View the original version online.
For many advisors, the latest year-in-review with clients may involve explaining why their portfolios were in the red in 2022, given the brutal year for both stocks and bonds. But the news won’t be bleak for clients of Vancouver-based Nicola Wealth Management Ltd., which reported a 7.5-per-cent rise in its Core Portfolio Fund for the year.
By comparison, Vanguard Growth ETF Portfolio VGRO-T, which includes a mix of roughly 80 per cent equities and 20 per cent fixed income, was down about 11 per cent in 2022, according to Morningstar Inc. All data are based on total returns.
“We’ve outperformed the traditional balanced portfolio by 2 or 3 per cent each year since 2000, but never by this much,” says John Nicola, founder, chairman and chief executive officer of Nicola Wealth, which has about $13-billion in assets.
He says the outperformance is thanks to the firm’s pension-style investment strategy, which is a rough one-third split between public and private equities, fixed income, and hard-asset, income-producing real estate.
The “beyond stocks and bonds” approach, including non-traditional asset classes like private real estate and private equity, provide greater diversification regardless of what’s happening in the markets.
Globe Advisor spoke recently with Mr. Nicola about his firm’s investment style and outlook for this year:
Where did you see the best performance in 2022?
Our real estate portfolio, which includes privately held multi-family and commercial-grade properties across North America, really outperformed. It was up about 20 per cent versus a REIT (real estate investment trust) market that was down by about 25 per cent.
Some commentators have said to me, ‘Well John, you’re dealing in private markets, and the public markets are marked-to-market.’ But I tell them the opposite is true. REITs are trading at 25 per cent below their net asset value, which means they are not the market. They are the public’s reaction to external events. They’ve been oversold. The actual market – what buildings are being bought and sold for – that’s the real market.
How did your bond investments perform?
As most investors know, bonds got clobbered last year. We didn’t get clobbered, but we lost money in bonds. We were always defensive by reducing our duration on bonds. The bond market dropped 9 per cent in Canada last year, while our bond fund was down 1 per cent.
Are you shifting your asset mix at all in 2023?
We’re not making dramatic changes, but we are tilting slightly more toward fixed income and away from equities.
We don’t see inflation coming down quickly, which means interest rates are likely to continue rising and remain high for a while longer. That could mean a recession, which means lower corporate earnings and higher unemployment. I would much rather be focused on fixed income in that environment as long as I’m careful about credit risk and default rates. With any new capital, we’ll continue to use cost averaging today to make sure that we maintain our asset mix – and we always rebalance.
What is your outlook for this year?
I don’t think 2023 will be spectacular. There won’t be a recovery like we saw coming out of the March 2020 downturn at the start of the pandemic.
It’s safe to say that higher interest rates will hurt most asset classes throughout the year. There will be no easy returns until we see interest rates hit a plateau, combined with some reasonable decline in inflation and, ultimately, that we’re at least halfway through any future recession that may be in the works.
All those things have to happen before you can start to say you’re in a generous market, whether it’s for equities or for real estate. We believe we’re well positioned because we have that one-third, one-third, one-third asset mix in place.
This interview has been edited and condensed.
– Brenda Bouw, Globe Advisor Reporter
