UK Edition
It was no doubt hubristic of us to say it and perhaps the gods of investment have punished us accordingly.
“A better business model than Spotify’s,” we claimed for the Hipgnosis Songs Fund in January 2019.
Since then the Swedish streamer has gained about 24pc while our music rights investment trust has lost 32pc.
The basis for our tip has not changed: the fund offers a rare opportunity to invest in previously unavailable assets, assets that should offer resilience, growth, income and relative lack of correlation with others.
But Hipgnosis has got itself into a terrible, multifaceted mess and shareholders face, in this column’s view, a lengthy period of further uncertainty before it is cleared up.
Its first problem is that it has borrowed too much, at least for today’s world of higher interest rates.
To conserve cash, and to avoid breaching the terms of its agreements with lenders, this week it said it would scrap the dividend it was about to pay.
A hurriedly cancelled dividend always dismays investors and the shares fell sharply from already depressed levels. The trust said divis would resume in due course, although in light of all the uncertainty we have our doubts.
Another concern is over the security of the trust’s income stream. The immediate cause of the scrapping of the divi was a decision by the trust’s independent valuer that certain payments expected in exchange for the use of songs over which the fund owns the copyright would be lower than previously thought.
Then there is the matter of the valuation of the assets.
The fact that the trust trades at a discount of almost 60pc shows investors’ mistrust of the its stated net asset value and the decision by the managers to sell some of its assets at a 17.5pc discount to NAV suggests that they don’t have much faith in it either.
That brings us to this proposed asset sale, which has angered many shareholders. Not only is there that headline 17.5pc discount at which the deal has been struck but some analysts have suggested that, once taxes and costs are taken into account, the true discount at which the fund’s assets will be sold is more like 25pc or even 30pc.
Also concerning is that the deal is not with an independent buyer but with a party related to the management company and that the buyer has the right to match any other bid received, which may discourage other potential buyers from going to the expense and effort of preparing an offer.
One large institutional shareholder in Hipgnosis, AVI, which manages the AVI Global trust (formerly British Empire), described the proposed sale as “tainted” and “truly dreadful”.
Fortunately, shareholders are not powerless to block the deal and to bring about wider change at the fund. They can vote down the asset sale at an extraordinary meeting and can separately vote against the trust’s continuation at the annual meeting. Both take place a week today.
The latter course of action may sound drastic but in fact to vote against continuation does not mean that the fund will automatically be wound up.
Rather, as the trust said in its annual report: “If the continuation vote is not passed, the directors are required to put forward proposals for the reconstruction, reorganisation or winding-up of the company to the shareholders for their approval within six months … failure to pass a continuation vote will not necessarily result in the winding-up of the company or liquidation of all or some of its investments.”
Other possible outcomes are the election of a new board and the appointment of a new management company. In summary, we believe the trust is a collection of excellent assets trapped in a poorly managed fund.
Change is clearly essential for the value of the assets to be reflected in the share price. Readers can help bring about that change by voting against both the proposed asset sale and the trust’s continuation.
We advise them to do so and to hold on to their shares in the hope and expectation of a better future for the fund.
Questor says: hold
Ticker: SONG
Share price at close: 73p
Investment trust news
Henderson Diversified Income is to be absorbed into Henderson High Income, subject to approval by the shareholders of both funds. Holders of the former can elect for cash at a 1pc discount to NAV. The merger should take effect in January.
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