Last September 30 we had the privilege of participating in an offsite meeting of the Board of Directors of the Panama Savings Fund (FAP), along with leading economists and representatives of the World Bank.
FAP was established in 2012 with a dual mandate: as a stabilization mechanism of fiscal balances in times of emergency and economic deceleration; and as a savings tool for future generations of Panamanians. Since then, the assets of the fund have remained relatively stable partly due to its conservative risk profile.
In fact, a good part of the portfolio has had to remain in cash or liquid assets in order to cover potential contingencies. When Covid-19 hit in March 2020, FAP had 24% of its portfolio, or US$ 324 million, in cash. The Panamanian government ended up withdrawing US$ 105 million, which represented 8% of the AuM.
As reflected in our 2021 Annual Report, this was an example of good governance among other stabilization funds especially in Latin America. Governments of Mexico, Colombia and Peru were notorious to exhaust their sovereign funds altogether, overpassing any fiscal rule that prevented them to do so. Panama did not.
However, the government has not being as diligent around the deposit rules, under which FAP should have received an extra US$ 750 million in the past few years, as part of the income generated by the Panama Canal. This capital could have helped the returns of FAP and accelerated its transition to a better risk-adjusted asset allocation.
The other key point in FAP’s success over the years has been the continuity of its leadership. The CEO and part of the team members have not changed since inception, and four of the seven directors, who have no political affiliation whatsoever, have been in the Board since 2016. A mandatory rotation of seven years may take effect later this year, although that may jeopardize the sync and well doing of the current board.
After a decade of investing, FAP is now in the process of increasing its allocation to alternatives (mainly, private equity), up to 10% of its portfolio, and to high-yield debt. These products may escape the understanding of the average Panamanian but will provide FAP with higher diversification and alignment with its global peers.
Global SWF’s latest GSR Scoreboard highlighted the best practices of FAP, with an overall score of 84% and 10/10 when it comes to governance. After immersing ourselves in a monthly session of the Board, we can confirm the well doing of FAP, which should be replicated by other funds in Latin America and beyond.
Photo: Offsite session with the Board of Directors of FAP, September 30, 2022