Fondo de Ahorro de Panamá was established in 2012, but 2022 may have been the year it came into its own.

Managers and board members of Panama’s sovereign wealth fund got a big shock when they learned the National Bank of Panama, an arm of the government, wanted to pledge assets of the fund as collateral for a loan to fund COVID-19 relief efforts.

That curveball—and a subsequent compromise—came in the midst of a multi-year process of reallocating money to better reflect the fund’s character as a long-term investor.

“This is a story about leadership, about stick-to-it-iveness,” the FAP’s CIO, Abdiel Santiago, told CIO. “What we learned is you have to take leadership and you have to know when to act. Broadly, it’s doing what’s right for the fund, given the mandate you’ve been given.”

Santiago came to the FAP in 2013 to launch the fund after more than a decade on Wall Street, including as an equity research executive at Morgan Stanley.

The FAP was established to be a “rainy day fund,” in Santiago’s words, but with a greater degree of autonomy than what’s typical among sovereign wealth funds, at least in Latin America. So when the nation’s congress was presented with legislation enabling the use of the fund as collateral, the FAP’s board and staff knew their responsibility was to protect its integrity for the long term.

Beyond eroding the principal of the fund, the pledge “might have exposed us to awkward situations,” Santiago said, such as margin calls. More importantly, however, there was already a law on the books that laid out ways for the FAP to contribute in case of a disaster.

In the end, the FAP turned over about 10% of the fund to the government. That money was used for vaccine efforts and to secure personal protective equipment. Some of the contribution also went to aid the housing industry, thereby preserving jobs.

“This institution really functioned as it was designed to,” Santiago said. “That’s something we are really proud of.”

It also helped ensure the fund’s longevity, something internal decisionmaking had been focused on in the year or so before COVID struck. Previously, the portfolio was comprised of cash and fixed income. Staff and the board realized it had to embrace other asset classes, including slightly riskier ones and even alternatives, to match its longer time-horizon expectations.

That transition began with global equities, then expanded to private equity. Initially, PE investments included secondary opportunities, but as the FAP grew more comfortable with the sector, it began to make primary, direct investments. Some money was also allocated to high yield.

While Santiago credits the FAP’s board for its leadership in the reallocation process, he is also grateful for industry support. He calls his ability to turn to associates in pension funds, sovereign funds and even foundations and endowments for guidance “crucial.”

One example: That broad network helped the FAP move quickly to hire a private equity adviser.

What’s next for PSWF? Santiago calls the Russian invasion of Ukraine the biggest unknown in the market landscape right now. “We are not seeing any light at the end of the tunnel in terms of this conflict,” he says. “Beyond that, we don’t even know what that light looks like. These are things that are really tough to handicap from an investing standpoint.”

Investing for the long term may mean looking out beyond the conflict, however, and preparing for a world economy that will at some point recover from the pandemic period. Santiago is interested in expanding the fund’s positions in private equity and also exploring investments in infrastructure, particularly energy assets.

He is also proud that the compromise with the government showed the FAP could be an example of something going well in a Latin American country, where the integrity of various institutions is all too often challenged by corruption and malfeasance. “This was a moment when we shined.”

—Andrea Riquier