Value added by active portfolio management

In this note, we explore Volta’s portfolio positioning, increasing its CLO equity weight and reducing the CLO debt proportion. We show how this has helped deliver relative resilience amid the COVID-19 crisis to date, with AXA IM selecting investments i) whose price already 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 17% of July NAV, and market conditions have been improving. We examine the upside optionality that Volta’s portfolio provides to any further recovery.

• Relative resilience to Jul’20: Volta has been increasing 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 double discount. Its share price is at a 25% discount to NAV. Furthermore, its mark-to-market NAV, we believe, includes a further sentiment-driven discount (10%-15%) to the present value of expected cashflows. Volta targets an 8% of NAV dividend (12% yield on current share price).
• Risks: Credit risk is a key sensitivity. We examined the valuation of assets, highlighting the multiple controls to ensure its validity, in our initiation note, in September 2018. The NAV is exposed to 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 there could be sentiment-driven, share price volatility. Long-term returns have been good: ca.10% p.a. returns (dividend-reinvested basis) over five years pre- crisis. The portfolio’s cashflow yield is currently ca.17%, more than 2x the cost of the dividend (8% of NAV, giving an 12% yield on the current share price).