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LONDON EYE: New rules will show the truth about profits.

Byline: JOHN HEFFERNAN

UNDER the old SSAP24 accounting rules the assumptions on what the pension fund would earn were veiled. But last month the new FRS17 rules came into full operation.

These strip the veil away,making it easy to compare the return assumptions used by one company with those of another. The resulting evidence that companies have been over-stating their profits by underfunding pension funds is going to put a cap on the current stock market recovery.

The figures to emerge so far indicate that the average pension equity fund expectation was for an annual return of 7.8pc with some expecting as high as 9pc. This could have been justified in the boom years since the Footsie100 share index started in 1984. But it is totally out of line with what has happened in the stock market over the past three years.

But now anew book called `Practical Speculation' (wileyfinance.com pounds 20.95) by Victor Niederhoffer, shows up how far these pension fund figures are out of line with long-term share market expectation. The author is a New York fund manager who has hands-on experience of how tricky the stock market can be since one of the funds he managed lost all its capital in the Nineties. He shows that while a dollar invested in a random selection of US stocks at the start of the century would have turned into $15,000 by the end of the period (a staggering 1,500,000 per cent return) the real annual return comes down to 6.5pc while that on UK equities is only 5.6pc.

The difference between the two figures -the 1.5m pc return for the century and the 6.5pc annual return -is accounted for by the power of compound interest plus inflation.

Now we have low inflation but the power of compound interest is working in reverse as pension fund deficits grow yearly due to lack of full funding.

Not surprisingly, two thirds of the Footsie100 companies have now abandoned final salary pay schemes and transferred the risk to their employees with money purchase schemes.

There are two points to be made about these figures. First, no one can point to a company that has survived unchanged for a century, although Shell must come close. Secondly, the indexes on which such calculations are based regularly replace losers with new winners, thus giving an upward bias. Niederhoffer's book also succeeds in debunking almost every myth and theory used by stockbroking analysts to justify share purchase recommendations. His contention them can be proved to work. is that none ofThe one possible exception is that buying in the second year after a fall usually pays off. The recovery seen in share prices since March shows that it still works.

Oh, and before you start building your `random portfolio' to achieve that 1.5m pc gain read his Chapter 5. It is headed: `We Are Number One' usually means `Not much longer'.

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JUST ANOTHER TRADING DAY: But a new book debunks almost every myth and theory used by analysts
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Title Annotation:Business
Publication:Daily Post (Liverpool, England)
Date:Aug 6, 2003
Words:514
Previous Article:Net firm travels to profit.
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