Today the $13 billion Government Pension Fund, Thailand's retirement fund for civil servants, has invested 19% of assets in international markets. It will probably hit its 25% legal limit within the next two years, after which it is likely to ask the government to let it invest up to 35% overseas.

The incremental allocations are probably going to alternative investments such as real estate and infrastructure, says Triphon 'Ed' Phumiwasana, director of foreign investment and external fund management, addressing the AsianInvestor Southeast Asia institutional investment forum last week in Kuala Lumpur.

The GPF invests overseas for diversification and to find sources of return that can beat domestic consumer-price inflation.

In addition, the fund has grown too big for its domestic capital markets. Triphon notes that GPF and Thailand's Social Security Office between them own nearly 70% of the Thai bond market. GPF is required to mark to market on a daily basis, and the way its size moves the local market generates too much volatility on the balance sheet. So it must move ahead with international exposures.

The GPF sees that its reliance upon global sovereign debt markets must gradually shift. The current low-interest-rate environment means it can use global fixed income to generate yield. "But this will become a problem if one day these bonds lose their value," Triphon notes.

The long-term response is to move into real estate and infrastructure. However the trade-off in liquidity is difficult to accept. "In today's markets, we give weight to the ability to move around," Triphon says.

The asset-allocation committee values such freedom given the eurozone crisis, concerns about the US economic recovery and the threat of Asian inflation. Over the long term, however, the GPF will have to make a strategic move to income-generating assets.

"The risk in infrastructure is more regulatory than economic," Triphon says, adding that GPF already has a 2% target allocation that it will start to invest in 2012. The GPF would like to invest in Asian infrastructure and take advantage of the region's growth rates, but it is also concerned about the region's relatively poor legal and regulatory systems.

However, the biggest challenge is internal governance.

Already, the GPF takes flack from some members about global investing. Its exposures to European securities can conjure criticism that it is endangering civil servants' retirement to, say, fickle Greece. Triphon and his team have to explain that 'Europe' can include great multinationals such as Nestle and Shell, whose businesses are global.

More broadly speaking, however, governance is an embedded challenge for the GPF. Its board of directors is subject to frequent turnover. This makes it hard for board members to obtain enough understanding of investments and, in turn, for them to trust the investment committee.

Triphon and his team see their long-term task to win enough trust for the board to delegate more decision-making powers to the investment sub-committees. This is happening, slowly: the lack of flexibility in 2008 cost the GPF a -5% annualised return, a point the board has come to understand.

For example, the GPF's latest round of hiring external fund managers has seen it withdraw a variety of restrictions, to free the managers to take advantage of market events.

Triphon says one of the strengths of the board is its diversity. Half of its members are drawn from the government and half from among civil servants. This way neither side can dominate the GPF and it gives its technocrats and professionals more control of operations, as well as a voice at the board.