Abdiel Santiago, Technical Secretary of the Fondo de Ahorro
de Panamá (FAP)
The Panama Canal is a renowned feat of engineering
— but by the early 2000s its century-old
infrastructure was creaky, and it was struggling to meet
demand. In 2006, the Panamanian government started a project to
renovate the canal and double capacity. Anticipating a big
increase in revenue, Panama in 2012 created a new sovereign
wealth fund, the
Fondo de Ahorro de Panamá (FAP), to
collect and manage future proceeds from the widened
Abdiel Santiago, technical secretary of the FAP, is responsible
for day-to-day management of the fund. FAP inherited a $1.3
billion portfolio of cash and government bonds from an earlier
investment vehicle, and Santiago is implementing a more
ambitious strategy that will add stocks and corporate bonds to
the fund’s portfolio. He spoke to the Sovereign
Wealth Center’s David Evans about how FAP is
sifting pricey markets for opportunities amid record low
yields. The transcript is edited for grammar, space and
SWC: What are the key investment challenges FAP will face
We’re just starting out, and
we’re finding it a challenge to adjust to the
expensive valuations we’re seeing in the market.
On both the equity side and the fixed income side, which are
the main asset classes we invest in, markets are approaching
full value. Equity prices are steep. From a practical
perspective, that means we want more meetings with managers and
that we put a greater emphasis on fees, because from a
mathematical standpoint they are taking a bigger chunk of the
returns. It also means we’re trying to keep closer
track of how the investments are doing.
SWC: Given the high valuations, are you looking
at exploring new equity strategies?
We’re looking at smart beta [in which
portfolios are weighted toward stocks with known
return-generating characteristics]. There’s a
knee-jerk reaction to anything that has "smart" in the name
— it’s good marketing — but when
I start peeling the onion on smart beta there are some things I
really like. Firstly, it moves you away from the [market
capitalization] weighting of benchmarks, which gives you a
different perspective. The other factor I appreciate is that it
draws on the quantitative information companies provide: book
value, price/earnings ratio and so on. Smart beta tends to be
agnostic in terms of industries and takes in potential value
opportunities across a range of stocks. As an investment
strategy, it gives me confidence that managers are making
decisions on the basis of factors that are observable and
quantifiable — which I certainly prefer to a more
SWC: Has the volatility in commodity prices led
to any opportunities?
Stocks in companies exposed to crude oil could
represent good value opportunities. If oil stays in the range
of $50 a barrel, some players are going to be taken out of the
market. So if you do your research right and identify those
guys that have reasonable exposure to the commodity, along with
some off—setting businesses within the oil complex, then you
SWC: How is the low-yield environment affecting
your fixed income strategy?
We invest in government bonds, and fixed income in
general, not only because of the yield but also the capital
appreciation and the liquidity they offer. So yield
isn’t the only consideration. With yields low,
however, I do see many sovereign investors potentially going
down the risk curve, down to triple-B instruments, especially
on the corporate side, to gain return. Obviously there are
risks involved, but it’s a strategy I see
sovereign funds adopting.
SWC: According to its founding legislation, FAP is not
allowed to invest in alternative assets until it grows bigger.
Have you been keeping an eye on potential longer-term
opportunities in alternatives?
If we go into alternative asset classes,
we’d want to get a balance between liquidity and
return. We’d look at access points such as funds
of private equity funds-style arrangements, for example. And
while we’re not planning to [invest in
infrastructure at this stage] I do see the attractiveness of
developed-market infrastructure. The hole that government
inaction in developed markets has left — especially in
the U.S. — has led to a big opportunity to finance new
SWC: Will FAP be awarding new investment mandates
in the coming months?
We’re currently implementing our
target asset allocation strategy, and our priority at the
moment is the equities allocation. The law provides for us to
explore new custodian relationships and asset management
relationships so that is something we’ll be
looking at over the next few months.
SWC: Will FAP receive any funding from the Panama
Canal this year?
According to the law the fund will receive any
revenue from the canal that exceeds 3.5 percent of
Panama’s GDP. There have been delays in the
expansion project [the widened part of the canal is expected to
open in December] and Panama’s economy is growing,
so it’ll be a challenge for us to reach that
threshold this year.