Could music royalties be the key to recession-proof portfolios?

Catalogues of Taylor Swift, Miley Cyrus and other notable artists drive strong streams of alternative income, says portfolio manager

Could music royalties be the key to recession-proof portfolios?

For Manitoba-based investment advisor Rob Tetrault, the decision to invest in music royalties to generate income for clients was a long and winding road.

“I probably started about five years ago,” recalls Tetrault, senior portfolio manager at the Tetrault Wealth Advisory Group with CG Wealth Management. “I was trying to consider ways to diversify and generate income with the least amount of correlation to the stock market possible.”

After doing some research on the asset class, he discovered the ICM Crescendo Music Royalty Fund by ICM Asset Management. It took another year of due diligence and conversation with the firm before he started adding it to his clients’ portfolios.

A diversified catalogue of return streams

ICM’s music fund invests in a diversified mix of catalogues from popular and iconic artists including Miley Cyrus, Gordon Lightfoot, Janis Joplin, and Taylor Swift, who’s now making fearless strides toward the $1-billion net-worth mark.

Most of the fund’s royalty income is derived from streaming revenue, digital downloads and physical sales including vinyl, but it also derives income from synchronization licensing – when a copyrighted song is used in video games, movies and TV shows.

Many investors considering music may prefer exposure to the hottest acts; the Barometer Global Music Royalty Fund, for example, has investments in music copyrighted by the likes of Drake, The Weeknd, Dua Lipa, and Post Malone. But Tetrault has a different view.

“If you can imagine a market where you buy and sell catalogues of artists’ songs, they sell on a multiple of revenue. The more famous and sexier artists will sell at a much, much higher multiple, even with the same revenue,” he says. “I don’t want to pay 50 times revenue for an A-list artist, when I can pay a seven-times multiple for a C-list artist with the same revenue.

“The way ICM’s fund is managed, they don’t take new artists. They go three to six years out, and look for musicians with a proven track record,” he explains. “You’re looking at an existing catalogue that’s been around for a while, and the revenue is more assured.”

For clients who need income or want to diversify their portfolio returns away from the stock market, Tetrault says he could recommend a small allocation of up to 5% in music investment.

“I think a modest exposure to this asset class could easily fit in most Canadian portfolios,” he says. “There’s liquidity, it’s stable, it’s got a track record of generating 10% return, and there’s no correlation to the stock market. … But I would also encourage people to do their due diligence, and understand that if the stock market gains 30%, they’re likely to trail that performance.”

‘Incredibly stable’ record of income

While real estate has traditionally been a headliner for Canadians seeking income-generating alternatives, Tetrault says music investments could be a good supporting act.

“If you think of real estate, there's a lot more variables. Rents could go up or down, interest rates can go up or down, and all of these moving variables can have positive or negative impacts on your total return.

“You don’t get that risk in music royalties … Your main variable to consider is how often are people going to stream or generate revenue from this song,” he says. “You’ve stripped out more variables, and you’ve made the income a lot more predictable and consistent.”

According to the ICM Crescendo Music Royalty Fund’s 2022 annual report, music royalties as an asset class have not been impacted by higher interest rates so far due to their scarcity, the continuing diversification benefits, and underinvestment by institutions.

“Perhaps most important is that the underlying cash flows of music assets are outpacing expectations in many cases which is more than offsetting a more expensive borrowing environment,” the annual report said. “This is something we monitor carefully as persistent rate rises could and should impact asset prices.”

Over the years he’s invested in the ICM Music Royalty Fund, Tetrault says he’s seen “incredibly stable” income month over month. He expects that robust income stream to prove particularly valuable as investors weigh the threat of a hard-landing recession from central banks’ policy-tightening.

“If you want to talk about recession-proofing a portfolio, this is a phenomenal asset to own,” he says. “People will have less income, but will they cut their Spotify or Apple Music subscriptions? There’s no way they’ll cut that out … They’re more likely to stop buying jewelry, or cut back on travel. And if people stay home more in a recession, they’ll potentially stream music more.”

Citing research from music data collection firm Luminate, the ICM Crescendo Music Royalty Fund’s 2022 annual report highlighted a “consumption renaissance” that saw U.S. on-demand audio streams exceed one trillion for the first time in 2022. Gen Z music listeners are leading the trend, it seems, as they were found to spend 21% more time per week consuming music than any other generation.

Some curious investors might be thinking about getting exposure to other aspects of the music industry like physical sales, touring and live shows – all top-of-mind possibilities as Taylor Swift’s Eras Tour is on track to be the highest-grossing concert tour of all time. But Tetrault is happy to steer clear from that side of the business.

“That’s too risky for me … there’s operational risk, and there’s recession risks. What if we start seeing fewer people go to concerts?” he says. “What I want is exposure to an asset class that generates income I could participate in.”