* Fund currently invests largely in fixed income, cash
* Looking at opportunities in developed stocks
* Will use MSCI World equity index as benchmark
By Natsuko Waki
LONDON, April 1 (Reuters) - Panama's sovereign wealth fund expects to begin the process of investing some of its assets into equities later this year, and would target developed economies, its chief investment officer said on Tuesday.
The fund, set up in 2012 to safeguard the country against negative shocks, currently invests almost two thirds of its $1.3 billion of assets in fixed income and holds the rest in cash.
The majority of its fixed income assets are in U.S. corporate bonds, mortgage-backed securities and Treasuries, as well as debt issued by multi-lateral lenders such as the Latin American development bank (CAF).
"We're going through the whole asset allocation process to come up with something that assures consistent returns over the long term," Abdiel Santiago, CIO of the fund, told Reuters.
"In the next version of the portfolio we're looking at a variety of asset classes, namely equities. On equities we're looking at developed markets," he said, adding that the process should finish in around 4-6 months.
Santiago said the fund would use the MSCI World equity index as a benchmark when it starts investing in stocks.
"We're trying to diversify away from the economy and the canal. In doing so, a logical thing to look at is developed markets, the U.S. and Europe," he told a conference.
The fund, initially set up with seed capital from the government, expects to start receiving revenues from the 100-year-old Panama Canal next year.
The Central American country has enjoyed strong growth, with its economy expanding at an average rate of 8 percent over the past six years, reaching double-digit growth in 2011 and 2012.
The economy is expected to grow 7 percent this year thanks to the construction of Central America's first metro system and the canal expansion project. Growth was 8.4 percent in 2013.
The fund's assets may increase further after an expansion of the canal, expected to be completed by 2016.
"Given the growth trajectory of the economy, using conservative estimates the fund could be anywhere from $6 billion to $8 billion by 2025 -- clearly it depends on the economy," Santiago said.
The fund does not have an annual return target but its assets cannot fall below the equivalent of less than 2 percent of Panama's gross domestic product, currently at $40 billion.
It would have various avenues to invest in equities -- including passive investing, exchange-traded funds and mutual funds, but the fund has to educate the population first who are not used to the culture of equity investing.
"The priority of the fund right now is liquidity. You never know when natural disasters might come... and eventually you may have deceleration in the economy and you have to be prepared for that," Jose Abbo, vice chairman of the board of directors of the fund, told Reuters.
"Before we move into equities... we have to develop the culture of investing in equities. It's not going to happen right away. We have to explain to people." (Editing by Raissa Kasolowsky)