Returns for the Nicola Core Portfolio Fund were -0.4% for the month of December, +2.8% for Q4, and +7.5% for 2022. 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.
The Nicola Bond Fund returned +0.9% in December, while the iShares Core Canadian Universe Bond Index ETF returned -1.5%. Quarter-to-date, the Nicola Bond Fund returned +2.1% while the ETF returned +0.5%. Year to date, the Nicola Bond Fund returned -0.1%, while the ETF returned -11.7%. For December, interest rates climbed higher, and the long end of the yield curve increased more than the short end. This increase was likely a result of several events: the Bank of Canada reiterating their commitment to the 2% inflation goal, a Canadian CPI number that is improving but still well above target and a strong Canadian labour environment. Canadian corporate spreads were marginally tighter by three basis points during the month ending the year at 1.63%. Overall, the credit curve remains flat, and our exposure to East Coast, Marret Investment Grade Hedged strategies, and Sunlife short-term private credit continues to benefit from the attractive opportunities in short-term yields. December was a busy month for the Canadian investment-grade primary market as we saw $8.1 billion of new issuance, which is well above the 10-year average of $5.6 billion. As they have all year, record supply of Canadian bank new issuance has been a technical headwind for bank spreads, and we think the current relative value versus other corporate bonds is likely favorable compared to historical levels.
The Nicola Global Bond Fund returned +1.8% in December. Quarter-to-date and year-to-date, the Nicola Global Bond Fund returned +3.6% and -3.6%, respectively. Templeton Global Bond Fund, a significant holding in the Nicola Global Bond Fund, performed strongly and was up +3.8% for the month. Currency was a strong contributor as the U.S. dollar weakened versus most Asian currencies. Many Asian currencies provided a tailwind to returns, including the Japanese Yen, South Korean Won, Chinese Yuan, Malaysian Ringgit and Thai Baht. In mid-December, the Bank of Japan's surprise move to widen its bond yield trading band triggered a sharp reaction in financial markets. This move was viewed mainly as an increase in the speed of policy normalization for Japan and was bullish for the Japanese Yen vs. other currencies. Despite increasing Covid cases, China moved forward with easing zero-Covid measures, which further helped Asian currencies. Meanwhile, securitized assets and global inflation-linked bonds returned slightly lower for December.
The Nicola High Yield Bond Fund returned +1.2% in December, while the iShares U.S. High Yield Bond Index ETF (CAD-hedged) returned -1.6%. Quarter-to-date, the Nicola High Yield Bond Fund returned +0.6%, while the ETF returned +5.8%. Year to date, the Nicola High Yield Bond Fund returned -0.7%, while the ETF returned -11.2%. For December, high-yield spreads widened slightly by 17 basis points, and we continue to believe that spreads are fairly tight at 5.1% with room to widen. One issuer default brought the YTD default rate to 1.4%, and our view is that the default rate may move higher in 2023 to 4%. High-yield issuers have not been incentivized to refinance debt this year, with most issuers taking advantage of low rates by refinancing in 2020 and 2021. We expect to see slightly more issuance in 2023, but activity will likely remain light as conditions remain tight. On a relative basis, the Nicola High Yield Bond fund remains defensive but we see opportunities forming in the high yield-investment grade crossover space as credit agencies expect to downgrade more issuers as the economy begins to weaken. From a technical perspective, sentiment for high yield switched back to negative after a couple of positive inflow months in October and November. We took advantage of this opportunity to add to our closed-end funds, which have been trading at a significant discount.
The Nicola Preferred Share Fund returned -1.4% in December, while the BMO Laddered Preferred Share ETF returned -2.1%. Quarter-to-date, the Nicola Preferred Share Fund returned -1.2%, while the ETF returned -3.8%. Year to date, the Nicola Preferred Share Fund returned -12.5%, while the ETF returned -17.5%. Despite the five-year Bank of Canada bond yields moving higher, sentiment continues to remain poor in the space. December's selloff in the preferred shares market was primarily driven by tax-loss selling and negative ETF flows. This presented an opportunity for us to buy a fixed-reset series of Brookfield Infrastructure Partners at a sizeable discount. Additionally, floating rate preferred shares returned +1% in December, while fixed reset preferred shares underperformed, returning -1.7%. One of the drivers of the Nicola Preferred Share Fund's outperformance is attributed to our weight in floating rate preferred shares where dividends are reset using the prime rate as a reference. In 2022, Institutional Preferred Shares outperformed LRCNs (Limited Recourse Capital Notes) by about 0.4 to 0.5%. We own Institutional Preferred Shares within the Nicola Preferred Share Fund which has assisted in generating excess returns.
Returns for the Nicola Primary Mortgage Fund were 0.1% in December, contributing to a year-end 2022 return of 3.5%. Returns for the Nicola Balanced Mortgage Fund were 0.5% in December, contributing to a year-end 2022 return of 6.1%. Cash in the funds at month end was -1% in the Nicola Primary Mortgage Fund (as the fund was drawn on its credit line) and 6% in the Nicola Balanced Mortgage Fund. Current annualized yields at month end, which are what the funds would return if all mortgages presently were held to maturity and all interest and principal were repaid and are in no way a predictor of future performance, were 5.3% for the Nicola Primary Mortgage Fund and 7.3% for the Nicola Balanced Mortgage Fund. The Nicola U.S. Mortgage Fund continues to hold a third party fund comprised of U.S. commercial mortgage loans with an individual loan program expected to make its first investment in Q1 of 2023.
For the month of December, the Nicola Private Debt Fund returned +0.3% bringing the 2022 NAV return to +5.3%. The Nicola Private Debt Fund’s 2022 cash distribution to investors was +7.7% representing 100% of the income generated by the Fund during the year.
The primary return driver during the month was contractual interest income from the Nicola Private Debt Fund’s portfolio of direct investments. Investments in two publicly traded BDCs detracted from monthly performance by approximately 11 basis points due to a modest decline in BDC share prices. New investments during the month included a US$12.5 million commitment to a privately syndicated incremental first lien term loan led by Manulife to George Industries, a manufacturer of high reliability thermal management systems for customers in the aerospace and defense sector.
Nicola Canadian Equity Income Fund performance vs. the S&P/TSX in December was -3.9% vs. -4.9%; in Q4 2022, +5.6% vs +6.0%; year-to-date, -1.0% vs -5.8%. December was weak for equity markets as investors' fear of inflation is migrating toward fear of recession. The bearish narrative is that while P/E ratios may reflect a recessionary scenario already, company earnings are destined to collapse as growth slows. In Canada, the S&P/TSX lost -4.9% in the month. All eleven TSX sectors were in negative territory in December as Materials (-1.9%), and Consumer Staples (-2%) were the best-performing sectors, while Health Care (-16.8%) and Technology (-7.2%) were the worst performers. The Canadian Equity Income Fund outperformed the S&P/TSX index as positive contributions from Financials and Energy more than offset negative contributions from Consumer Discretionary and Utilities. With macro conditions likely to worsen before they improve, we positioned the Canadian Equity Income Fund defensively with a large underweight in Financials. Opportunities should arise in the first half of 2023, providing entry points that offer attractive upside potential for the long run. In the month of December, the Nicola Canadian Equity Income Fund's top-performing holdings were Parkland Corp, Altagas, and I.A. Financial. The bottom performers were Brookfield Infrastructure, Nuvei Corp, and Shopify. We took profits, exited our position in Enbridge Inc., and added to our existing position in T.C. Energy. There were no new additions in the month.
Nicola U.S. Equity Income Fund performance vs. the S&P 500 in December 2022 was -4.2% vs -5.8%; in Q4 2022, +11.8% vs +7.6%; year-to-date, -8.6% vs -18.1% (USD). During the fourth quarter, the Nicola U.S. Equity Income Fund outperformed the S&P 500 by +4.2% due to positive relative contributions from Consumer Discretionary, Communication Services, Materials and Financials more than offsetting the negative relative contributions from Energy and Utilities. Last month, the Nicola U.S. Equity Income Fund outperformed the S&P 500 by +1.6%, mainly attributable to positive relative contributions from Information Technology, Consumer Discretionary and Health Care which more than offset the negative relative contributions from Energy, Consumer Staples and Communication Services. The Nicola U.S. Equity Income Fund's top three contributors to performance were Boston Scientific, Blackrock and Pfizer. The top three detractors from performance were Alphabet, Bank of America and Walmart. There were no new names added last month, but there were a few sales; the Nicola U.S. Equity Income Fund sold names that performed well in 2022 (Pepsi and Merck) and added to existing names with more reasonable valuations and/or better growth outlooks (Pfizer, Visa, AT&T, and Electronic Arts). The Nicola U.S. Equity Income Fund ended the month with a delta-adjusted equity exposure of 90% due to significant option-writing near month-end (26% of portfolio is covered); the Nicola U.S. Equity Income Fund consists of high-quality names with healthy balance sheets, strong free cash flows and attractive consensus forward 12-month ROEs (37% vs 22% for S&P 500).
Performance for the Nicola International Leaders Fund was +0.3% in December and +16.1% in Q4, versus the MSCI ACWI ex U.S. Index -0.8% in December and +12.2% in Q4. Year-to-date, -7.3%. For the month, International Markets (+0.1%) outperformed and Emerging Markets (-1.5%) underperformed. In Europe (+0.2%), the European Central Bank slowed its rate hikes to 50 basis points in December but warned that further rate hikes were needed to tame inflation and said, "anybody who thinks this is a pivot for the ECB is wrong." Emerging Markets were negatively impacted by India (-5.5%), Taiwan (-5.5%), and Korea (-5.8%), as concerns over the Fed's hiking cycle and a global recession weighed on these markets. In China (+5.2%), the market continued to rally on its re-opening and continued easing in property. The main contributors to performance during the month were our holdings in Financials and Japan. One of the biggest contributors was Mitsubishi UFJ Financial Group ("MUFG"), the largest bank in Japan (Market Cap: US$88 billion). MUFG re-rated in December as the bank was seen as a direct beneficiary of the Bank of Japan's adjustment to its yield curve control and any future policy normalization. Our holdings in Consumer Discretionary and Germany were the leading detractors to performance during the month. One of the biggest detractors was Kering, one of the largest luxury goods conglomerates globally with brands such as Gucci and Yves Saint Laurent. Kering shares were impacted by uncertainty due to a change in the creative director at Gucci. However, the stock remains well-positioned to benefit from a re-opening in China.
The Nicola Sustainable Innovation Fund returned -6.7% (USD) / -6.4% (CAD) in December, +0.1% (USD) / -1.1% (CAD) for the fourth quarter, and -18% (USD) / -12.4% (CAD) year-to-date. Our top performers during the month were Vestas Wind Systems, PIMCO California Carbon Access L.P., and Boralex, while Stem, Sunrun, and ChargePoint Holdings were the biggest laggards. 2022 saw the technology-heavy NASDAQ close out its worst year (-33%) since 2008 and its third-worst decline on record. Other growth-focused benchmarks like ARK's Innovation ETF fell more than 66% during the year. During the month we were taken out of our Siemens Gamesa Renewable Energy position following the acquisition by their parent company, Siemens Energy. This takeout marks the third acquisition in our portfolio's short history. We were actively trading throughout the month trimming names like Fluence Energy, Innergex Renewable Energy, and Orsted, raising more cash to allow us to be defensive and deploy opportunistically. While the year was another challenging one for growth-focused companies like many of our portfolio holdings, we remain encouraged by the long-term opportunity of investing in the energy transition space, understanding we will have periods of volatility, like we have seen the last few years, along the way.
The Nicola Alternative Strategies Fund returned +0.7% in December. Quarter-to-date and year-to-date, the Nicola Alternative Strategies Fund returned -0.1% and +10.6%, respectively. The month's returns were supported by a relatively strong U.S. dollar versus the Canadian dollar. In local terms, Verition had a slightly positive month as fixed income relative value, mortgages and commodities trading contributed to returns, while quantitative trading and convertible arbitrage trading were the main detractors. According to Eurekahedge, overall hedge fund returns were strong for the month, returning +6.0%, while the Eurekahedge Arbitrage Hedge Fund Index returned +0.7% and the Relative Valued Hedge Fund Index returned +0.8%, respectively. The Nicola Alternative Strategies Fund is winding down and has returned well this year relative to other asset classes.
The Nicola Precious Metals Fund returned +2.3% in December. Quarter-to-date and year-to-date, the Nicola Precious Metals Fund returned +10.9% and -5.2% respectively. Underlying gold stocks in the S&P/TSX Composite index returned +1.6%, and gold bullion was up +4.2% (in Canadian dollar terms). Dispersion continues to be the story within gold stocks as Torex Gold and IAMGOLD returned above 20% for the month, while Wesdome Gold Mines, Gold Royalty Corp, Victoria Gold Corp, and New Gold Inc all sold off more than -10%. Overall, gold rallied alongside most commodities as the U.S. dollar continued to retreat throughout the month, and China eased its zero-Covid policy, leading to a higher demand for metals. Similar to past months, the price of gold has continued to be less sensitive to interest rates, potentially signalling an inflection point going forward.
The Nicola Infrastructure and Renewable Resources Limited Partnership returned +0.1% for the month of December 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 -0.1%. This was primarily driven by a slight mark-down in our North American data center's co-investment. For Q4 and 2022, the Nicola Infrastructure and Renewable Resources Limited Partnership returned -0.2% and +7.3%, respectively.
During the month, the Nicola Infrastructure and Renewable Resources Limited Partnership closed and funded a US$15M co-investment alongside Canada Pension Plan Investment Board ("CPPIB") into Ports Americas Group, the largest terminal operator and stevedore in the United States, operating in more than 33 ports and 70 locations. CPPIB is a leading global infrastructure investor, ranking first on IPE Real Assets' 2022 Top 100 Infrastructure Investors. The CPPIB co-investment was completed through One Queen Capital ("OQC"), a CPPIB wholly-owned portfolio group company that facilitates the syndication of investments across CPPIB private investment strategies. The Nicola Infrastructure and Renewable Resources Limited Partnership is excited to continue working with OQC to access high-quality co-investment opportunities alongside a like-minded long-term investor. During the month, the Nicola Infrastructure and Renewable Resources Limited Partnership also funded a US$4M existing commitment to the KKR fund. Proceeds will be used to fund the acquisition of a co-controlling stake in Vodafone's European telecommunications tower business, Vantage Towers. The Nicola Infrastructure and Renewable Resources Limited Partnership is at $208M of AUM with a waitlist of $5M that is expected to be fully drawn by the end of Q1 2023 from existing fund commitments.
The Nicola Private Equity Limited Partnership returned +0.3% during Q4 and +6.1% for the year. Performance during the quarter was driven by a valuation write-up in our investment in a U.S. Northeast-focused car wash business that experienced strong sales growth. The pool also benefited from the write-up in a new fund investment managed by Integrum, a NY-based Financials sector-focused sponsor. This was driven by the sale of a portfolio company: MerchantE, a leading U.S. payment processing and commerce platform. These returns were partially offset by a decline in the value of a secondary’s investment, where mature investments that had gone on to be listed but not yet sold, were down due to a soft public equity market in 2022. The secondary investment was acquired at a very attractive price and currently sits at 2 x our cost basis. Currency was the largest driver of the Nicola Private Equity Limited Partnership's returns during the period, as the 2.0% decline in the USD was an approximately 140 basis point headwind to returns. New investments include Addmore Group, a Toronto-headquartered IT staffing company specializing in SAP, and a B.C.-based food processing business where more than half of its revenues are generated outside Canada. Exits include Ares Capital Corp, a publicly traded company that lends to private businesses.
The Nicola Global Real Estate Fund performance vs. iShares S&P/TSX Capped REIT Index (XRE): December 2022 -0.1% vs -2.4%; Q4 2022 +2.1% vs +8.9%; YTD -3.5% vs -17.4%. Publicly traded REITs posted negative returns in December as investors wrestled with inflation and recession concerns. The economic and capital market turbulence caused by central bank monetary policy has created a significant disconnect between public REIT and private market valuations. As a result, public REITs are valued significantly below core, stabilized private real estate. Our global REIT manager Hazelview Investments believes that the implied cap rate on the global REITs market expanded around 100 basis points to 6% in 2022. According to Bank of America Global Research, over the last three recessions (including the 2008 global financial crisis), private market cap rates in the U.S. increased an average of 113 basis points from trough to peak. This implies that public REITs are already priced to a level where cap rates expand in recessionary times. The current discount implied between public REIT, and private market pricing is -26%, which is equivalent to the widest discounts experienced at the height of the pandemic (March 2020) and on par with the discounts experienced in September 2008 when Lehman Brothers and Merrill Lynch went belly-up. Near-term volatility will likely persist until visibility on rates and inflation improves, but we like our valuation starting point as we enter 2023. As interest rates stabilize, the market will have a better idea of the cost of capital and therefore be able to triangulate better what real estate values will be going forward, which will help lift the uncertainty in REIT share prices.
The Nicola Canadian Real Estate Limited Partnership NAV per unit has decreased to $156.6871 (previously $157.0549), effective December 31, 2022. This represents a decrease of 0.2% and a positive return for November of 0.2%. YTD return as at November 30, 2022, is 13.9%. Portfolio Leverage is 42.31%. The positive return was primarily a result of increased appraised values of Golden Drive, 47th Street, and Northwoods Business Park.
The Nicola U.S. Real Estate Limited Partnership NAV per unit has increased to US$198.4761 (previously US$198.1228), effective December 31, 2022. This represents an increase of 0.2% and a positive return for November of 0.6%. YTD return as at November 30, 2022, is 22.6%. Portfolio Leverage is 45.84%. The positive return was primarily a result of increased appraised values of The Harrison, the Whitney, and Carlyle Place.
Nicola Value Add Real Estate Limited Partnership NAV per unit has increased to $234.7639 (previously $234.1119), effective December 31, 2022. This represents an increase of 0.3% and a positive return for November of 0.3%. YTD return as at November 30, 2022, is 19.3%. In November, we funded a total of $16.6M 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 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. 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.
