The Bt380 billion ($12.1 billion) Government Pension Fund of Thailand will start 2008 by increasing its overseas investment allocation from the current 13% to up to 25%, says Visit Tantisunthorn, secretary general.

The GPF is a defined-contribution scheme for ThailandÆs 1.2 million civil servants. Members have their own account but the GPF handles investments, and it has calculated it needs to earn an annualised return of 2.75% over inflation over the next 12 years.

Inflation in Thailand is now 2.5%, so the GPF has handily beaten this target this year, racking up 9% in the first nine months of 2007. But that is thanks to a strong performance in Thai equities. The Thai stock market is up 40% year to date. The GPF recognises is a volatile asset class, however, and the need to diversify more overseas in order to reduce its total risk.

ôWe donÆt want to be a big fish in a small pond,ö Visit says. ôWe want to be a small fish with lots of room to swim.ö

At present, however, the GPFÆs foreign investments have not performed well, mainly due to the appreciation of the baht. Its global equities are returning only around 5% in baht terms. And hedging costs make global fixed income too-low returning to be attractive; the GPF can get the same total returns in the domestic bond market, with durations up to 10 years.

The GPF has received approval from its regulator, the Ministry of Finance, to increase its international allocation up to 25%, a process it can start in two months. Visit is not concerned that international returns have been lacklustre, noting that these investments are long term and that the GPF is not interested in trying to time markets.

Currently the GPF has 9% of total assets in international equities and 4% in international bonds, with nine external fund managers running equity mandates (in global value, growth and index strategies) and four in bonds.

The GPF has just hired two more fund managers to run Asia ex-Japan equities, the first time the GPF has entered this asset class, although Visit declines to name the firms. Frank Russell is providing its manager database, and State Street is the GPFÆs global custodian.

The international equity component will rise to 13% of total assets and the GPF plans to hire additional fund managers, as well as increase allocations to its existing ones. Global fixed income will be reduced to 3% and the GPF is probably going to trim the existing mandates, although Visit says the GPF wonÆt fire any. And he notes over time as the GPFÆs asset size continues to grow, this reduced allocation will still see extra monies in absolute terms.

The big step is in alternative investments, which in international terms is new territory for the GPF. The GPF will allocate 5-6% to global real estate and global private equity.

It is already ThailandÆs biggest real-estate investor, and it is now looking to invest in global real-estate investment trusts, both in Asia and worldwide. Visit adds these new allocations are an opportunity for the GPF to diversify out of US dollar holdings. Up to 2% will go to private equity, with the GFP interested in multiple strategies.

On top of this, the GPF is growing its in-house capability for managing international asset classes. It wants to include training in its requirements for selecting managers, although managersÆ investment performance remains the top criteria, says Visit.