A Global Portfolio of Sturdy Growers


The team behind this fund is stable, experienced, and well-resourced. Jim Hamel, who serves as lead manager, has been on the team since its 1997 founding. Comanagers Matt Kamm, Jason White, and Craigh Cepukenas joined the team in 2003, 2003, and 2009, respectively. Each of the managers serves as the lead on one of the team’s four other charges–Artisan Global Discovery (APFDX),  Artisan Mid Cap (ARTMX), and Artisan Small Cap (ARTSX). Those funds cover a lot of ground. But eight analysts with an average tenure of eight years and industry experience of 15 years back the managers. Because of overlapping holdings across the portfolios, the team tracks about 150 names in all.

The team has consistently focused on sturdy growers with healthy balance sheets. The fund has tended to invest more in companies with solid competitive advantages than the MSCI ACWI Growth Index (arguably the fund’s best benchmark given its growth tilt) according to Morningstar’s risk model. The fund also has had more exposure to financially healthy firms than the index, according to the model.

The portfolio holds 40-50 stocks and often invests 35% to 45% of its assets in its 10 largest positions. But thanks to its focus on relatively stable fare, blowups have been few. Indeed, since the former large-growth fund moved to the world-stock Morningstar Category in 2012 and later to the recently created world large-cap stock category in 2017, the fund has lost 95% as much as the index when stocks decline while gaining 10% more in rising markets. From the start of 2012 through September 2018, the fund beat the growth index as well as the fund’s MSCI ACWI benchmark, the typical world large-stock fund, and a subset of that category that–like this fund–resides in the large growth corner of the Morningstar Style Box (the strongest-performing portion of the style box during that period).

Process Pillar: Positive | Greg Carlson 10/11/2018
The fund’s distinctive and prudent approach has been resilient in downturns and has produced solid long-term performance, earning a Positive Process rating.

The 15-person team behind this fund looks for companies that lead their industries, have (or will have) accelerating profits, and possess healthy balance sheets. The team is collaborative, meeting twice daily to discuss current and prospective holdings. The team slowly increases position sizes as it becomes more confident in their prospects and starts trimming holdings as they approach the team’s estimate of private-market value. The fund’s turnover has averaged about 42% over the past five years, and top holdings in this 40-50 stock portfolio typically don’t get much above 5% of assets.

According to Morningstar’s risk model, the fund has held more financially healthy companies with solid competitive advantages than the MSCI ACWI Growth Index.

The fund changed its name to Growth Opportunities as it moved to the world-stock category from large-growth in 2012 and then to world large-stock when Morningstar created that category in 2017. The team intended it to be a global fund from the start but ramped up its non-U.S. exposure gradually because the team had focused on U.S. stocks at its other charges. The non-U.S. stake is expected to stay above 30% of assets; since the start of 2012, it’s averaged 39%.

The team expects a scarcity of sustainable growth–only those businesses with quality services and products will get rewarded, it says. Thus, expect the fund to remain concentrated at 40-50 holdings. At the end of June 2018, it held 46 stocks and stashed 36% of its assets in the 10 largest holdings.

The fund looks significantly different than what is arguably its best benchmark, the MSCI ACWI Growth Index. Active share versus the index at the end of June was 90.8%. The fund owned some of the growth darlings at the top of the index, such as Alphabet (GOOG) and  Tencent (TCEHY) (and it also owned Facebook (FB) until early 2018). But the fund doesn’t own other growth titans such as Apple (AAPL), Amazon.com (AMZN), and Microsoft (MSFT).

Capacity is less of an issue at this large-cap fund than at the smaller-cap portfolios this team runs, but it’s still worth watching at this still-open offering. The team manages $17.2 billion in this strategy, which is more than $2 billion above its previous capacity estimates. That said, most of the assets are outside the fund in separately managed accounts that have stopped accepting new money. Market appreciation accounts for some of the rise in strategy assets, and inflows have been modest in 2017 and 2018 to date. Two of the team’s other charges, Artisan Mid Cap and Artisan Small Cap, also are closed to new investors.

Performance Pillar: Positive | Greg Carlson 10/11/2018
This fund’s strong record overall earns a Positive Performance rating.

This was a large-growth vehicle at its late 2008 inception, but it gradually boosted its exposure to non-U.S. stocks and moved to the world-stock category in 2012 and then the recently created world large-stock category in 2017. From the start of 2012 through Sept. 30, 2018, the fund surpassed more than 90% of its world large-stock peers on both a total return and risk-adjusted basis. It beat its MSCI ACWI benchmark, as well as the MSCI ACWI Growth Index, to which the fund has been more correlated, by an annualized 4.5 and 2.8 percentage points, respectively. The fund gained significantly more than either index in rising markets during the period, while losing less when stocks decline.

The fund did gain an advantage over much of that span thanks to a larger U.S. stock stake than the world large-stock norm and relevant indexes. The difference–an average of less than 10 percentage points–doesn’t account for all of the fund’s margin of victory. Decent stock picks in varied regions and sectors, such as Japanese cosmetics maker Shiseido and Danish drug developer Genmab, helped.

The fund’s performance when it resided in the large-growth category, from its September 2008 inception through 2011, was mixed. It outpaced 60% of that peer group while lagging the Russell 1000 Growth Index.

People Pillar: Positive | Greg Carlson 10/11/2018
A deep, experienced, and heavily invested team earns a Positive People rating.

Jim Hamel, who joined the team at its 1997 founding, has led the fund since its 2008 inception. Matt Kamm, who joined in 2003, has served as a manager since 2010, and Craigh Cepukenas, who joined in 2009, was named a comanager in 2013. Jason White, an analyst since 2003, became an associate manager on all of the team’s funds in 2011 and later became a manager. Eight analysts with an average of eight years tenure back the managers. Most of the analysts have sector-specific roles, and five have worked on the team since at least early 2010. There are also three research associates.

Andy Stephens, who founded the team in 1997, relinquished his portfolio manager title in 2014 and conducted research and mentored analysts until his March 2018 retirement.

The team has also managed Artisan Mid Cap since 1997 launch, Artisan Small Cap since 2009, and Artisan Global Discovery since 2017. The team is still well-resourced. There is considerable holding overlap among the four portfolios. In all, the team oversees about 150 holdings across its charges.

The team also invests significantly in its funds; the four portfolio managers together have between $12.6 million and $14.5 million in the funds, according to filings.

Parent Pillar: Positive | Greg Carlson 03/28/2018
Artisan hires proven or promising managers and allows them to build and run their teams with a large degree of autonomy. Four of the five teams with long histories have performed strongly over longer-term periods. The emerging-markets team lags its benchmark since the strategy’s June 2008 founding, though performance has rebounded lately. Three teams have joined since early 2014, and two of those reflect the firm’s broadened lineup, which previously focused strictly on equities: One invests in high-yield debt, while another runs a thematically driven alternatives strategy. It’s unlikely the firm will launch another equity strategy in the near future.

Beyond delivering largely solid performance, the firm tends to close funds to preserve their flexibility and increase the chances that they will continue to outperform. Indeed, five of the firm’s 15 funds are currently closed to new investors. (Two others have been closed in the past.) The firm also has a clean regulatory history.

Artisan went public in March 2013. While this could pressure management (led by Eric Colson, who became CEO in 2010) into keeping popular funds open to boost revenue, it has thus far continued to close them. Its executives no longer control the stock’s voting shares, but the firm’s employees, founders Andy and Carlene Ziegler, and two private equity firms who have owned stakes since Artisan’s 1994 founding own close to 40% of the firm combined.

Price Pillar: Neutral | Greg Carlson 10/11/2018
This fund’s fees aren’t high, but they aren’t a good deal either. The fund earns a Neutral rating for Price.

The fund’s Institutional shares hold 48% of the assets and charge 0.93%, which is near the median for similarly distributed world-stock funds. The Investor shares hold 35% of the assets and charge 1.15%–just a bit more than its typical no-load peer. The Advisor shares hold 17% of the assets and charge 1.03%, which lands in the middle quintile of the comparison group.

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Merlin distributions to label members in Japan increase 200% year-on-year


Distributions to Merlin’s Japanese independent record label members has increased by over 200% year-on-year.

According to Merlin, some of this growth is owed to its membership increasing in the territory over the last 12 months.

The rest it attributes to average payments to members increasing by over 70% during the same period.

The independent label agency opened its Tokyo office, based in the Ebisu district, in October 2016.

The office is headed up by Haji Taniguchi, one of the most experienced and respected executives in the Japanese and Asian music business.

Working full-time alongside Taniguchi is Kaoruko Hill, who provides an international point of contact – supporting local independent labels and enabling them to participate in Merlin’s licensing deals, while liaising with colleagues in Merlin’s London, New York and Amsterdam offices.

Merlin Chief Executive, Charles Caldas (pictured inset), is set to highlight the increase in distributions to Merlin’s Japan-based members during his upcoming keynote at the 15th Tokyo International Music Market (TIMM).

“Opening our Tokyo office in 2016 was a landmark in the global growth of Merlin.”

Charles Caldas, Merlin

Charles Caldas, CEO, Merlin, said: “Opening our Tokyo office in 2016 was a landmark in the global growth of Merlin. As well as being the world’s second largest music market, Japan has a thriving music culture with huge export potential. Our data underlines that Merlin is helping our Japanese members extract maximum value from the global demand for their repertoire.

“Much of this is down to the hard work of Haji Taniguchi and Kaoruko Hill. They have done a fantastic job in establishing Merlin’s presence in Japan and have additionally enabled Merlin members around the world to gain greater insight of the Asian market overall. I look forward to further successes in the years ahead.”

Haji Taniguchi, GM, Merlin Japan added: “I am hugely proud of what we’ve achieved over the past two years. Merlin now has an established base in Japan, and it is gratifying that local independent labels are already realizing the value of Merlin membership and growing their overseas business.

“Most excitingly, these are still early days for streaming in our country. Indicated by the trends in Merlin’s 2018 Impact Report, the full benefits of a global digital music market are arguably still yet to come.”

Masahiro “Jack” Oishi, CEO, Danger Crue and current Merlin board member said: “Merlin has empowered independent record labels for more than a decade, and I am proud not only to be a board member but also to celebrate the work of Haji and Kaoruko in establishing our Japanese office.

“With the streaming market now growing across Asia, Japanese labels are in a perfect situation to benefit from Merlin’s global licensing partnerships and to build a worldwide business.”Music Business Worldwide

Columbia Records appoints Manos Xanthogeorgis Senior Vice President of Digital Marketing and Media


Columbia Records has named Manos Xanthogeorgis Senior Vice President of Digital Marketing and Media.

Xanthogeorgis (pictured) was previously Vice President, Head of International Digital for Sony Music Entertainment.

He reports to Jenifer Mallory, General Manager for Columbia Records.

In his new role, Xanthogeorgis will be responsible for developing and executing Columbia’s overall digital strategy including consumer engagement, social media, influencer and streaming marketing, and advertising on behalf of the label’s artists.

Appointed Vice President, Head of International Digital for Sony Music Entertainment in 2017, Manos oversaw international digital and streaming functions across the company’s Columbia, Epic, and RCA labels.

He was appointed Senior Director of International Digital for Sony Music in 2015.

He has helped develop and implement campaigns for Sony’s US-signed artists, including Adele, Beyoncé, Camila Cabello, David Bowie, Harry Styles, Khalid, SZA, Travis Scott, Pharrell, DJ Khaled, Future, The Chainsmokers, and others.

From 2012 to 2015, Xanthogeorgis was Manager, and then Director of Social Media & CRM for Legacy Recordings, the catalog division of Sony Music Entertainment.

He oversaw the strategy calendar and handled social media campaigns/digital content for artists including Bob Dylan, Michael Jackson, and Miles Davis.

“Manos has executed countless creative and impactful global digital campaigns for Sony Music signature artists.”

Jenifer Mallory, Columbia Records

“Manos has executed countless creative and impactful global digital campaigns for Sony Music signature artists around the world over the last few years,” stated Mallory.

“His strategic insight and acute understanding of the global digital and streaming landscape will be a tremendous asset to Columbia’s artists and label partners. We are so excited to welcome Manos to Columbia Records.”

Xanthogeorgis added: “I am truly honored and grateful to Jenifer Mallory and Ron Perry for the opportunity to be part of this new phase of Columbia Records, one of the most iconic record labels in the business.

“Working at Sony has been a life-changing experience for me. I owe a big thank you to the global Sony Music community for the continuous support and for being such an inspiration over the past few years.

“I am fortunate to be able to continue to work with Jenifer who is one of the brightest and most forward-thinking music executives and continue to learn from her. I look forward to further cultivating key partnerships around the world as we integrate our strategies regionally and globally.”

 Music Business Worldwide

Invesco to Buy OppenheimerFunds


Invesco and MassMutual Life Insurance Company announced today that they have entered into an agreement for Invesco to buy OppenheimerFunds, the advisor to the Oppenheimer family of mutual funds, from MassMutual. MassMutual and the employee shareholders of OppenheimerFunds will receive a combination of common and preferred stock worth about $5.7 billion, and MassMutual will become Invesco’s largest shareholder, with a roughly 15.5% stake. In addition, MassMutual will have representation on Invesco’s board of directors; MassMutual says it will nominate William F. Glavin Jr., former CEO of OppenheimerFunds and currently an independent board member there, as its representative.

The firms said they expect that the transaction will close in the second quarter of 2019, pending approvals from regulators and other parties.

The deal would increase Invesco’s total assets under management to $1.2 trillion, with $680 billion in U.S. retail assets under management, as OppenheimerFunds’ $225 billion is added to Invesco’s $455 billion.

Midsize fund firms have been combining in recent years in part because of competition from low-cost exchange-traded funds offered by a few giant companies such as Vanguard and BlackRock. Many fund company executives as well as outside observers believe that only larger firms will survive this process, leading to consolidation. For example, Janus and Henderson merged in May 2017, and Standard Life bought Aberdeen in August 2017. In fact, since 2006, Invesco itself has acquired PowerShares’ exchange-traded funds, the Van Kampen fund lineup from Morgan Stanley, the ETF lineup from Guggenheim, and another ETF group from Source of the United Kingdom.

The firms have not made any decisions about integrating the families’ fund lineups, including whether some funds might be merged or liquidated in areas where there is overlap. The firms are strong in similar areas, notably foreign equities, and weak in similar areas, notably municipal bonds. Both firms have considerable assets in high-yield munis, and the merger will significantly increase Invesco’s already heavy exposure to U.S. large-cap equities, which have experienced heavy outflows as investors have moved to cheaper, more-passive options.

For more details, see Looking at a Possible Merger Between Invesco and Oppenheimer.

SOCAN launches new services arm called Dataclef, inks deal with IPRS


Canadian music licensing and collection society SOCAN has launched a new services arm called Dataclef.

According to SOCAN, Dataclef is “the most authoritative global music services platform ever built” with a comprehensive music database from more than 200 territories.

Dataclef is currently a bilingual organization (English and French), but will be expanding language support to Spanish and Arabic in the coming months.

SOCAN’s services team, led by Dataclef Chief Operating Officer & Head of Sales Janice Scott, will operate at “arm’s length from SOCAN’s core business teams”, and on segregated systems, which SOCAN says will ensure “complete privacy and confidentiality for all clients”.

SOCAN has also signed a deal the Indian Performing Rights Society Limited (IPRS), for Dataclef to now provide back office services through the Dataclef Suite of products and services to facilitate rights management for IPRS.

Dataclef will administer mandates, process all types of music usage data, and work with IPRS to deliver royalty revenue to its members in the region.

“Dataclef is a milestone for SOCAN and the music industry, on a global level.”

Eric Baptiste, SOCAN Group

“Dataclef is a milestone for SOCAN and the music industry, on a global level,” said SOCAN Group CEO Eric Baptiste (pictured inset).

“For the first time ever, organizations can go to one place for state-of-the-art license administration, worldwide reporting, and intelligent royalty tracking and delivery, improving their efficiency and bottom line to return superior results.”

Scott added: “SOCAN has asserted a position in leading the global transformation of music rights.

“Dataclef is the latest strategic move forward for the SOCAN Group, resulting from years of investment in technology development and acquisition, integration of complementary leading-edge companies, and, most importantly, the world’s best collective team of industry experts.”

Javed Akhtar, Chairman of IPRS, added: “IPRS is excited to work with Dataclef to leverage their data and systems for maximized efficiency and royalty delivery to our members.

“Dataclef’s revolutionary systems and database are unlike anything we’ve had access to before. We anticipate many years of mutual success working with their impressive technology and team.”

SOCAN announced in May 2018 that it had struck a services deal with the Dutch Caribbean performing rights organization, Ducapro, which will now be served by Dataclef.Music Business Worldwide

Investors Continue to Favor Taxable-Bond Funds


It appears 2018 will be the third consecutive year that taxable-bond funds receive the greatest inflows among Morningstar’s eight U.S. category groups. Investors shoveled $20.9 billion into taxable-bond funds in September, nearing $189 billion during 2018. That’s about half of 2017’s $390 billion calendar year total, though it’s nearing 2016’s $196 billion total.

As we have discussed previously, taxable-bond demand seems to fall into three segments. First, investors are moving money into core, intermediate-term bond funds. This category received about $6.1 billion in September and leads all taxable-bond categories with about $55 billion year to date. These inflows may reflect investors rebalancing and shifting money from equity funds. Second, rate-sensitive investors are pouring money into ultrashort-bond funds. This category collected $5.3 billion in September and is just behind intermediate-term bond funds for the year to date with about $54 billion. Finally, long government funds received about $3.6 billion in September inflows. These funds have historically diversified equity portfolios well, but their 2018 success is still surprising. The category has been hammered by rising interest rates, and the average fund is down 8.7% through October 9. Nevertheless, investors have funneled about $15.4 billion into these funds during 2018.

Core strategies are still the most popular across asset classes. For both U.S. equity and international equity, it’s core, large-blend funds, and then everything else. Large-blend U.S. equity funds collected $9.1 billion of the group’s overall $10.5 billion flows. For the year to date, large-blend funds have absorbed $35.4 billion versus overall U.S. equity’s $5.8 billion, meaning the remaining eight categories have experienced collective net outflows this year.

Within international equity, foreign large-blend funds received $3.9 billion compared with the entire category group’s $850 million in inflows, implying the remaining categories suffered modest net outflows. For the year to date, foreign large-blend funds have taken in $72.6 billion versus $89.3 billion for all international equity.

Conversely, world large-stock funds had $1.3 billion of outflows in September, the greatest among international equity funds. Investors had little interest in some other world strategies, with world allocation funds losing $2.1 billion in outflows.

Download the complete Asset Flows Commentary here.

YouTube’s Susan Wojcicki tells artists: Article 13 poses ‘a threat to your livelihood’


YouTube CEO Susan Wojcicki has warned content creators that the “unintended consequences” of Article 13 “poses a threat” to their livelihoods.

Wojcicki’s warning about the EU Copyright Directive vote was shared in a wide-ranging letter with YouTube creators detailing her current priorities as well as progress made over the past few months.

The European Parliament voted on the EU Copyright Directive in Strasbourg on September 12, passing Article 13 into law.

The legislation could see user generated content-reliant platforms like YouTube held legally accountable for all copyright-infringing material appearing on their platforms.

YouTube’s latest show of disdain for the legislation comes after the platform’s Chief Business Officer Robert Kyncl said that the ability for creators and artists to find fans and build a business online is now “at risk” thanks to Article 13.

“Article 13 as written threatens to shut down the ability of millions of people – from creators like you to everyday users – to upload content to platforms like YouTube,” said Wojcicki (pictured) in the letter.

“It threatens to block users in the EU from viewing content that is already live on the channels of creators everywhere. This includes YouTube’s incredible video library of educational content, such as language classes, physics tutorials and other how-to’s.

“This legislation poses a threat to both your livelihood and your ability to share your voice with the world. And, if implemented as proposed, Article 13 threatens hundreds of thousands of jobs, European creators, businesses, artists and everyone they employ.”

“Article 13 threatens hundreds of thousands of jobs, European creators, businesses, artists and everyone they employ.”

Susan Wojcicki, youTube

Wojcicki also cites the importance of “all rights holders being fairly compensated,” a primary reason for support shown for the directive by the likes of Sir Paul McCartney, who wrote in a letter urging MEPs to vote for Article 13, that “User Upload Content platforms refuse to compensate artists and all music creators fairly for their work”.

Wojcicki argues however that YouTube developed its Content ID system for this reason. “But the unintended consequences of Article 13 will put this ecosystem at risk,”  continued Wojcicki.

“We are committed to working with the industry to find a better way. This language could be finalized by the end of year, so it’s important to speak up now.”

You can read Susan Wojcicki’s letter in full below:

A Final Update on Our Priorities for 2018

Dear Creators,

Since 2005, YouTube has transformed from a single video at the zoo to a global video library where billions of people turn to each day for knowledge, creativity and connection. Today, YouTube is a diverse community of creators who are building the next generation of media companies and drawing fans from every corner of the world. You are making history and changing the way people watch video, engage with each other and share their voice. I feel honored to help you do this, and I continue to be inspired by what I see.

In the last year, the number of channels with over 1 million subscribers has increased by 75%. Each month, more than one billion fans come to YouTube to be part of music culture and discover new songs and artists. Building on that momentum, we’ve expanded YouTube Music to the UK, Ireland, Germany, Austria, France, Italy, Spain, Sweden, Norway, Finland, Russia, Canada, Denmark, Belgium, the Netherlands, Luxembourg and Brazil. We also rolled out three new stories on Janelle Monáe , J Balvin and Shawn Mendes in our YouTube Artist Spotlight series over the last few months. And we launched 13 YouTube Originals in the last quarter, including three in Germany and two in France.

All of this is possible because of the creative economy powered by you. However, this growing creative economy is at risk, as the EU Parliament voted on Article 13, copyright legislation that could drastically change the internet that you see today.

Article 13 as written threatens to shut down the ability of millions of people – from creators like you to everyday users – to upload content to platforms like YouTube. It threatens to block users in the EU from viewing content that is already live on the channels of creators everywhere. This includes YouTube’s incredible video library of educational content, such as language classes, physics tutorials and other how-to’s.

This legislation poses a threat to both your livelihood and your ability to share your voice with the world. And, if implemented as proposed, Article 13 threatens hundreds of thousands of jobs, European creators, businesses, artists and everyone they employ. The proposal could force platforms, like YouTube, to allow only content from a small number of large companies. It would be too risky for platforms to host content from smaller original content creators, because the platforms would now be directly liable for that content. We realize the importance of all rights holders being fairly compensated, which is why we built Content ID , and a platform to pay out all types of content owners. But the unintended consequences of article 13 will put this ecosystem at risk. We are committed to working with the industry to find a better way. This language could be finalized by the end of year, so it’s important to speak up now.

Please take a moment to learn more about how it could affect your channel and take action immediately. Tell the world through social media (#SaveYourInternet) and your channel why the creator economy is important and how this legislation will impact you.

Please read on for an update on our priorities for 2018.

1. Communication and transparency

As I’ve written to you before, we’ve made a conscious effort to communicate with you more in the places where your conversations are taking place–social and video. Based on your feedback, we’ve also increased the number of product updates or “heads up” messages regarding changes to YouTube, including smaller tests or experiments, on our @TeamYouTube handle and the Creator Insider channel . And we continue to share helpful tutorials and inspiring creator stories on our YouTube Creators channel, formerly the Creator Academy channel. We’re working to increase these efforts. I’m posting more videos to my own channel and the Creator Insider channel just posted their 100th video!

We’ve heard that you want communication from us in a simplified way and in one central location. To that point, we launched YouTube Studio , the new one-stop shop for platform news and product updates. This is the primary place for getting YouTube-related information, such as announcements about new features, creator academy videos and Creator Insider weekly news flashes. This easy-to-view dashboard is THE place you can go to find the latest news and will be the new homepage for all creators by end of the year.

Finally, our leadership continues to meet face-to-face with creators around the world. Robert Kyncl and Neal Mohan spoke to creators from across Europe, the Middle East and Africa at the Creator Summit in Berlin. Robert continued his series of Creator Interviews with Caspar Lee in Berlin and Gautam Anand, Managing Director of YouTube APAC, sat down with Korean creator Dotty in Seoul. We saw incredible turn out at our Creator Summit in Seoul, with creators from across Asia Pacific, and, we look forward to hosting Latin American creators at our final 2018 Creator Summit in November.

2.Helping you succeed

Monetization is the heart of your business. To that end, we released an update to our monetization systems this quarter, which improved the accuracy of monetization icons by 10%.
In my last letter, I talked about our pilot to test a new video upload flow that asks creators to provide specific information about what’s in their video as it relates to our advertiser-friendly guidelines. Most creators in the pilot were able to accurately represent the content in their video, and it is providing more transparency to creators in terms of what type of content is suitable for ads. We hope to offer self certification to more creators before end of year and plan to expand broadly in early 2019.

This summer, we announced Channel Memberships, and since then, we’ve seen thousands of creators take advantage of this feature. For instance, Wintergatan , creator of the Marble Machine, grew his revenue by more than 50% since adding channel memberships and is using it to fund his next generation Marble Machine and a World Tour. Gaming creator Markiplier increased his revenue by 20% and comedy creator Mike Falzone tripled his YouTube revenue. We’ve also seen creators use Memberships to support creative endeavours, such as TriStar Gym offering exclusive Brazilian Jiu Jitsu technique videos and Ola Englund offering guitar lessons online to members. Because of this success, we’re accelerating the roll-out of memberships to more channels and lowering the subscriber threshold from 100,000 to 50,000 subscribers. We plan to expand memberships to even more of you in the months to come.

Over the past few weeks, we’ve hosted three special editions of our NextUp camps designed to support up-and-coming Black, Latino and women creators . We received more applications for this round than any other before it. If you missed your chance to apply this time, please stay tuned for the next round. We are hosting two more in Rio De Janeiro, Brazil and St. Petersburg, Russia and plan to announce more in the coming months.

3. Giving people more ways to engage

Since we announced Premieres this summer, creators have been using this new feature to generate more views, more engagement and more revenue for their channel. For instance, Twenty One Pilots premiered their new video My Blood to more than 75,000 fans who watched it together and engaged over live chat and comments. One of our top gaming creators, TheRadBrad , tried it out and told his fans in his live chat that “it was one of the coolest experiences in my 8 years on YouTube.” And Linus Tech Tips ’ premiere of his recent tech reviews was one of his best performing videos. I’m happy to announce that premieres is now available to all creators.

We recently introduced YouTube Giving , a suite of features that allow creators and nonprofits to raise funds for causes they care about directly on YouTube videos and live streams. While these features are currently in beta, we’ve seen creators use them to create inspiring impact. Hope for Paws raised over $100,000 in the first 10 days, and over 12 gaming creators have teamed up with St. Jude Children’s Research Hospital to raise over $125,000 throughout Childhood Cancer Awareness Month. Our hope is to expand these features soon to more creators so that they can give back and support causes they care about.
Finally, we’re building a stronger gaming community on YouTube with features, such as our new Gaming Destination , Gaming Creator on the Rise and dedicated pages for over 80,000 games. We’ll also be retiring the standalone gaming app next year. We know this change impacts a lot of you, but it will allow gaming creators to have greater access to fans while still providing a unique gaming experience.

4. Tightening and enforcing our policies

One of our biggest priorities from a policy perspective has been investing in the news experience on YouTube and tackling misinformation. In close collaboration with many of our news partners, we’ve rolled out a number of changes to address them. For example, we have worked to make credible sources more readily available to users and rolled out breaking news and top news shelves in 23 countries. We also hosted the first YouTube News working group meeting at our headquarters and used this opportunity to listen to news organizations, academics, and creators on how we can improve news on the platform. Finally, we’re supporting journalism with technology that allows news to thrive, including an innovation fund to help news organizations sustainably build their video capabilities. We know we have more to do to combat misinformation, and we will continue to invest in innovative solutions to address this.

We also continue to provide updates to our YouTube Community Guidelines enforcement report, which you can read here .

5. Learning and education

Learning is one of the best parts of YouTube. In recent months, BookTubers came together for their annual BookTubeAThon , during which creators read books, shared their thoughts via their channels and inspired people around the world to do the same. We also saw “ Study with me ” videos gain popularity– motivating users to persevere through their own study sessions.

We’re committed to empowering both the creators who want to share their knowledge with the world and the users who come to our platform to learn–from home improvements to the basics of physics to grammar lessons. Today I’m happy to announce we’re investing $20 million in YouTube Learning, an initiative to support education focused creators and expert organizations that create and curate high quality learning content on YouTube. Part of this investment includes a Learning Fund to support creators who want to build multi-session learning content for YouTube. If you’re interested in this program, please fill out this form.

As part of our efforts to support creators who are sharing their knowledge on the platform, we also launched Learning , a new channel of curated tutorials, DIY videos, skill-based playlists, and other high-quality educational content from a range of creators. And we hosted three YouTube EduCon gatherings in Los Angeles, Mexico City and Rio de Janeiro. These conferences were great opportunities for Edutubers to network and learn new skills, and we’re planning to hold more conferences in new places in the upcoming year.

At YouTube, we hope to give back. We’ve worked with Lilly Singh to support girls’ education and fight violence against children, and we teamed up with Priyanka Chopra , BB Ki Vines and MostlySane to encourage girls’ literacy and education around the world. Please take a moment to watch and support theses causes.

Thank you for making YouTube an incredible source of creativity, knowledge and inspiration. As always, keep the feedback coming. I’m listening.

Susan WojcickiMusic Business Worldwide

How Exposed to Italy Are Index Funds?


Italy’s budgetary plans for the 2019 fiscal year have unnerved financial markets. The Lega/Five Star Movement governing coalition, which came into power with the promise of a comprehensive program of extra public expenditure, has approved a substantial upward revision to the 2019 budget deficit target to 2.4% of gross domestic product: 3 times higher than the 0.8% figure agreed by the previous administration with the European Commission. The deficit targets for 2020 and 2021 are 2.1% and 1.9%, respectively.

To say that EU authorities are displeased would be an understatement. Yields on Italian bonds, which had been on a rising trend since the installation of the populist administration, have shot up further, sparking fears that an open confrontation between Rome and her eurozone partners could be the beginning of another systemic crisis for the euro.

So far there has been little sign of contagion. The spread between German and Italian bonds has widened but, crucially, so has that between Spain and Italy (see Exhibit 1). This indicates that financial market participants have focused the selling pressure on Italy alone, pricing in the mounting risk–inevitable for some–that Italy’s sovereign rating will be downgraded. At present, Italy is rated just two notches above non-investment-grade by the three major rating agencies (S&P, Moody’s, and Fitch).

Italy Is a Large Holding in Fixed-Income Passive Funds
The lack of contagion to other peripheral eurozone issuers, while welcome, should not lull investors into a false sense of security. Italy’s problems on their own do matter–a lot, in fact. Italy has the largest government bond market in the eurozone and the third largest in the world after the United States and Japan. This means that passive funds providing exposure to international sovereign bond markets, which for most U.S.-based investors are a tactical investment, can have a large weighting in Italian bonds. 

Negative sentiment in government bonds can easily spill over to other areas of the fixed-income market, such as corporate and high yield. Therefore, when assessing exposure to Italy, one should take a broad view. For example, the weight of Italy in  Vanguard Total International Bond ETF (BNDX) stands at around 6.5%, while in the case of iShares International High Yield Bond ETF (HYXU), it is 17.5% (see Exhibit 2).

Will My Passive Fund Become a Forced Seller of Italian Bonds?
Holders of passive funds with a large exposure to Italian government bonds are rightfully concerned about the practical implications of a sovereign rating downgrade in the day-to-day management of the funds. Typically, developed sovereign bond market passive funds track benchmarks that require issuing governments to be rated investment-grade. This means that a downgrade of Italy to junk would turn the funds into forced sellers at the worst possible time. Given the large weight of Italy in these indexes, it is easy to imagine a situation where downside pressure to prices is magnified by the sheer volume of bonds that these passive funds–and active funds unable to invest in non-investment-grade debt–would have to shed and, thus, the cost that investors would have to bear.

Besides, a downgrade to junk would also mean that the European Central Bank may be technically barred from coming to the rescue, which would add fuel to the anti-euro rhetoric of this Italian government. In that situation, “Italexit,” that is, Italy abandoning the single currency, may no longer feel like the empty threat that it currently is.

As mentioned, Italy is still two notches above non-investment-grade, and rating agencies rarely bring ratings down by more than one notch in a single move. But more important, a downgrade to junk by just one rating agency would not lead to the expulsion of Italy from the benchmarks, at least not from the most popular ones (Bloomberg Barclays, Markit iBoxx, and FTSE MTS) that ETFs and index funds typically track. For these indexes, the investment-grade-rating eligibility criterion is defined as the average rating from the three main rating agencies–in effect meaning that at least two rating agencies would need to downgrade Italy to junk for it to be dropped and passive funds to be forced to reconstitute their portfolios.

While a downgrade to just one notch above non-investment-grade looks likely–at least from one of the rating agencies–chances of a downgrade to junk status do not seem high at this juncture. For all her ills–and there are quite a few–Italy’s ability to generate sizable budget primary surpluses remains a key factor in her favor. The primary budget position is the difference between tax revenues and public expenditure net of interest payments on debt. This is a key measure to assess public debt sustainability. As Exhibit 3 shows, even in the years since the introduction of the euro and through the worst years of the global economic crisis, when Italy’s economic growth has been pretty much absent, the primary budget position of Italy’s public accounts has been routinely in surplus. In fact, it has been the most stable of the big eurozone four. Italy’s public debt burden is certainly high, but it would have been much higher if the government had had to borrow just to settle bond interest payments. And while no one doubts that Italy needs economic growth, it pays not to lose sight that arriving at a sovereign rating decision is a much more complex process that simply looking at GDP growth figures.

Negative Sentiment Can Spread to Other Italian Assets; Financials Most at Risk
Even if Italy being downgraded to junk feels like a tail risk, the losses already incurred–and those that may come–by such an important sovereign bond holding are not to be dismissed lightly. Indeed, sustained negative sentiment on Italian government bonds can easily drag down other Italian assets–both bonds and equities. Typically, corporations pay a premium over domestic government bonds to borrow in the open market, and so any worsening of financing terms (that is, higher yields on corporate bonds) would weigh on stock valuations. Most at risk would be Italian banks, as they are large holders of domestic government debt. The average weight of Italian stocks in a Europe stock passive fund is close to 6%, while in world equity funds the highest weight is in those with a value tilt (see Exhibit 4).

Investors should keep a close eye on Italy for the time being. It is an important economy with a large weighting in bond and equity indexes. We may have to get used to periodic episodes of financial market volatility caused by the blustery utterances of her ruling politicians. However, it is important to not lose sight of the bigger picture to realistically assess investment risk, particularly in relation to the fundamental issue of euro membership.



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Jose Garcia-Zarate does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Greece’s music rights sector in turmoil as head of copyright office steps down


Greece’s scandal-hit authors’ rights sector has just been plunged back into crisis.

The country’s major CMO, AEPI (the Hellenic Society for Protection of Intellectual Property), was investigated by the country’s Public Prosecutor in March 2017 after widespread allegations of corruption.

Ernst & Young audited its 2011-2014 finances and found that during the period AEPI had sustained losses of just over €11m, failed to distribute around €42m in royalties to its members and that it was nearly €20m in debt.

Its Managing Director Petros Xanthopoulos, on the other hand, was being paid an annual salary of €635,000.

Earlier this year, the Government permanently revoked the license of the (former family-run) AEPI and decided to set up a new state-owned authors society, called the EYED.

In the latest episode of this on-going saga, a key government official, Irini Stamatoudi, who was at the centre of efforts to rebuild the sector, has just quit her job as head of the the Greek Copyright Office (OPI).

We know this because her damning resignation letter has been published in full by the country’s national newspaper Kathimerini and other outlets such as Times of Change.

In the letter, addressed to the country’s Minister of Culture and Sports Mirsini Zorba, Stamatoudi cites a general lack of transparency and behaviour of officials at the OPI and EYED as the main reason for her decision to step down.

Among the list of allegations, translated into English, Stamatoudi accuses officials of taking out excessive salaries, and dishonesty about their relationship with AEPI.

She also highlights issues such as missing expense reports, the conflict of interest of officials who sit on the boards of both the copyright office and the EYED.

The Government put the Copyright Office (OPI) in charge of EYED, even though OPI is also the government agency responsible for supervising the country’s societies.

The letter also alleges unequal treatment of EYED compared to other CMOs operating in the same market, which, argues Stamatoudi, implies that there is “unequal treatment among authors and other rightsholders”.

The other prominent CMO operating in the market is Autodia, which is supported by most major societies around the world as well as The International Confederation of Societies of Authors and Composers (CISAC).

MBW understands that most of the top local publishers have signed with Autodia and that it has hired over 30 new members of staff, some of which have previous experience from working at AEPI.

Autodia also appointed a new “Interim CEO”, Declan Rudden in September “to coordinate Autodia’s transition to a modern European Collecting Society.”

“CISAC is leading an unprecedented effort in Greece to save a collapsing market.”

Gadi Oron, CISAC

Speaking to MBW, CISAC Director General Gadi Oron called the resignation of Irini Stamatoudi “a huge loss”.

“We have appreciated her genuine efforts over many years to improve the collective management system in Greece”, added Oron.

“CISAC is leading an unprecedented effort in Greece to save a collapsing market. There is an exceptional unity and commitment among our members to returning this market to long term stability.

“We have been working since April to help develop CISAC’s only member society in Greece, Autodia, including significant funding which has been provided by members, and numerous reciprocal agreements.

“Illustrating the faith placed in Autodia by CISAC members, a funding package of over €1 million from many of its international partners has been agreed in recent days, and many societies offered their expertise and training to quickly improve Autodia’s capacities and operations”.Music Business Worldwide

Western Digital Looks to Flash for the Future


After taking a fresh look at hard disk drive manufacturer  Western Digital (WDC), we are maintaining our no-moat and negative moat trend ratings. We have decreased our fair value estimate to $75 per share from $84 but note that the shares are still trading at a significant discount to our valuation.

Western Digital is one of two leaders in the hard disk drive market and, with the purchase of SanDisk in 2016, has become a significant player in the NAND flash market. The company has invested significant resources in successfully negotiating the technological transition from HDD to flash storage. Solid-state drives have important performance benefits versus older spinning disc media, and as a result, HDDs have lost their luster for both PCs and servers. HDDs currently have superior cost metrics and higher capacities, but SSDs have been closing these gaps and quickly limiting the number of use cases for HDDs. We believe Western Digital has significant competitive advantages in the HDD market, but these are unlikely to generate excess returns on capital as that storage solution continues to decline.

We believe the secular headwinds for HDD demand in PCs will continue. With a lower total cost of ownership from SSD products in many PC applications, we anticipate there will be an ongoing decline in annual HDD sales as SSDs increase share and PC unit sales generally decline. HDDs will remain a significant component of the storage environment to accommodate the business-critical storage needs of enterprises, but SSDs have already made significant headway in the enterprise market by taking a major portion of the share in mission-critical applications. While Western Digital’s SSD capabilities give it the potential ability to curb overall HDD declines in certain enterprise applications, thus far we believe the company has been unable to translate its success in enterprise storage to share gains in the SSD enterprise market.

Western Digital maintains a joint venture (Flash Ventures) with Toshiba to develop and manufacture flash memory wafers. While flash competitor Samsung does have an economic moat, we do not believe moats are easily developed in the flash market, given the commoditized nature of that technology, the capital intensity, and the highly cyclical nature of the semiconductor market.

We Don’t Foresee Excess Returns on Capital
Despite its place as one of two leaders in the hard disk drive market, we do not believe Western Digital has an economic moat. Notwithstanding considerable intangible assets surrounding HDD design expertise as well as a cost advantage in HDD manufacturing, its capabilities are unlikely to allow the company to generate excess returns on capital over the next decade, given the broad technological trends away from legacy hardware. Flash technology, specifically in the form of solid-state drives, have performance improvements over HDDs that have resulted in an ongoing shift toward SSDs for mass storage needs in PCs and servers. Western Digital has attempted to offset declines in the legacy HDD market by spending considerably on new HDD technologies in addition to purchasing flash player SanDisk in 2016. While the combined company has an advantage over competitor Seagate Technology (STX), we believe Western Digital will struggle to maximize its opportunities in NAND because of the considerable competition in the space.

Over the past decade, the HDD market has experienced rapid consolidation, with the number of players falling from 10 to three as others have exited because of an inability to meet the rising investments to keep pace with higher-capacity HDDs and the shift to SSDs. The result of this consolidation is that Western Digital and rival Seagate now own a combined share in excess of 80% of the HDD market, with Toshiba playing a bit part. While the oligopoly in HDDs should allow rational behavior from both companies and help prevent price wars, the future of HDDs as a technology is in serious decline. Innovations from both companies may help to stave off obsolescence in the near term, but the next decade promises to limit the number of use cases. For context, industry estimates in 2005 for average selling price per gigabyte of storage on SSD drives were over $50. That declined to less than $0.40 in 2018 amid considerable investments from NAND players, and we estimate it will continue to decrease to $0.10-$0.15 by 2022.

HDDs still offer a cost advantage over SSDs, as HDD storage is as low as $0.03 per gigabyte. However, SSDs still have significant advantages, even at a higher cost per bit. SSDs benefit from improved performance, speed, lower power consumption, increased durability (no moving parts), and a smaller form factor. Indeed, even at multiple times the cost per bit, there are several use cases where the total cost of ownership in using SSDs is far lower than using HDDs. Though the cost advantage of HDDs over SSDs is progressively narrowing, the need for cheap high-capacity storage in data centers will continue to support the demand for enterprise HDDs, which carry higher average selling prices and margins than PC HDDs. We expect the company to benefit from an acceleration in cloud deployments and subsequent need for massive amounts of high-capacity storage. At present, SSD remains a costly product for high capacities, and we anticipate that business-critical storage (that is, “nearline” storage not needed for immediate access) will continue to be in the hands of HDD technology. However, while we model for average selling price and exabyte growth from business-critical HDDs, flash technology has already made significant headway in the mission-critical piece of enterprise storage, with SSDs accounting for nearly 20% of the mission-critical market in 2018 from a base of just 8% in 2015. In our view, enterprise HDD demand will not fully offset headwinds from SSD substitution and a declining PC market.

At the moment, PCs remain the Western’s primary end market for products. We continue to see significant secular headwinds for HDD demand in PCs, including an ongoing decline in annual PC unit sales and SSDs replacing HDDs. With nearly 50% of all laptop and other mobile PCs using SSD storage as of 2017, Gartner expects that attach rate to increase to 96% by the end of our explicit forecast. Likewise, total PCs with SSDs, including both desktop and mobile, is expected to increase to 93% by 2022. In 2018, almost half of HDD units sold by Western come from desktop and notebook sales, and thus the importance of a strong SSD portfolio to capture that shift cannot be understated.

While we are generally positive on the company’s purchase of SanDisk, which in principle has the company better positioned to deal with the technological shift, Western Digital has been unable to translate its dominance in enterprise HDD storage to SSD strength thus far. The company has gained share in the PC SSD market, expanding to 14% at the end of calendar 2017, but enterprise SSD has not followed as strongly and has in fact declined to 12% from 15% in the prior year. The company has sought to buttress its enterprise capabilities through the acquisition of Tegile, a leader in enterprise flash storage systems. Competitor Seagate has been severely handicapped in its ability to benefit from the shift to SSDs due its previous lack of a captive source of NAND flash capacity to drive its SSD business. This has changed recently with Seagate completing an agreement with Toshiba Memory Corp. Western–through its acquisition of SanDisk–also uses TMC to source its NAND through a collection of joint ventures. The two companies also have considerable intangible assets related to the design and development of NAND, and this has continued, albeit with significant negotiation after Toshiba’s flash business was purchased by Bain.

Beyond SSDs, SanDisk sells NAND into mobile devices with increasing storage capacities driving growth. However, flash storage technology becomes commoditized quite quickly, with well-capitalized competitors such as Samsung pushing the technological boundaries, particularly on the component side for mobile devices. As a result, transient product differentiation hampers long-term profitability for all parties involved. Meanwhile, the delicate balance between supply and demand remains a concern, with bouts of oversupply crippling margins and undersupply leading to overexpansion. We think the consolidation that has occurred in recent years should encourage the remaining companies to act rationally in terms of future capacity additions. Nevertheless, it only takes one additional fabrication plant to tip the market scales toward oversupply. Furthermore, the SSD space has more players, including Samsung and Intel (INTC). We anticipate stronger competition in SSDs will also hamper Western Digital’s returns on invested capital.

While Western Digital has intangible assets (in the form of design expertise) and a cost advantage in HDD production, we expect these advantages to deteriorate as HDDs face rapid substitution risk from SSDs and the price/performance gap between HDDs and SSDs narrows. The acquisition of SanDisk has assuaged some concern, as the combined company will focus more on the growing SSD market in lieu of HDDs. However, Western Digital is still struggling to make its SSD expertise count, thus far losing share in enterprise SSD. We don’t see significant design or manufacturing expertise in SSDs that would warrant a stable moat trend for Western Digital. We remain skeptical that the SSD business will lead to excess returns on invested capital for the combined company, as we view memory suppliers as no-moat entities due to the highly cyclical nature of the storage market and the commoditized nature of the memory industry (for example, we viewed pre-acquisition SanDisk as a no-moat company). Despite ongoing investments in technology and manufacturing, we believe that remains the case. Thus, we do not believe Western Digital has stabilized its competitive positioning.

Inherent Cyclicality of Chip Market Is Risk
We believe the semiconductor market is inherently cyclical, with memory demonstrating similar supply and demand dynamics as the broader industry. Also, while Western Digital and Seagate typically act rationally as a duopoly in the declining HDD market, NAND flash memory is more commoditized. As a result of these issues, as well as the broader technological trends affecting the storage market, we assign a very high uncertainty rating to Western Digital.

The ongoing supply and demand imbalances in flash have created a challenging pricing environment for major players. With Samsung, Intel, Micron Technology (MU), and SK Hynix there is also the risk that competitors will beat Western Digital to producing novel silicon products (such as Intel and Micron’s 3D XPoint) that further curb the company’s ability to benefit from flash. Most important, despite the addition of SanDisk, Western Digital still relies on HDDs for the majority of revenue. The attach rate for SSDs in PCs is increasing at a steady rate while HDDs are in secular decline. Enterprise storage provides a significant opportunity for the company in the near term, with business-critical storage demands increasing, but should energy efficiency concerns increase for data centers and hyperscale cloud players, this opportunity may quickly evaporate. Should Western Digital be unable to successfully execute on its flash and SSD portfolio, or if it is unable to eke out improvements in HDD technology, it will be unlikely to generate profitable growth.

We believe Western Digital is in decent financial health. While debt increased to facilitate the SanDisk acquisition, the company has been working to steadily pay it down. Leverage is higher than usual, but we forecast that the company’s cash flow generation will more than meet the debt obligations it currently has. We expect management to continue to deleverage, but we also expect capital expenditures to stay elevated for the duration of our forecast. The demands of flash technology require the company to invest more in equipment, especially in pursuit the newest and best in 3D NAND.

In general, we believe Western Digital has a sensible and diligent capital-allocation strategy. The company has an ongoing share-repurchase program as well as a quarterly dividend to shareholders.