October 2020 Monthly

In our 15 September note, Value added by active portfolio management, we explored Volta’s portfolio positioning (increasing CLO equities and reducing CLO debt). We showed how this delivered relative resilience amid the COVID-19 crisis. AXA IM selected investments i) whose price reflected a downturn, ii) of recent vintage, and iii) in defensive sectors. Volta marks to market its investments, and has suffered from sentiment-driven effects. Annualised received cashflows, though, represent 16% of August NAV, and market conditions have been improving. We also examined the upside optionality that Volta’s portfolio provides to any further recovery.

• Relative resilience to Jul’20: Volta has increased its CLO equity weighting since summer 2018. It bought positions where prices already reflected a downturn, which were recent structures and in defensive sectors. These positions showed less volatility than debt positions, and Volta has outperformed its peers.
• Upside optionality: Potential upside could come from i) improving trends in CLO markets, with rising asset prices, greater volumes and widening spreads, ii) normalisation of sentiment discounts on both assets and Volta’s shares, iii) Volta shares aligning with other corporate debt vehicles, and iv) a rising dividend.
• Valuation: Volta trades at a 26% discount to NAV (subject to significant external input and oversight). The relative discounts to Fair Oaks and Marblepoint seem anomalous, as, over the long term, Volta has delivered a better NAV performance. Volta declared a €0.11 dividend on 21 September, and aims for 8% NAV distribution.
• Risks: Credit risk is a key sensitivity (Volta has a widely diversified portfolio). We examined the valuation of assets, highlighting the multiple controls to ensure its validity, in our initiation note. NAV is affected by sentiment towards its own and underlying markets. Volta’s long $ position is only partially hedged.
• Investment summary: Volta is an investment for sophisticated investors, as both the NAV and the discount to NAV reflect sentiment. This may be expected to normalise over time, and we note that BGLF’s model-based approach saw its NAV drop by only a third that of Volta in March 2020. Fundamental long-term returns have been good: pre-COVID-19, ca.11% p.a. (dividend re-invested basis) over five years. Volta’s performance relative to its peers has been strong, and returns for investments made after the financial crisis were double those in prior years.