During the second half of 2020, FAP suffered the first two withdrawals in its short history, for US$ 105 million, i.e., an 8% of its AuM, to help support Panama’s recovery. At the same time, the fund managed to record its second highest return, to start investing in private capital, and to become a signatory member of the UN’s PRI. We had the pleasure to catch up with Mr. Abdiel Santiago, its CEO & CIO, who has led FAP for the past 7 years and is highly respected in the international investor community.
[GSWF] FAP may become the world’s only SWF to be funded by a tollway; how will the Panama Canal revenues be transferred to the fund annually?
[FAP] I’d like to think that FAP is funded by a renewable source that does not deplete. Unfortunately, we have not received any revenues from the Canal yet, but we hope to soon get 50% of their net income above 2.25% of GDP. We were initially funded by a series of privatizations and expect our balance sheet to grow through further injections.
[GSWF] FAP is a stabilization and a savings fund and distributed $105 million in 2020. How do you manage both mandates?
[FAP] We have decided to manage a single pool of capital for now. We were asked for capital during a market shock, which proved that the SWF model works: we were able to grow the fund organically and to pursue changes in asset allocation despite the call.
[GSWF] The dual-mission model seems to be quite popular in Latin America – were you modelled after the Chilean funds?
[FAP] Chile’s funds are bigger than FAP, and we have “borrowed” some of their best practices around communication and mission.
[GSWF] FAP started investing in equities in 2015 and is now diving into private capital, via Carlyle / AlpInvest. Why?
[FAP] It is all about risk diversification: when you introduce PE into the mix, you reduce concentration risk and increase the potential return given that unit of risk – it is accretive to long-term portfolios. Private capital has a lot of challenges, incl. too much “dry capital,” but we are hoping to be able to find the right assets at the right price, thanks to trusted partners with a successful track record.
[GSWF] Can you give us a heads up on how the annual return looked like in 2020? How is your target return determined?
[FAP] Despite the profound effects that the pandemic had in Panama, 2020 was generally a good year for FAP, our second-best return with 7.2% before costs. We started the year with a huge challenge but have built a resilient portfolio for shocks such as Covid. We follow a reference mixed portfolio similar to what NZ Super does, so we expect a 2%-3% nominal rate of return in the long term.
[GSWF] What are the main industries your portfolio is exposed to, and do you see this changing in the next few years?
[FAP] We are building track record before we seek to rely heavily on alpha, which currently hovers around 5%-10% of overall returns.
[GSWF] Our GSR Scoreboard highlighted that FAP still has work to do on Sustainability; how do you plan on doing that?
[FAP] ESG has rapidly grown as a theme for investors, and we are doing our best to catch up. We recently became signatories of PRI, but it is not something we can do overnight, and we look forward of incorporating ESG in our investment decision criteria.
[GSWF] How many employees do you have at the moment, and will it be enough to tackle the challenges ahead?
[FAP] We currently have seven people in our middle and front office. Our back office is outsourced and handled by the national bank. Private capital and ESG will add some challenges, and we will probably be adding a few more experienced professionals to the team.
[GSWF] What keeps you awake at night, as a CEO and/or as a CIO? What is your summary of the past eight years?
[FAP] We are so focused on transparency and accountability that I worry about the headline risk: waking up and finding out that our portfolio has dropped significantly because of external factors, which we need to explain to our citizenry – and if explaining financial markets is hard, explaining portfolio management is 10 times harder! We have done a relatively good job during these 7 years judging by the lack of negative headlines associated to us, which is an important KPI. I look forward to doing many more things for FAP 2.0.
