6th December 2023
The basic investing build blocks are to save regularly, invest long term and diversify our investments, but with Hong Kong and China equities in decline and Global bonds in negative territory it would appear that traditional diversified portfolios don’t work, but they do, just not all the time.
In today’s blog, Mr MPF will introduce you to an asset class which while not presently available within the MPF system, is one you hear every day and may provide excellent diversification benefits for moments when equities and bonds don’t. Music!
Music has universal appeal. For some it’s the catchy melody, for others it’s the lyrics or a sentimental attachment, but for a growing audience, it’s the steady cash flows through a variety of different income streams over several decades that has piqued the appeal. Once the almost exclusive domain of singers and songwriters, music royalties are now available to the very people who made royalties a possibility, you the listening audience.
It may seem a little absurd to think that one could make money every time one opens their Spotify app, but an asset class based on the revenues generated by the purchasing of music catalogues has emerged to potentially provide a fascinating opportunity for investors looking for something slightly different. But what does music investing actually involve and what makes a song a good investment?
Investing in music royalties are generated from three main sources:
- Performance royalties, which are paid when the song is performed. Whether it’s being streamed, played over the radio, or in your favourite bar, the purchase of a licence needed to play that song is a source of revenue.
- Mechanical royalties, which are paid when a physical copy of the music is bought in the form of a CD or vinyl, and;
- Synch royalties, which are paid when the song is used in another form of media, like an advert or a film’s soundtrack.
Like picking the best returning shares there’s also an art and science to identifying the best songs. Where equity analysts might separate stocks into buckets of quality, growth, and value, a similar method can be applied to songs.
There are evergreen or classic songs. Safe and predictable, they’ve continued to produce royalties for decades. Alternatively, there are popular songs that might not have the long-term track record that classic songs do. These are songs that investor believes have instantly become culturally influential, just as classic songs might have done decades ago. Finally, there are songs that are potentially undervalued. These are songs that may be well suited for an advert or film soundtrack and so have the potential to generate large, albeit unpredictable, synch returns. Like quality, growth and value equities, all three music categories have the potential to provide good and diversified returns.
Investing in songs may seem somewhat strange, and historically not freely available to individuals, but nowadays there are a number of investment trusts which make the asset class more accessible than ever. Combining the ease of investing with high dividend yields, music royalties could be that diverse source of investing to literally soundproof your retirement and investment portfolios from the times when traditional equities and bonds do not.
This article was written by MPF Ratings, Hong Kong’s independent provider of MPF research, views and education, in association with Belvest Investment Services, a leading Hong Kong based independent financial planning and wealth advisory group.
The information contained in this blog is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
