Financial Times Weekend 22-23Feb2020

18 ★ FTWeekend 22 February/23 February 2020

Bryce Elder

Inside London

A

decade-long bull market

can make even the exotic

look normal. London has

long been a hub for alterna-

tive investment trusts —

publicly traded funds that tie their

returns to illiquid, long-life, difficult-to-

value assets. These closed-ended

investment companies have proved one

ofthemarket’sbrightspots.

NoteventheunravellingofNeilWood-

ford’s Patient Capital Trust has weak-

ened investor appetite for fundraisings.

Companiestappingthemarketsincethe

start of December have been in niches

including student housing, nursing

homesandutility-scaleenergystorage.

Part of the appeal of such funds is that

they promise payouts uncorrelated to

mostassetclasses.Withultra-easymon-

etary policy crushing the yield on con-

ventional safe assets over the past dec-

ade,anystockthatpromisestopayouta

steadyyieldhasobviousattractions.

But that promise might not live up to

reality. The company most often cred-

ited with revitalising the alternatives

area is Hipgnosis Songs Fund, a music

royaltiesspecialist.

Floated in July 2018, it has raised

about £625m in four separate share

issues with another expected immi-

nently. Its investors receive dividends

after advisory and performance fees are

funnelled to an external investment

management committee headed by

founder Merck Mercuriadis, the former

manager of acts including Elton John,

IronMaidenandBeyoncé.

Hipgnosis, which trades under the

ticker SONG, is more than anything a

playonthegrowthofmusicstreaming.

Forabout15yearsaftertheturnofthe

century, song royalty payments were in

sharp decline as legal downloads failed

to compensate for plummeting sales of

CDs. But about four years ago, the low-

cost unlimited monthly subscriptions

offeredbythelikesofSpotify,Appleand

Pandorafoundamassmarket.

As an asset, music is extremely dura-

ble — in markets including the US and

UK the intellectual rights associated

with a song last for 70 years after the

deathofitslastlivingco-author.

Streams of royalties can fit better in a

publicly traded stock than in a private

equity fund with a fixed wind-up date.

Closed-ended funds should also give

these illiquid long-life assets time to

mature without the threat of redemp-

tions forcing fire sales, while allowing

theuseofdebtleveragetojuicereturns.

But the net asset values of closed-

ended funds tend to be based on dis-

counted cash flow models that run over

decades. The immaturity of the stream-

ingmarketmakesforapoorfoundation.

Valuing the Hipgnosis songbook

requires brave assumptions about the

global growth potential of streaming as

well as the competitive landscape and

the legal protections copyright holders

might be afforded in the future. It also

demandsconsiderableguessworkabout

whichsongsmighthavestayingpower.

Hipgnosis revealed with interim

results in December that four-fifths of

its income had come from just 183 songs

or 1.6 per cent of its total catalogue. An

earlier analysis by Stifel estimated that

43 per cent of its 2018 income was from

33songs,allreleasedsince2015.

Age is as important as concentration

because most new material decays

quickly. The older the song the more

likely its revenue has hit a point of sta-

bility. Just two songs in Hipgnosis’s top

10 of 2018 — “Sweet Dreams (are made

of this)” by The Eurythmics and “Don’t

Stop Believin’” by Journey — could be

saidtohavereachedthatvintage.

The longevity of hits from The Chain-

smokers, Shawn Mendes and Justin Bie-

berrepresentsmoreofagamble.

Hipgnosis has been working to bulk

out its portfolio with 30 music cata-

logues purchased since the 2018 flota-

tion and says better management will in

timewakeitssleepinggiants.

But release dates in its portfolio

remain clustered within the past dec-

ade. A recent flood of money towards

competingfundshasledtobiddingwars

for more mature songbooks, meaning

Hipgnosis has had to tweak the plan set

out at its IPO and buy mostly from

youngerartists.

That has made the fund more reliant

on the nascent streaming market and,

with Hipgnosis providing few details on

how independent valuers gauge the

worth of its catalogues, the whole proc-

essbeginstolookverysubjectiveindeed.

Exotic funds like Hipgnosis might

appear useful for portfolio diversifica-

tion but their market-uncorrelated

returns come with some extremely eso-

teric risks attached. Anyone buying for

the long term on the expectation of a

quietlifeislikelytobedisappointed.

[email protected]

Investors must take

care after listening to

siren song of Hipgnosis

The longevity of hits

from The Chainsmokers,

Shawn Mendes and Justin

Bieber is more of a gamble

MARKETS & INVESTING

3 Downbeat economic data knock Wall

Street stocks

3 Search for safety spurs rally in US

government bonds and gold

3 US dollar powers to strongest level

since 2017

Equities retreated and government bonds

rallied yesterday as concerns over the

impact of the coronavirus on the global

economy fed back into asset prices.

The FTSE All-World index fell 0.6 per

cent after a cluster of cases in Beijing and

a jump in the numbers diagnosed in

South Korea unnerved investors.

Daegu, South Korea’s fourth-biggest

city, and the neighbouring town of

Cheongdo were declared “special care

zones” after reports of a second person

infected with coronavirus had died.

The country’s stock index, the Kospi,

fell 1.4 per cent yesterday, taking its fall

for the week to 3.6 per cent.

Elsewhere in Asia, Hong Kong’s Hang

Seng dipped more than 1 per cent,

although the CSI 300 index of Shanghai-

and Shenzhen-listed stocks edged up 0.

per cent yesterday after the People’s

Bank of China introduced several

measures this week aimed at propping up

its beleaguered economy.

The tentative mood was exacerbated

by downbeat US data pointing to

manufacturing and service activity

contracting for the first time since 2013.

“The deterioration in was in part linked

to the coronavirus outbreak, manifesting

itself in weakened demand across sectors

such as travel and tourism, as well as via

falling exports and supply chain

disruptions,” said Chris Williamson, chief

business economist at IHS Markit.

But “companies also reported increased

caution in respect to spending due to

worries about a wider economic

slowdown and uncertainty ahead of the

presidential election later this year”.

Wall Street, which had hit record highs

this week, retreated yesterday.

The technology-heavy Nasdaq

Composite index was down 1.4 per cent

by midday in New York while the S&P

500 slid 1 per cent and the Dow Jones

Industrial Average fell 0.7 per cent.

European bourses also fell with

London’s FTSE 100 slipping 0.5 per cent

and Frankfurt’s trade-reliant Xetra Dax

down 0.6 per cent.

The continent-wide Stoxx Europe 600

index, which had hit an all-time high on

Wednesday, fell 0.5 per cent.

Oil was caught up in the risk-off trade

with global benchmark Brent crude

sliding 1.3 per cent to $58.53 a barrel.

Yesterday’s market jitters pushed

investors to assets prized for their

relative safety such as core government

bonds and gold.

The yield on the 30-year US Treasury

hit a record low, sliding as much as 7 basis

points to a trough of 1.89 per cent.

Meanwhile, a week-long rally in gold

gathered pace as the metal advanced 1.

per cent to $1,645 an ounce, its highest

level since February 2013.

Ole Hansen, head of commodity

strategy at Saxo Bank, said gold’s rally

was due to increased worries about

company earnings and “the clear risk that

the virus outbreak may have a longer and

more profound impact”.

The US dollar, which of late has been

viewed as a haven asset, also

strengthened with an index measuring

the greenback against peers hitting its

highest level since 2017 this week.

Ray Douglas

What you need to know

Clamour for havens sparks bond rally

US Treasury yields ()

Source: Bloomberg











   

 year

 year

 year

The day in the markets

Markets update

US Eurozone Japan UK China Brazil

Stocks S&P 500 Eurofirst 300 Nikkei 225 FTSE100 Shanghai Comp Bovespa

Level 3346.59 1667.89 23386.74 7403.92 3039.67 113551.

% change on day -0.79 -0.54 -0.39 -0.44 0.31 -0.

Currency $ index (DXY) $ per € Yen per $ $ per £ Rmb per $ Real per $

Level 99.720 1.085 111.705 1.296 7.039 4.

% change on day -0.145 0.463 -0.343 0.621 0.334 -0.

Govt. bonds 10-year Treasury 10-year Bund 10-year JGB 10-year Gilt 10-year bond 10-year bond

Yield 1.473 -0.433 -0.066 0.589 2.892 6.

Basis point change on day -4.390 1.400 -2.250 -0.600 -0.500 -2.

World index, Commods FTSE All-World Oil - Brent Oil - WTI Gold Silver Metals (LMEX)

Level 378.32 58.34 53.25 1619.00 18.39 2654.

% change on day -0.60 -1.47 -1.13 0.92 0.22 -0.

Yesterday's close apart from: Currencies = 16:00 GMT; S&P, Bovespa, All World, Oil = 17:00 GMT; Gold, Silver = London pm fix. Bond data supplied by Tullett Prebon.

Main equity markets

S&P 500 index Eurofirst 300 index FTSE 100 index

||||||||||||||||| |||

Dec 2020 Feb

3200

3280

3360

3440

|||| |||||||| ||||||||

Dec 2020 Feb

1600

1640

1680

1720

||||||| |||||||| |||||

Dec 2020 Feb

7200

7360

7520

7680

Biggest movers

% US Eurozone UK

Ups

Deere & 7.

Gilead Sciences 3.

Pinnacle West Capital 2.

Newmont 2.

Extra Space Storage 2.

Telecom Italia 3.

Jeronimo Martins 1.

Iberdrola 1.

Alstom 1.

Ses 1.

Polymetal Int 2.

Berkeley Holdings (the) 2.

Bae Systems 1.

Centrica 1.

Astrazeneca 1.

%

Downs

Hasbro -7.

Devon Energy -4.

Consolidated Edison -4.

Capri Holdings -4.

Dxc Technology -4.

Prices taken at 17:00 GMT

Tenaris -4.

Unicredit -3.

Deutsche Bank -3.

Commerzbank -3.

Seadrill -2.

Based on the constituents of the FTSE Eurofirst 300 Eurozone

Pearson -3.

Rolls-royce Holdings -2.

Smith & Nephew -2.

Bp -2.

Burberry -2.

All data provided by Morningstar unless otherwise noted.

Fears of a new wave of coronavirus

infections outside China put travel stocks

under pressure withAmerican Airlines

the sharpest faller.

American, with just 3 per cent of

revenue coming from Asia-Pacific routes,

had been the most resilient of the

US-listed airlines since the virus began

making headlines in mid-January.

Norwegian Cruise Linefaded after

cutting 2020 guidance to reflect

cancelled sailings in Asia.

Advanced Micro Deviceswas the

weakest among chipmakers after Wells

Fargo turned cautious on its valuation.

DrugmakerGileadled the S&P 500

gainers after US prescription data

showed its recently approved Descovy

HIV treatment was gaining market share.

Bank of America said Gilead’s HIV

franchise was “an anchor” to group

profitability.

Deere & Corose on forecast-beating

quarterly earnings with sales from the

tractor maker’s agriculture and turf

equipment unit falling less than feared.

Slackedged higher on a report that

Uber was adopting the workplace chat

app globally for all of its employees.

Reassuring fourth-quarter results lifted

Dropboxwith the online file storage

provider also raising long-term targets for

profit and share buybacks.Bryce Elder

Wall Street Eurozone London

Sopra Sterialed the Stoxx Europe 600

gainers after the Paris-based IT

consultant posted 6.5 per cent organic

growth for 2019.

In spite of a fourth-quarter slowdown,

it left expectations for 2020 unchanged.

The company also revealed a takeover

offer for listed peer Sodifrance to

strengthen its insurance and social

welfare business lines.

Sikaof Switzerland, the speciality

chemical supplier to construction and

auto industries, climbed on full-year

results showing improved gross margins

thanks to improving pricing and lower

raw material costs.

The improved profitability eclipsed a

rise in employee costs that meant

headline earnings missed expectations.

Valeo, the French auto parts maker,

retreated on weaker than expected

second-half earnings and vague guidance

for 2020.

Even after “massive” downgrades over

the past few years, the “low-quality”

earnings report from Valeo suggests

forecasts still need to move lower to

reflect “declining prospects for global car

demand”, said Kepler Cheuvreux.

Proximusof Belgium dropped after the

telecoms group set out a restructuring

plan with weak quarterly results that

required a €253m provision.Bryce Elder

Moneysupermarket.comslipped in the

wake of a near 20 per cent gain on

Thursday, which followed in-line results

and unchanged guidance from the

price-comparison website.

Repeating “sell” advice, Berenberg

called the market response “dislocated

from reality” given the results showed

slowing core growth and deteriorating

margins.

Pearsonled the FTSE 100 fallers after

full-year results from the textbook

publisher matched a January update,

albeit with net debt slightly worse than

predicted.

Property groupDaejan Holdings

jumped after revealing a take-private

offer from 79 per cent shareholder

Freshwater.

Imperial Brandsedged higher after

management played down fears about

cash returns on the sidelines of a US

conference.

Investors had been concerned about a

possible dividend cut so committing to

retaining the payout would likely be seen

as encouraging, said Jefferies.

A global trend towards defensive

positioning helped support gold miners

includingPolymetal,Centaminand

Hochschildwhile oil companies such as

BP andTullowtracked commodity prices

lower.Bryce Elder

FEBRUARY 22 2020 Section:Markets Time: 21/2/2020 - 19: 06 User: stephen.smith Page Name: MARKETS2, Part,Page,Edition: LON, 18 , 1