At the end of last year, a new type of investment fund hit the market in the form of the Hipgnosis Songs Fund (LSE: SONG).
Hipgnosis is completely different to any fund the market has seen before. Unlike most funds, which invest in traditional assets such as stocks, bonds and property in an attempt to outperform the market, Hipgnosis owns a portfolio of song royalties. These royalties provide an income for the group, part of which it reinvests, with rest distributed as a dividend.
I’m fascinated by this business model because it’s so completely different. Historically, music royalties have the preserve of the rich and famous, but Hipgnosis has opened the investment class up to the masses.
Different asset class
One of the primary reasons why I like the look of Hipgnosis is the fact that music royalties are completely different to any other asset class. Unlike stocks and bonds, their price doesn’t fluctuate with investors’ views on the economy. Although the income stream from music rights may vary (depending on popular opinion), the fact that this asset isn’t cyclical should mean Hipgnosis provides a steady income for its investors whatever the weather.
Management is focusing on acquiring high-quality rights for the portfolio. For example, at the beginning of the year, it purchased a music catalogue from Dutch record producer, songwriter and musician Giorgio Tuinfort, which comprises 182 songs in total, including 23 number-one hits and over 15 UK top-10 singles with David Guetta.
More recently, the fund acquired a music catalogue from Itaal Shur, which includes the multi-platinum song Smooth, as well as the rights to 208 other songs including a US top-10.
Market-beating potential
Hipgnosis rarely discloses the prices paid for music rights, so it’s difficult to calculate how much the firm is worth. However, we do know that at the end of September, management valued the royalty portfolio at just under £200m, or 97.7p per share. That was four months ago now. Since then, Hipgnosis has announced a string of further deals so I think it’s reasonable to assume the net asset value has since exceeded 100p per share.
With the stock trading at 109p at the time of writing, I think it offers good value at this level. What’s more, the company is targeting a dividend for the first 12 months following its admission to trading (July 2018) of 3.5p per share. That gives a prospective yield of 3.2% at current levels.
The fund’s dividend potential, coupled with Hipgnosis’ net asset value growth, leads me to believe that this one-of-a-kind investment can outperform the FTSE 100 in 2019. The steady income stream from royalties, coupled with the fact that cash flows aren’t subject to economic booms/busts, implies that the enterprise could produce an attractive high single-digit total return for investors in 2019. Meanwhile, the FTSE 100’s outlook is more dependant on global economic growth.
With economic headwinds growing, FTSE 100 investors could be in for a tough time this year. Hipgnosis looks as if it could be a safe haven in these stormy waters, and that’s music to my ears.