Serge Demay, from Fund Manager AXA IM, gave an investor presentation at the Hardman & Co 17 June 2019 Forum (video https://www.hardmanandco.com/june-investor-forum/). We produced a short note for this event, Volta Finance: 9% yield from diversified corporate loan portfolio. In this report, we address the questions that were raised at both the Forum and in the one-on-one discussions our analyst had with attendees post the event. The bias was on credit and how the portfolio may optimise returns if the expected gentle economic deterioration happens.
- Credit outlook: There were a number of questions on the credit outlook: how and why it may be better to be invested in CLO equity securities than debt if the economy deteriorates; the impact of cov-lite trends; and how Volta has changed from before the financial crisis.
- Other questions: Other questions included an exploration of the relationship between Volta and its asset manager (we see benefits from this relationship), the level of fees, gearing (and how it is both low and structured to ensure Volta will not be a forced seller of assets), and the impact of sentiment.
- Valuation: Volta trades at a 16% discount to NAV. Peer-structured finance funds, and a range of other debt funds, on average, trade at smaller discounts. Volta has delivered faster NAV growth than its immediate peers and in-line/lower volatility, making this absolute and relative discount an anomaly.
- 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 last September. 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 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. The current portfolio-expected NAV return is broadly similar. The 2019/20E dividend yield of 9.0% will be covered, in our view, by predictable income streams.