Nicola Wealth Investment Returns: April 2024

Nicola Core Portfolio Fund  

Returns for the Nicola Core Portfolio Fund were +0.4% in April and 3.0% year to date. The Nicola Core Portfolio is managed using similar weights to our model portfolio and is comprised entirely of Nicola Pooled Funds and Limited Partnerships. Actual client returns will vary depending on specific client situations and asset mixes.

Nicola Bond Fund  

The Nicola Bond Fund returned -0.6% in April and +0.5% year-to-date, surpassing the iShares Core Canadian Universe Bond Index ETF, which had a monthly return of -1.1% and year-to-date return of -3.5%. The index experienced a negative total return in April as yields rose, with the 10-year Government of Canada bond yield increasing by 0.3% from 3.5% to 3.8%. Concerns rose that the central bank would need to keep interest rates higher for longer, leading to a reduction in expected cuts for 2024. By the end of April, the market expectations for the Bank of Canada were for only two cuts this year, as opposed to the five cuts expected at the end of 2023. Canadian corporate spreads were relatively unchanged in April and remained resilient as higher all-in yields continue to be attractive to investors.

The fund’s outperformance in April was driven by its relatively shorter duration, overweight in select sectors, and good credit selection. During the month, we increased the fund’s exposure to REITs, bank sub-debt, and short-dated automotive finance companies. These sectors were the top performers in April and contributed to our relative outperformance. We continued to see robust new issuance and participated in selecting new issues with attractive risk/reward characteristics. We participated in HomeEquity Bank’s short-dated new issue in mid-April. The new issue concession was meaningful, and we have a favorable view on the credit fundamentals. HomeEquity Bank (HEB) is Canada’s leading reverse mortgage provider with a high-quality, low loan-to-value reverse mortgage portfolio of approximately $7 billion. The credit spread of the new issue tightened by 0.23% in April and outperformed. The fund remains defensively positioned and we will look to take profits and adjust exposure when appropriate. This gives us the flexibility to add risk as we see opportunities arise in a rapidly evolving market.

Nicola High Yield Bond Fund

The Nicola High Yield Bond Fund returned +0.4% CAD/-1.2% USD in April and +2.6% CAD/-1.4% USD year-to-date, outperforming the iShares US High Yield Bond Index ETF (CAD-Hedged), which had a monthly return of -0.8% and year-to-date return of 0.1%. Though higher all-in yields provided support for credit spreads, which were mostly unchanged on the month, the index experienced a negative total return as U.S. treasury yields increased with the 10-year treasury yield rising 0.5% from 4.2% to 4.7%. Higher quality BB credits outperformed lower quality bonds in the month.

The Nicola High Yield Bond Fund outperformed in April as it had a relatively shorter duration, given our cautious stance on the timing of Fed interest rate cuts, combined with good credit selection. Top-performing strategies during the month include PIMCO Multi-Sector Income Fund and BlackRock Securitized Investors Fund, which returned +4.9% and +3.8% respectively in Canadian dollar terms. Our Canadian corporate hybrids positions in the midstream/pipeline sector, Canadian banks’ capital notes, and recent Canadian high yield new issues experienced strong returns in our internal portfolio. We initiated a position in TransCanada Pipeline’s investment-grade rated, corporate hybrid bonds in January at approximately 7.8% yield to call. We believe this bond will be called at first call date in May 2027, when it will lose highly advantageous equity treatment at one of the rating agencies. This bond also offers good relative value compared to traditional high yield bonds and we view TransCanada Pipeline as a high-quality issuer with low default risk. Since our initiation, yield to call on this bond has compressed to 6.9% by the end of April and credit spreads tightened by 1.2% from 4.0% to 2.8%. We believe there continues to be value in this portion of the market though, and are monitoring it closely given the strong performance this year. The fund will continue to focus on higher quality credits with better risk/reward characteristics in the near-term as current spread levels do not appear to be pricing in any risk of material credit deterioration in a “higher for longer” scenario.

Nicola Canadian Mortgage Fund  

The Nicola Canadian Mortgage Fund (“NCMF”) returned +0.6% in April, with a trailing 12 month return of +7.9%. Two new loans were funded last month, however overall origination activity remains relatively quiet as market transaction activity continues to the slow. NCMF held 6.6% in cash & cash equivalents, with 67.2% of the direct loan portfolio secured by senior ranking mortgages at month end.

Nicola U.S. Mortgage Fund  

The Nicola U.S. Mortgage Fund (“NUSMF”) returned +1.3% CAD/+1.2% USD in April, with a trailing 12 month return of +5.3% CAD/+4.3% USD. Investment activity was limited with no new loans funded last month; however, we continue to review and quote on opportunities in the market while commercial real estate transaction volumes remain low. NUSMF held 34.0% in cash & cash equivalents, with 100% of the direct loan portfolio secured by senior ranking mortgages at month-end.

Nicola Private Debt Fund

In April, the Nicola Private Debt Fund (the “Fund”) returned +0.8% CAD/+0.6% USD bringing LTM returns to +9.8% CAD/10.2% USD. Returns for the month were primarily driven by contractual cash interest income from the Fund’s diversified portfolio of direct investments. The Fund deployed US$21.8 million and made one new direct investment in the month, a US$15.0 million participation in a term loan to a leading manufacturer of specialty pet food ingredients. The Fund also realized two direct investments in April, totaling US$22.5 million.

Nicola Canadian Equity Income Fund  

Nicola Canadian Equity Income Fund performance vs S&P/TSX Composite Index (TSX): April 2024 -1.9% vs. -1.8%; YTD 2024 3.3% vs. 4.1%, respectively.

The Canadian equity market delivered its first month of negative returns following a string of positive monthly performance that began in November 2023. Elevated geo-political tensions and stickier than expected inflation globally continue to support the rally in gold and oil. Additionally, better than forecasted GDP growth out of China in the first quarter of the year fueled a rise in the prices of industrial metals, such as copper (+12.8%) and iron ore (+14.0%). As a result, Materials (+5.9%) and Energy (+1.1%) were the only two sectors of the TSX that posted positive returns in the month of April. Rounding out the top three sectors of the Index was Consumer Staples (-0.8%). The bottom performers were Real Estate (-6.8%), Industrials (-6.1%), and Information Technology (-5.8%).

For the month, the Fund underperformed the TSX by 10 basis points. As described above, narrow market breadth was the primary source of relative underperformance as the Fund’s quality tilt leads it to be underweight the materials sector. Our preference for commodity exposure remains in Energy. Within the Fund, the top performing sectors were Communication Services (+2.0%), Materials (+1.2%), and Energy (-1.0%). The bottom performing sectors were Real Estate (-7.6%), Information Technology (-5.7%), and Consumer Discretionary (-2.2%). In terms of equity holdings, the Fund’s top three contributors were Suncor Energy, CargoJet, and Labrador Iron Ore Royalty. The bottom three detractors were TC Energy, Canadian Western Bank, and Canadian Apartment REIT. A new position was initiated in Finning International – a heavy equipment retail, rental, and service operation with a network that spans Western Canada, South America, the UK, and Ireland. Finning’s stock is reasonably valued and provides an opportunity to participate in a resource rally, while its improved business mix supports better margins than in prior years if the cycle unexpectedly turns. We also completed building a position in Information Services Corp. (ISC) – a registry and information management services company whose free cash flow is largely underpinned by a long-term contract with the province of Saskatchewan. ISC has delivered an average return on invested capital of 19.0% over the past decade and pays a well-covered dividend that yields 3.6%. To fund these and other purchases during the month, we exited Altagas, Lumine Group, Teck Resources, and CPKC – where valuations were suggesting skinnier risk-adjusted returns. Put options were opportunistically written on Shopify. At month end, Canadian equities comprised 90.6% of the Fund’s assets.

The preferred share sleeve of the portfolio returned +0.7% in April. During the month, RBC issued a $1 billion US dollar denominated AT1 security with a coupon of 7.5%. The reset spread on the new issue swapped to a Canadian dollar equivalent of 298 basis points versus if they issued in Canada, they would likely pay in the range of 330-350 basis points. As a result of cheaper funding, banks have resumed redeeming Canadian preferred shares which is positive for the market and returns.

Nicola U.S. Equity Income Fund  

In April, the Nicola U.S. Equity Income Fund (USD) saw a decline of -4.2% compared to the S&P 500's -4.1% return. The Nicola U.S. Equity Income Fund (CAD) returned -2.7% for the month of April.

After five consecutive months of positive returns, the U.S. market experienced a downturn in April, marking the first month of the year with negative returns. Market expectations of Fed easing continued to fade, affecting sectors across the board.

Most sectors ended the month in negative territory, with Utilities being the only exception, posting a modest gain of 1.6%. Despite slight easing in oil prices, the Energy sector was the second strongest performer. Real estate, however, continued to lag, as the market has priced out five interest rate cuts since the beginning of the year. The market now anticipates the first interest rate cut will happen in the fall, which has negatively impacted this interest rate-sensitive sector. Despite the challenges posed by higher interest rates, Utilities became more appealing to investors, thanks to the growing excitement around data center power demands driven by AI.

The Fund slightly underperformed the S&P 500 by 0.1%, attributed to positive contributions from sector allocation, particularly overweight positions in Communication Services and Energy, which were outweighed by negative stock selection within Real Estate and Industrials.

Top contributors to the Fund's performance were Shell, Alphabet, and Crown Holdings, while Meta, Adobe, and Prologis were the top detractors. Prologis experienced a significant decline of nearly 22% due to management revising its 2024 guidance for same-store net operating income (SSNOI), occupancy, and earnings. This guidance adjustments were attributed to ongoing weakness in its key markets, specifically Southern California and northern New Jersey. Despite the challenges of softening demand and higher rates impacting the industrial REITs sub-sector, these factors are also reducing new supply into the market, which could benefit Prologis in the long term. We see attractive upside potential in Prologis, driven by its anticipated mid-to-high single-digit SSNOI growth, fueled by re-leasing spreads of nearly 50%. Moreover, Prologis boasts an attractive global footprint and a flexible balance sheet, positioning it favorably for future growth opportunities. Despite these strengths, Prologis currently trades at a discount compared to its historical valuation.

In terms of portfolio adjustments, the Fund trimmed or sold certain positions in Carlisle Companies, VISA, and Shell due to valuations and risk management purposes. The Fund increased exposure in Information Technology by adding back to the portfolio Apple via Put options.

Apple's stock has declined by 14% year-to-date, primarily due to concerns about weak iPhone volumes, the Chinese government's crackdown on foreign-made phones and associated market share shifts towards domestic competitors. Despite this, Apple boasts an impressive ecosystem with over 2.2 billion devices, including an installed base of over 1 billion iPhones. Its service business is substantial and growing, expected to generate close to $100 billion in revenue with 70% profit margins. In fact, Apple's service revenue alone surpasses that of 75% of the companies in the S&P 500.

The upcoming iPhone 16 cycle, featuring AI-enabled features, has the potential to drive incremental demand in a market where over 200 million iPhones are sold each year. Apple's sustainable competitive advantages, high returns on invested capital, and significant free cash flow (over $100 billion) allow the company to continue investing in new products like the Vision Pro, while also returning significant cash to shareholders through dividend increases and share buybacks. Notably, Apple recently announced a $110 billion share buyback authorization, the largest in corporate history.

Overall, the Fund consists of high-quality names with healthy balance sheets, strong free cash flows and attractive blended forward 1-year ROEs (26% vs 19% for S&P 500). At the end of the month, the Fund's delta-adjusted equity exposure stood at 87.5%, factoring in option positioning (with 4% of long positions covered and 15% in notional put options). Additionally, the Fund ended the month with approximately 1% of its assets in cash.

Nicola International Leaders Fund

For April 2024, the Nicola International Leaders Fund returned -0.4% vs -0.3% for the MSCI ACWI ex-USA NTR Index.

For the month, Emerging Markets (+2.0%) outperformed, while International Markets (-0.9%) underperformed. In Europe, signs that inflation remains contained and slow economic growth have increased the likelihood that ECB may start cutting rates in June. In Emerging Markets, China’s (+8%) market rebounded driven by strong earnings reports, new capital market guidelines, and anticipation for more property policy support.

Main relative contributors to performance during the month were our holdings in Industrials, Energy and Switzerland. One of the biggest contributors was Schneider Electric (one of the global leaders in energy management and industrial automation), as quarterly results continued to show robust growth in energy management and improving trends for industrial automation.

Main relative detractors to performance during the month were our holdings in Financials, Health Care, and India. One of the biggest detractors was Infosys (one of India’s largest IT services providers), which de-rated as FY25 guidance missed market expectations reflecting soft market conditions with customers limiting discretionary projects.

Nicola Global Small-Cap Equity Fund

For April 2024, the Nicola Global Small Cap Fund was -0.5% CAD/-2.1% USD vs -2.7% for the MSCI ACWI Small Cap NTR Index.

For the month, Emerging markets (+3.5%) & International (-1.4%) small caps outperformed, while U.S. (-5.1%) small caps underperformed. In the U.S., the market was pressured by higher yields as hotter than expected inflation data and mixed economic readings reduced the market’s expectations for rate cuts in 2024. In Europe, the region continued to see progress on inflation supporting the case for rate cuts by the ECB. In Emerging Markets, India’s market rebounded (+11%) after last month’s sell-off as data continues to show robust growth for the region.

Main relative contributors to performance during the month were our holdings in Consumer Discretionary and the U.S. (underweight). One of the biggest contributors was Yue Yuen (one of the largest manufacturers of athletic footwear), which moved higher as it guided for a substantial increase in Q1/24 earnings driven by a recovery in orders and improved utilization.

Main relative detractors to performance during the month were our holdings in Energy, and the United Kingdom. One of the largest detractors was Convatec (leading provider of medical equipment related to wound care, ostomy care, and continence), as potential changes to U.S. wound reimbursements (3% of sales) weighed on the shares.  

Nicola Sustainable Innovation Fund

The Sustainable Innovation Fund returned -3.8% USD / -2.2% CAD in April and -8.6% USD/-4.9% CAD year-to-date. The main publicly traded benchmarks that we track produced negative returns for the month and have faced steeper selloffs year-to-date with the iShares Global Clean Energy ETF off nearly 15% and the Invesco WilderHill Clean Energy ETF declining roughly -31% as of the end of April. Equity markets staged an early May comeback with our strategy recovering most of its year-to-date losses in the first few trading sessions of the month following comments from Fed Chair Jerome Powell indicating that rate hikes are not likely the next move with markets interpreting that rate cuts are still anticipated to happen this year.

Our top performers were Aker Carbon Capture, and new positions Enel and Prysmian, while Sunrun, Array Technologies, and Stem were our primary detractors. During the month we added four new positions – Nextracker, Prysmian, Enel, and Schneider Electric and we exited our position in ChargePoint following ongoing weakness in electric vehicle and EV charging companies. Nextracker is a market leader in utility-scale solar trackers with roughly 40% market share in the U.S., and 20% internationally, complementing our existing position in Array Technologies capturing much of the global solar tracker market. Prysmian produces cables that are vital for energy and telecom industries.They are direct beneficiaries of both the energy transition and digital transformation with their products being utilized in applications from power transmission for offshore wind, to cables for data centers. Our recent addition of Schneider Electric builds on our exposure to decarbonization and energy management themes with their exposure to low and medium voltage electrical products for residential, commercial, and industrial applications including numerous solutions for data centers and power metering and monitoring for electrical grids. Enel broadens out our international exposure as the largest electricity producer and distributor in both Italy and Spain through its majority ownership of Endesa, with strong footprints in wind, solar, geothermal, and hydropower across the World. With the addition of these new companies, we were active in rebalancing throughout the portfolio, locking in some recent gains in names like Itron and Constellation Energy, and utilizing some of our built-up cash, ending the month with a balance below 5%.

Nicola Global Infrastructure Limited Partnership

The Nicola Global Infrastructure LP returned +0.3% USD/0.8% CAD for the month of April and is at C$344 million of AUM. Currency movements from the USD strengthening against CAD, EUR, and GBP had a negative impact on the USD returns. In local currency, our assets returned 0.8% during the month. Monthly performance was primarily driven by a markup to NAV on our second diversified secondaries co-investment that was acquired at a discount and returns in line with expectations at a diversified fund, partially offset by a markdown at our North American data centres co-investment due to updated cost of capital assumptions.  

Nicola Private Equity Limited Partnership  

For the month of April, the Nicola Private Equity Fund returned +1.4% with foreign exchange having a +0.5% impact for the month. This translates to an LTM return of +10.3% and longer term 3-year and 5-year returns of +12.7% and +11.3% respectively. Investment return for April was driven by valuation increases in Project Mobius (A global omnichannel money transfer platform), Central Builders’ Supply (Full-service provider of building products and home improvement retail on Vancouver Island), and Regimen Equity Partners Fund (a Vancouver based diversified private equity fund investing across Canada). No new investments or realizations were made during the month.

Nicola Global Real Estate Fund

Nicola Global Real Estate Fund performance vs iShares S&P/TSX Capped REIT Index (XRE): April 2024 -2.6% vs -6.4%; YTD 2024 -2.2% vs -7.1%

Performance for publicly traded REITs was weak in April as bond yields moved higher. The yield on the 10-year Government of Canada Bonds began the month at 3.47% and ended the month at 3.82% as the expectations for rate cuts from central banks have been trimmed sharply in recent months. After a challenging 2023 for publicly traded REITs and other sectors where investors look for dividends, these same sectors have continued to struggle so far this year. Investors have taken a cautious view and current prices on publicly traded REITs provide a cushion for potential NAV erosion from higher cap rates and/or lower Net Operating Income. The good news is that we believe that the Bank of Canada may have more room to cut than the Fed. While we don’t believe that Canada has the luxury of fully parting ways with the Fed, any interest rate relief may provide a bounce in valuations for publicly traded REITs and other interest rate sensitive areas of the market. Valuations appear attractive and fundamentals are relatively strong across most property types. We will be patient waiting for global rate cuts which will be the key catalyst for unlocking the value embedded in the portfolio.

Nicola Canadian Real Estate Limited Partnership

Nicola Canadian Real Estate LP NAV per unit has decreased to $152.0806 (previously $151.7794), effective trade date March 31, 2024 . This represents an increase of 0.2% and a positive return for March of 0.5%. Returns were positive this month, primarily due to increased appraised values of Advanced – Squamish, 880 Avonhead, and Advanced – Riverside. Actual YTD return as at March 31, 2024 is +0.7%. Portfolio Leverage is 45.98%.

Nicola U.S. Real Estate Limited Partnership  

Nicola U.S. Real Estate LP NAV per unit has decreased to US$188.8983 (previously US$190.2000), effective trade date March 31, 2024. This represents a decrease of 0.7% and a negative return for March of 0.3%. Returns were negative this month, primarily due to lower multi-family market rents from an increase in competitive supply. However, yields appear to be stabilizing relative to prior months. Actual YTD return as at March 31, 2024 is -0.9%. Portfolio Leverage is 50.11%.

Nicola Value Add Real Estate Limited Partnership  

Nicola Value Add Real Estate LP NAV per unit has increased to $250.2423 (previously $249.9028), effective trade date March 31, 2024 . This represents an increase of 0.1% and a positive return for March of 0.1%. In March, we funded $4.9 million for existing projects. Actual YTD return as at March 31, 2024 is +1.1%.