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Say you save in a pension fund, provident fund or that sort of thing. Say the manager of your fund is offered two shares, one superior, one inferior. Which will he choose?

You might think it's obvious, but actually, it depends. Specifically, it depends on what he gets out of it. Here's a real example.

Shareholders in Partner Communications (LSE, TASE, Nasdaq: PTNR)  sold controlling shares in late December. Controlling shares in Partner differ from ordinary ones, which are traded on the stock market, by the fact that they can't be sold without the explicit permission of the Communications Ministry. They are, as they say, locked up.

Usually, an asset you can't sell is worth less than one you can sell. Naturally, we'd all rather save in a vehicle we can tap at need, than in one we can't touch for 5 years. The question then becomes, how much less is such a thing worth?

In the case of Partner's locked-up shares, they were sold for 12% less than the publicly traded shares. Is that enough of a discount?

Accountants are the venue to answer to that one. The accountants at institutional investors, that is.

The more diligent and conservative ruled that since these Partner shares were and will remain non-negotiable, then a 12% discount is reasonable.

Less conservative accountants said they had no idea and that any investment manager could price Partner however he or she deemed fit.

Thus the managers of the institutional investors received the imprimatur from their number-crunchers to record the value of the locked-up Partner stock at the same value of the ordinary Partner stock, and report in an immediate profit of 12%.

Conservatism of accountants, therefore, was the factor that decided which institutional investors bought the locked-up Partner shares, and which didn't. The institutionals that didn't receive the nod to post an immediate 12% profit didn't buy the shares.

One might conclude that their professional opinion is that the inability to trade in the share required a discount of more than 12%, and therefore, buying the stock would be a bad deal.

Siren songs

But the institutionals that did receive the nod to post an immediate 12% gain pounced on the locked-up shares like they were candy.

No, it wasn't that they thought the discount was suitable: they simply succumbed to the siren song of an immediate capital gain, just before year-end, which would pretty up their returns.

These institutional investors preferred to buy an inferior share, just because they could win a skirmish in the marketing war over new investors in the following year.

One is less than impressed by the professionalism of certain accountants, who again proved they're nothing more than puppets of their clients (in this case, institutional investors). But the professionalism of the clients (in this case, institutional investors) is even less impressive, in pressing their accountants to accept the unreasonable pricing.

And one is purely appalled by institutionals that manipulate the pricing of non-tradable assets as a method to inflate returns.

It is a method. We have written about it, and warned that December would be marked by a flood of offerings of non-negotiable assets, and that the only reason for them would be to artificially inflate returns. And because it is a method, the Capital Markets commissioner woke up and is now thinking of instituting new rules for pricing non-negotiable assets.

It is well that he does so. But experience shows that every loophole the commissioner closes merely spurs the market to find a new one. So don't rely on the commissioner to solve the problem: you have to rely on your common sense.

Common sense says that in a year in which the dollar sinks, the euro ends unchanged, stocks gained 5-12% and bonds rose by 4-7%, a good provident fund should generate 8-10% in returns, at most. A provident fund that boasts it gained 15-20% for investors is one at which you should raise an eyebrow. You can't explain returns like that through clever investing, but most probably, through shenanigans.