====== Round Hill Music Royalty Fund ======
===== The 30-Second Summary =====
  *   **The Bottom Line:** **Round Hill Music was a publicly traded fund that acted like a landlord for timeless songs, collecting "rent" (royalties) every time they were played, and in doing so, it provided a masterclass in how to find durable, cash-generating assets trading for less than they are worth.**
  *   **Key Takeaways:**
  * **What it is:** A company that owned the copyrights to a large catalog of popular music (from The Beatles to Céline Dion) and collected the royalty payments.
  * **Why it matters:** It's a perfect real-world example of an [[alternative_assets|alternative asset]] with classic value investing traits: a durable "moat," predictable cash flows, and a value that isn't tied to the daily whims of the stock market.
  * **How to use it:** The fund's story, especially its acquisition, is a powerful case study for understanding the gap between market price and [[intrinsic_value|intrinsic value]], and the importance of a [[margin_of_safety]].
===== What is Round Hill Music Royalty Fund? A Plain English Definition =====
Imagine you own a portfolio of high-quality apartment buildings in a dozen different cities. Every month, without fail, rent checks arrive in your mailbox. Your income is steady, reliable, and backed by a real, tangible asset.
Now, replace those apartment buildings with classic songs.
That, in a nutshell, was the Round Hill Music Royalty Fund (LSE ticker: RHM). Instead of buying bricks and mortar, it bought the copyrights to a vast collection of music—over 120,000 songs. Its portfolio included timeless hits performed by artists like The Beatles, Johnny Cash, The Rolling Stones, and Bruno Mars.
Just like a landlord collects rent, Round Hill collected **royalties**. A royalty is a small payment generated whenever a song is:
  * **Streamed** on Spotify or Apple Music.
  * **Played** on the radio or in a restaurant.
  * **Purchased** as a download.
  * **Used** in a movie, TV show, or commercial (this is called a "synchronization" or "sync" license).
  * **Performed** live in a concert.
These small streams of cash, flowing from thousands of sources all over the world, added up to a significant and predictable river of income for the fund. The fund then passed a large portion of this income on to its shareholders in the form of dividends.
So, when you invested in RHM, you weren't betting on a hot new tech startup or a fluctuating commodity. You were buying a small piece of the enduring cultural and economic value of music itself. You were, in essence, becoming a landlord for some of the world's most beloved songs.
> //"An investment in knowledge pays the best interest." - Benjamin Franklin. Understanding unique assets like music royalties is a form of knowledge that can yield great returns.//
===== Why It Matters to a Value Investor =====
At first glance, a music fund might seem like a niche, exotic investment. But when you look at it through the lens of a value investor, it ticks a surprising number of the right boxes. It's a phenomenal example of applying the core principles of [[benjamin_graham|Benjamin Graham]] and [[warren_buffett|Warren Buffett]] to an unconventional asset.
**1. A Strong, Durable Economic Moat:**
A value investor's primary quest is for businesses protected by a durable competitive advantage, or what Buffett calls an [[economic_moat|economic moat]]. For a music catalog, the moat is crystal clear and legally enforced: **copyright**. Copyright law grants the owner exclusive rights to a song for a very long time (often the life of the last author plus 70 years). This is a government-granted monopoly on a specific asset. A song like "What A Wonderful World" has been generating income for decades and will likely continue to do so for many more, protected from any direct competition.
**2. Predictable, Uncorrelated Cash Flows:**
Unlike a company whose earnings might swing wildly with the economy, the income from a diversified catalog of classic songs is remarkably stable. People listen to music in good times and bad. This means the fund's revenue stream is largely **uncorrelated** with the broader stock market. During a market panic, when everyone is selling stocks, royalties from Spotify keep flowing. This is a powerful diversification tool that Graham would have admired for its stability and defensive characteristics.
**3. An Anchor to Intrinsic Value:**
One of the biggest challenges for investors is determining a company's true worth. For RHM, valuation was anchored by a concrete, independently assessed metric: **[[net_asset_value_nav|Net Asset Value (NAV)]]**. The NAV represented what a professional appraiser believed the entire music catalog was worth on the open market. This gave investors a rational benchmark. The stock market price, on the other hand, was driven by emotion and short-term sentiment.
**4. The Ultimate Case Study in Price vs. Value:**
This is the most critical lesson from RHM. For much of 2022 and 2023, the fund's share price on the stock market traded at a massive discount—sometimes over 40%—to its NAV. Mr. Market, the manic-depressive business partner Graham described, was deeply pessimistic. He was worried about rising interest rates and offered to sell you a dollar's worth of music assets for just 60 cents.
A value investor understands that **price is what you pay; value is what you get**. The market price was cheap, but the intrinsic value of the song catalog remained high. This created a huge **[[margin_of_safety]]**. You could buy into the fund knowing that even if the NAV was slightly overestimated, you still had a massive cushion.
In September 2023, the value investor's thesis was proven correct. A private music company, Concord Chorus, recognized the disconnect. They saw the true value and announced they would acquire Round Hill for $1.15 per share—a price that was roughly a 67% premium to the previous day's market price, and much closer to the fund's actual NAV. Investors who had bought at the deeply discounted price, trusting value over market sentiment, were rewarded handsomely.
===== How to Apply It in Practice =====
While Round Hill Music itself has been acquired, the principles used to analyze it can be applied to other listed funds, real estate investment trusts ([[reits]]), or any business where assets can be independently valued.
=== The Method ===
Here is a step-by-step framework a value investor would use to analyze a company like RHM:
**Step 1: Understand the Quality of the Assets.**
Don't just look at the numbers. Look at the music catalog itself.
  * **Age & Vintage:** Are the songs timeless classics ("vintage") or recent hits that might fade? Older songs often have more predictable, stable royalty streams, known as their "decay curve."
  * **Diversification:** Is the catalog concentrated in one artist or genre, or is it diversified across many? Diversification reduces the risk of a single artist falling out of favor.
  * **Type of Rights:** Does the fund own both the writer's share and the publisher's share? Owning more of the rights to a song means a bigger piece of the royalty pie.
**Step 2: Find the Net Asset Value (NAV).**
This is your North Star. The company will publish its NAV (usually twice a year) in its financial reports. It's typically presented as a total value and a "per share" value. This is your best estimate of [[intrinsic_value]].
**Step 3: Calculate the Discount or Premium to NAV.**
This is where you find your [[margin_of_safety]]. The formula is simple:
> (Current Share Price / NAV per Share) - 1
  * If the result is negative, the fund is trading at a **discount**. For example, if the share price is $0.70 and the NAV is $1.20, the discount is ($0.70 / $1.20) - 1 = -41.7%. This is an attractive entry point for a value investor.
  * If the result is positive, it's trading at a **premium**. This would suggest the market is overly optimistic and should be viewed with caution.
**Step 4: Analyze the Cash Flow and Dividend.**
The NAV is great, but cash is king. Look for a metric called "Net Publisher Share" (NPS) or "Adjusted Earnings." This represents the actual cash being generated by the catalog.
  * **Is the dividend covered?** The dividend paid to shareholders should be less than the cash earnings. If a company is paying out more than it earns, the dividend is unsustainable.
  * **Is the cash flow growing?** Look for growth driven by the rise of streaming, better royalty collection, and smart acquisitions of new catalogs.
=== Interpreting the Result ===
A deep discount to NAV is not, by itself, a reason to buy. You must ask **why** the discount exists. In RHM's case, the market was worried that rising interest rates made the future royalty streams less valuable (a concept similar to how bond prices fall when rates rise).
The value investor's job is to determine if the market's fears are overblown. You would conclude that while interest rates matter, they don't change the enduring cultural value of The Beatles. The market was focused on short-term macroeconomics, while the long-term value of the asset remained intact. The acquisition by Concord proved that the "smart money" agreed with this long-term view.
===== A Practical Example =====
Let's invent a hypothetical fund, the **"Evergreen Royalties Trust" (ERT)**, to illustrate the process.
| Metric ^ Evergreen Royalties Trust (ERT) ^
| --- | --- |
| Professionally Appraised NAV per Share | $2.00 |
| Current Market Share Price | $1.20 |
| Annual Cash Flow per Share | $0.12 |
| Annual Dividend per Share | $0.10 |
**1. Calculate the Discount:**
($1.20 / $2.00) - 1 = **-40%**.
This is a significant discount. You are being offered the chance to buy $1 of prime assets for just 60 cents. This is a massive [[margin_of_safety]].
**2. Check the Dividend:**
The dividend yield is ($0.10 / $1.20) = **8.3%**. This is a very attractive income stream.
More importantly, the cash flow ($0.12) comfortably covers the dividend ($0.10). The dividend appears sustainable.
**3. The Value Investor's Decision:**
You investigate ERT's catalog and find it's full of classic, well-known songs from the 60s, 70s, and 80s. You believe the market is overly pessimistic about interest rates and is ignoring the stable, long-term nature of these royalty payments.
You decide to buy shares at $1.20, confident in two things:
  * You will collect a well-covered 8.3% dividend while you wait.
  * The large gap between the price ($1.20) and the value ($2.00) is likely to close over time, either through a change in market sentiment or through a catalyst, like a buyout offer from a competitor who also sees the obvious value.
This is precisely the logic that would have led an investor to buy Round Hill Music before the acquisition was announced.
===== Advantages and Limitations =====
==== Strengths ====
  * **Durable, Long-Life Assets:** Copyrights provide a legally-protected income stream for many decades, making the asset base highly durable.
  * **Clear Valuation Anchor:** The NAV provides a rational, transparent benchmark for [[intrinsic_value]], helping investors avoid emotional decisions based on market noise.
  * **Portfolio Diversification:** Music royalties are an [[alternative_assets|alternative asset]] whose returns are not directly correlated with the performance of traditional stocks and bonds.
  * **Inflation Protection:** Streaming services periodically raise their prices, and other royalty sources are often tied to advertising revenue, which tends to grow with inflation, providing a natural hedge.
==== Weaknesses & Common Pitfalls ====
  * **Interest Rate Sensitivity:** Like a bond, the present value of future royalties is sensitive to changes in interest rates. When rates rise, the discount rate used to value the catalog also rises, which can put downward pressure on the NAV and the share price.
  * **Subjective Valuation:** While the NAV is a great guide, it is still an //estimate//. Different appraisers can arrive at different valuations, and they are not infallible.
  * **Acquisition Risk:** Management could destroy shareholder value by overpaying for new music catalogs, especially in a competitive market. Analyzing management's track record on [[return_on_invested_capital|capital allocation]] is crucial.
  * **Technological & Regulatory Risk:** The music industry is constantly evolving. The shift from CDs to streaming was a major disruption. Future technological changes or new regulations regarding copyright could impact royalty values in unpredictable ways.
===== Related Concepts =====
  * [[net_asset_value_nav]]
  * [[margin_of_safety]]
  * [[price_vs_value]]
  * [[alternative_assets]]
  * [[economic_moat]]
  * [[catalyst]]
  * [[dividend_investing]]