Malaysian state retirement fund KWAP hopes to double its exposure to overseas investments to 20% of its total portfolio from 10%, following a review of its asset allocation this year.

The RM89 billion ($30 billion) pension has been building its foreign allocation from a very low level. This is leading it to strengthen its investment and operational capabilities, look at bringing in expertise in new areas, such as portfolio hedging, and outsource more to external managers.

“We are planning to put together a team for portfolio hedging very soon,” says Wan Kamaruzaman, KWAP’s recently appointed CEO.* “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.

The fund currently manages risk purely via asset allocation. However, the board of directors wants to make KWAP’s risk management a model for all government-linked companies in Malaysia, says Wan. Hence the risk team is set to double in the next three years from its current six or seven.

Wan also wants to beef up the in-house portfolio management capabilities. “While we want to outsource more emerging-market mandates, we also want to build an internal team; we don’t have one at the moment,” he tells AsianInvestor. “We want to do more investing and benchmarking internally."

KWAP now has a $100 million global emerging-market mandate, largely in fixed income, and $700 million invested in Asia Pacific ex-Japan.

The fund is also looking at building expertise in small- and mid-cap domestic stocks, notes Wan.

Meanwhile, it is likely that KWAP will need to strengthen its asset-and-liability management expertise down the line, notes Wan.

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

“That liability will probably soon be passed onto us, likely in the next one or two years – that’s been in the pipeline for a while. That will provide us with a whole new set of issues, and we may hire more people in-house to deal with it.”

In addition to building up its internal capabilities, KWAP plans to outsource more to external managers for both equities and fixed income. It has around 12 managers for equities – 10 for domestic stocks and two for international mandates.

It may be that the fund will also raise its alternatives allocation. Up to 2% of its total portfolio is in private equity, entirely in commingled funds, via some 15 PE firms. Some 90% of this PE exposure is provided by international managers.

In addition, all of the fund's international real estate allocation is invested via foreign managers. KWAP has a small amount of infrastructure exposure, which is currently all domestic and comes under the private equity allocation.

* An extended interview with Wan Kamaruzaman will appear in the September issue of AsianInvestor magazine.