Ian Cowie: this new asset class is not hitting the right note for me

6th January 2022 10:53

Our columnist explains why he hasn’t been persuaded to invest in an alternative asset class that’s growing in popularity.

David Bowie hit the headlines posthumously this week, with news that his song book has been sold for $250 million (£185 million). The Man Who Sold The World is still raking it in, six years after he died. Never mind ‘Is there life on Mars?’, prospective investors seeking income and growth should ask: ‘is there real value in music royalties?’

Bear in mind that nearly £2 billion is now invested in two investment companies specialising in this alternative asset class. Hipgnosis Songs (LSE:SONG) has total assets above £1.6 billion and Round Hill Music Royalty (LSE:RHM) has just over £350 million, so we are not talking about small Changes here.

The ‘Thin White Duke’ was one of the first artists to turn ‘jam tomorrow’ into ‘cash today’ when he sold ‘Bowie Bonds’ in 1997. Since then, a stream of stars have followed him into the money markets.

Last month, Bruce Springsteen sold his catalogue as both songwriter and recording artist to Sony for $550 million. Songs have two copyrights: one for the songwriting and one for the recording. Last year, Bob Dylan sold his entire catalogue to Universal Music for an estimated $300 million.

Working from home and digital distribution via streaming services, such as iTunes and Spotify, are boosting music royalties, despite Bowie’s predictions that the internet would destroy copyright. These revenues enable RHM and SONG to deliver dividend income of 4.2%, according to independent statisticians Morningstar.

Before deciding to jump in and say Let’s Dance investors should beware of what we might call ‘The Great Rock ‘n’ Roll Dwindle’. Music favoured by baby boomers - like me and, probably, you - has been making less money than hip-hop and rhythm & blues for years.

For example, the American market research giant Nielsen reported in 2017: “For the first time ever, R&B/Hip-Hop became the most dominant genre in the US, with nine of the top 10 most-consumed songs coming from that genre, including breakthrough hits by new artists Migos, Post Malone and Cardi B.”

No, me neither. But the important point is that people in their teens and 20s today are not listening to the same stuff their parents and grandparents enjoyed. Sex and drugs and growing old ain’t what they used to be.

Protest is an important part of the appeal of pop music for a young audience. Yesterday’s anti-establishment Heroes might not attract as much adolescent adulation now they are wrinkly multi-millionaires or even dead billionaires.

Here and now, there are balance sheet questions about the value of unlisted assets - where answers may involve as much art as science - including the discount rate applied to assess the current value of potential streams of income in future. SONG’s annual charges also look on the high side at 1.59%, according to Morningstar, which is unable to provide a comparable number for RHM. In RHM’s key information document, its total ongoing charges figure is stated as 2.4%. For SONG, it states a figure of 2.9% in its key information document. The document attempts to be forward-looking to give investors an idea of the total costs of what they may pay in the future by including potential transaction costs, gearing costs and performance fees.

Against all that, Alan Brierley, an analyst at the stockbroker Investec, tipped SONG as a ‘buy’ at 127p last month. It traded at 126p this week, compared to a 52-week high and low of 130p and 114p. RHM traded at $1.07 this week, compared to its annual high and low of $1.09 and $1.02. Both trusts trade within 1% of their net asset value (NAV).

Brierley said: “We believe that there are numerous revenue streams which will underpin growth in this asset class over the medium term. These include the continued growth in streaming in addition to numerous new revenue sources and licensing opportunities. We note that most settlements from emerging platforms are yet to be paid through by the publishers and this should be reflected in future royalty statements.

“We continue to like the fundamentals of the sector and this underpins our ‘buy’ recommendation, however we believe there are still unanswered questions on the company’s approach to balance sheet management.”

More warily, Sachin Saggar, an analyst at Stifel, commented on both companies’ audited accounts: “While SONG has made progress with transparency, we believe the RHM accounts are more straightforward and can be related back to our understanding of the fund and its published metrics more easily.

“Arguably, RHM should be more leveraged to streaming growth. SONG will potentially benefit more if adjustments are made to the publishing royalty pie.

“We believe investors should switch to RHM over SONG on the basis that both will capture high-level trends in the sector, but SONG has displayed more manager-specific risks that we have not yet been able to gain comfort over.”

Just over a year ago - on December 10, 2020 - I shared similar concerns here. At that time, RHM was trading at $1.03 and SONG at 120p, so I have not missed much by sitting out that dance and continue to be cautious about this alternative asset class.

Ian Cowie does not own any shares in the companies mentioned above.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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