Retail investors are often warned against overtrading. Not only does it increase costs, which eat away at returns, but it can also send investors running around in circles: either taking profits too soon before rueing their mistake and buying back in at a higher price, or doing the opposite and chasing their losses in a stock that is only going in one direction. 
However, overtrading does not just affect retail investors, but professional fund managers too. This is why James Henderson (pictured) has started experimenting with ‘inertia analysis’ – gauging how well his funds would have done if he hadn’t traded any of his stocks over a specified period.
The results of the investigation, he said, make for uncomfortable reading.
“I found turning up for work was detracting value from the funds,” he explained, pointing out there was one culprit in particular that was skewing results against him.
“Blue Prism is really making progress in robotics, removing the need for a human element when processing data for insurance companies and that type of thing,” he explained.
“This is a hot area and Blue Prism has been remarkably strong, with its share price and valuation going like that,” he said, pointing upwards, “and it has gone to more than 5 per cent of the Henderson Opportunities Trust.”
Data from FE Analytics shows that Blue Prism has made 1,648.42 per cent since it listed a little over two years ago. However, the problem for Henderson is that it is already the largest stock in his portfolio – compared with Keywords Studios in second place at 3.9 per cent – even though he has trimmed his holding on a number of occasions.
Performance of equity vs index since launch
Source: FE Analytics
Another problem is that while he is a value manager, Blue Prism is clearly a growth stock and is not expected to turn a profit, never mind pay a dividend, for many years.
So what is Henderson doing with the results of his inertia analysis?
“Well, I am not going to tell management,” he laughed, before adding: “Because something like inertia analysis shows that my selling is wrong and Blue Prism has gone from £1 to £15, instead of being absolutely wedded to valuation, you have to say that it could be – it could be – right.
“I sell in small amounts, on strong days, and it is still 5 per cent of the fund because the bloody thing keeps going up.”
Henderson believes in buying out-of-favour domestic stocks and has recently bought brewery and pub-chain operator Greene King, saying that although it is having “a really tough time”, a lot of this strife is already priced in.
“The thing is not to go overboard and do it in one big swoop, it is to buy just little bits on weakness,” he added.
“So I sold bits of Blue Prism on real strength, but the next day you come in and Blue Prism has gone up and Greene King has gone down. So you just have to do a little bit more, because it has opened up, but you have to do it slowly. There is no rush.”
Henderson is not allowing the results of the inertia analysis to completely change his process. He said that while Blue Prism is the sort of company that growth managers are referring to as “the future” – and, he admitted, they may well be right – this doesn’t mean it won’t correct significantly in the future and he doesn’t want to be over-exposed if this happens.
“The other side of that is all the people wanting to get in to robotics,” he added. “You’ve got to be fully aware that it is going to be really competitive and there is a lot of capital on the sidelines with people wanting to support companies in this area and they will eventually fight.
“So I have still got 5 per cent in Blue Prism, but on a strong day I will have to smile and say ‘thank you’ and let some shares go.
“We are watching it, I will watch it, and somewhere along the line if it does turn then I will be more confident in dealing in a bigger size. But while it is not there, why bang your head against a brick wall for the sake of it?”
Blue Prism is not the first stock of Henderson’s to deliver stratospheric returns. In an article published earlier this year, he said that he bought insurer Hiscox for his Lowland Investment Company in the early 1990s when it was worth £40m. Its market cap is now £1.6bn.
“Hiscox is everywhere [in my portfolios],” he added. “It has been in Lowland since 1993 and I do have to reduce it slightly every so often. It is a good company but it is now trading at 2x book [value].
“But it would be typical of the inertia analysis that it hasn’t been right to reduce it. You are never going to call these things perfectly right and it is fundamentally a very good story still, it is just the valuation has got quite rich.”
Even though the manager said Henderson Opportunities Trust would have done better at times if he wasn’t there, data from FE Analytics shows it hasn’t done too badly when he has been present. The trust is significantly ahead of the IT UK All Companies sector and FTSE All Share index over one, five and 10 years, making 254.26 per cent over the past decade compared with 147.79 per cent from its peer group composite and 115.73 per cent from the benchmark.
Performance of trust vs sector and index over 10yrs
Source: FE Analytics
The trust has ongoing charges of 0.86 per cent and is 13 per cent geared. It is trading at a discount of 16.12 per cent to net asset value (NAV), compared with 17.1 per cent and 15.63 per cent from its one- and three-year averages.