Tone deaf?
Simon King, chief investment officer at wealth management firm Vermeer Partners, says he never invested in these funds.
“Our main concerns centre on the fact that we do not understand the price elasticity of the streaming services and the fact that millions of new songs are written each year that compete with the back catalogues. Also we [challenge] anyone to fully understand the byzantine nature of the rights system.”
Price elasticity is a term to mean the responsiveness of the demand for a good or service to changes in the price.
King’s view is that the music streaming services only came into existence and grew during a period when no recession happened, so the durability of these companies, and so of the revenues they provide to the investment funds, may be more negatively impacted if a recession were to happen as consumers tend to cut discretionary spending first.
Conversely, Paul Flood, multi-asset investor at Newton Investment Management, said in a note to clients that the changed economics of music – whereby one subscription offering access to thousands of songs is now cheaper than it used to cost to buy a single album – may mean that music subscriptions are more durable in an economic downturn than might be expected.
Flood says he strongly believes in music royalties as an asset class, commenting that many consumer view access to music as being "a utility", and so as important to them as broadband.
For this reason he has investments in such products as a major part of one of the themes that underpins his multi-asset funds: digitalisation.
He tends to run his multi-asset funds in a thematic way.
Traditional values
One of the issues that may have brought matters to a head for investors in these vehicles is the way the music catalogues were purchased.
Round Hill’s sale comes at a price lower than that of the book value of the assets, that is, the music catalogues were valued at a level in the trust’s accounts that is higher than the price at which they are now being sold.
King says “these funds paid too much for the catalogues”, and adds it is difficult to actually understand what the value of the assets may be.
This point is elaborated on by Merriam, who notes: “Most funds that invest in unquoted assets get independent valuations performed by well-known accountancy firms such as Deloitte or Mazars.
"But in the case of both of these music royalty trusts, they used a firm that wasn’t well known in the market, and so there has been a lot of scepticism around the valuations as a result."
