Investors are raising questions about music royalty trusts that have been firm favourites as a diversifier, as the Neil Young row with Spotify throws into question the control and valuation of music rights.
In January last year, the Hipgnosis Songs Fund announced it acquired 50% of the worldwide copyright and income interests of Neil Young's entire catalogue.
At the time, Merck Mercuriadis, founder of trust, revealed just how exciting the acquisition was for him personally, saying: "I bought my first Neil Young album aged seven. Harvest was my companion and I know every note, every word, every pause and silence intimately. Neil Young, or at least his music, has been my friend and constant ever since."
Mercuriadis may now be regretting some of that companionship. As Neil Young pulled his songs from Spotify, investors in the trust scratched their heads at what that meant for them and what their money had actually paid for.
The nearly £2.1bn Hipgnosis trust has fallen to a 8.4% discount and its share price is down 2.2% in the past five days.
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Laith Khalaf, financial analyst at AJ Bell, put it simply, saying the situation "raises question marks about the importance of control of music rights and indeed the valuation of those rights where artists are withdrawing their work from certain platforms".
Rob Morgan, analyst at Charles Stanley, agreed and said the recent argument "could have consequences on earnings assets can achieve - and their value".
"Understandably, artists are usually sensitive about the uses of their work and aren't likely to take a wholly mercenary view of how it is monetised," he explained. "So the relationship between the investor and the artist is very important, as are the details of the terms that have been agreed."
The relationship adds a layer of risk for investors to consider and is something they will need to ask questions and get to grips with the granularity of, he said. It seems the recent tussle has done just that.
The other music royalty trust, Round Hill, has also fallen over the past few days, but only by 0.09% and its discount is considerably narrower at 1.1%.
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However, investors in both trusts will be eyeing upcoming results and notices from Hipgnosis to see how headline making battles with Spotify are going to effect their investments in the future.
"It is these sorts of complexities, and the nascent nature of the asset class, that have so far made us hesitant on the sector until we see how it develops a bit more, even though the concept of an uncorrelated source of income is appealing," Morgan concluded.
Still some investors remain confident in the trust and Fergus Shaw, portfolio manager of TM Cerno Select fund believes that this recent debate might "enhance the value of music" despite the short-term noise.
Shaw, who holds the trust, said the significant discount seems unnecessary.
"It is incredibly difficult to assemble a catalogue of music of high quality as the two London listed investment trusts have done," he said. "Given the opportunity to enhance value through sound management, it seems odd that this fund is being offered at a significant discount to NAV," he said.
