SWC Talks to Panama’s SWF on New Equity Strategies

March 04, 2015 by Loch Adamson

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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 waterway.

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 context.

SWC: What are the key investment challenges FAP will face in 2015?

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 qualitative model.

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 could profit.

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 projects.

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.

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