Returns for the Nicola Core Portfolio Fund were +1.2% for the month of August. The Nicola Core Portfolio 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 returned +0.3% in August, surpassing the iShares Core Canadian Universe Bond Index ETF, which had a return of -0.4%. Top-performing strategies include East Coast Investment Grade, Marret Investment Grade, and Sun Life Short Term Private Fixed Income, all of which returned +0.6% in August. These strategies focus on short-dated, high-quality investment grade assets, which contributed to their positive performance. Our outperformance occurred despite Canadian investment grade credit spreads widening by +0.1% and ended the month at +1.5% as banking, energy infrastructure and auto sectors underperformed. The Bank of Canada (BoC) opted to hold the overnight rate steady at 5% in early September but kept the door open for future hikes as they remained concerned with inflation. The BoC pointed to the softness in recent GDP growth and labour markets as evidence of the lagged effects of monetary policy. We expect new issuance activity to pick up in North American investment grade markets in September and volatility to persist in the Investment Grade credit market, which should provide attractive trading and investment opportunities for the fund.
The Nicola Global Bond Fund (CAD) returned +0.6% in August.
The Nicola Global Bond Fund (USD) returned -2.0% in August.
The major contributor to returns was Blackrock Securitized Investors LP, which returned +5.3% (total return in Canadian dollars), while Templeton Global Bond Fund and PIMCO Monthly Income Fund both returned -0.4%. Blackrock's strength was driven by tighter spreads within structured credit. Collateralized Loan Obligations (CLOs) rallied on news that U.S. banks may return to the CLO market in 2024 once there is enough capital buildup and additional clarity around bank regulatory changes. The structured credit market continues to offer higher yields and additional diversification of risks within a fixed income portfolio compared to traditional corporate credit. Additionally, Blackrock Securitized Investors LP also benefited from a strong U.S. dollar, which rallied +2.4% against the Canadian dollar. For Templeton Global Bond Fund, sovereign global bonds weakened, while currencies were mixed, with the Japanese Yen gaining ground while the South Korean won weakened during the month against the Canadian dollar.
The Nicola High Yield Bond Fund (CAD) returned +1.4% in August.
The Nicola High Yield Bond Fund (USD) returned –1.2% in August.
The Nicola High Yield Bond Fund (CAD) achieved positive returns as the U.S. dollar strengthened, contributing +1.3% to our returns. The U.S. dollar strengthened by +2.4% against the Canadian currency in August due to better-than-expected U.S. economic data, which would allow the Federal Reserve to keep interest rates higher for longer as it continues to combat inflation. Despite the resilient economic data, the U.S. labour market is showing signs of slowing down, with U.S. payrolls and jobless claims data indicating a slowdown. On average, the U.S. added 150,000 monthly jobs from June to August, compared to 238,000 from March to May. Additionally, the U.S. unemployment rate increased from +3.5% in July to 3.8% in August. The Fed remains data-dependent and will continue to raise rates later this year if inflation proves to be persistent. U.S. high yield credit spreads widened by 0.1% in August, ending the month at +3.9%. Lower quality credits, such as CCCs, outperformed in August and tightened by 0.1% on average, while BBs and Bs underperformed and experienced modest spread widening. The Nicola High Yield Bond Fund maintains a defensive position due to relatively tight high yield valuations and a focus on higher-quality high yield credits with better risk/reward characteristics.
The Nicola Preferred Share Fund returned -2.7% in August. The preferred share market reversed two months of gains, primarily due to weak investor sentiment and poor technicals. Rate-resets, which represent the most liquid segment of the market, underperformed floating rate and perpetual fixed-coupon preferred shares. The volatility observed in the rate-reset preferred share market likely reflected investor uncertainty driven by fluctuations in the 5-year government of Canada bond yield, which initially reached +4.2% but closed the month at +3.9%. Throughout the month, the Nicola Preferred Share Fund continued to enhance its liquidity. We believe that increasing liquidity at this time is prudent due to the uncertainty caused by Budget 2023 on the Canadian preferred share market. Additional taxation on a larger preferred share investor base, such as financial institutions, may continue to pose a headwind for the preferred share market. However, we may begin to identify areas of opportunity in the higher-quality segments of the market if market conditions further deteriorate.
The Nicola Primary Mortgage Fund returned +0.5% in August, with a trailing 12-month return of +5.0%. New investment activity continues to be limited in anticipation of the termination of the fund and the transfer of assets to the Nicola Balanced Mortgage Fund on or around October 31, 2023. The Nicola Primary Mortgage Fund held 12.2% in cash & cash equivalents, with 96% of the direct loan portfolio secured by senior ranking mortgages at month end.
The Nicola Balanced Mortgage Fund returned +0.6% in August, with a trailing 12-month return of +7.7%. Although new investment activity has been limited, the fund continues to explore new opportunities. As of the end of the month, the Nicola Balanced Mortgage Fund held 2.8% in cash and cash equivalents, with 47% of the direct loan portfolio secured by senior-ranking mortgages.
The Nicola U.S. Mortgage Fund (CAD) returned +2.8% in August with a trailing 12-month return of +6.0%.
The Nicola U.S. Mortgage Fund (USD) returned +0.1% in August with a trailing 12-month return of +2.7%.
The volume of new investment opportunities under consideration has increased, with a new loan funded in August and additional loans scheduled to fund in September and October. The Nicola U.S. Mortgage Fund held 4.7% in cash and cash equivalents, with 100% of the direct loan portfolio secured by senior ranking mortgages at month end.
The Nicola Private Debt Fund (CAD) returned +1.3% in August.
The Nicola Private Debt Fund (USD) returned +0.8% in August.
The main source of returns for the month was the contractual interest income derived from the Nicola Private Debt Fund’s diversified portfolio of direct investments. New investments during the month included a US$12 million investment in a first lien term loan to an IT services brokerage company specializing in the procurement of cloud, colocation and other IT infrastructure for corporate clients.
The Nicola Canadian Equity Income Fund returned –1.8% in August. Canadian equities surrendered some of the strong gains from the previous month, resulting in a negative return for August. This downturn was influenced by diminishing optimism regarding a China-led economic recovery, which had a pronounced impact on the TSX due to its exposure to base metals. On the domestic front, the Canadian economy recorded weaker-than-expected retail sales in the second quarter, adversely affecting consumer businesses. Furthermore, subsequent to the end of the month, a surprising -0.2% GDP decline was reported.
In addition to these economic factors, third-quarter bank earnings garnered significant attention as they fell below analyst expectations. Nevertheless, it is worth noting that bank credit metrics remained in line with long-term averages, and capital ratios were substantially above current regulatory minimums.
A bright spot for Canada was the energy sector, driven by Saudi Arabia and Russia's decision to extend voluntary oil production cuts through year-end, leading to an increase in benchmark crude prices. Examining sector performance, the top three contributors to the TSX's performance were Energy, Consumer Staples, and Information Technology, while the underperformers were Financials, Materials, and Consumer Discretionary.
Within the Nicola Canadian Equity Income Fund, the top-performing sectors for August were Energy (+7.0%), Utilities (+1.5%), and Info Tech (+1.3%), whereas the underperforming sectors were Consumer Discretionary (-10.6%), Financials (-5.7%), and Materials (-4.3%). Regarding attribution, security selection had the most significant negative impact on relative performance during the month, primarily due to continued weakness among the shares of consumer-related holdings.
Notable top performers within the Nicola Canadian Equity Income Fund portfolio for August included Suncor Energy, Lumine Group, and Canadian Natural Resources, while Nuvei Corp., Pet Valu Holdings, and Jamieson Wellness were among the bottom performers. No new positions were initiated during the month. We capitalized on areas of strength to realize some gains and exited our investment in TELUS International due to deteriorating competitive dynamics. Additionally, put options were opportunistically written on West Fraser Group and Teck Resources.
The Nicola Canadian Equity Income Fund continues to maintain competitive characteristics relative to the TSX, achieving double-digit growth rates through superior value (12.8x P/E vs. 13.2x) and lower leverage (2.8x vs. 3.5x). Our commitment remains steadfast in focusing on enhancing the Nicola Canadian Equity Income Fund’s profitability and strengthening its balance sheet characteristics.
The Nicola U.S. Equity Income Fund (CAD) returned +1.7% in August.
The Nicola U.S. Equity Income Fund (USD) returned -0.9% in August.
In August, U.S. equities experienced negative performance, with both the S&P 500 and Nasdaq 100 declining by approximately -1.5%. This marked their first monthly decline since February 2023. During the first three weeks of the month, the market faced various challenges, including a U.S. Sovereign credit downgrade from AAA to AA+ by Fitch Ratings, which caused volatility in the bond market. Additionally, concerns arose due to China's weak economic data and turmoil in the property market, leading to fears of a slowdown in the world's second-largest economy. Furthermore, there was a deterioration in U.S. consumer confidence as inflation and higher rates exacerbated the strain on an already stretched consumer.
In the past month, the Nicola U.S. Equity Income Fund (USD) outperformed the S&P 500 by 0.7%, primarily due to positive stock selection within the Financials sector (favouring insurance brokers over insurers and not holding any U.S. banks) and Consumer Staples (owning Grocery discounts while avoiding Consumer Packaged Goods companies). The Nicola U.S. Equity Income Fund also benefited from having an overweight position in the top-performing sector (Energy) while being underweight and/or having zero exposure to the worst-performing sectors (Staples & Utilities).
The Nicola U.S. Equity Income Fund’s top contributors to performance were Ross Stores, Seagate Technologies, and VISA, while the top detractors were Electronic Arts, Hyatt Hotels, and NXP Semiconductors. In terms of portfolio changes, the Nicola U.S. Equity Income Fund reduced exposure to John Deere and completely exited the Pfizer position. Pfizer continues to face headwinds related to COVID-related sales, with sales expected to decline significantly from their peak levels by 2024. Additionally, the company is facing patent expirations in the second half of the decade. In contrast, a company like AbbVie (a new pharmaceutical name added) has already navigated the loss of exclusivity for its blockbuster drug (Humira) and does not face any other expiries until the end of the decade. AbbVie is an attractively valued company that offers a well-covered 4% dividend yield and has multiple catalysts, including the growth of Humira replacement drugs (Rinvoc & Skyrizi), pipeline potential, and steady growth from its Allergan franchise (Botox).
The Nicola U.S. Equity Income Fund is composed of high-quality names with healthy balance sheets, strong free cash flows, and attractive blended forward 1-year ROEs (32% vs. 18% for the S&P 500). The Nicola U.S. Equity Income Fund concluded the month with a delta-adjusted equity exposure of 85%, influenced by option positioning (6% of longs covered and 11% notional put options).
The Nicola International Leaders Fund returned –0.5% in August. In Europe, concerns arose due to signs of an economic slowdown and persistent inflation, raising worries of stagflation in the region. In Emerging Markets, China's market experienced underperformance attributed to concerns about a decelerating economy and challenges in the property sector.
The main contributors to relative performance during the month were our holdings in Financials and the United Kingdom. Notably, BAE, a global aerospace and defense company, made a significant positive impact on performance. BAE's stock price increased as the market viewed its acquisition of Ball Aerospace favourably, as it expanded the company's exposure to the space sector and the United States.
Conversely, the main detractors from relative performance during the month were our holdings in Health Care and Germany. One of the significant detractors was Siemens, a global conglomerate with leading positions in automation, electrification, medical imaging, and transportation. Siemens faced downward pressure as concerns emerged regarding weaker orders in its automation division, with demand normalizing post-COVID.
The Nicola Global Small-Cap Equity Fund (CAD) returned +0.9% in August.
The Nicola Global Small-Cap Equity Fund (USD) returned –1.8% in August.
In the U.S., markets were influenced by higher treasury yields, driven by the reduced odds of a recession due to solid economic data. Conversely, in Europe, concerns emerged due to weaker economic data and persistent inflation, raising fears of stagflation. In Emerging Markets, India's market performed well, buoyed by improving GDP growth and ongoing corporate earnings growth.
The primary contributors to relative performance during the month were our holdings in Health Care, and we maintained an underweight position in the U.S. Notably, Convatec, a leading provider of medical equipment related to wound care, ostomy care, and continence, made a significant contribution to performance. Convatec's first-half results demonstrated continued progress in its top-line and margin expansion initiatives, instilling greater market confidence in the company's ability to achieve its medium-term targets.
On the other hand, the primary detractors of relative performance during the month were our holdings in Industrials and Hong Kong. One of the largest detractors was Krones, a leading global manufacturer of bottling, filling, and labelling machines primarily for the beverage industry. Despite strong first-half results with earnings growing by +40%, Krones experienced a sell-off due to lower order intake as demand normalized from record levels.
The Nicola Sustainable Innovation Fund (CAD) returned –6.1% in August.
The Nicola Sustainable Innovation Fund (USD) returned –8.6% in August.
The Nicola Sustainable Innovation Fund saw its top performers during the month as Array Technologies and Constellation Energy, while Plug Power, Stem Inc., and Orsted experienced the most significant lag. There were no new positions added to the portfolio during the month. Still, gains in Array and Constellation were trimmed, and rebalancing was carried out in other parts of the portfolio, including names like Hannon Armstrong, Bloom Energy, and Enphase Energy.
On August 16th, the one-year anniversary of the landmark Inflation Reduction Act (IRA) legislation in the U.S. was marked. The full impact of the tax credits and funding aimed at incentivizing green energy projects has not yet fully materialized, and some large projects resulting from the IRA are likely years away from completion. Uncertainty in the offshore wind market had a notable impact on portfolio returns during the month, with Orsted indicating they may be willing to abandon several U.S. projects unless they receive more support from the White House and the Biden administration. One of the main challenges is the requirement for developers to produce a significant portion of their components in the U.S. to fully leverage the various tax credits. Rising interest rates, increased costs for materials like steel, and supply chain disruptions have all compounded the challenges faced by many renewable technology companies over the past year.
Despite these challenges, the long-term commitment to decarbonization initiatives globally instills optimism that, once stability is achieved around inflation and interest rates, sentiment for companies involved in the energy transition should improve.
The Nicola Infrastructure and Renewable Resources Limited Partnership (CAD) returned 2.2% for the month of August.
The Nicola Infrastructure and Renewable Resources Limited Partnership (USD) returned -0.5% for the month of August.
Currency movements, particularly the CAD weakening against the USD, had contrasting impacts on the USD sleeve and the CAD sleeve. The CAD's depreciation had a negative effect on the USD sleeve but a positive effect on the CAD sleeve. When disregarding currency fluctuations, our assets yielded a 0.3% return over the month.
This performance was primarily driven by Q2 2023 results, which met our expectations, especially in our U.S. district heating and cooling platform co-investment and two of our global diversified funds specializing in super-core and core infrastructure. However, these gains were partially offset by markdowns in our UK specialized waste co-investment due to lower inflation forecasts and our global diversified mid-market fund due to unfavourable FX movements affecting the underlying investments.
The Nicola Global Real Estate Fund returned +1.3% in August. During the second-quarter earnings reporting period, publicly traded REITs demonstrated robust growth in cash flows, reaffirming their attractiveness as yield-oriented investments. Despite the generally positive earnings season, publicly traded securities experienced volatility in August, largely due to heightened attention on the future direction of key interest rates by central banks.
It is worth noting that REITs appear to be trading at significant discounts compared to historical standards. These discounts are a result of ongoing macroeconomic risks that have persisted over the past 1-2 years, as central banks have raised interest rates to combat high inflation. This, in turn, has led to wider discounts to Net Asset Values (NAVs).
Stabilization of interest rates is expected to boost market sentiment, and a reduction in long bond yields could potentially enhance earnings growth while alleviating concerns about cap rate expansion. In the event of substantial downward pressure on REITs, it may present attractive opportunities for long-term investors, especially those with income requirements.
The Nicola Canadian Real Estate Limited Partnership NAV per unit has increased to $157.3668 (previously $157.1178), effective August 31, 2023. This represents an increase of 0.2% and a positive return for July of +0.5%. YTD return as at July 31, 2023 is +3.7%. Portfolio Leverage is 46.36%. The positive return was primarily due to increased appraised values of 55th Ave, Advanced - Queensborough, and Origin at Longwood.
The Nicola U.S. Real Estate Limited Partnership NAV per unit has increased to US$202.2925 (previously US$201.9921), effective August 31, 2023. This represents an increase of 0.2% and a positive return for July of +0.5%. YTD return as at July 31, 2023 is 4.8%. Portfolio Leverage is 48.44%. The positive return was primarily due to increased appraised values of Champions Green, Coles Crossing, and Villas at Newnan.
The Nicola Value Add Real Estate Limited Partnership NAV per unit has increased to $243.7594 (previously $242.7048), effective August 31, 2023. This represents an increase of 0.4% and a positive return for July of 0.4%. YTD return as at July 31, 2023 is 3.7%. In July, we funded $9.9M for existing projects.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information presented here has been obtained from sources believed to be reliable, but not guaranteed. Returns are quoted net of fund/LP expenses but before Nicola Wealth portfolio management fees. Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth Management Ltd. (Nicola Wealth) is registered as a Portfolio Manager, Exempt Market Dealer, and Investment Fund Manager with the required securities’ commissions. This is not a sales solicitation. This investment is generally intended for tax residents of Canada who are accredited investors. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. Comparisons of the historical performance of Nicola Wealth funds or models to the historical performance of indexes, mutual funds or other investment vehicles should only be undertaken with consideration of the differences that exist between the underlying investments that comprise the compared investment vehicles. Indexes may be primarily composed of a single asset type/asset class (i.e. 100% equities or 100% bonds) whereas Nicola Wealth funds may or may not contain a combination of exchange-traded equities, marketable bonds, private investments, other alternative investment classes and exempt products. When making any comparison of historical performance, these differences and their impact on the performance of each comparable should be taken into account. ETF’s are pooled funds that track a specific investment universe that is expressed by a market index or a basket and that is listed on an exchange. Unlike a market index, an ETF incurs trading costs and other charges, including taxes. Because of these incurred costs, an ETF may underperform the market index that it tracks. ETF returns stated in this material are based on NAVs and are stated net of fees and other costs, including transaction costs. For a complete listing of Nicola Wealth Real Estate portfolios, please visit https://realestate.nicolawealth.com. All values sourced through Bloomberg. Investments in alternative funds are highly illiquid and carry a related degree of risk of financial loss. Investors should consult the relevant disclosure and subscription documents for a full listing of risks associated with an investment in alternative assets and consult their Nicola Wealth advisor and relevant professionals regarding any tax, accounting, legal or financial considerations.
