Nicola Core Portfolio Fund
The Nicola Core Portfolio Fund returned 0.0% for the month of December, +1.8% in the fourth quarter, and +5.8% in 2023. 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.
Nicola Bond Fund
The Nicola Bond Fund returned +1.9% for the month of December, +4.7% in the fourth quarter, and +7.6% in 2023. In contrast, the iShares Core Canadian Universe Bond Index ETF posted a monthly return of +3.6%, marking one of its highest performances since April 2020. The quarterly return stood at +8.3%, with an annual return of +6.7%, respectively. Notably, the Canadian bond index demonstrated robust total returns in December, attributed to a 0.09% decrease in credit spreads to 1.32%. Additionally, Canadian government bond yields experienced a meaningful decline, with 10-year Government of Canada bond yields dropping from 3.55% to 3.11%, a decrease of 0.44%.
The decline in yields persisted throughout December, fueled by cooling inflation data and a relatively resilient economy, reinforcing the market's confidence in the potential retreat of inflation to the central bank's 2% target without entering a recession. There is a possibility that stronger-than-expected inflation and employment data could drive yields higher and moderate investor expectations.
The Nicola Bond Fund adopted a defensive stance with a relatively shorter duration, contributing to its underperformance in both December and the fourth quarter. Internally, we have progressed well in managing the Nicola Bond Fund, having internalized around 50% of it by strategically deploying funds into corporate credit markets across 30 issuers. We believe the market may have pre-emptively priced in aggressive rate cuts from early 2024, potentially leading to disappointment if inflation persists above the target for an extended period. Consequently, we approach the market with caution and remain prepared to take on additional risk as opportunities unfold in this rapidly evolving market.
Nicola High Yield Bond Fund
The Nicola High Yield Bond Fund returned +1.1% CAD/+3.8% USD in December, +2.8% CAD/5.1% USD in the fourth quarter, and +8.3% CAD/+10.9% USD in 2023.
In contrast, the iShares US High Yield Bond Index ETF (CAD-Hedged) demonstrated a monthly return of +3.4%, a quarterly return of +6.7%, and an annual return of +11.1%. The high-yield sector witnessed robust total returns in December, propelled by a decrease in US treasury yields. The 10-year treasury yields fell by 0.45%, declining from 4.33% to 3.88%. Concurrently, credit spreads concluded the month 0.47% lower at 3.23%.
The U.S. Federal Reserve, maintaining interest rates in December, indicated a more dovish stance than anticipated. The suggestion that further interest rate hikes were unlikely, coupled with the possibility of rate cuts in the New Year, led to a surge in both stock and bond prices. This unexpected message increased speculation on potential rate cuts from the Fed in the first half of the year.
In December, higher-quality credits, such as BBs, relatively underperformed, tightening by an average of 0.27%. In contrast, Bs and CCCs outperformed, experiencing spread tightening of 0.57% and 1.04%, respectively. The Nicola High Yield Bond Fund underperformed due to its relatively shorter duration and defensive positioning.
Noteworthy performers for the month included the PH&N High Yield Bond Fund and Canso Corporate Value Fund, returning 3.2% and 2.0%, respectively, in Canadian dollar terms. Moving forward, the fund will maintain its focus on liquid issuers with strong balance sheets and solid credit fundamentals. Current spread levels do not seem to reflect any significant pricing in of credit deterioration if a soft-landing scenario fails to materialize.
Nicola Canadian Mortgage Fund
The Nicola Canadian Mortgage Fund (CAD) returned +0.7% in December, +1.9% in the fourth quarter, and +8.0% in 2023. The fourth quarter saw increased deal flow which is anticipated to continue into 2024 as interest rates have likely peaked. The Nicola Canadian Mortgage Fund held 3.1% in cash & cash equivalents, with 64.1% of the direct loan portfolio secured by senior ranking mortgages at month end.
Nicola U.S. Mortgage Fund
The Nicola U.S. Mortgage Fund (USD) returned +0.4% in December, +1.5% in the fourth quarter, and +4.4% in 2023. The fourth quarter had slower deployment as the pipeline of new investment opportunities was down, likely driven by reduced commercial real estate transaction volume coupled with strong competition in the Core Plus mortgage lending space. The Nicola U.S. Mortgage Fund held 29.0% 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 +0.6% CAD/+1.1% USD in December, +2.4% CAD/+2.9% USD in the fourth quarter, and +9.6% CAD/+10.6% USD in 2023. Returns for the month and year were primarily driven by contractual cash interest income from the diversified portfolio of direct investments. The Nicola Private Debt Fund made three new direct investments in the month, including a US$20.0 million participation in a first lien term loan to a New York-based provider of highly engineered commercial HVAC solutions and services. The Nicola Private Debt Fund also realized two direct investments in December, totaling US$22.0m, and earning a 15.0% and 9.9% realized IRR.
Nicola Canadian Equity Income Fund
The Nicola Canadian Equity Income Fund returned +3.9% in December. The Canadian equity market extended its positive momentum from the previous month, sustaining a rally throughout December. The prevailing macro narrative remained heavily influenced by interest rates, with an expectation of easy monetary policy in 2024. Market participants actively speculated on the potential depth of rate cuts, resulting in robust performances from interest rate-sensitive sectors. For the second consecutive month, Healthcare (+12.8%), Real Estate (+8.8%), and Financials (+7.8%) emerged as top performers within the index. On the flip side, Energy (-2.8%), Communication Services (+1.0%), and Materials (+1.4%) were among the bottom performers, with energy prices facing weakness due to a cloudy demand outlook.
In December, the Nicola Canadian Equity Income Fund closely mirrored the performance of the S&P/TSX Composite Index. Canadian equities, constituting 86% of the Nicola Canadian Equity Income Fund’s assets, delivered a solid 4.5% total return. Real Estate (+9.4%), Industrials (+8.7%), and Materials (+7.3%) led the sectoral performance, while Energy (-2.1%), Communication Services (-1.5%), and Utilities (+0.9%) lagged. The Nicola Canadian Equity Income Fund’s notable overweight (+5.2%) allocation to REITs proved to be the primary source of value addition, while its substantial underweight (-10.5%) allocation to Financials acted as the main drag. Among equity holdings, top contributors included Royal Bank of Canada, Dream Industrial REIT, and Brookfield Asset Management, while energy producers Suncor Energy, Canadian Natural Resources, and Whitecap Resources were the detractors. Killam Apartment REIT and InterRent REIT were added opportunistically, given their perceived deep discounts by historical standards.
The equity portfolio, as of December, continued to exhibit lower valuations, consistent double-digit growth rates, and stronger balance sheet characteristics compared to the TSX. The Preferred Share allocation (14% of the fund) returned +2.3% in December. Market confidence received a boost with the Bank of Nova Scotia announcing the redemption of their Series 40 preferred shares. Institutional preferred shares outperformed, returning on average +4.2%, while rate resets returned +1.2%.
Nicola U.S. Equity Income Fund
The Nicola U.S. Equity Income Fund returned +4.3% USD/+1.6% CAD in December, +10.6% USD/+8.2% CAD in the fourth quarter, and +17.5% USD/+20.3% CAD in 20223. In Q4, there was a notable positive shift despite the dominance of the Magnificent 7 throughout the year, with the S&P 500 equally-weighted index outperforming the cap-weighted index by nearly 3% in the last two months. December showcased the market's resilience, witnessing positive returns across almost all S&P 500 sectors. The Real Estate sector, in particular, maintained its robust performance, benefiting from a decline in long-term interest rates since the peak in October near 5%. Positive statements from the Fed after their mid-December FOMC meeting, highlighting progress on their dual mandate with decreasing inflation and a more balanced labor market, contributed to the market's strength. The Fed Dot plot aligned with their outlook, indicating 3 anticipated rate cuts in 2024, although market expectations were higher, influencing the rise in asset prices.
The Nicola U.S. Equity Income Fund’s marginal underperformance against the S&P 500 by -0.2% was primarily attributed to sector allocation. The Nicola U.S. Equity Income Fund had an overweight position in the worst-performing sector, Energy, and maintained a higher-than-normal cash balance. On the positive side, the Fund benefited from overweights in Real Estate and strong stock selection, particularly in Real Estate, Industrials, and Consumer Discretionary, with notable contributions from Prologis, CubeSmart, Wesco, Carlisle, Hyatt, and Lowes. The top detractors were Arthur J Gallaher, Cheniere Energy, and UnitedHealth Group.
In terms of portfolio adjustments, the Nicola U.S. Equity Income Fund adopted a more defensive stance by increasing exposure to historically defensive sectors and focusing on higher-quality holdings. During the month, the Nicola U.S. Equity Income Fund sold its position in Air Products & Chemicals and adjusted its Seagate Technologies target weight, which had been called away with options in the prior month. The portfolio increased its Healthcare exposure with the purchase of Becton Dickinson, a U.S.-based medical equipment company with a robust business moat. Becton Dickinson's competitive advantage in manufacturing and distribution scale, coupled with high switching costs for low-price point items, positions it well in the market. The business offers a solid growth profile not reflected in the current valuation, with anticipated self-help catalysts in the second half of 2024 expected to unlock value.
Overall, the Nicola U.S. Equity Income Fund comprises high-quality names with healthy balance sheets, strong free cash flows, and attractive blended forward 1-year ROEs (29% vs. 19% for the S&P 500). At the end of the month, the Fund's delta-adjusted equity exposure stood at 86%, factoring in option positioning (with 3% of long positions covered and 7% in notional put options). Additionally, the Nicola U.S. Equity Income Fund ended the month with approximately 7% of its assets in cash.
Nicola International Leaders Fund
The Nicola International Leaders Fund returned +1.7% (CAD) in December, +6.4%. in the fourth quarter, and +16.4% in 2023. International Markets outperformed with a gain of +2.4%, while Emerging Markets experienced underperformance with a more modest +1.0% return. The European market rallied on the anticipation of lower interest rates following indications from the Fed about rate cuts in 2024. Conversely, the Chinese market faced challenges, recording a decline of -5.1%, driven by disappointing economic data, specifically in retail sales and CPI, and potential regulatory concerns affecting the online gaming sector.
The Nicola International Leaders Fund’s performance was notably bolstered by holdings in Health Care, Real Estate, and Germany. Vonovia, Germany's largest listed residential real estate company, emerged as one of the significant contributors, experiencing upward momentum fueled by expectations of interest rate cuts.
Conversely, the Nicola International Leaders Fund faced relative detractors in Financials and Japan. BBVA, the second-largest bank in Spain, was among the notable detractors, as concerns regarding peak interest rates weighed on its shares during the month.
Nicola Global Small-Cap Equity Fund
The Nicola Global Small-Cap Equity Fund recorded a gain of +4.6% CAD/+7.4% USD, +6.1% CAD/+8.5% USD in the fourth quarter, and +10.6% CAD/+13.3% USD in 2023.
In December, U.S. small caps demonstrated strong relative performance, registering an impressive gain of +8.2%, while both International (+4.3%) and Emerging Markets (+1.5%) small caps lagged. In the United States, the Federal Reserve opted to keep interest rates unchanged at its recent meeting but signaled upcoming rate cuts for 2024, leading to a market rally. European markets also experienced an upward trajectory in anticipation of lower rates, despite some resistance from ECB officials against immediate cuts. In Emerging Markets, India stood out as a major contributor, with favourable state election results for Modi boosting overall sentiment.
The Fund's performance was positively influenced by holdings in Materials, Consumer Staples, and Germany, with Lanxess, a leading specialty chemicals company, emerging as one of the substantial contributors. Lanxess experienced a re-rating as the company confirmed that a capital raise was unnecessary due to improvements in working capital efficiency and asset sales.
Conversely, the Nicola Global Small-Cap Equity Fund faced relative detractors in the Financials sector and the U.S. (underweight). Nabors, one of the largest oil services companies in the U.S., was among the notable detractors, impacted by a broker downgrade and lower oil prices during the month.
Nicola Sustainable Innovation Fund
The Nicola Sustainable Innovation Fund returned +9.0% USD/+6.1% CAD in December, +7.1% USD/+4.7% CAD in the fourth quarter, and -15.2% USD/-17.2% CAD in 2023.
In December, equity markets sustained their risk-on rally from November, witnessing a robust recovery in interest rate-sensitive stocks, particularly within the clean energy sector, as the year came to a close. Notable contributors to performance during the month included NextEra Energy Partners, along with solar companies Sunrun and Enphase Energy. However, Constellation Energy and Fluence Energy had a negative impact on performance.
The month saw active portfolio repositioning, with profits taken in companies that had recently rallied, such as Sunrun, Stem Inc., and Array Technologies. The proceeds were redeployed into First Solar, Itron, and Canadian renewable companies Boralex and Northland Power. Additionally, a small capital call was received on the Ares Climate Infrastructure Partners' position towards preferred equity in two investments, including a U.S. renewable energy developer, bringing the drawn commitment to approximately 86%. The cash position at the end of the year stood around 5%, providing flexibility for further repositioning in the event of market drawdowns.
Reflecting on the broader context, 2023 posed challenges for the portfolio, marked by capital cost inflation, supply chain issues, adverse weather conditions, and rising interest rates. Despite supportive governmental policies and a strong demand backdrop for alternative energy, these factors weighed on the clean tech and renewable industries. Throughout the year, seven investments were exited, including one through a takeout by another portfolio company (Evoqua Water Technologies acquired by Xylem in May), and three new companies were added to the portfolio – Aker Carbon Capture, Mobileye, and First Solar.
The Utilities sector, the largest sector allocation, faced headwinds, emerging as the worst-performing area for many major indices. Higher treasury yields and growing investor interest in money market funds and high-interest savings accounts offset prior investor demand for the sector. Offshore wind, electric vehicle, and EV charging-related companies were negatively impacted during the year, contributing to significant drags on performance.
Amidst the challenges, certain themes performed well in 2023. Nuclear-exposed stocks rallied on supply concerns for uranium due to the ongoing conflict between Russia and Ukraine, and a more positive outlook for nuclear globally as part of the energy transition. This benefited positions like Constellation Energy. Carbon credits also emerged as a positive theme, with the investment in the California carbon credit market being the largest contributor to returns for the year.
Nicola Infrastructure and Renewable Resources Limited Partnership
The Nicola Global Infrastructure LP returned +0.4% USD/-0.2% CAD in December, +2.3% USD/ +2.2% CAD in the fourth quarter, and +5.1% USD/+4.8% CAD in 2023. Currency movements in December showcased the USD weakening against CAD, EUR, and GBP, which had a positive impact on the USD sleeve. Conversely, the CAD strengthening against the USD, EUR, and GBP had a negative impact on the CAD sleeve, partially mitigated by the USD currency hedge in place.
In a currency-agnostic assessment, our assets yielded a return of +0.3% over the month, +2.1% over the quarter, and +5.2% over the year. The monthly local performance was primarily influenced by the robust Q3 2023 performance in our global diversified secondaries fund investment. This positive performance was partially offset by a Q3 2023 mark-down in our North American data centers co-investment due to updated interest rate assumptions. It's noteworthy that leasing at the data centers continues to outpace budget expectations, and most markets have experienced significantly higher new lease rates, mitigating the impact of higher costs.
Throughout December, the Nicola Global Infrastructure Fund executed funding of US$4M for existing commitments, directed towards both our globally diversified infrastructure secondaries fund and co-investment. The proceeds were strategically utilized to acquire assets managed by top-tier GPs at attractive discounts.
Nicola Private Equity Limited Partnership
The Nicola Private Equity Limited Partnership returned -2.3% (CAD) in December, -1.5% in the fourth quarter, and +4.0% in 2023. Performance for the month was primarily influenced by the impact of a weaker U.S. dollar and the performance of specific co-investments. The weakening of the USD in December resulted in a negative 191 basis points impact on performance.
Nicola Private Equity Limited Partnership’s co-investments in Mara Renewables (Mara) and Project Malt (Malt) experienced write-downs, but this was partially offset by write-ups in Vendasta and Project Mobius. Mara, a producer and developer of plant-based nutritional and nutraceutical ingredients, faced slowing sales. The management team is actively raising additional growth capital and focusing on various operational initiatives to drive top-line growth. Malt, a designer and manufacturer of beverage equipment systems, encountered softness in sales attributed in part to the higher interest rate environment. The company is implementing a new commercial strategy expected to contribute to sales growth. Vendasta, a software company providing e-commerce solutions for small and medium-sized businesses, completed a strategic acquisition in 2023 and successfully closed on a $20 million series E financing led by Foundry. Project Mobius, a leading cross-border money transfer business, exhibited strong revenue growth compared to the prior year.
Nicola Venture Capital Limited Partnership
The Nicola Venture Capital Limited Partnership returned -3.5% CAD/-1.4% USD in December and the fourth quarter, and -9.1% CAD/-6.9% USD in 2023. Performance was primarily influenced by foreign exchange movements and, to some extent, a valuation change on an LP secondary position. This adjustment brought several underlying portfolio company valuations more in line with their public market comparables. Notably, the venture financing landscape remained relatively quiet in Q4 2023. However, LP secondaries emerged as an attractive area of the market, and in Q3/Q4 2023, the firm established several new partnerships with specialist firms. This strategic move has resulted in an improvement in deal flow and the quality of opportunities heading into 2024.
During the quarter, the firm closed a new fund commitment to XYZ Venture Capital, a high-quality early-stage venture manager based in San Francisco and led by Ross Fubini. XYZ Venture Capital has demonstrated a track record of early backing for various high-profile technology companies, including Anduril, Verkada, Newfront Insurance, and others.
Nicola Global Real Estate Fund
Nicola Global Real Estate Fund returned +1.3% (CAD) in December. The year 2023 proved to be a roller coaster for publicly traded Real Estate Investment Trusts (REITs), with performance characterized by fluctuations. Publicly traded securities started the year on a positive note, faced challenges in the middle of the year amid indications that the rate hike cycle was not yet over, and concluded the year with a rally in the last two months as expectations for rate cuts gained momentum. Central banks, aiming to combat high inflation, exerted control over the short end of the yield curve, resulting in higher rates in 2023.
As inflation recedes, the stage is now set for potential rate cuts in 2024 and 2025, offering a favourable tailwind for the portfolio. Currently, over 40% of the Nicola Global Real Estate Fund is invested in publicly traded securities. The belief is that publicly traded REITs are currently trading at a significant discount compared to historical standards. The expectation is that stabilization in interest rates will positively impact sentiment, and the potential for lower long bond yields could contribute to improved earnings growth and alleviate concerns about cap rate expansion.
Forward-looking valuation models indicate that REITs are priced at a high-teen discount to intrinsic value, suggesting approximately a 22% upside in price from the current levels, according to the fund's manager, Hazelview Investments. The forecasted decline in new supply for 2024 and 2025, coupled with a more favourable economic environment, adds to the optimism regarding future expected returns from this asset class.
Nicola Canadian Real Estate Limited Partnership
Nicola Canadian Real Estate Limited Partnership NAV per unit has decreased to $155.0477 (previously $156.9662), effective December 31, 2023. This represents a decrease of -1.2% and a negative return for November of -0.9%. YTD return as at November 30, 2023 is +3.5%. Portfolio Leverage is 46.25%. Returns were negative this month: Decreases in appraised values due to yield expansion were partially tempered by strong leasing activity, an increase in market rental rate assumptions, and net operating income.
Nicola U.S. Real Estate Limited Partnership
Nicola US Real Estate Limited Partnership NAV per unit has decreased to US$196.2446 (previously US$199.1475), effective December 31, 2023. This represents a decrease of -1.5% and a negative return for November of -1.1%. YTD return as at November 30, 2023 is +3.1%. Portfolio Leverage is 50.29%. Returns were negative this month: Decreases in appraised values due to yield expansion were partially tempered by strong leasing activity, an increase in market rental rate assumptions, and net operating income.
Nicola Value Add Real Estate Limited Partnership
Nicola Value Add Real Estate Limited Partnership NAV per unit has decreased to $247.6281 (previously $247.8393), effective December 31, 2023. This represents a decrease of -0.1% and a negative return for November of -0.1%. YTD return as at November 30, 2023 is +5.3%. In November, we funded $9.4M 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. Effective October 31, 2023, Nicola Balanced Mortgage Fund changed its name to Nicola Canadian Mortgage Fund. Effective January 1, 2024, Nicola Infrastructure and Renewable Resources Limited Partnership changed its name to Nicola Global Infrastructure Limited Partnership
