Cooper Investors, an investment management firm, published its ‘Cooper Investors Global Equities Fund (Hedged)’ fourth-quarter 2020 Investor Letter – a copy of which can be downloaded here. A return of 9.96% was recorded by the fund for the Q4 of 2020, below its MSCI ACWI benchmark that returned 12.24%. You can view the fund’s top 10 holdings to have a peek at their top bets for 2021.
Cooper Investors, in their Q4 2020 Investor Letter said that they acquired a position in Warner Music Group Corp. (NASDAQ: WMG) because they see a valuable future growth in the company. Warner Music Group Corp. is a premier record label and music publisher company that currently has an $18 billion market cap. For the past 3 months, WMG delivered a decent 30.52% return and settled at $35.81 per share at the closing of January 27th.
Here is what Cooper Investors has to say about Warner Music Group Corp. in their investor letter:
“The portfolio also established a position in Warner Music Group (“WMG”), a leading record label and music publisher. The portfolio has a long history investing in content assets across the spectrum of video, gaming and audio. Each of these content sub-segments has its own nuances and is at a different stage regarding the impact of technology on distribution and business models; video is still working through the technological impact of streaming whereas gaming is enhanced by technology which enables the creation of more immersive content.
Audio, and specifically the music industry, has transitioned through the most acute period of technological disruption with the unbundling of physical albums by both pirated and legal services occurring in the early 2000s. With the rise of streaming services like Spotify and Apple Music we now see the emergence of durable industry tailwinds. Put simply, penetration of streaming music is a compelling customer proposition and these services remain at under 10% penetration of global smart phone users today.
WMG is one of just three major suppliers of scarce IP to the rapidly growing streaming music market. Every time one of their tracks is played on a streaming platform they get paid. The relationship between the record labels and the streaming platforms remains symbiotic with both parties needing each other. We do not believe this will evolve much over the foreseeable future. Beyond streaming there are many other avenues for growth enabled by digital distribution facilitating the collection of royalty revenue, for examples Social Media (TikTok dances), Fitness (Peleton workouts) and Original Content (soundtracks in movies or games).
Management outlined a robust margin expansion plan including natural efficiencies from digital streaming taking share from physical, as well as specific productivity measures. Combined with the growth tailwinds outlined above, looking out we see a business with ~US$1bn of Free Cash Flow power annually or roughly triple the amount generated in FY20. This provides the base for a double digit annual return to shareholders.”
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