Ian Cowie: I am not going to rush to join the chorus at SONG

Our columnist runs the rule over a music royalties investment trust that has won over analysts.

Where can investors find income and growth uncorrelated to conventional asset classes that might actually benefit from the coronavirus crisis? The answer, my friend, is blowing in the wind, as demonstrated this week by Bob Dylan’s $300 million (£226 million) sale of his back catalogue copyrights to Universal Music, part of the French media giant Vivendi.

Universal claims more than 600 Dylan songs in the catalogue it now owns have already been recorded by 6,000 other artists. Royalty revenues have recently been boosted by rising demand via online streaming services - such as Spotify, in which Universal also owns a stake - because the pandemic has closed live music venues.

Closer to home, the royalties investment trust Hipgnosis Songs (LSE:SONG) enables individual investors of all sizes to gain exposure to royalties. Launched in July 2018, this trust now has total assets of £1.25 billion and yields 4.3%.

According to independent statisticians Morningstar, SONG achieved total returns of 18% over the last year. It aims to generate income and growth by investing in “musical intellectual property rights” including, for example, Mariah Carey’s All I Want for Christmas is You.

Carey is the ‘Queen of Christmas’ according to Christopher Brown, an analyst at JPMorgan Asset Management. He explained that her 1994 classic has been played 758 million times on Spotify, making it the most streamed Christmas song of all time.

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Among male artists, Wham! are the winners with their 1984 hit Last Christmas. Brown commented: “Hipgnosis argues that songs produce repeatable and predictable earnings. That is clearly the case with the top Christmas songs, which are uncorrelated with the economy, and have a strong seasonal pattern, showing underlying growth.”

David Bowie was one of the first artists to turn ‘jam tomorrow’ into ‘cash today’ when he sold ‘Bowie Bonds’ in 1997, conferring ownership of rights to some of his music. Last week, Stevie Nicks, the singer best known for her work with Fleetwood Mac, was reported to have been paid $80 million for her back catalogue by the American publishers, Primary Wave Music.

Even if these deals are attractive for the vendors, can they make sense for the buyers? Ben Newell, an investment trust analyst at the stockbroker Investec Securities, told me: “SONG has an important role to play in improving portfolio and income diversification.

“The yield is underpinned by long-term royalty income streams from a portfolio of hit songs and we believe that these predictable cashflows should be largely uncorrelated with economic cycles.

“We think that the potential for capital growth is underpinned by future increases in underlying music industry revenues, driven by the growth in streaming.”

Priyesh Parmar at Numis Investment Companies is another analyst who sees substantial value in something as intangible as a pop song, provided the quality is right. He explained: “The Hipgnosis Songs portfolio contains 2,845 number ones, 10,618 top 10s, four out of the top five Billboard Songs of the Decade and 10 of Spotify’s 30 most-played songs of all time.

“Investors remain attracted by the potential tailwinds of increased streaming and the shares are trading at 122p, which represents a 1.2% discount to the net asset value (NAV) of 124p.”

Against all that, the valuation of unlisted assets - such as songs or securities that are not traded on any stock exchange - can prove as much of an art as a science. This can be less a matter fact, more a question of opinion, as investors in Schroder UK Public Private (LSE:SUPP) know to our cost.

It is all very well being told that a trust owns valuable assets but, when push comes to shove, who will buy them? Even SONG’s directors don’t seem all that enthusiastic. Although all four of them own shares in this trust, none holds stock worth as much as his or her annual fee for sitting on its board, according to analysis by Investec.

Potential investors considering exposure might want to see its directors having more ‘skin in the game’. More positively, the top 10 shareholders in SONG are led by CCLA Investment Management, one of the UK’s largest charity fund managers. Schroders, Newton and Ruffer are also top 10 shareholders. That’s the kind of company this DIY investor likes to keep, but I am not going to rush to join the chorus at SONG.

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A similar venture, Round Hill Music (LSE: RHM), raised $282 million last month to invest in royalties. Competition may help to improve transparency over issues such as the discount rate applied to assess the capital value today of income from royalties anticipated in future.

That may sound confusing but, in an age of mass leisure, it is clear that there is a lot of money in the business called show. Many artists are squeamish about discussing finance in public, but others are happy to do so. For example, when the singer Don McLean was asked the meaning of his somewhat mystifying hit American Pie, he replied: “It means I will never have to work again.”

Ian Cowie is a shareholder in Schroder UK Public Private (SUPP) as part of a diversified portfolio of investment trusts and other shares.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

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