UPDATE 1-Malaysia Khazanah's portfolio falls to 108 bln ringgit

KUALA LUMPUR Jan 18 (Reuters) - The investment portfolio of Malaysia's state strategic investment arm, Khazanah Nasional, fell slightly to 108.1 billion ringgit ($35 billion) at the end of last year from 112.6 billion ringgit at the end of 2010, its managing director Azman Mokhtar said on Wednesday.

Khazanah has been aggressively scaling back its holdings in the Southeast Asian country's top companies as part of a government strategy to boost liquidity in the stock market and lighten the state's heavy hand in the economy.

"We are cautious in the market, becoming net sellers, but we have built some growth engines in healthcare and that is where harvesting will begin," Azman told reporters.

This week, the investment fund, owned by the Finance Ministry, announced plans to sell its 42.7 percent stake in domestic carmaker Proton for $412 million to property-to-autos conglomerate DRB-Hicom.

That was Khazanah's largest divestment of a state-linked firm so far in its campaign that has included disposing of minority stakes in Pos Malaysia, Malaysia Airports, Telekom Malaysia and the country's No.2 lender, CIMB .

As it cuts stakes at home, Khazanah has been more active overseas.

The sovereign wealth fund was a cornerstone investor in Chinese IPOs this year including those of New China Life Insurance and hypermarket operator Sun Art .

The healthcare arm of Khazanah, Integrated Healthcare Holdings (IHH), bought a controlling stake in Turkish hospital group Acibadem for $1.68 billion ahead of its planned listing for this year.

IHH, in which Japan's Mitsui & Co owns a 30 percent stake, is set for a $1.5 billion listing of its healthcare assets that span Malaysia, Singapore and India.

Azman said Khazanah was banking on Iskandar Malaysia, a development project in Johor state bordering Singapore, to attract more investment. He said Iskander Malaysia attracted new investment commitments of 15.3 billion ringgit in 2011.

He said the returns from Iskandar would come via Malaysian builder UEM Land, in which Khazanah has controlling 65 percent stake. (Reporting by Niluksi Koswanage, editing by Stuart Grudgings and Matt Driskill)