Nicola Wealth Investment Returns: August 2024

Nicola Core Portfolio Fund

The Nicola Core Portfolio Fund returned were -0.6% in August. The Nicola Core Portfolio is managed using similar weights as 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 +0.7% in August and +4.9% year-to-date. In comparison, the iShares Core Canadian Universe Bond Index ETF posted a monthly return of 0.4% and a year-to-date return of 2.3%. The index posted positive returns in August, buoyed by a decline in yields as Canadian economic data suggested further easing by the Bank of Canada as the year progresses. Canadian corporate spreads remained resilient during the month despite heavy new issuance and increased interest rate volatility.   

The Nicola Bond Fund’s outperformance in August was mainly attributed to its stronger credit selection and effective sector allocation. Top-performing sectors included REITs, bank bail-in debt, and subordinated debt, while telco, pipeline, and automotive finance bonds underperformed. We added value by maintaining an overweight position in the sectors that outperformed and adopting a defensive stance in the underperforming sectors. A standout performer was Algonquin Power, which signaled its intention to make whole its bonds following the recent announced sale of its renewable energy business and its transition to a pure-play regulated utility. Looking ahead, we anticipate robust new issuance activity in September and continued volatility in the Investment Grade credit market, which should offer attractive trading and investment opportunities for the Nicola Bond Fund.  

Nicola High Yield Bond Fund

The Nicola High Yield Bond Fund returned +0.2% in August and +5.4% year-to-date. Comparatively, the iShares US High Yield Bond Index ETF (CAD-Hedged) delivered a monthly return of +1.4% and a year-to-date return of +5.3%. The high yield bond market experienced relatively healthy total returns in August, largely due to a significant decline in US Treasury yields. This was driven by signs of a weakening labor market, stabilizing inflation, and rising expectations of an imminent start of the Federal Reserve rate-cutting cycle. Credit spreads ended the month slightly narrower at 3.1%, with lower-quality credits outperforming as anticipated interest rate cuts were particularly beneficial for riskier borrowers.

The Nicola High Yield Bond Fund’s relative underperformance in August was largely due to its exposure to the U.S. dollar and its shorter duration. The Nicola High Yield Bond Fund has a bias toward U.S. high-yield credits given the greater breadth of that market, which makes it more sensitive to changes in underlying U.S. interest rates.

During the month, we selectively participated in new issues that were attractively priced relative to their credit fundamentals, which positively influenced our performance. We also opportunistically increased our positions in high-quality BB issuers with potential for rating upgrades, given their favourable risk/reward characteristics at current spread levels, and trimmed our exposure to higher beta, more economically sensitive issuers that had outperformed. Additionally, our investments in Canadian corporate hybrids continued to perform well, emerging as top contributors to our internal portfolio. Given current tight high yield valuations, the fund maintains a defensive stance and focuses on higher-quality credits in anticipation of potential cracks to form in a prolonged higher interest rate environment.

Nicola Canadian Mortgage Fund

The Nicola Canadian Mortgage Fund returned +0.6% in August, with a trailing 12-month return of +8.0%. There were no new loans funded in August which reflects a low number of quality loan opportunities seen this summer as the market awaited further anticipated interest rate cuts, resulting in a continued elevated level of cash and cash equivalents. The Nicola Canadian Mortgage Fund held 21.1% in cash and cash equivalents, with 73.2% of the direct loan portfolio secured by senior ranking mortgages at month end.

Nicola U.S. Mortgage Fund (USD)

The Nicola U.S. Mortgage Fund (USD) returned +0.3% in August, with a trailing 12-month return of +4.1%. There were 2 new loans funded in August with three additional new loans scheduled to fund in the next 60 days. The fund held 4.8% in cash & cash equivalents, with 100% of the direct loan portfolio secured by senior ranking mortgages at month end.

Nicola Private Debt Fund

The Nicola Private Debt Fund returned +0.8% CAD/+1.2% USD in August. Returns for the month continue to be primarily driven by contractual cash interest income from the Nicola Private Debt Fund’s diversified portfolio of direct investments. The Nicola Private Debt Fund deployed US$44.5m and made five new direct investments in the month, including a US$10.0M participation in a senior term loan to a leading New England-based fire protection services provider. The Nicola Private Debt Fund also realized one direct investment in August, totaling US$12.0M.

Nicola Canadian Equity Income Fund

The Nicola Canadian Equity Income Fund returned +0.9% in August.

Global equity markets were volatile at the start of August, and the TSX was no exception, dropping more than 5.0% in the first week. A risk-off sentiment was driven by concerns about a potential U.S. recession, exacerbated by the Federal Reserve’s continued delay in cutting its policy rate. In Canada, corporate earnings for the second quarter provided some relief, with reports indicating a soft but manageable environment. However, caution persists regarding consumer behavior. Throughout August, the TSX recovered from its initial losses and moved into positive territory, buoyed by strong earnings reports and stabilizing credit conditions from Canada's Big Six banks. Overall, macro and micro data points suggest further rate cuts by the Bank of Canada, which should benefit interest rate-sensitive stocks, particularly in the Utilities, Communication Services, and Real Estate sectors.

Nicola U.S. Equity Income Fund (USD)

The Nicola U.S. Equity Income Fund (USD) returned +2.7% in August.

In early August, the unwind of the yen carry trade, concerns about a slowing U.S. economy, and global uncertainties (including unrest in the Middle East and upcoming U.S. elections) negatively impacted stocks, with the S&P 500 and NASDAQ indices experiencing declines of 6.1% and 8.0%, respectively. While monthly job reports have largely remained stable, the Labor Department announced a preliminary negative revision of 818,000 jobs over the 12-month period ending in March 2024—almost 30% less than initially reported. Despite this largest payroll revision since 2009, markets rallied on hopes of a soft landing. The CPI results, showing continued inflation moderation, increased the likelihood of a 25bps rate cut in September. This prospect was reinforced by Chair Powell’s comments at Jackson Hole, where he stated, "the time has come for policy to adjust." Additionally, U.S. consumer spending remained strong despite a decline in the savings rate. Performance broadened out, with defensive sectors (Consumer Staples, Healthcare, Utilities) leading, while the Communication and Technology sectors saw more modest gains.

The Nicola U.S. Equity Income Fund outperformed the S&P 500 by 0.3% which can be attributed to stock selection in the Communications sector (AT&T and Netflix) and in the Consumer Discretionary sector (Hyatt and Ross Stores).  In terms of sector allocation, the fund benefited from its higher exposure compared to the benchmark in Real Estate, which was the second highest-performing sector, and its lower exposure to Information Technology, the fourth worst-performing sector.

Top contributors to the Nicola U.S. Equity Income Fund’s performance were Walmart, Meta Platforms and CubeSmart. Walmart reported a beat-and-raise quarter with very solid results for U.S. same-store sales growth and other high-growth initiatives (eCommerce, advertising); management continues to demonstrate impressive execution against the backdrop of a weakening consumer which should benefit the scaled value-oriented company.

Top detractors to the Nicola U.S. Equity Income Fund’s performance were Casey’s, WESCO and Alphabet. For Casey’s, fundamental news was limited but the stock pared gains from its all-time high achieved in late July as competitor Alimentation Couche-Tard (who proposed to acquire Casey’s in 2010) extended an offer to acquire the market leader Seven & I Holdings in an effort to expand internationally and redefine higher-margin fresh food offerings. This deal has been attempted before (most recently in 2020) and will likely face intense regulatory scrutiny.

The Nicola U.S. Equity Income Fund has divested its stake in the biopharmaceutical company AbbVie. No new names were added during the month.

Nicola International Leaders Fund

The Nicola International Leaders Fund returned +0.9% in August.

In August, International Markets (+1.0%) outperformed Emerging Markets (-0.6%). The month was marked by volatility, with global equity markets experiencing a sell-off in the first week due to fears of a U.S. recession and the unwind of the yen carry trade. However, most markets recovered by the end of the month as U.S. recession concerns eased, supported by more favourable economic data. In Europe (+1.6%), positive data on growth and inflation contributed to the region's performance. In Emerging Markets, South Korea (-4.9%) was a significant detractor, with concerns over the memory cycle and Nvidia’s earnings negatively impacting the region’s technology sector, which constitutes 46% of the index.

Main relative contributors to performance during the month were our holdings in Industrials, Consumer Staples, and the United Kingdom. One of the biggest contributors was Seven & I (largest convenience store operator in Japan and the U.S.), which moved higher on reports of a take-over offer from Alimentation Couche-Tard.

Main relative detractors to performance during the month were our holdings in Financials and South Korea. One of the biggest detractors were our holdings in Japanese banks (MUFG – biggest bank in Japan, SMFG - second largest bank in Japan), which suffered from the unwinding of positioning in the sector.

Nicola Global Small-Cap Equity Fund

The Nicola Global Small Cap Equity Fund returned -2.1% CAD/+0.3% USD in August.

In the U.S., the market saw a sharp sell-off in the first week of August due to a weak jobs report raising fears over a recession. The market partially recovered by month end as recession fears eased with several better-than-expected economic indicators. In Europe, the region saw improving data on growth and inflation. In Emerging Markets, Taiwan (+2.6%) was the biggest contributor driven by solid earnings reports from PC/server companies.

Main relative contributors to performance during the month were our holdings in Consumer Staples and Germany. One of the biggest contributors was Coca Cola Consolidated (one of the largest bottlers for Coca-Cola in the U.S.), which moved higher on its plans for a $1 billion share buyback program (9% of market cap).

Main relative detractors to performance during the month were our holdings Info Tech, Japan, and the United States. One of the biggest detractors was Nabors Industries (one of the largest land drillers in the U.S.), which was impacted by lower commodity prices.   

Nicola Sustainable Innovation Fund

The Sustainable Innovation Fund returned +0.9% USD/-1.5% CAD in August. The decline of over 2% in the USD/CAD rate last month negatively impacted the returns of our Canadian series, as our currency positions are unhedged. Our top performers included Sunrun, Fluence Energy, and Tetra Tech, while Array Technologies, Mobileye, and NEXTracker were the primary detractors. During the month, we exited our Mobileye position and, consequently, our exposure to the Innovative Transportation theme, following another disappointing quarter where the company lowered its guidance due to macro concerns and customer delays. This led us to reassess our near-term exposure to both the company and the broader transportation theme. This sector has been among the most challenged in our coverage over the past few years. Although we believe there may be selective investment opportunities in the future, our current preference is to focus on other areas.

Additionally, towards the end of the month, we began selling our smaller position in Aker Carbon Capture, completing the exit in early September, due to a lack of near-term catalysts to improve our outlook for the company. We were active in rebalancing throughout the month, using built-up cash and proceeds from our partial PIMCO California carbon credit sale to reinvest in names like Fluence Energy, Cameco, and HA Sustainable Infrastructure.

Nicola Global Infrastructure Limited Partnership

The Nicola Global Infrastructure Limited Partnership returned +0.7% CAD/ 1.6% USD in August. These returns were driven by relatively strong performance across the portfolio. During the month, the Nicola Global Infrastructure Limited Partnership invested in distributed solar generation assets with 20+ year contracts, establishing a North American renewable energy platform. The Nicola Global Infrastructure Limited Partnership currently manages C$368M in assets under management (AUM). The monthly distribution reflects the predictable cash flows generated by the LP’s well-positioned infrastructure assets.

Nicola Private Equity Limited Partnership

The Nicola Private Equity Fund returned -2.0% in August. Excluding the impact of foreign exchange, the return for the CAD class was -0.5%. In Canadian dollar terms, this resulted in a one-year return of +4.5%, and annualized returns of +8.8% over three years and +10.6% over five years. The monthly returns were driven by valuation increases in Tailwind Concessions (an airport concessionaire specializing in food, beverage, and retail) and Canadawide Sports (a Canadian distributor of sporting goods). These gains were offset by a significant write-down in Project Malt (a designer and manufacturer of beverage equipment systems) and a lower valuation in South East Mechanical (an HVAC and electrical services company operating in the Southeast United States).

Nicola Global Real Estate Fund

The Nicola Global Real Estate Fund returned +1.1% in August.

After a two-year period of relative stability, we believe that Real Estate Investment Trusts (REITs) are well-positioned for growth. The rise in interest rates during 2022 and 2023 has made term deposits and High-Interest Savings Accounts (HISAs) more appealing to many investors, resulting in capital flows away from asset classes such as REITs. However, as the economy shows signs of slowing, the labor market cools, and inflation levels normalize, we anticipate a necessary adjustment in monetary policy that may pave the way for lower interest rates.

These anticipated rate cuts are expected to act as a key catalyst for unlocking the value within our REIT portfolio. Recent positive performance has been driven by improvements in the interest rate environment, and we foresee that global rate reductions will continue to provide a supportive backdrop into 2025.

In July, we strategically reduced our exposure to our European Real Estate Limited Partnership in order to increase our allocation to publicly traded securities and cash. We believe that our REIT portfolio currently trades at a discount to its intrinsic value. Should interest rates decrease significantly over the next 6 to 12 months, we expect to see upward movements in valuations, net asset value (NAV) estimates, and price targets.

Nicola Canadian Real Estate Limited Partnership

Nicola Canadian Real Estate Limited Partnership NAV per unit has increased to $151.9874 (previously $152.2533), effective trade date August 31, 2024. This represents a decrease of 0.2% and a positive return for July of 0.1%. Returns were positive this month, primarily due to increased appraised values of industrial properties in the GTA, as well as self-storage and multi-family properties in Greater Vancouver.  Actual YTD return as at July 31, 2024 is 1.90%. Portfolio Leverage is 46.32%.

Nicola U.S. Real Estate Limited Partnership

Nicola U.S. Real Estate Limited Partnership NAV per unit has decreased to US$185.2311 (previously US$185.6513), effective trade date August 31, 2024. This represents a decrease of 0.2% and a positive return for July of 0.2%. Returns were positive this month, primarily due to increased appraised values of industrial properties in Phoenix and Las Vegas. Actual YTD return as at July 31, 2024 is -1.3%. Portfolio Leverage is 49.63%.

Nicola Value Add Real Estate Limited Partnership 

Nicola Value Add Real Estate Limited Partnership NAV per unit has increased to $251.1943 (previously $250.7196), effective trade date August 31, 2024. This represents an increase of 0.2% and a positive return for July of 0.2%. In July, we funded $7.2M for existing projects.