Investing in movies
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Mark J. Ferrari is Senior Investment Strategist at AXA Rosenberg Group LLC, Orinda, California.
Andrew Ruddn is Chairman and CEO at Advisor Software, Inc., Lafayette, California. n
Advisor Software, Inc., Lafayette, CA 94549, USA. E-mail: [email protected]
Abstract Investment managers are becoming increasingly interested in intellectual property as an asset class, and a large part of this intellectual property is filmed content created by the major movie studios. We have collected reliable information about the creative content and financial performance of feature films, and used this data to better understand the returns to investing in movies. We describe the valuation context of feature films and list the important factors influential in explaining financial returns. These factors are then used to build a quantitative, multiple factor valuation and risk model of the asset class. Journal of Asset Management (2008) 9, 22–40. doi:10.1057/palgrave.jam.2250091 Keywords: movies, valuation, risk, multiple factor model, locally weighted regression
Introduction The world economy is increasingly devoted to the production of intangible assets. ‘The economic output of the United States has becomeypredominantly conceptual,’ according to Greenspan (2003). Borod (2005) states, ‘The sheer volume of intellectual property worldwide is staggering.’ A large part of this intellectual property is filmed content created by the major movie studios. Despite its increasing importance, analysis of intellectual property as an asset class remains difficult because of the scarcity of systematically collected data. Filmed content is emerging as an exception. Reasonably reliable information about the creative content and financial performance of feature films is available to those willing to assemble it from a variety of sources. The goal of this paper is to use such data to understand the returns to investing in movies. Movie projects are priced in an incomplete and inefficient market where valuation and arbitrage are difficult if not impossible, suggesting an opportunity for active management. There are, however,
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at least four reasons why this task is quite different from investing in more conventional securities. First, there are fewer investment opportunities in the movie industry. Each year, the major US studios release just over 100 movies that might be candidates for investment, compared to several thousand common stocks listed on the US exchanges. Secondly, movie projects are far less transparent than listed equities. No regulatory organisation mandates financial disclosure at the project level, and hence the nature of the investment opportunities is unclear even in retrospect. Thirdly, there is a very large body of research and a sound theoretical basis underlying the analysis of public securities. Despite a great deal of academic work, there is no generally accepted model relating movie revenue to any particular set of factors. Finally, each movie is an individual project that offers the investor a single decision: w
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