Returns for the Nicola Core Portfolio Fund were +1.0% for the month of April. The Nicola Core Portfolio Fund is managed using similar weights as our model portfolio and is comprised entirely of Nicola Wealth pooled funds and limited partnerships. Actual client returns will vary depending on specific client situations and asset mixes.
The Nicola Bond Fund was up for the month returning +1.2% in April while the iShares Core Canadian Universe Bond Index ETF returned +0.9% for the month. Credit spreads helped drive returns for the month as Canadian investment grade bond spreads tightened from 1.66% to 1.58% with banks, autos, and insurance leading the way. Credit spreads were also helped by a tighter Canadian corporate primary market as gross supply so far this year is 47% lower than this time a year ago.
The Nicola Bond Fund outperformed in April as our exposure to the East Coast strategy and Algonquin Capital had strong months returning +2.2% and +1.4% respectively. In addition to credit spreads, returns were also supported by interest rates as there was a rally in most parts of the curve, with 2-year yields falling 8bps to 3.65%. Modest flattening of the yield curve was a minor detractor for the Nicola Bond Fund as we continue to be shorter duration.
The combination of both rates and credit spreads supporting returns was welcomed in April as central banks and governments sought to reassure investors after a volatile March in the banking sector. We continue to like the major Canadian banks, which we believe are well capitalized, resilient, and pillars of the financial industry. This is in sharp contrast to the U.S. regional banking system which consists of thousands of regional banks where regulation and oversight is different depending on the bank size and where lending standards and risk management may be more risky.
The Nicola Global Bond Fund was up for the month returning +0.2%. The Nicola Global Bond Fund was supported by returns from PIMCO Monthly Income Fund and Templeton Global Bond Fund, which were up +0.7% and +0.2% respectively. Global credit spreads broadly rallied while interest rates rose as developed market PMIs generally beat expectations and China’s Q1 GDP was also stronger. After a weak Q1, securitized credit also participated in the rally, but we are cautious on the CMBS space, particularly in office, where fundamentals may be deteriorating. Inflation-linked bonds were flat for the month as rising inflation was offset by a reiteration of central bank hawkishness.
Currency was a negative contributor for the month as the U.S. dollar strengthened versus most currencies. Many Asian currencies such as the Japanese Yen, South Korean Won, Malaysian Ringgit, and Chinese Yuan were negative contributors for the month. In Latin America, the Brazilian Real contributed positively to the portfolio in April. Brazil unveiled fiscal rules at the end of March which limit the increase in public spending which was one of the primary concerns that had previously been a headwind for the Real. In addition, Brazil and China also reportedly reached a deal to trade in their own currencies furthering the global trend towards reducing reliance on the U.S. Dollar for global trade. This trend alongside the rise of multi-polar economies may in the long run reduce the appeal of the U.S. Dollar.
The Nicola High Yield Bond Fund returned +1.2% in April while the iShares US High Yield Bond Index ETF (CAD-Hedged) returned +0.2%. USD exposure was a positive contributor for the Nicola High Yield Bond Fund as the U.S. Dollar strengthened slightly against the Canadian Dollar by 0.3% in April. High yield spreads moved slightly tighter during the month with CCCs outperforming BBs by about +1.8%. We continue to be positioned in higher quality high yield and believe that overall credit spreads remain slightly expensive at around 4.52%. Default rates are currently at 1.7% and may move higher and reach historical levels closer to 4%.
Over the month, California carbon credits were the main contributor of the Nicola High Yield Bond Fund returning +4.3% in U.S. Dollars. Carbon credits were positively affected by two recent announcements. California announced two landmark rules setting aggressive zero-emission requirements for fleets of heavier vehicles and locomotives, while Apple planned to invest another $200 million in carbon credits. Over the past couple months, Apollo Credit Strategies has been net short U.S. bank credit, which has helped drive outperformance for the month.
We remain cautious in sectors that are heavily dependent on U.S. regional banks for financing, such as commercial real estate, but believe there are potential gains to be had if there is further stress in real estate credits. During the month, we continued to add to Canso Corporate Value, who remain defensively positioned with abundant liquidity. If credit conditions remain tight and leads to an economic recession, we think Canso’s excess liquidity will be beneficial to take advantage of a wider spread environment and drive returns higher.
The Nicola Preferred Share Fund returned -0.2% for the month while the BMO Laddered Preferred Share Index ETF returned +0.2%. The Nicola Preferred Share Fund underperformed as one of our top holdings, Artis REIT, decided against redeeming their preferred shares, which caused its preferred shares to reprice lower. This was largely offset by the stability of our ownership in higher reset spread institutional preferred shares which had positive returns. For example, CIBC’s institutional preferred share returned +1.2% while BMOs returned +1.1%.
ETF flows were net negative for April but quieter than earlier in the year and block volumes were also muted as investors try to balance between attractive reset yields versus the potential of less institutional market participants due to 2023 Budget taxation changes affecting financial institutions. The backdrop of the relative attractiveness of preferred shares has decreased in the long run but we continue to see good value rate resets, particularly in institutional preferred shares and also $25 bank preferred shares from a tactical perspective.
In addition, fixed-rate perpetual preferred shares and floater preferred shares, which base their coupon primarily on prime rates, underperformed rate-resets. This saw more opportunistic buyers on a relative basis due to being a more liquid and larger segment of the preferred share asset class. Lastly, new issuance continues to be slow and there have been no new preferred share issuances in April for both the retail and institutional preferred space.
The Nicola Primary Mortgage Fund returned 0.5% for the month of April. New investment activity remains low as the Nicola Primary Mortgage Fund is virtually fully invested. The Nicola Primary Mortgage Fund held 0.2% in cash & cash equivalents, with 97% of the loan portfolio secured by senior ranking mortgages at month end.
The Nicola Balanced Mortgage Fund returned 0.7% for the month of April. We continue to review attractive investment opportunities, as the Canadian mortgage market remains unsettled in the current interest rate environment. The Fund held 1.5% in cash & cash equivalents, with 35% of the loan portfolio secured by senior ranking mortgages at month end.
The Nicola U.S. Mortgage Fund (USD) returned 1.28% for the month of April. New investment opportunities continue to be considered as part of a separately managed account amid recent turmoil in the U.S. banking sector, which is expected to benefit non-bank commercial mortgage lending. Investments are comprised of senior ranking floating rate mortgage loans secured by commercial real estate in major U.S. markets.
For the month of April, the Nicola Private Debt Fund returned +1.1% bringing the YTD return to +3.0%. The primary return driver during the month was contractual interest income from the Nicola Private Debt Fund’s portfolio of direct investments. In addition, April returns benefited from NAV mark-ups on investments in Vistara Technology Growth Fund III and IV. New investments during the month included a US$10 million commitment to the first lien credit facilities of a leading provider of cost and care management solutions to government healthcare programs.
Nicola Canadian Equity Income Fund performance vs S&P/TSX Composite Index: April 2023 +2.7% vs +2.9%; YTD +6.7% vs +7.6%. Canadian equities closed the month in positive territory. Resilient macro data is feeding the soft-landing narrative and supporting sentiment and equity prices (at least for now). The S&P/TSX Composite Index was up +2.9% in April and all 11 sectors were in positive territory.
The best performing sector was telecommunications (+6.5%) as finally, after two long years, regulatory approval was given for Rogers Communication and Shaw to merge along with the sale of Freedom Mobile to Quebecor. In commodities, crude oil prices were flat (WTI +1.5%; Brent -0.3%) while natural gas (+8.8%) and precious metals were strong (Gold +1.1%, Silver +4%).
Our Nicola Canadian Equity Income Fund underperformed the S&P/TSX Index slightly as positive contribution from industrials and energy were offset by negative contribution from financials and materials (we are underweight both financials and materials). In the month, our top performing holdings were Lumine Group Inc, Lundin Mining and Canadian Natural Resources. The bottom performers were Nuvei Corp, CCL Industries and Neighbourly Pharmacy Inc.
There were no new positions added or exits for the portfolio during the month. We were active with option writing as we initiated new option trades (writing cash covered puts) for Magna, Nuvei, Telus International, and West Fraser Timber. At this point, we are still wary of a deeply inverted yield curve and many leading indicators pointing towards an economic slowdown. As a result, we view the risk-reward tradeoff for option writing as attractive in this climate. We aim to generate double-digit annualized return while having good downside protection. We are very targeted in our option-writing strategies and target companies that we feel have good balance sheets in industries that we are happy to own for the long term.
The Nicola U.S. Equity Income Fund (USD) and the S&P 500 returned +0.6% & +1.6% respectively for the month of April. The positive return in April resulted in a rare back-to-back monthly return for the S&P 500; the previous back-to-back positive month was in October/November of last year. The last few days of the month the market rose sharply due to strong quarterly results from select names within the technology and communication services sector (Microsoft & Meta were both up double-digits).
Market sentiment seemed to improve as the banking crisis appeared contained, inflation continued to moderate, and expectations of a Fed pause were on the horizon. This sense of calm was also reflected by the CBOE Volatility Index (“fear gauge”) which declined to its lowest reading in over a year. The Nicola U.S. Equity Income Fund underperformed the S&P 500 by 1% due to negative relative contributions from industrials, healthcare, and information technology which more than offset the positive relative contributions from consumer discretionary, energy and financials.
The Nicola U.S. Equity Income Fund’s top contributors to performance were Shell, Microsoft and Electronic Arts. The top detractors to performance were NXPI Semiconductors, AT&T and John Deere. The Nicola U.S. Equity Income Fund became more defensive by selling economically sensitive Bank of America and adding to higher quality names such as AT&T, VISA, Netflix, and Amazon. The Nicola U.S. Equity Income Fund ended the month with a delta-adjusted equity exposure of 87% due to option positioning (17% of longs covered and 9% notional put options).
For April 2023, the Nicola International Leaders Fund was +3.8% vs +2.0% for the MSCI ACWI ex-USA Index. For the month, international markets (+3.1%) outperformed, while emerging markets (-0.9%) underperformed. European markets (+4.4%) were supported by a rebound in economic activity and a strong earnings season so far. In emerging markets, despite further signs of a rebound in China’s economy, the MSCI China Index (-5.0%) was down in April over reports of potential new investment regulations by the United States.
Main contributors to performance during the month were our holdings in healthcare, consumer staples and France. One of the biggest contributors was EssilorLuxottica (global eyewear company with leading positions in lenses, frames, and retail distribution), which re-rated on strong Q1 sales figures.
Main detractors to performance during the month were our holdings in financials and Taiwan. One of the biggest detractors was TSMC (the market leader in advanced semiconductor manufacturing). TSMC was impacted by rising geo-political tensions between U.S./China and quarterly results that showed no signs of turnaround in the semi-conductor industry.
For April 2023, the Nicola Global Small Cap Fund was +0.9% vs +0.2% for the MSCI ACWI Small Cap Index. For the month, U.S. small-caps (-1.2%) underperformed, while International (+2.3%) & emerging markets (+0.9%) small-caps outperformed. In the U.S., signs of a slowing economy, concerns over the debt ceiling, and the potential failure of First Republic Bank weighed on sentiment. European markets (+3.3%) were supported by a rebound in Q1 GDP growth. In emerging markets, India (+5.8%) performed strongly on an unexpected pause in its rate hiking cycle. Main contributors to performance during the month were our holdings in consumer discretionary, consumer staples and Germany. One of the biggest contributors was Coca-Cola Consolidated (the largest bottler for Coca-Cola in the U.S.), which moved higher on Coca-Cola Company’s Q1 results that showed continued success in passing on inflation.
Main detractors to performance during the month were our holdings in energy and the United States. One of the biggest detractors was Nabors Industries (leading energy services provider), which was impacted by slowing drilling activity in the U.S. due to lower commodity prices.
The Nicola Sustainable Innovation Fund returned -5.6% (USD) / -5.3% (CAD) in April, and -6.6% (USD) / -6.3% (CAD) year-to-date. Our top performers during the month were Orsted, Sunrun, and Iberdrola while Beam Global, Aker Carbon Capture, and Enviva were the biggest laggards. April was another challenging month for our strategy and clean-tech focused companies more generally. During the month we fully exited our positions in Aptiv PLC, and the iShares USD Green Bond ETF with the proceeds going to cash to provide us with some dry powder in the event of further pullbacks.
Our allocation to green bonds was largely a placeholder for capital that is committed for further draws on our Ares Climate Infrastructure Partners LP investment; however, with high-interest savings account products yielding close to 5% today, we are opting to use these as placeholders for future draws. While our monthly returns were disappointing, they were within the range of the pullbacks we saw in several clean energy focused indexes with the S&P Global Clean Energy Index (SPGTCLEN) off -5.5% and the WilderHill Clean Energy Index (ECO) off -12.6%.
One of our biggest headwinds over the last year has been rising interest rates and the Fed delivered another 25bp hike in early May, taking the Fed Funds rate to their highest level since 2007. With the most recent rate hike we received some indication in the language from Fed Chair Jerome Powell that we may be nearing the end of this rate-hiking cycle. If we see a pause from the Fed, avoid a recession in future months and risk appetite returns we expect a positive reaction from longer duration, growth focused equities.
The Nicola Infrastructure and Renewable Resources LP returned 1.0% for the month of April in Canadian dollar terms. Overall, currencies had a positive impact over the period with CAD weakening against the USD and GBP; agnostic to currencies, our assets returned 0.7%. This was driven by strong Q4 2022 performance in our global core and core-plus infrastructure fund and Q1 2023 performance in line with expectations from our co-investments in Ports America Group and the US energy as a service platform. This more than offset a Q4 2022 mark-down in our North American data centres co-investment due to updated interest rate assumptions. Note, leasing at the data centres remains ahead of budget and most markets have seen significantly higher new lease rates mitigating the impact of higher costs.
The Fund is at $227M of AUM with a waitlist of $33M that is expected to be fully drawn by the end of Q2 2023 from existing fund commitments and the near-term co-investment pipeline.
The Nicola Alternative Strategies Fund returned 0.0% in April. The primary factor was currency as the U.S. Dollar strengthened during the month versus the Canadian Dollar by +0.3%. This added +0.1% to the Alternative Strategies Fund’s return in April. According to Eurekahedge, overall hedge funds returned +0.6% for the month while the Eurekahedge Arbitrage Hedge Fund Index returned -0.5% and the Relative Valued Hedge Fund Index returned -0.1%. Despite lagging in April, over a YTD and 1-year period, the Alternative Strategies Fund returned +2.6% and +10.3% respectively while the Eurekahedge Hedge Fund Index returned +2.4% and -0.4%.
The Nicola Precious Metals Fund returned +2.0% for the month of April. Underlying gold stocks in the S&P/TSX Composite Index returned +4.0% and gold bullion was up +1.1% in Canadian dollar terms. The continued rally in the Nicola Precious Metals Fund was a function of a strong global bid for gold as a safe haven asset in times of uncertainty. In early April, OPEC+ also made the decision to further cut output which surprised markets and subsequently helped move gold prices higher.
While developed market data on inflation appears to have peaked, inflation remains elevated with fatter tail risks. Risks to higher inflation include de-globalization and higher prices expected from a net-zero transition while risks lowering inflation include the likely slower economic growth due to higher debt leverage in developed markets and the disinflationary effect of technology for example. Gold ETFs also continued to see inflows in April as well, which further supported higher prices.
Nicola Global Real Estate Fund performance vs iShares S&P/TSX Capped REIT Index (XRE): February 2023 -0.6% vs -0.3%. Publicly traded REITs took a small step back in the month due to higher than anticipated inflation readings and a global economy that is proving resilient. The race to combat inflation (and the associated ramifications on interest rates) continues to be a headwind for the REIT universe, putting pressure on stock prices. Except for the office sub-sector, companies continue to report robust demand and limited supply, which drives rent growth. While near-term volatility will likely persist until visibility on rates and the economy improves, we continue to like valuations.
As interest rates stabilize, the market will have a better idea of the cost of capital, and therefore be able to better triangulate what real estate values will be going forward. This will help lift the uncertainty in REIT share prices. A more stable interest rate environment will allow for a discount to NAVs to normalize. REITs with strong balance sheets, strong real estate portfolios, superior earnings potential, and high-quality cycle tested management teams will ultimately prevail. Investors turn to REITs for income growth and fundamentals appear strong particularly in the multi-family and industrial sectors which can set the stage for continued growth in dividends.
The Nicola Canadian Real Estate LP YTD return as of March 31, 2023, is 1.6%. Portfolio Leverage is 43.61%. The positive return was primarily due to increased appraised values of Avonhead, Grace Road, and 400 Brooksbank.
The Nicola U.S. Real Estate LP The YTD return as of March 31, 2023, is 2.3% and the Portfolio Leverage is 47.63%. The positive return was primarily due to increased appraised values of San Palmilla, South Shore Lakes, and Valley View Commerce Center.
The Nicola Value Add Real Estate LP The YTD return as of March 31, 2023, is 1.9%. In March, we funded $7.0M for existing projects.
