Facing the Music

As always, this old MarketMinder website and I aren’t in the business of making individual security recommendations—we are here for the broader theme only. And we aren’t inherently for or against any investments, with our take on song funds and the like amounting to “do your homework.” But with that said, let us take a brief look at the travails of the Hipgnosis Song Fund, which suspended dividends and is down by about one-third of its 2018 debut price amid a major management kerfuffle and disagreements about its song portfolio’s value.^[i] As reasons for investors to be skittish over a rather novel alternative investment go, these appear sound enough. Not making any predictions about where things go from here, but the market seems to be assessing the near-term risks in a rational manner.

Near-term being the key, because when you read commentary on Hipgnosis, you see a bunch of discussion about whether it was ever a viable investment in the first place given the music business’s vagaries. It sounded sweet, buying famous back catalogues on the thesis that future licensing opportunities would generate a solid royalty stream, giving investors lovely dividends and long-term returns. But valuing future revenue streams is always tricky. In this case, it depends on rights holders being able to command big licensing fees from movies, television shows and commercials. That, in turn, depends on entertainment and advertising continuing to grow in their present forms while consumers’ musical tastes stay constant. Asset valuations based on long-term projections of these are all just guesswork, and if investors see them being overvalued within the foreseeable future, then they will adjust the price accordingly. This is just how markets work. With Hollywood strikes delaying production for much of 2023—and the film and television business struggling in general—some reassessment of near-term royalty mojo seems logical enough.

But short term and long term are two different beasts, and here is the weird thing about these funds’ long-term potential that I haven’t seen anyone talking about: In the long run, these back catalogues’ terminal value is probably zero or close to it. I know, I know, I know, we are talking about the back catalogues of artists like Blondie and Journey here, and I am not throwing shade at anyone’s musical taste, but hear me out.

All song licensing decisions are tradeoffs. Either the studio, director and producers think the costs are worth the benefits, or they don’t. The benefits usually hinge on audience recognition and affection, which is what these funds seem to be banking on by purchasing some of the biggest and most famous back catalogues. Problem is, tastes change. Many of the acts fetching top dollar in recent years are old Boomer favorites. These (or bad cover versions of them), along with some Gen X staples, are all over television commercials these days. But what happens when society and producers move on and spend more resources targeting Millennials and Gen Y instead? To whom will they eventually sell all these Boomer catalogues for a profit, any profit, never mind an inflation-adjusted one in order to roll the funds over into new royalties? (Which aren’t cheap!)

I know this is hard to see in an era when kids sometimes find their parents’ records and give them a spin in the name of cool and irony. Some of the younger generation are having quite a fling with the 70s and 80s. But very often, music gets lost to time and history. It is just hard to fathom because the age of mass media is so new.

But think it through. Have you ever heard The Andrews Sisters in a commercial or any production that wasn’t a period piece? They were huge in their day! Now, not so much. Did Artie Shaw play over the credits of Oppenheimer? Did Tom Cruise soar through the skies to the sounds of the Glen Miller Orchestra in Top Gun: Maverick? Did Robert Johnson soundtrack a training montage in Creed III? Some catalogues get new life through jukebox musicals like Leader of the Pack, Beautiful and Mamma Mia, but even those depend on specific generations’ nostalgia. And we haven’t even gotten to the fact that the vast majority of these will enter the public domain in the long run.

But then again, in the long run we are all dead, as Keynes famously quipped, and so are most businesses. That is the thing about markets, they don’t really care when an asset’s likely terminal value is zero, because that doesn’t mean it can’t generate earnings on the way there, and those earnings have value. This is why, if stocks knew the world was going to end in 2032, they probably wouldn’t start pricing it until like 2030.

It is also why, no matter how many certain green finance types try to argue oil and gas fields are “stranded assets” whose resources will be trapped in the ground as cleaner energy sources ascend, investors keep flocking to them—and likely will for the foreseeable future. For one, “stranded” is an opinion and a long-term forecast in one. Even if e-fuel ever comes fully into its own, humanity will need to burn things in the years before that happens so that we don’t starve and freeze to death. Davos and COP-28 can whine about this all they want, and they can lament that banks and capital markets are still financing fossil fuels, but the simple truth is the market knows what is real. And what is real is that while fossil fuel assets may generate less revenue in the far future than they do now, markets probably won’t weigh that very heavily—they are very likely looking to the next 3 – 30 months as usual.

If markets discounted the far future today, they probably wouldn’t exist. Said differently, in the very, very, very long run, most companies’ endgame historically has been bankruptcy. If markets valued that far future now, who would buy it? But investors who correctly view the fact there could be 100 mostly profitable years in between may choose to focus, shall we say, nearer term? The point is: We know, as a society, that nothing lasts forever, whether that is a company or an entire civilization. But we invest in the potential these entities have to generate money along the way, because we are a risk-taking, inherently optimistic people that understand how return works.

The dichotomy of investing is that in weighing your portfolio strategy, asset allocation and goals, taking a very long-term view is correct. But in weighing securities, sectors, trends and market conditions, the near term does matter. The decision to own a stock, in our view, is mostly about the likelihood of the company continuing to generate sales and profits—preferably better-than-expected sales and profits—over the next year, two or so. That is about as far out as anyone can estimate the likely trends, before all the major unknowns start rearing their ugly heads. Markets know those unknowns exist, and they know there is a chance they can be bad as well as good. But when they are all mere possibilities, why shouldn’t they just get on with the business of discounting the more foreseeable future? So that is what they do.