Evolution is as longstanding as life on Earth and as old makes way for new, things change in all sorts of ways that were previously inconceivable. The emergence and widespread adoption of the world-wide internet web has been perhaps the most transformational event in recent living memory. Artificial intelligence is now peering over the horizon presenting a potentially similar seismic shift in the offing. How that will come to influence our lives is only just entering the mindset.
For us as investment managers the changes are mostly welcome developments. They create new opportunities for investment. Among, perhaps, the more interesting stocks that we hold are two companies which own music royalties and copyrights in thousands of songs, across many countries and musical genres. Hipgnosis Songs Fund and Round Hill Music Royalty Fund provide us with an attractive level of income as well as potential capital return from investment in music intellectual property rights.
As the consumption of music has moved from physical format to streaming, increasingly a range of investors has started to realise the value of these musical copyrights while song writers and musicians have been willing to sell their royalty rights in order to monetise their creativity more immediately. Each time a song is streamed it generates payment to the copyright holder. As more people shift to this way of consuming music, the income generated is growing and streaming giants (Spotify, Apple, Amazon to name but a few) have been putting up subscription prices. This feeds directly into royalties paid to copyright owners.
In addition to streaming, every time a song is played live in a concert, used in advertisements or television programmes or YouTube, that also prompts royalty payment. The ownership of the copyright is an investment with longevity. Typically, the ownership of copyright is valid until 70 years after the last song writer dies, so if we look at the Beatles as an example, that 70-year extension has not even started yet. The share prices of these companies are trading at around a 45% discount to their operative Net Asset Values1 and these stocks are paying good dividends, so in our view the share prices are out of kilter with where they should be.
Behind the headlines of buy to let
Investing in the new doesn’t replace exposure to tried and tested traditional sectors, and bricks and mortar, in one way or another, remain an element in many portfolios, including ours. One of the ways that we have chosen to access this sector is via the financial stock OSB, a specialist mortgage lender focused on selected sub-segments, such as buy to let. That we are willing to draw attention to this may surprise some investors because if media headlines are to be believed the housing market is in meltdown and buy-to-let landlords on the precipice of collapse.
Fortunately, our understanding of the dynamics of the market are more nuanced, informed by our conversations with OSB. It is true that some private individuals are finding their buy to let units more challenging to operate, due to higher borrowing costs and increasing regulation of the rental market. However professional landlords, that make up the majority of OSB’s customers, are experiencing a far less severe headwind. While borrowing costs have gone up so to have rents as supply and demand metrics favour the sector (housebuilding has slowed and other landlords have been selling properties, reducing the supply of accommodation). OSB reports that most of its borrowers are securing rent rises that go a long way to offsetting the impact of higher base rates. Nevertheless, the valuation of OSB’s stock appears very much driven by the negative sentiment that dominates headlines. The stock is trading at around 3.5 times next year’s forecast earnings2, discounting a lot of bad news.
Tourism bolsters demand for bottled beverages
The background commentary from the press for 2022 and 2023 has focused a great deal on the struggling consumer, hit by rising interest rates and the increase in inflation. However, again things are not so simple. Discretionary spending on many things has been hit but after the lockdowns of Covid, a return to tourism and domestic recovery have led to demand for some products bouncing back. An interesting by-product of that rebound is the return of demand for cold drinks on the go. Our investment in Coca-Cola Hellenic Bottling Company is plugged into this development. Founded in Greece but primarily listed on the London Stock Exchange, the company has a longstanding strategic arrangement with the Coca-Cola Company for whom it bottles and sells beverages exclusively in 29 markets. These include some established markets in Europe, developing markets in Eastern Europe and emerging markets in Africa.
