Building Your Own Content Royalty Portfolio

Michael Jackson the Investor?

Most of us would never imagine the King of Pop to be a skilled investor. Born in Gary, Indiana, Michael Jackson began his singing career at a very young age and his stardom took off in the 1980s with hits like “Thriller,” “Billy Jean,” “Beat it.” Most of us would have heard of these hits. 

Jackson’s investment career involved few and profitable deals, which showed his eyes of valuable assets in the music industry. One of his best investment was in 1985 when Michael Jackson successfully bid $47.5 million for a 4000-song catalog owned by ATV Music (now “Sony Music”). 

This enormous catalog contains songs from the most iconic artists in music history:

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Billboard Magazine has called the deal one of the most valuable catalogs in music history. 

In 2016, the catalog’s value reached $1.5B, which theoretically gives Jackson a 1,327% return, averaging 42.8% a year for 31 years assuming Jackson had not sold his shares to Sony due to financial hardships.

This record outperforms even the Oracle of Omaha’s average return of 20.9% and the S&P’s 9.9%.

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Building a Portfolio

A few days ago, I’ve detailed the re-emergence of the music industryafter a fifteen-year slump.

The industry has properly adjusted to digitization of media and the threat of piracy, thanks to government initiatives such as President Trump’s Hatch-Goodlatte Music Modernization Act and streaming taking over CDs as the main form of distribution, it is the ideal time to invest in music royalties.

You expand on this investment concept further by considering royalties as a broad revenue concept.

For example, I built a portfolio of content-based assets- books, songs and movies that will pay me regularly, similarly to how I’ve been able to receive royalties from my first book, except that this time around, I have a more succinct portfolio.

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How to Unlock Value

There are many ways to profit from content royalty. The first and simplest way is to buy shares in a specialized fund such as Hipgnosis Songs Fund Limited (SONG), a $265 million investment trust which invest exclusively in music royalties. 

The fund’s management aims to produce an index-beating 10% per annum (net of fees) and a dividend yield of 5% in the long term. 

However, during SONGs initial offer shares were oversubscribed and they are currently trading at a 11% premium over its Net Asset Value. I suggest interested investors to add this stock into your watch list and wait until the stock get cheaper to purchase them. 

Another approach is to create a portfolio from scratch. However, I would suggest this route to be more suitable for experienced investors as it requires more skills. A well-balanced content portfolio looks like this:

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The chart’s left side represents large-cap-only publicly-listed stocks in the media and entertainment industry, weighted by market cap. This 50% allocation towards public-listed stocks is meant to anchor the portfolio in companies that are poised to or already benefiting from the renewed streaming industry.

These group of companies will also generate a stable income via dividends as well as being the anchor of my portfolio. By this I mean well-established corporations such as Disney who pay an average dividend yield of 1% to 2%.

The top right side of my portfolio are contents from private sales of catalogs including 2Pac’s Hail Mary.

…But watch out.

Gems such as these are rarely on sale, and therefore command high-prices due to their strong and stable standing in the music royalty world. However, once owned, the timelessness factor of the music will ensure a steady stream of income for my portfolio literally forever. 

These stand as a less risky, yet more expensive, focused investment to round out your portfolio with.

The “private domestic” 25% of your holdings represents ownership in private domestic consumption companies, which allow investors to be active shareholders as opposed to strictly passive shareholders. This is more suitable for experienced investors and professionals who believe they can unlock additional values in terms of the price to sales ratio.               

By doing so will allow me the ability to unlock additional values that a private business may generate in terms of revenues, margins and other operational issues. Obviously, this imply greater amount of risk for investors, but the returns are worth it, especially in high growth region like Asia in which publishing content is the most promising.

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Ultimately, the aim of my portfolio is to generate a 30%-40% returns which are generated via my private investments and an average dividend yield of 2 to 3% which will come from my basket of stocks.

Interested in building a similar portfolio, or just want to say hi? Feel free to send me an email at peterpham@oneroadresearch.com!

 

Peter Pham