Questions for Man as bull returns

The question wrapped up in the enigma of Man Group's share price is whether the explosion of investment in hedge funds is a bear market fad or something sustainable in the long term.

Man is the UK's biggest hedge fund manager and its shares have surged in recent years as it harvests cash from wealthy investors who have decided to duck out of the traditional equity market. As of this week, the company is looking after $28bn of other people's money - and for fees that would bring a tear to the eyes of traditional fund managers.

The group polarises opinion in the City. Its detractors have an ill-formed suspicion, a "something in the woodshed" mentality that probably stems from the disaster of Long-Term Credit Management, the notorious hedge fund collapse in 1998. Hedge funds are dangerous investments; it does not necessarily make hedge fund managers dangerous, too. Man insists that it runs highly diversified funds of funds, using more than 200 underlying managers and spreading its investments among the many weird and wonderful styles of hedge fund activity.

Harvey McGrath, the chairman, did accept yesterday, though, that returns from many of these styles will tend to fall as more money chases the same opportunities for exploiting mispricing by markets. He argues we are not there yet, though it does seem returns from the hedge fund industry have been lower in the last 18 months than previously.

Not at Man, though. It had a bumper year for performance-related bonus fees which, on top of standard fund management charges, took profits to £297m. That compares with £193m the previous year, before Man owned the Swiss group RMF, which has brought the group big new institutional clients.

Even if stronger equity markets do tempt back some investors, the bear market in shares has taught the need to diversify. Hedge funds should account for more than the current 2 per cent of investments.

On 12 times forecast earnings in the next year but one, and with no reason to suspect Man will be de-rated, the shares still look worth having.

Growth in public sector work boosts ITnet

It is still a tale of two halves at ITnet, a services company you might hire if you wanted to upgrade your organisation's IT system.

The work it does for the commercial sector remains under pressure as customers, especially ones in the finance sector, cut their spending to conserve profits. As a result, the company is trying to focus on the transport and utility sectors.

Yet the public sector-focused half of its business is on the up. Sales to local government rose 20 per cent last year and ITnet has got off to a flying start there in 2003. In the first quarter it signed new business worth £50m over 10 years - compared with £36m for the whole of last year. Better still, it describes the value of its order pipeline as "significant", says it is bidding for a number of large contracts, and expects to announce more wins in the summer.

Add the two halves together and the business is okay. At the end of April, future orders totalled £280m, of which nearly £100m will be booked this year.

A pre-tax profit of £16.5m is likely for the full year. That puts the stock, up 6 per cent at 221.5p last night, on a forward multiple of about 15 times. That's not particularly cheap, but current holders should hang on for when commercial sector work picks up.

Mothercare investors bank on new chief for Disney magic

Mothercare, the stricken children's retailer, could do with a bit of Disney-style magic, and Ben Gordon, the former head of Disney Stores in Europe and Asia, looks like he might just be able to write a fairytale ending.

Six months into the job of chief executive, Mr Gordon impressed the City yesterday with his plans to turn the group around. He is an unassuming man, with an apparently modest strategy. But it is quiet determination, rather than grand gestures, that will be required if Mothercare is to defeat the dastardly super-markets, whose expanding children's clothing and toys ranges have got the specialist retailer into its sticky situation.

Just how sticky was set out in the historic results published yesterday. These showed the group tumbled to a £25m loss in the year to the end of March, having got far too many of the retail basics wrong. Its distribution systems have been a disaster, which cannot be solely blamed on the running of a new warehouse by one of the group's contractors. Not enough of the right products were in stores in time for Christmas. The three-year turnaround plan will tackle (and reduce the cost) of distribution,

Mr Gordon appears to have stabilised the business and like-for-like sales in the first seven weeks of the new financial year are up 2.8 per cent with margins improving, too. Mothercare will invest its strong cash flows in things as simple as modern lighting, a lick of paint and new tills.

With nearly £500m of annual turnover, the profit uplift could be considerable. That makes it worth joining our plucky hero's new band of followers.