Outlook: Arnold embarks on long slog of customer service at Abbey

Celltech/OGS; Hedge/long funds

Luqman Arnold has made good progress in the three months he's been at the Abbey National helm in shifting the ship off the rocks, but having completed the salvage in double quick time, what now to do with the hulk?

Mr Arnold reckons he's got one of the best retail banking franchises in Britain, and he utterly rejects the idea that Abbey National is just the smallest of six retail banking lookalikes with no long term future as an independent. That may be true in terms of revenue and profits, but judged by number of customers, 16m, Abbey is the second biggest, and that's an asset Mr Arnold reckons he can turn to his advantage.

But how? One thing he's not going to do is simply compete on price, as some sections of the City have been urging. Retail banking is a good deal more profitable in Britain than it generally is elsewhere in Europe, and investors would not thank him for reducing margins to German levels or below. Some £200m annually is to be stripped from the cost base by 2005, but it is not Mr Arnold's plan to turn the Abbey into a cheap and cheerful, retail banking version of Asda.

Instead, Abbey intends to distinguish itself around customer service and advice. It will continue to offer the full range of basic mortgage, current account and savings products, but it also hopes to become a big retailer of other people's produce. The strategy seems not unlike that already adopted by Bradford & Bingley, only Abbey plainly has greater scale, a bigger brand, and a larger pre-existing range of services.

Mr Arnold must be right to think there's a huge potential market out there for sound personal finance advice and service. Heaven knows, with plunging equity markets, dwindling pensions and fast deteriorating endowment policies, people are worried enough by it all. Only one problem. Everyone else is pursuing the same Holy Grail. There's no reinvention of the wheel in this business, and Mr Arnold will struggle to convince that what he's doing is so very different from what everyone else is up to. As basic banking and mortgage lending becomes ever more commoditised, banks have to find ways of returning to their routes as organisations that offer a personal service people really want to pay for.

Mr Arnold reckons he's putting the systems and structure in place to be better at it than anyone else, but the proof of the pudding will be in the execution, and he's wisely giving himself a long, three year time frame to show results. It will be a long, hard slog, he warns. In the meantime, he seems already to have established a firm base from which to rebuild. The figures yesterday were stomach churning, as was the fifty per cent cut in the dividend, but nobody could claim they were not warned and the shares rose on relief that the position wasn't even worse.

On the life side, Abbey seems to have capped its liabilities, in so far as that is ever possible with market conditions as rocky as they are. There are some difficult credit exposures left from the group's disastrous foray into wholesale banking, but there wouldn't be any mileage in Mr Arnold hiding further bad news from the world at this early stage in his turnaround strategy, and we can be pretty sure that this is as bad as it gets for Abbey. What remains is a still stable mortgage bank that last year produced profits before tax of £1.4bn. That's a good starting point for the long hard slog to come.

Celltech/OGS

Peter Fellner, chief executive of Celltech, is by comment agreement one of the best of the boffins turned managers who run Britain's cluster of biotechs. He seems to be something of a wizz as a corporate raider too. His intervention in the Oxford GlycoSciences/Cambridge Antibody Technology marriage plan is a perfectly timed and masterly piece of financial opportunism which may well succeed.

The all shares CAT bid for the cash rich OGS always did seem like little more than a disguised rights issue, and CAT shares have been clobbered accordingly. The upshot is that Celltech has been able to bid at a 23 per cent premium to the value the CAT offer has sunk to but still maintain a discount to the amount of cash OGS has on its balance sheet. Celltech is bidding 182p a share in cash. OGS is burning its cash reserves at a fair old pace, but at the last count they were still worth 245p a share and they won't have been depleted too seriously since. Celltech would thus be getting OGS's intellectual property rights and other assets for nothing, or as even Dr Fellner admits, for "a negligible net cash cost".

Unfair, screams David Ebsworth, chief executive of OGS. Shareholders should stick with the CAT deal or they will lose all the potential upside. It's hard to see why. On the Celltech deal, they can take Dr Fellner's cash, reinvest it in Celltech and CAT shares, and still be better off than they are under the terms of the CAT/OGS merger. Mr Ebsworth needs to come up with a better alternative fast, or he's just been outmanoeuvred.

Hedge/long funds

I've never taken the time to count, but it is sometimes said there are as many equity funds available for purchase by the British public as there are companies quoted on the stock market. It could well be true if you think about the sheer volume of investment trusts, unit trusts and other flotsam and jetsam bobbing around in the world of investment, yet far more time and energy is expended on analysing and commenting on companies than the funds that invest in them.

It scarcely needs saying that in the great bulk of cases, performance among the latter is abysmal. As long as stock markets kept on going up, no-one much noticed. You got your 10-20 per cent a year, and if that was a bit worse than the market as a whole, there was always some excuse and the promise to do better next year.

With poor performance cruelly exposed by the bear market, disillusionment with the fund management industry has become almost total. Figures released yesterday by the Investment Managers Association show a continued collapse in sales. They fell a further 19 per cent between December and January, when net sales were little more than a third of the level a year ago. Old style fund managers are being laid off right left and centre, and things are so bad that some groups think it not worth bothering with the marketing effort that usually accompanies the ISA selling season. We'll be lucky to cover our advertising spend, they figure, in another example of how the industry sells like there's no tomorrow at the top a bull market but ceases all activity at the bottom of a bear one.

No wonder so many are switching to hedge fund investment, which seems to offer at least some prospect of capital protection and growth, and no wonder too that the hedge funds are progressively attracting all the top fund management talent. There is no proper definition of a hedge fund, but there are generally three distinguishing factors. One is use leverage. Another is that they are unidimensional, in the sense that they don't benchmark themselves against anything, but instead simply promise to deliver outstanding rates of return. A third is that remuneration is performance based, which is what keeps the best talent moving into the industry.

Most pension funds continue to have a big problem with all three of these distinguishing features. They want transparency, benchmarking and acceptable levels of remuneration, and as a result, they have opted for mediocrity and value destruction. On the other hand, things do seem to be changing, and already the more progressive pension funds are adopting hedge funds as an asset class.

Many retail investors would like to do the same. Most high net worth individuals already have. Of course, it remains to be seen how well the hedge funds do in a bull market, or indeed whether they can still generate outstanding returns once they become a mass market phenomenon. But as things stand, traditional, long only fund management is dying on its feet and the hedge funds are coming of age.

jeremy.warner@independent.co.uk