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Can music bring you record returns? How to make a portfolio sing

A new opportunity may well have attracted investors with a keen ear.

On both sides of the Atlantic, musicians have been auctioning off the rights to their songs — often for eye-watering sums.

Last year, Bob Dylan sold the rights to his entire back catalogue. Now Dolly Parton is rumoured to be doing the same.

Music mania: Hedge fund titan Bill Ackman is finalising plans to a buy part of Universal Music Group - the label behind Taylor Swift (pictured)

Of course this isn't entirely new: record labels have been in the business of buying and selling song rights for decades. But now the market is on the rise — and is increasingly opening up to everyday investors.

The likes of Aviva, Axa and Schroders have all invested in music royalties recently — as has the Church of England.

Meanwhile, hedge fund titan Bill Ackman is finalising plans to buy a part of Universal Music Group — the label behind Taylor Swift and The Beatles.

His 10 per cent stake will be listed on the New York Stock Exchange, and be open to retail investors. So could royalties help jazz up your portfolio?

You don't have to be a pop mogul to know that modern music is big business.

Behind all the multi-million-pound deals lies one simple idea: royalties.

Every time a song is played — whether on radio, television or elsewhere — its owners pocket a small fee.

With the most popular songs, these can add up to hundreds of thousands of pounds per year.

Over the years, the industry has become more creative about sharing these proceeds with investors.

Cashing in: Last year, Bob Dylan sold the rights to his entire back catalogue. Now Dolly Parton is rumoured to be doing the same

In 1997, David Bowie raised tens of millions of pounds by issuing so-called 'Bowie bonds' on his future earnings.

Now the rise of online streaming services, some with hundreds of millions of users, has seen royalties on the rise.

A number of specialist investment firms are looking to capitalise on this — including with retail investors. And 2018 saw the launch of Hipgnosis, the first royalties-focused investment trust on the London Stock Exchange.

The trust essentially buys up the copyright from thousands of songs and splits the proceeds among its investors.

Since joining the exchange, it's raised more than £1 billion from institutional and retail investors, including Aviva and the Church of England.

Last year it was joined by a second investment fund, Round Hill Music Royalty.

The fund has ambitious plans to acquire works from the likes of The Beatles, the Rolling Stones and Marvin Gaye.

But how do investors know whether these funds will deliver on the hype?

The first thing to note is that both Hipgnosis and Round Hill are classed as income funds.

That means they're looking to benefit investors by paying a regular dividend, rather than capital growth.

Slump: Streaming giant Spotify went public (in New York) 2018. Its shares rocketed on last year's U.S. tech boom, doubling in value in 12 months, before dipping 30 per cent since

When Hipgnosis launched, it set out an ambition of paying 3.5 per cent per year (while also growing its share price), rising to 5 per cent over time.

Three years on and the trust is paying 4.22 per cent — well beyond the range of a cash savings account. Its share price has been rising, too, with the trust up 17 per cent since its stock market debut.

It's a similar story for newcomer Round Hill, which is up 5 per cent in just one year. However, Moira O'Neill, from investment platform Interactive Investor, says savers should be careful about reading too much into this.

Instead, she suggests their short-term growth could be partly down to dividends being cut elsewhere.

'Many investors have been looking for income that is uncorrelated with the wider equity markets,' she says.

Similarly, as these funds are a new asset class, it's difficult to predict their future performance.

Hipgnosis's revenues to date, for example, have been largely driven by a very small number of star performers.

The trust's own reports suggest that just 2 per cent of songs have provided four-fifths of its income.

If their fortunes fade in future, the fund may find itself slashing those coveted dividends. As for picking future winners, the reality is that it's more of an art than a science.

'Hipgnosis is essentially buying into the future of songs through royalty rights,' says Ms O'Neill.

'But how do you know if a song will be another Fairytale Of New York, or a long-forgotten one hit wonder?' It's for these reasons, she says, that royalty funds are best considered a specialist asset class for now.

However, that doesn't mean that retail investors should avoid them altogether.

Rather that they should only form part of a larger and diversified portfolio.

Music fans should also know that royalty funds aren't the only way to invest in the industry. Two of the biggest labels — Warner and Sony — are listed in New York and Japan respectively.

Meanwhile, streaming giant Spotify went public (in New York) 2018.

Its shares rocketed on last year's U.S. tech boom, doubling in value in 12 months, before dipping 30 per cent since.

Given these shares are based outside the UK, retail investors may pay extra fees to buy them directly.

Another option is to look at which UK-based funds invest in these companies.

Sony, for example, is the largest single investment (at 6.5 per cent) for Janus Henderson's Japan Opportunities fund.

The company's growth has helped fuel the fund's performance: turning a £10,000 investment five years ago into £17,800.

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