There’s NO business like SHOW BUSINESS to drown out inflation
One of the words you will hear a lot this autumn is ‘uncorrelated’, as the focus shifts to the damaging impact of inflation on investment portfolios.
Who knows whether rises in the cost of living are merely ‘transitory’ (another word of the season), or here to stay?
But, wisely in my opinion, many people may still wish to diversify, taking shelter from the adverse effects of inflation through investments that are uncorrelated, that is unconnected, to stocks or bonds. After all, inflation is the thief of savings.
Various routes are available. They involve risk, of course. But deciding that inflation is not staging a comeback after a 30-year absence may also be a gamble.
You can break into show business by betting on the investment trusts that own rights to hits like Fleetwood Mac’s Go Your Own Way or Blondie’s Heart Of Glass.
Or you can help save the planet through trusts that back energy efficiency and other infrastructure projects designed to aid levellingup or carbon reduction.
Duncan MacInnes of the Ruffer Investment Trust argues that we are in ‘a permanently more inflationary environment’, as a consequence of the rebound in the economy. The key factors set to drive up prices are the billions of pounds in savings built up in lockdown and the US Federal Reserve and Bank of england stimulus programmes.
MacInnes argues that anyone whose cash has been invested in the traditional 60:40 split between shares and bonds – still regarded as a bulwark against perils like inflation – may now be vulnerable.
MAnY portfolios have been built on the assumption that bonds and shares were uncorrelated: when share prices fell, bonds rose and vice versa. However, MacInnes argues: ‘Two hundred years’ worth of data shows that shares and bonds are correlated when inflation is above 3pc.’
The Bank of england is forecasting a rise in inflation to 4pc this year, but is unlikely to counter it by raising interest rates, as this could hamper recovery.
The Ruffer Trust is designed to stay ahead of inflation, and also to protect capital and income.
Its owns a mix of index-linked gilts, gold mining stocks, defensive shares like BP and Shell and a stake in Hipgnosis, the investment trust which owns royalties to songs, a holding selected for the uncorrelated nature of its returns.
Set up in 2018, Hipgnosis – which means hip knowledge – has acquired the rights to works of artists, producers and songwriters like Blondie (co-founded by singer Debbie Harry, pictured above), the eurythmics, Fleetwood Mac’s Lindsey Buckingham and Christine McVie, and also 50 Cent, the rapper and entrepreneur famed for the Get Rich Or Die Tryin’ album who might be impressed by the trust’s 4.3pc dividend yield.
The smaller Round Hill Music Royalty Trust, whose dividend yield is 4.24pc, made its debut late last year. It has the rights to Tesla (the heavy metal band, not the car maker) and also to a few early Beatles’ songs and some Celine Dion hits. The trusts’ sources of revenue include live music, as well as music played in pubs and bars and used in TV, films and advertisements. But their key aim is to exploit revenues from the pandemic-accelerated surge in music streaming from Apple, Spotify, YouTube, TikTok and Peloton.
Merck Mercuriadis, Hipgnosis founder and investment adviser, says: ‘The explosion of streaming has transformed music from a discretionary consumer purchase to a utility purchase.’
Mercuriadis (pictured below) is a former manager to Beyonce, Morrissey and Iron Maiden, experience which comes in very useful in his current career.
He is not alone in this view. Bill Ackman, manager of the Pershing Square Holding Trust, has said that streaming’s total addressable market is ‘every person on the planet’. You may raise an eyebrow at this assertion. Yet the share price of Hipgnosis is 19pc higher than at its launch and the trust stands at a 4.7pc premium to its net value of assets. Round Hill Music is at a 6.65pc premium. This suggests that the chance to diversify into this sector, with its promise of improving yields, is an appealing one for many.
The SDCL energy efficiency Income Trust – known as SeIT – stands at a premium of 13.57pc, further underlining the attraction of uncorrelated assets, particularly when combined with a dividend yield of 4.3pc.
As the trust manager Jonathan Maxwell explains, SeIT focuses on projects that reduce the huge and costly levels of waste of energy in areas such as buildings, whose air conditioning systems are often injurious to the planet. Demand for these services is soaring as countries and corporates seek to meet carbon targets.
Maxwell says: ‘This is good for the environment – and a boost to companies’ productivity.’
If you would like a mix of music and infrastructure, the TM Cerno Capital Fund, which has a holding in Hipgnosis, supplies both.
Of course, you may be unconcerned about inflation. Yet anyone who, in the 1970s, sang along to Barry Manilow’s hits (now owned by Hipgnosis) will remember
the pain it causes.