNH [Hong Kong-issued renminbi-denominated] bond exposure at this point.

We don’t have a QFII [qualified foreign institutional investor] licence, but are exploring the possibility of applying for one. As a sovereign fund, we’d probably get priority from China.

Q Do you have sharia-compliant assets?

A We initiated our sharia asset portfolio, with both domestic and international exposure, via three mandates about two years ago. It’s still very small, with two managers for global sukuk and one for local equity.

Q How big is your investments team?

A As of July 1, KWAP had 188 staff in total, 56 of which form the investment team. That’s been growing quite a bit, because we’ve been starting to buy more products in new areas and moving into new asset classes. The headcount growth has also come in risk management, legal, operations and systems.

Q Can you give me more details?

A We are planning to put together a team for private equity, entirely in commingled funds – we use around 15 PE firms. Our local private equity allocation is very, very small; 90% of our PE exposure is provided by international managers.

All of our international real estate allocation is invested via international managers. And we have a small amount of infrastructure exposure, but it’s all domestic right now – it comes within our PE allocation. portfolio hedging very soon.

At the moment we don’t internally hedge interest rates or currency, but we want to do so, to compliment the mandates we outsource to external managers.

Q Do you use investment consultants?

A We use consultants to screen fund managers for mandates sometimes, but we usually do that in-house. We might use Mercer or Towers Watson to check asset managers we have already more or less identified – if they come back with a positive report, we will likely choose the manager.

Q How do you approach asset-and-liability management?

A At the moment the government has assumed our pension liabilities, so this isn’t an issue right now, but we do have to tailor investments to match future liabilities, so we are having to look at asset-and-liability management.

Those liabilities will probably soon be passed onto us, likely in the next one or two years – so we may hire more people in-house to deal with it.

Q How do you risk-manage your portfolio generally?

A At the moment we manage risk purely via asset allocation, and we’ve had a risk management team in place for a while. But our board of directors has aspirations to make our risk management a model for all government-linked companies in Malaysia. So we’re looking to double the team from six or seven now over the next three years.