SCOTTISH Friendly will deal Glasgow's financial sector another bitter blow by axing its (pounds) 350m in-house fund management operation and outsourcing the work - almost certainly to the City of London.

The emergence of the friendly society's intentions follows revelations by The Herald of Abbey National's plans to announce next Thursday that it is abandoning its (pounds) 28bn funds division in Glasgow, and outsourcing asset management to US giant State Street.

Funds are fleeing Glasgow at a time when the city has been trying desperately to build an international financial services district.

Scottish Friendly's move comes as a surprise - given its investment team led by Julian Fosh has consistently figured in league tables of top-performing fund managers in the UK.

However, the outsourcing of fund management is part of a wider review which will cut costs and reduce by more than one-third the workforce of the friendly society, which has 350,000 policyholders.

The outsourcing decision was revealed to The Herald by an industry source, and confirmed by Bob Thomson, chief executive of Scottish Friendly.

Asked about this intention, he replied: ''That is correct. We have decided to do that. We are in confidential negotiations with a number of providers.''

Thomson cited London as the likely destination for the funds, and signalled Scottish Friendly would be shifting away from its current focus of attempting to beat stock market indices through active management.

Scottish Friendly's investment performance in recent years is all the more impressive because it has a three-strong fund management team supported by one clerk.

However, Thomson said: ''In the long run, (we are) firmly of the belief that tracker funds outperform the average fund manager. We expect a significant part to be in tracker funds.''

Highlighting another reason for outsourcing, Thomson said: ''When you have a very small team, you actually carry a risk that in volatile times, if you have a risk of illness, holidays, combination of both, you can suddenly find yourself without the key people to make moves (in equity and bond markets).

''While that actually didn't happen to us, we went through a fairly volatile period, as the stock market and institutions connected with it did last year and the year before.''

Seemingly acknowledging Fosh's achievements, Thomson added: ''We have weathered the storm quite well.''

Thomson declined to identify those investment houses seeking to manage Scottish Friendly's funds, but denied categorically talk that one was Aberdeen Asset Management.

Although Scottish Friendly is small compared with Abbey, it is still one of only a handful of significant fund managers in the Glasgow.

Britannic Asset Management, running (pounds) 14bn, is by far the biggest in the city behind Abbey, with Aberdeen Asset Management and Glasgow Investment Managers other players of note in Glasgow.

Aberdeen has been shifting some funds from Glasgow to Edinburgh, following its acquisition of Edinburgh Fund Managers late last year.

Thomson, meanwhile, said Scottish Friendly, which has ramped up its profile by marketing its tax-free bonds through newspaper inserts, planned to reduce its total workforce from 71 to 44. Taking into account seven unfilled vacancies just now, he added that this would involve 20 ''potential'' job losses.

The other cuts are coming in information technology, and administration functions.

Scottish Friendly cited its implementation during 2003 of a (pounds) 3m administration system to improve customer service, and aid the launch of six new products over the next 12 months.

Thomson said: ''There is cost pressures on all life (assurance) outfits. In spite of our size, we have one of the lowest acquisition costs (for new business) in the country. We can't rest on our laurels. We have to keep doing this.''

Times have been tough for the friendly society sector. Rival Scottish Legal Life, also based in Glasgow, closed its doors to new business in 2002 after concluding associated marketing and regulatory costs were draining members' resources.

Thomson also blamed government measures such as 1% maximum annual charges on policies for some of the cost pressures on insurance companies generally, and linked these with the current transfer of jobs to India by institu-

tions larger than Scottish Friendly.

He said Fosh's fellow ''approved persons'' in the investment team were John Campbell and Malcolm Ramsay.

Asked if all the fund managers would be made redundant, he said: ''That is a consequence - the way it looks at the moment.''

Thomson predicted transfer of the funds to an external manager would be completed ''within the next three months''.