Embroiled in a scandal in 2011, has ENPAM now turned the corner? Carlo Svaluto Moreolo reports

The ENPAM pension fund for medical professionals published its balance sheet in May, reassuring members that the dark days of the past are finally over. In 2012 the fund recorded a €1.3bn budget surplus and net assets grew 10.3% to €13.2bn.

ENPAM’s 2012 balance sheet was seen as a sign of full recovery by members and the wider community after the fund had played a leading role in a scandal that blighted the institutional investment sector in Italy in 2011/12.

ENPAM is a cassa di previdenza (a fund for professionals) and has provided pensions and other types of insurance to Italian doctors for over 50 years.

In 2011 the fund was put under the spotlight when it was alleged that the fund’s board was investing recklessly in ‘toxic’ products and had made large losses on them. As a result of these allegations, in April 2012 ENPAM’s chairman, Eolo Parodi, was notified that he was under investigation by Italian authorities, and subsequently he resigned in June. Three other individuals were investigated – Maurizio Dallocchio, professor of economy and finance at Bocconi University in Milan and investment adviser of ENPAM for 17 years; Leonardo Zongoli, general director and consultant of ENPAM until 2007, and Roberto Roseti, also responsible for the fund’s finances. The allegations that put ENPAM in the eye of the storm came from a group of five chairmen of local branches of ENPAM, who complained about the fund to the Rome Public Prosecutor’s office and the parliamentary commission dealing with the private pension sector. Their statement said that Parodi had allegedly failed to disclose a report prepared by the consulting firm SRI Capital Advisers, dated May 2010, which gave evidence of irresponsible management by ENPAM’s board.
The doctors’ statement also alleged that Parodi had kept the negative report secret and instead asked SRI Capital Advisers to modify the conclusions of the report, particularly those concerning the limited transparency of ENPAM in disclosing its balance sheet, and that Parodi failed to inform the board about the risk involved in CDO investments.

According to the report by SRI, ENPAM had invested €446.5m in collateralised debt obligations (CDOs), losing 56-57% of the investment and consequently the fund had to renegotiate the terms for these instruments, spending a further €102.6m on restructuring and bringing the cost of the investment to €549.1m.

These allegations, as well as resulting in Parodi’s departure, three more people coming under investigation, and an extensive search of ENPAM’s offices by the Guardia di Finanza, the financial crime law enforcement agency, spread the reasonable concern that the pension money of almost half a million doctors in the country was not safe. The investigation is still under way but there have been no significant updates from the public prosecutor in the last 12 months.

However, today the fund looks in much better shape.

The new board, led by chairman Alberto Oliveti, has adopted a more prudent and transparent investment strategy, which seems to be paying off. The 2012 balance sheet showed positive results in terms of revenue, which was €2.17bn in 2012 or €41.7m more than the year before. Overall, net asset growth was 10.3%, with the real estate portfolio – 34% of the overall portfolio – showing slightly worse results than other investments. Most importantly, during 2012 ENPAM has continued to make a concrete effort to move away from illiquid assets.

A statement by the fund said: “ENPAM is gradually reducing the weight of structured products. At the end of 2011, the fund had 88 structured notes; the number has now been reduced to 75. The number of CDO investments has gone from 9 to 8. Thanks to the restructuring, the value of the existing investments is rising. A structured note that matured on 31 December 2012 (DB Eirles 337) returned the whole invested capital and the money that was spent on restructuring and has made a profit as well. Therefore to date, there have not been any losses from CDO investments.”

The statement also said that the progress of the ‘non-real estate assets oscillation fund’ – a fund set up in 2008 by ENPAM to monitor the risk of losses from equity, fixed income and other products – shows that over the years the risk of large, sudden losses has gradually decreased, affecting €71.8m of the overall portfolio at the end of 2012, compared to €400m when the fund was set up.

As well as reducing exposure to structured products, the ENPAM board is trying become more prudent and efficient by turning to passive management.

During the past year, it has activated passive mandates to manage a portfolio of €2.5bn.
The investment was carried out in two phases – at the end of 2012 the fund invested €1.5bn and in the first half of this year the board approved another €1bn investment. The four managers that have been appointed to manage the €2.5bn portfolio are: BlackRock (€940m in the first phase and €250m in the second), which is managing the EU corporate bonds portion; State Street Global Advisors (€475m plus €290m), managing EU bonds and corporate bonds; Credit Suisse (€85m plus €125m), managing a North American and emerging countries equity portfolio; and Legal & General Investment Management (€335m), managing a portfolio of bonds from non-EU developed and emerging countries.

An ENPAM spokesperson said: “We took the list of the 30 largest asset managers (who manage around 90% of assets in the global asset management industry) and received 14 expressions of interests. Then we made a selection based on quantitative indicators such as the level of fees, and qualitative ones, for instance the sector specialisation of managers or the number of staff and their qualification and experience in passive management.”

The fund is still looking for a new risk adviser and a new investment adviser. The ENPAM spokesperson says that by the end of the year, the new risk advisory contract will be signed, although the identities of the firms that have expressed their interest is still unknown. Once the selection of the risk advisory firm has been completed at the end of the year, ENPAM will begin searching for an investment adviser, before signing the contract by the end of 2014.