Hipgnosis Songs Fund (SONG) currently has net assets of c. £1.2bn, and aims to achieve income and capital growth by owning songwriters’ music royalties. In total, SONG’s portfolio currently comprises over 61,000 songs, of which over 3,100 have been number one hits.
As the portfolio has been built up, the exposure to older hits has increased significantly and is now close to 50%. Evergreen hits are more predictable, and should provide a stream of royalties to the fund for the long term. At the same time, younger songs provide exposure to the potential evergreen hits of the future, as well as those which have higher immediate potential for streaming income.
A recently announced performance metric shows the portfolio is making good progress against expectations, ahead 0.4% over the six-month period to 30/09/2020. Streaming constitutes the largest proportion of SONG’s revenues (36% as at 30/09/2020), as well as leading the growth of revenues in the music industry. According to the recent IFPI release, revenues across the global music industry reached its highest level in 2020 since 2002. With the rise of subscription models, music has moved from being a discretionary purchase to more of a utility.
Over the past financial year, the portfolio’s earnings covered the 5p dividend two times over. More recently, the managers have provided an additional metric (pro-forma annual revenue or PFAR), which shows the annual run rate of revenues (before expenses) for 2019 was 11.04 cents per share (or c. 8p per share). The board is targeting a dividend of 5.25p for the current financial year, a prospective yield of 4.3%.
We continue to believe that the uncorrelated nature of SONG’s NAV and the high income the portfolio provides are attractions. As recent statistics provided by the IFPI highlight, the music industry is experiencing a resurgence. SONG is in a good position to benefit from these tailwinds. It offers a prospective dividend yield of 4.3%, as well as the potential for capital growth.
Aside from an improving background to earnings, the way that music is consumed could also lead to important changes to the way that revenues are valued. With the music industry moving towards a subscription model, this improves the predictability of revenues, and (as one influential academic has already suggested) potentially means that discount rates should move lower. SONG’s independent valuer has so far moved the discount rate in to 8.5%, from the 9% used at launch.
The newly announced portfolio metrics provide a good way for investors to understand the performance of SONG’s portfolio against expectations. They are a good step towards what we expect will be further and enhanced disclosure on the portfolio in time.
Although this is a relatively new area for alternative income investors, and therefore arguably bears higher risks, should the managers achieve their objectives the potential long-term total returns look higher than those currently on offer in other alternative income sectors. Over the short term, the discount rate used to value the portfolio has the potential to fall further, which, if it occurred, would boost the NAV.
|Attractive yield, with prospect of income and capital growth
||Unfamiliar and illiquid asset class, means the portfolio is difficult to analyse, even as disclosure improves
|NAV returns likely to be uncorrelated with equity and bond markets
||Gearing (currently in low double digits as % of NAV) can exacerbate downside
|Opportunity for capital growth from industry trends as well as active management
||Possibility that the current trend of rising royalty payments will reverse