Blinkx – more market abuse in AIM stocks?

The Blinkx share price reached a peak of 218p on the 6th January, but yesterday (30/1/2014), it closed down 33%. At one point it was as low as 90p. This followed the publication of a blog post by Benjamin Edelman under the heading “The Darker Side of Blinkx” which attacked various aspects of the company’s operations.

Blinkx sells advertising linked to on-line videos, supported by a video search engine (it originally spun out of Autonomy). Edelman, who is an associate professor at Harvard Business School and specialises in internet matters, published his blog on the 28th January. It is quite a long one so only a brief summary will be given here. His prime focus is on possible inflated measures of “views” of Blinkx’s advertising videos on which basis advertisers might be overpaying.

He attacks the company’s links to Zango from which Blinkx acquired some technology in 2009 (surely an eon ago in internet terms). Zango was known to be associated with deceptive advertising technology. He also raises the issue that a “weather alert” app is apparently linked to Blinkx but there is no clear ownership statement on it. But he does not seem to have bothered to ask the company any specific questions on this issue.

Edelman complains about Blinkx not disclosing more details of the assets acquired from Zango and what continuing use is made of them, including splitting them out so that “the results of the ex-Zango business could be reported separately”. The company apparently integrated those assets into its main operations as reported in the 2010 financial statements. Comment: it seems very odd that anyone could expect a company to report separately on a relatively minor acquisition, and it would be impossible if the business and staff had truely been integrated as the company claimed.

Edelman also discusses the acquisition by Blinkx of Prime Visibility who were linked to a business called “AdOn Network” which is allegedly associated with adware installed on users computers and other disreputable activities. Edelman links this to a jump in the use of the blinkx.com video web site in 2013 and suggests it might be fictitious traffic.  Again there is no specific evidence provided however.

Edelman also complains about the quality of some of the material Blinkx presents and how it is presented, plus reports that Vindico indicated a low “viewability” rating for Blinkx video ads (in comparison with major media channels CBS and MSN).

Finally he compares the revenue per employee at Blinkx with other allegedly similar companies (Tremor, YuMe, RocketFuel and Criteo) where Blinkx is approximately double the others. This leads him to question whether Blinkx’s employees are really “twice as productive” or whether it is because of “short-term profits in adware, forced-visit traffic, and other black-hat practices”. He then goes on to complain that Blinkx does not explain exactly how it makes money.

The Company’s Response. After the abrupt decline in the share price, the company published an announcement (unfortunately no doubt delayed until the afternoon because the company’s staff are based in California) which said “Blinkx strongly refutes the assertions made and conclusions drawn in the blog post”. It also confirmed that “Fiscal Q3 trading was in line with management expectations”.

Citigroup, the company’s joint broker, also made some comments which were “Our view: Reaction Overdone” and they suggested that “Blinkx’s business model is no more unusual than that of many ad tech companies” – see the FT.com web site for details.

Analysis and Comments: Edelman does not appear to have asked the company how it makes money, although the company might not wish to disclose as much detail as Edelman would like for obvious commercial reasons. But it is worth noting that the company is generally very open with its communications. Indeed ShareSoc commented on the live web cast of its results in May 2013 (see our June newsletter) which anyone could dial into and ask questions. In addition they run a very well attended AGM which lasts half a day including presentations. Any complaint that the company is being over secretive is surely dubious.

As regards the comparables to other companies, all companies are different and in the internet/software areas there is usually significant differentiation between the business models, markets attacked, the partner arrangements (often key to revenues), the size of the networks, etc.  

Most of the other allegations are based on supposition or innuendo with few hard facts. Citigroup make the additional point that all Blinkx ad impressions are verified (including by third thirties). It would seem odd that advertisers would continue to pay for such advertising if they did not see good results from it.

A Link to Shorting? It is known that Blinkx is a stock that has been shorted of late. One can perhaps see why if you look at the financial fundamentals. A share price of 218p would have implied a forecast p/e of over 50 or a market cap of more than 5 times revenue (although those are not particularly exceptional ratios for high-tech companies with the revenue growth being achieved by Blinkx).

One oddity about Edelman’s blog post is that he says that some of it was prepared “at the request of a client that prefers not to be listed by name”. Now this is most peculiar. Folks who commission research into companies usually want to keep it to themselves.

Is it possible that the commissioner is one of the shorts? Indeed Edelman says that if he traded the companies he writes about, he would be “short Blinkx”.

This case looks very similar to the situation that arose a few weeks ago at Globo. Another internet  software company that seemed to get rather ahead of the fundamentals after the share price zoomed up. It then became the target of attacks of a similar nature – suppositions discussed, uncomparable companies compared, the basic revenue models of the company called into question and similar tactics. Again with very little firm evidence being supplied. But the investors panicked regardless, or as one of them said to the author in the case of Blinkx, there is surely no smoke without fire.

ShareSoc published a lengthy article after the events at Globo and on the abuses of blogs and bulletin boards, where dubious and unverified information can be published. It’s very easy to demolish the reputation of a business if one has a mind to do so particularly those operating in new and complex technical areas and where the author has limited knowledge of the company’s operations.

Surely when shorting is also involved, the possibility of “market abuse” by traders needs to be examined.

Roger Lawson

Nominee system defeats shareholder voting

ShareSoc  has recently issued a survey to our Members and the public covering their voting and attendance at General Meetings and the prevalence of the use of nominee accounts. The results demonstrate that the nominee account system undermines shareholders’ ability to vote at the General Meetings of the companies they own.

Nominee accounts are now the commonest form in which investors hold shares in companies (89% of ShareSoc Members held some shares in a nominee account, as opposed to the use of Personal Crest accounts or paper share certificates).

When shares are held directly, only 7% of our Members never bother to submit a proxy voting form. But for those shares held in nominee accounts the number rose to 42%. Public respondents (i.e. non Members) were even less likely to vote their shares.

Investors not enfranchised. The reason for these low numbers is primarily that only 18% are actually given information and voting rights by their stockbroker or platform operator. Indeed only 38% of our Members and 31% of Public respondents were aware that the ISA regulations required nominee operators to provide voting rights.

Investors also feel disenfranchised. 74% of our Members and 70% of the Public confirmed that they felt disenfranchised by the existing nominee system and proxy voting arrangements.

There were also a large number of individual comments on the difficulties of voting, particularly where nominee accounts were in use – “too much hassle” was a typical one.

Summary. The results of this survey demonstrate that the nominee account system dramatically reduces the number of investors who submit proxy voting forms for the companies in which they hold shares. Even among ShareSoc Members, who are more likely to understand how to exercise such votes, they are often unable to do so because only a small minority use a broker who provides information and voting rights.  There is also general ignorance of the obligation of ISA operators to provide voting rights.

The results from this survey will be used in the ShareSoc Shareholder Rights campaign which is under development.

Please contact ShareSoc if you require more information on the questions posed in these surveys and the details of the responses.

Fundsmith progress and new Emerging Markets Trust

Fundsmith have recently published their results for the year ending December 2013. ShareSoc reviewed this fund in our November 2012 newsletter so it’s interesting to review their progress since then and whether they have managed to keep up their initial superior performance.

Led my well known investor Terry Smith, Fundsmith has a very specific style and these are the promises they make to investors: No performance fees, No initial fees, No redemption fees, No overtrading, No leverage, No shorting, No hedging, No derivatives, No over diversification, No closet indexing, No lack of conviction and No other equity strategies.

The fund focuses on global equities, typically liquid large cap equities with a focus on consumer products companies and avoidance of banks, insurance companies, commodities and other cyclical sectors. There is a strong emphasis on a buy and hold strategy with resulting low stock turnover and low costs. Stock selection is focussed on free cash flow yield, where the yield is above what might be obtained on long term government bonds.

How was the performance in 2013? Total return of the T Class shares was 25.3% which compares with 24.3% for the MSCI World Index in sterling, in other words only slight out-performance. But as Mr Smith points out, in a year when equity markets were in a bullish mode. and the fund could be seen as relatively “defensive” in nature, this might be viewed as a good result.

Top five performers were Dominos Pizza, Microsoft, Stryker, Becton Dickinson and 3M, with the bottom five performers being Swedish Match, Serco, Imperial Tobacco, Schindler and Philip Morris, so three of the five losers are tobacco companies. Mr Smith thinks the concerns about plain packaging and e-cigarettes are overdone but they are limiting their exposure to this sector.

Fundsmith are optimistic about the growth in emerging market economies but say that few emerging market equities meet their requirement for liquidity, as Fundsmith is an open-ended fund. Therefore they are proposing to launch an investment trust in 2014 to be called the Fundsmith Emerging Equities Trust (“FEET”) which will focus on such companies.

The fact that Fundsmith have chosen to launch a fund for this sector is surely interesting when emerging markets have been out of favour for some time and valuations do not look expensive.

Roger Lawson

Eurofinuse adopts manifesto

Eurofinuse, a representative body for European shareholder organisations of which ShareSoc is a Member, has adopted a “Better Finance Manifesto”. They are launching this before the European Parliament elections in May to try and influence politicians to adopt policies to protect savers and investors over the coming years.

Although some of the manifesto policies are focussed on problems in other countries in Europe than the UK, there are many meritorious aspects. Here’s just a few of the issues they cover:

1. That there should be an end to the destruction of the real value of savings including reducing all forms of “financial repression”.

2. Enhancing minority shareholder rights and facilitating the exercise of voting rights, especially for cross-border voting.

3. Promoting equities as a simple, cheap, liquid and transparent long term investment tool, and returning capital markets to their natural participants (end investors and non-financial issuers).

4. Enforcing a balanced representation of retail investors in the EU Authorities consultative processes and groups.

5. Exempting individual investors from all financial transaction taxes (the UK has had stamp duty for many years of course, but this might also be relevant to proposed new Europe wide taxes).

6. Putting an end to double taxation of dividends issued in another member state (still a common problem).

As regards item 4 above, it is of course important that retail investors are well represented in European forums because a lot of our core financial regulations now come out of the European Commission and the ability of the UK to opt out is becoming limited. For example, only recently did the European Court of Justice (ECJ) reject a challenge by the UK to the ability of ESMA to introduce short-selling regulations – for example to ban short-selling in emergencies. HM Treasury declared the judgement was “disappointing”. For such reasons ShareSoc actively supports Eurofinuse and one of our directors regularly attends their meetings.

Roger Lawson

AIM is no longer a dog, but the mastiffs are the winners

There was an interesting analysis of the performance of AIM stocks in a recent “AIM Journal”, a publication sponsored by Finncap.  As others have pointed out, AIM finally changed course after a long streak of poor performance, and the AIM index actually beat both the FTSE-100 and FTSE-250 indices in 2013.

If you had invested in the AIM index back when it was formed back in 1996, even with dividends reinvested  you would still be losing money. And that is the case even if you added backed the AIM companies that have migrated to the main LSE market. In addition it ignores the impact of AIM delistings where many of those companies were in financial difficulties and investors would have lost out from the poorer valuation of private companies.

But the interesting aspect brought out in the AIM Journal was that most of the improvement in performance was as a result of the out-performance of the  AIM top 50 companies (those in the FTSE AIM UK 50).  That index actually rose by 43%  and is the third year in a row that it showed out-performance over the main AIM index.  

Who is in the AIM-50 index? Such companies as Abcam, Advanced Computer Software, Advanced Medical Solutions, ASOS, Blinkx, Clinigen, Dart Group, EMIS, Globo, Hargreaves Services, Majestic Wine, Monitise, Nichols, Quindell, RWS, Telford Homes, and F.W.Thorpe to name a few at random that might be more familiar. There is a marked absence of many natural resource companies, such as mining and oil companies, who have done particularly badly of late.

Professors Dimson and Marsh have looked at the returns on new AIM IPOs and here is a quotation from the Kate Burgess of the Financial Times based on their analysis: “…disappointing returns have failed to lower over-optimistic pricing of IPOs. Post-float performance of AIM IPOs was strongly negative between 2000 and 2011, according to the profs“, although returns did improve somewhat in 2013 probably because of the general over-excitement in AIM share prices that grew during the year.

However, the moral is surely that if you want to invest in AIM stocks, it might be wise to pick the established larger and stronger ones if these trends continue – the pedigree bull mastiffs of the AIM investment world. But there is a proviso here. The “popularity” of such stocks as ASOS, with investors jumping on this bandwagon for well known larger AIM stocks, might have inflated their prices to unrealistic levels. So whether this trend will repeat itself in 2014 and future years remains to be seen.

Investing in AIM shares at their IPOs or soon after is clearly an exceedingly risky affair though. Many years of experience tells you that and with companies now queuing up to join AIM it is surely the case that history will repeat itself.

Why institutional investors overpay for AIM IPOs is a more difficult question to answer (it is they who set the prices). Is it because they have more money than they know what to do with, in other words cash they must invest in such companies? Answers on a postcard to……

Roger Lawson

Silverdell Shareholder Meeting Report

There was a meeting attended by about 20 Silverdell shareholders in Beckenham on the 20th January. A report of the meeting is present here: www.sharesoc.org/Silverdell_Shareholder_Meeting_Report.pdf

It covered what was known about the events at this AIM company, where the shares were suspended out of the blue, and delisted 6 months later with not much communication to shareholders in the meantime. The company has announced that the shares are worthless. Also discussed was what actions shareholders might take at this point in time and some of the general issues surrounding company law and regulations.

Note that we expect to publish an article in our next Members Newsletter that also covers how to avoid investing in companies that quickly become “duds” like Silverdell. This is of course possible not just with AIM companies but with any listed company (although it’s more common in the small cap sector).

Roger Lawson

Hargreaves Lansdown doubles charges for some investors

On the 15th January Hargreaves Lansdown (HL) announced new charges on its investment platform, which is one of the most widely used by private investors. The changes are no doubt provoked by the new rules whereby funds can no longer pass part of their charges back to HL, as a result of the RDR (Retail Distribution Review). But the changes will mean that the annual fees paid to HL by some investors will double. ShareSoc has issued a press release explaining the impact of the change – see www.sharesoc.org/pr53hargreaveslansdown.html

A particularly dubious change is the imposition of a fee of £10 if you wish to exercise your vote as a shareholder, or wish to attend an AGM which is very damaging to shareholder democracy and good corporate governance. Instead of making it easier for investors to exercise their rights, as other investment platforms have done by providing automated systems, they seem to have chosen to deter investors from taking any interest in the companies they own.

In addition the changes prejudice those investors who prefer to invest in a mix of direct shares and investment trusts rather than funds when investment trusts have been shown to generally be better value in terms of performance and charges than funds. Hargreaves Lansdown seem to be taking the side of the fund management industry as against the interest of their clients.

Anybody affected by this change is recommended  to contact HL to object to these changes, and if they do not reconsider their position to look to transfer to other investment platforms.

Roger Lawson