* Sherborne says it is engaging with bank over chairman
* Activist also looking at capital and costs
* Fund has a 5.4 percent stake in Barclays (Adds investor comment and further background)
By Ben Martin, Sinead Cruise and Lawrence White
LONDON, Aug 8 (Reuters) - Activist fund Sherborne Investors is in talks with Barclays about replacing chairman John McFarlane as part of a plan to overhaul the British bank.
Sherborne, which built a 5.4 percent stake in the lender earlier this year, said in its first half results on Wednesday it was engaging with the lender over the search process and the mandate for McFarlane's successor.
In what are Sherborne's first public comments about its Barclays investment, the activist also disclosed that it was talking to the bank about its capital allocation, quality of earnings, capital adequacy, and cost structure.
Sherborne said "addressing these matters could improve Barclays' financial strength and its long-term competitive position", adding that its "intention is to continue its dialogue with Barclays for as long as it appears to be appropriate to do so."
In May, investors briefed by Sherborne told Reuters that the fund was calling on Barclays to end the bulk of its trading activities at its investment bank, to help lift returns and cut costs.
McFarlane is a financial services industry veteran who has been chairman of Barclays since 2015.
The 71-year-old told shareholders at the bank's annual meeting in May that he had asked the chairman of its nominations committee to prepare for his eventual departure, but added that he was not poised to leave.
"You are not getting rid of me yet," McFarlane told the meeting, following speculation he could exit the bank soon.
Sherborne is led by Edward Bramson, who has previously embarked on overhauls at a number of British companies including Electra Private Equity and chemicals business Elementis .
Barclays did not comment on Sherborne's results and the fund declined to comment further.
The market had been waiting for more definitive signs of Bramson's influence at one of Britain's largest lenders ever since his stakebuilding came to light in March.
"It was not all about him (Bramson) coming in and making dramatic changes, it’s a combination of valuation and subtle changes to the strategy," one fund manager who holds shares in both Barclays and Sherborne told Reuters. "Let’s judge his actions 12 months after he took the investment, not 6 months."
A second Barclays investor, who recently spoke to the bank's management, agreed that Bramson should be given at least a year to see if he is having a positive impact. But he flagged continued tensions between Barclays and the activist in their engagement so far.
"They felt his analysis was flawed and had done their own calculations on the costs of attempting to do what he wanted, describing the costs in terms of capital burnt in the process as 'terrifying'," the fund manager said.
The bank last week posted pre-tax profit of 1.9 billion pounds for the April-June quarter, an increase from 659 million pounds a year ago and better than the 1.46 billion average of analysts' estimates compiled by the lender.
Jes Staley, Barclays' chief executive, said last week the bank was holding conversations with Bramson and they had met, but the activist "has not outlined what his strategy is to us."
Sherborne raised 700 million pounds by listing its latest fund on the London stock market in July last year.
It said on Wednesday that the fund's net asset value attributable to shareholders had fallen to 607.3 million pounds as of June 30 from 695.9 million pounds at the end of 2017 based on Barclays share price.
Shares in the bank have declined by about 5 percent so far this year to trade at 192.96 pence on Wednesday.
Reporting by Ben Martin, Sinead Cruise and Lawrence White in London; editing by Simon Jessop and Alexandra Hudson