Outlook: Aspire to Gent's achievement at Vodafone, but envy his pay

Gilt yields; Littlewoods/GUS

Sir Christopher Gent, chief executive of Vodafone, reckons there is something culturally questionable about Britain's penchant for envy and criticism when it comes to high levels of executive pay, which contrasts badly with the US's supposedly more aspirational approach to such issues.

As it happens, the backlash against "fat cat" pay is even more extreme in the United States right now than it is here, although admittedly it starts from an altogether different plane, with top executive remuneration typically four or five times higher than in Britain in most industries. The number of instances of wholly unjustified excess following the over indulgence of the boom is also bigger by an order of magnitude.

Yet what really gets Sir Christopher's goat is not so much the general level of noise about fat cat pay, which is inevitable after a boom and bust of the size we've just had, as that he is so much a part of it, alongside all the robber barons - we don't apply this to him - who have ridden off into the sunset with their bag loads of money having largely destroyed the companies they once worked for.

Sir Christopher is leaving, sure enough, but he is doing so voluntarily, and although his share price is but a shadow of its bubble inspired heights, his company looks better positioned and more robustly constructed than almost any other telco left standing. For a company founded as recently as the mid-1980s, that's quite an achievement.

Debt is low, the company is throwing off cash in ever increasing quantities, and Vodafone has built an impressive international patchwork of market leading positions in mobile telephony across the world. Vodafone has resisted pressure to write off the cost of its 3G licences in Britain and Germany, but that's less an issue of management pride, the company insists, and much more to do with the fact Vodafone's interests in Germany and Britain are now so profitable that the accounting standards wouldn't allow them to write off the carrying costs of the licence.

Sir Christopher would say that if he's an overweight feline at all, then he's one fat cat that thoroughly deserves his bowl of cream.

Up to a point, he's right. Sir Christopher is one of the highest paid chief executives in the FTSE 100. Controversially, he was also awarded an after the event bonus of £10m for his takeover of Mannesmann, an acquisition which marked the high point of the Vodafone share price and has as a consequence so far created no value at all for investors. Before he goes, there will be another multimillion-pound bonus, and the transfer value of his pension will be increased to ensure a prosperous retirement.

Sir Christopher's three-year rate of return to shareholders looks grim. Go back six years, to when he became chief executive, and it looks much better, if not yet outstanding. Go back to when the company was first floated in the late 1980s, when Sir Christopher was managing director of the main network business in the UK, and the returns are sensational. In that period the shares have risen more than twelvefold against an index which has barely doubled.

Again, the achievement in constructing a global empire from such small beginnings is a remarkable one. Unfortunately, not many of Vodafone's current shareholders would have been on the register since the beginning. Most would have bought in with the shares at or close to the top, so their perspective will be a good deal less generous.

As yesterday's results demonstrated, profits have started to flow strongly, so management can hardly be accused of failing to deliver, yet the share price has already had its glory days. Today, the share price reflects the lower growth, maturer company Vodafone is bound to become, rather than the young tearaway it once was. There is a consequent mismatch between share price performance and the rewards for success, largely linked to earnings and peer group comparisons, that Sir Christopher has come to enjoy.

Sir Christopher is said to be retiring early because he's fed up by being vilified over his pay. If that's true, then he is being unduly sensitive about it, and I suspect that's not the real reason at all. It would be an awful shame if Sir Christopher was remembered more for fat cattery than Vodafone. He's built a remarkable company, and what's more, he's got the good sense to know when to let go, unlike so many chief executives who hang on far too long. Whatever he decides to do next, he's assured a warm welcome.

Gilt yields

Last Friday, the yield on a ten year gilt dropped through 4 per cent, a level not seen since the mid 1950s. It bounced a bit yesterday after data from the US suggesting that deflation may not be quite the racing certainty the bond markets have come to suggest, but it remains close to historic lows.

To those of us brought up in an age of high inflation, it looks like a scarcely believable anomaly, a triumph of hope (if that's the right word for fear of deflation) over experience. Experience suggests that long term interest rates as benign as this cannot last, even though the authorities have now succeeded in maintaining a relatively low inflation and interest rate environment for ten years now.

The fear is that they point to something exceptionally nasty coming down the line towards us - a Japanese style deflation. In Japan, the equivalent long bond yield is just 0.58 per cent, while even in the US, it's a bit lower than it is here. Theoretically then, gilts could still rise a lot further before they peak. Would anyone bet on it? I don't know about you, but I certainly wouldn't.

War loan, originally issued at 5 per cent and then refinanced at 3.5 per cent during the deflationary 1930s, was eventually made almost valueless by inflation. I'm not suggesting that anything like that will happen to modern day gilts, but to make the maths work on current yields requires inflation to go some distance below the present inflation target and then stubbornly sit there. That doesn't seem a good wager to me.

Alan Greenspan, chairman of the Federal Reserve, recently said the Fed stood ready to buy long bonds at low interest rates to counter deflation should that be necessary. His comments have to some extent succeeded in achieving the desired result without having to spend a dollar of Federal Reserve money, which was presumably his intention. By simply opening his mouth, Mr Greenspan has made long term credit that little bit easier. Yet the market cannot be manipulated indefinitely, and the present combination of exceptionally low interest rates and a declining currency will eventually prove inflationary.

Many investors think equities still too risky for them. The risk in bond markets seems to me much higher. For the time being, cash remains far and away the most reliable bet.

Littlewoods/GUS

Last time two big mail order companies tried to merge, they were packed of to the Monopolies and Mergers Commission where they were subsequently blocked. Littlewoods and GUS concede that the 70 per cent share of agency mail order they will have when combined might be enough to do the same again if the competition authorities were to adopt the same narrow definition of the market they did back in the mid-1990s. So confident is Littlewoods that they will not that it is buying GUS's mail order business unconditionally.

The market has changed fundamentally since then, they argue, and it is hard to disagree. Home shopping has been transformed by the internet, and credit is now both easy and cheap, even for those elements of society traditionally targeted by traditional catalogue selling. The Barclays ought to be able to make the business pay its way once they've stripped out the duplicated cost. Alone, the two companies would have struggled to survive.

jeremy.warner@independent.co.uk

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