A Royal(ty) Investment Return

Sep 05, 2014

The only reason to invest in anything is to make money. Regardless if it's stocks, real estate, mutual funds or precious metals, the goal is absolute return. So how can one fashion a portfolio that withstands market maelstroms while achieving attractive rates of risk-adjusted return over time? As we pointed out last week, diversification is what makes a portfolio. Investing cannot be an all-or-none endeavor, choosing different assets, and different types of assets, is what differentiates investment from the craps table.

Jennifer Lopez Music Royalties at Online Auction at Royalty Exchange

Music royalties should be considered in the diversified portfolio. Not only are their returns uncorrelated with other assets, but, in many cases, they're exceptionally attractive matched against other options. If your interest is in making money, choosing assets with strong performance is a good start, and historically, many music royalties offer just that.

Source: Royalty Exchange, Inc.

For example, consider the Cheryl Pearl Cook royalty auction, based on songs originally made popular by J-Lo, Sugarhill Gang and others, that recently sold on Royalty Exchange, Inc. Referring to the figures above, we see that from Q3 2001 through Q4 2013, nearly twelve years, this music royalty asset generated an interal rate of return (IRR) of 17.76%.

A Decade's Average Annualized Returns
Q3 2001 - Q4 2013
U.S. Treasuries > 1 year 4.87%
S&P 500 5.83%
High-Yield Bonds 6.49%
Equity REITs 11.21%
Cheryl Cook Music Royalties 17.76%
Source: Howard Simons, data provided by Royalty Exchange, Inc.

The music royalty's IRR compared to the IRRs of the S&P 500 index, U.S. Treasuries over one-year maturity, the Dow Jones REIT index and the Bank of America/Merrill Lynch Corporate and High-Yield Master bond index listed above, experienced the best return for the same time period.

While past performance is no indicator of future performance, in this case, the return from music royalties bested them all €“ for well over a decade.

Upon analysis of the graph of royalty income (shown below), one can see a pronounced income spike 2002, a year when the S&P 500 stock index lost -23.37%.Windfalls like this are difficult to predict, but as the saying goes, luck is the residue of design. Only a royalty owner is in position to realize these types of extraordinary gains independent of the economy or financial markets.

Music Royalties streaming

So, how should music royalties fit into a portfolio? They're not stocks or bonds, but they do provide regular income like stocks and bonds. Are they pieces of art? Annuities? I'll decipher, one week from today.