He adds that one of the key metrics when it comes to understanding the true worth of the assets is the “decay rate” of the songs, that is, the extent to which the music continues to be played in future years.
He says that as the trusts got bigger, the quality of the music catalogues deteriorated and so the decay rate increased.
Concerns around corporate governance and valuation are also central to the reason Investec analyst Alan Brierley recently cut his rating on the Hipgnosis trust.
He says the recently announced deal by Hipgnosis to sell some of its catalogues has the benefit of allowing it to repay debt, and this should reduce the volatility of the share price.
But he adds that the valuation being paid for the catalogues equates to about the share price when the trust launched in 2018, implying either the catalogue has been sold too cheaply to a related party now, or that the intrinsic value of the asset has not risen in five years.
Sachin Saggar, analyst at investment bank Stifel, says he believes the valuation of the music catalogue being sold by Hipgnosis is accurate now, but the problem is "the price (adjusted for expenses etc) is 26 per cent below the previous portfolio fair value.
"This is a material difference compared with a valuation that the board and manager have robustly defended for the past few years, despite our scepticism."
He says if the shareholders voted to reject the sale and wind up of the trust, it could get "messy" as the assets would all have to be revalued downwards and the debts of the trust may be called in.
Brierley said these factors “raise significant corporate governance concerns”, and as a consequence he feels investors may take the view they are better off voting to disband the trust and have their capital returned, when they have the opportunity to do that in October.
Merriam cannot comment on which direction his employer will go in during the continuation vote of the Hipgnosis trust, but says his personal view is that shareholders will vote to wind the fund up.
While Evan Lovett-Turner, director at Numis Securities, says he believes shareholders in the Round Hill trust will vote to accept the takeover offer despite the bid being at 11.5 per cent below the value of the assets in the accounts.
If both votes go as expected, it will bring the curtain down on music royalty funds as an asset class, ending what has been a rather expensive lesson for some advisers and their clients.
