Investment Ideas : Covered call ETFs, Hipgnosis and Bond funds (again)
Plus a rather curious new ETF that invests in both US equities and US government bond futures
Hipgnosis Songs Part 4
Ahead of the continuation vote for this large, once popular, music royalties fund, the debate is heating up. First the bad news. The fund has just announced that because of an analysis by its independent valuation agent, it is suspending its dividend as there has been a small reduction in potential income. To say that’s unfortunate is something of an understatement, especially as this is predominantly an income story.
This move comes amid a huge outcry from shareholders about the recent move to sell off some of the portfolio to a related fund run by the manager. This was done at a less-than-full book value valuation and I think it’s fair to say that the sell-off has proved controversial – to say the least. I wouldn’t be surprised to see the sell-off voted down. Given the controversy, it’s not surprising to see a number of directors including the chair depart.
There’s now a growing clamor from some investors to wind the fund up – and the share price has fallen consistently in recent days. This has prompted the release of an open letter by one of the main institutional shareholders AVI. It makes a number of well-argued points, the chief one being that winding up the fund would be a bad idea.
Quite.
One of the main concerns of many observers – myself included – was the real ‘market value’ of the assets if there was a fire sale. In simple terms, there aren’t that many buyers of this kind of specialist asset class, and if the board decided to tell everyone they were selling, it would be open season on the true NAV i.e we could see some complete lowball offers from very informed parties who knew the fund had to sell.
Stopping the dividend was a real surprise but as the AVI letter says there’s nothing inherently wrong with the asset class or even the portfolio. It’s just that the management structure and the resultant financial engineering haven’t been as investor-friendly as they should have been. The trick is now to do a new deal with the manager, set new targets, renegotiate the terms, and get on a level footing again.
I think the AVI letter puts it very succinctly as follows: the fund should benefit from
“continued and accelerating industry tailwinds from growth in the adoption of streaming; the likelihood of more systematic price increases from the DSPs1 with music streaming subscriptions still representing extraordinary value relative to other forms of entertainment; potential for greater shares of revenues accruing to songwriters; and more widespread adoption of artist-centric streaming payment models. We are also excited at the prospect of these positives being better reflected in shareholders' returns than they have to date. The Company has a bright future. And that may well be with the current Manager on revised terms should a new Board decide so following consultation with shareholders.”
U S Government Bonds
Last week I mentioned that it might be worth watching an iShares Treasury Bond ETF – USD Treasury Bond 20+yr UCITS ETF GBP Hedged (Dist), ticker IDGT - which invests in long-dated US government bonds. To date, it’s been a terrible investment as expectations of long-term bond yields have risen inexorably.
The flip side of this collapse in the price of T Bonds can be seen in a very different product, a short and leveraged tracker from Wisdom Tree called the Wisdom Tree US Treasury 30 years 3x daily short, ticker UL35 (TER 0.30%).
This does what it says on the tin, which is that amplifies threefold any price move on the downside. It's been a great investment assuming that is you’d had the foresight to realize that long-term yields were bound to rise! It’s up 21.60% in the last 12 months and over 3 years its more than trebled in value.
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