A New Holding
The impact of paid streaming services has had a profound impact on the global music industry. In 2019, streaming revenues grew by 23% to become the largest revenue source, taking total revenues to a level not seen since 2004. We believe this technological development for the consumers of music, along with attractive pricing to access it, will provide a powerful tailwind to industry revenue as users grow rapidly. In 2019 alone, 86 million paid subscribers were added to the 255 million at the end of 2018. The portfolios we manage have been exposed to this growing revenue stream for some time with the holding in Hipgnosis Songs Fund. During the month we participated in the IPO (initial public offering) of the Round Hill Music Royalty Fund, an investment we think is complementary to the holding in Hipgnosis.
Key to our investment in Round Hill is their focus on high quality catalogues. The Company will look to purchase music publishing assets that have stood the test of time, thereby lowering the risk of acquiring catalogues at a valuation based on peak earnings, a risk associated when acquiring rights to today’s most popular songs which may not be as popular in 10-20 years’ time. We are also attracted to Round Hill’s highly resourced in-house administration and marketing teams. As compared to outsourcing the administrative function, control over the royalty collection process will allow the company to efficiently collect and monitor royalties across what is a complex network. An established marketing team also increases the potential for enhancing the cash flows generated from the catalogues. Zync, a business acquired by Round Hill in 2017, specialises in generating additional revenue via actively managing music catalogues, seeking opportunities such as synchronisation licenses (e.g. placing songs in movies or video games). The trust will aim to deliver a dividend yield of 4.5% and total shareholder return of 9-11%.
Following our internal asset allocation meeting during the month, we increased our rating of the Japanese equity market, moving it to a recommended overweight position (previously neutral). The change is attributed to an improvement in our overall assessment of Japanese equities, which are looking increasingly attractive. From the opportunity set we monitor, the market has a median price-to-book ratio of just 1.2x, significantly below that of other developed markets such as Europe ex UK (2.0x) and North America (2.7x). Whilst Japan has historically lagged in the profitability part of the value equation, the median return-on-equity for a Japanese equity stands at 6.5% today, not too dissimilar to Europe’s 7.6% and just above North America’s 6.4%. Additionally, whilst the average European and North American business has a leveraged balance sheet, the median Japanese business boasts a fortress-like net cash position.
Our job when selecting fund managers across overseas equities is to find those who are willing and able to capitalise on attractive opportunity sets. We believe our holding in the Morant Wright Fuji Yield Fund captures the opportunity we find in Japan. Morant Wright’s portfolio is valued at a price-to-book ratio of 0.7x, delivering a dividend yield of 4.1% which is well covered by a free cash flow yield of 7.8% and the average portfolio position maintaining a net cash balance sheet.
Sources: ‘A new holding’ – Round Hill Music Royalty Fund Limited prospectus.
‘Japan’ – Bloomberg Finance L.P.
For professional investors only.
Past performance should not be seen as a guide to future performance. The outlook expressed in this communication represents the views of Tom Delic at the time of preparation and are not necessarily those of Seneca Investment Managers Limited. His views may be subject to change and should not be interpreted as investment advice. Whilst Seneca Investment Managers has used all reasonable efforts to ensure the accuracy of the information contained in this communication, we cannot guarantee the reliability, completeness or accuracy of the content. This document is provided for the purpose of information only. Seneca Investment Managers Limited is authorised and regulated by the Financial Conduct Authority and is registered in England No. 4325961 with its registered office at Tenth Floor, Horton House, Exchange Flags, Liverpool, L2 3YL. FP20 293.