Returns for the Nicola Core Portfolio Fund were +0.7% for the month of February. The Nicola Core Portfolio Fund 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 was up for the month returning +0.4% in February while the iShares Core Canadian Universe Bond Index ETF returned -2.0%. For the market, interest rates were the largest detractor of returns for the month as 10-year Bank of Canada bond yields moved from 2.9% to 3.3%, reversing January’s rally. The Nicola Bond Fund outperformed in February as our portfolio remains lower duration with a focus on high quality bank debt. Our position in Sun Life Short Term Private Fixed Income also generated excess returns through access to higher private yields which are about 1.5% above public investment grade bond spreads. Our exposure to the East Coast strategy and Marret Investment Grade Hedge Strategies also returned positively during the month. Credit spreads tightened marginally as corporate Canadian bond spreads moved from 1.49% to 1.44%, with financials, real estate, and auto sectors leading the way, while energy, utility and telco spreads widened. During the month, the rates market for the US and Canada repriced higher due to hawkish rhetoric from the Federal Reserve alongside strong labour and services inflation data. The market is no longer pricing in rate cuts in 2023, which has always been our view. We believe this repricing of interest rates gives us a tactical opportunity to begin adding some duration to the portfolio.
The Nicola Global Bond Fund returned -0.7% in February. Global credit spreads widened on global growth concerns, but we would note the European Commission raised its 2023 GDP growth to 0.9% from 0.6% in February. Currency reversed in February and was a detractor for the fund as the US dollar rallied against most currencies after weakening since early November. Many Asian currencies such as the South Korean Won, Thai Baht, Malaysian Ringgit, and Japanese Yen contributed negatively to returns as they weakened in February against the USD. This reversal in the USD was in part driven by a hawkish Federal Reserve, but also by signals from emerging market central banks that they are near the peak of their rate tightening cycles.
The Nicola High Yield Bond Fund returned +1.3% in February while the iShares US High Yield Bond Index ETF (CAD-Hedged) returned -1.2%. High yield spreads tightened by 0.16% during the month, while interest rates moved higher. USD exposure was a main contributor for the High Yield Bond Fund as the USD rallied against the CAD by +2.6% in February. With all else equal, high yield continues to generate a good carry given higher overall rates. However, we continue to be positioned in higher quality high yield as we believe that credit spreads remain expensive at around 4.2%. Default rates are currently at 1.7% and may move higher towards historical levels closer to 4% if the economic backdrop deteriorates later this year. We continued to add exposure to high rate-reset Bank Limited Recourse Capital Notes (LRCNs) which are attractive to us as they have similar yields to high yield bonds but with exposure to investment grade corporations.
The Nicola Preferred Share Fund returned +0.1% in February while the BMO Laddered Preferred Share Index ETF returned -0.4%. One of the drivers of the Nicola Preferred Share Fund’s outperformance is our weight in floater preferred shares, which outperformed fixed-reset preferred shares by about +1.7%. Floater preferred shares have dividends which are reset using the prime rate as a reference. On the other hand, fixed rate perpetual preferred shares returned -3.9%. Throughout the month, we continued to add to 2023 and early-2024 rate resets which will likely reset to a higher all-in yield. Our portfolio also marginally added to BCE Inc floater preferred shares which now yield around 8.5% or higher. With the strong relative start to the year compared to other credit sectors, the relative attractiveness of preferred shares decreased slightly, but we continue to see good value in institutional preferred shares and will be adding if an opportunity presents itself.
Returns for the Nicola Primary Mortgage Fund and Nicola Balanced Mortgage Fund were 0.4% and 0.7%, respectively, in February. Cash in the funds at month end was 0% in Primary Mortgage Fund and 7% in Balanced Mortgage Fund. Current annualized yields, 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, are 5.1% for Primary Mortgage Fund and 7.5% for Balanced Mortgage Fund. The U.S. Mortgage Fund continues to hold a third-party fund comprising U.S. commercial mortgage loans with the first individual loan scheduled to fund in March.
For the month of February, the Nicola Private Debt Fund returned +0.8% bringing the YTD February return to +1.3%. The primary return driver during the month was contractual interest income from the Nicola Private Debt Fund’s portfolio of direct investments. February returns also benefited from a fair value markup of the Project Strength warrants given the Borrower’s strong financial performance during 2022. New investments during the month included a US$10 million commitment to the first lien credit facilities of a leading US-based provider of professional and technical engineering services to private and public sector clients in the water and wastewater infrastructure market.
The Nicola Canadian Equity Income Fund performance vs the S&P/TSX Index: February 2023 -1.1% vs -2.4%. Equity markets were weaker in February with most regions falling on decelerating growth and fears of higher for longer interest rates. Stronger-than-expected inflation reports and expectations of a more hawkish central bank response caused a steep selloff in bonds. The yield on the 2-year Government of Canada Bond rose from 3.75% at the beginning of the month to 4.2% at the end of February. Our Nicola Canadian Equity Income Fund outperformed the S&P/TSX Index as positive contribution from Financials (where we are underweight) and Consumer Staples offset negative contribution from Utilities and Communication Services. We have positioned the Nicola Canadian Equity Income Fund defensively as we are still concerned about the economic fallout from one of the most intense tightening cycles in decades. The economy and consumers have been resilient so far due to the strong job market and massive fiscal transfer during the pandemic, but swallowing 500+ bp of tightening is a tall task. The possibility of a recession is still something to worry about as key indicators continue to flash red. In the month of February, the Fund’s top performing holdings were Neighbourly Pharmacy Inc., Stantec, and IA Financial Corp. The bottom performers were Lundin Mining Corp, Agnico Eagle Mines Ltd., and Shopify. We exited our positions in Shopify, Brookfield Corp, and Rogers Communications. There were no new additions.
The Nicola U.S. Equity Income Fund (USD) and the S&P 500 returned -2.6% & -2.5% respectively for the month of February. February saw risk-aversion creep back into the market as a number of economic datapoints (strong non-farm payroll, high PPI & CPI) raised concerns about interest rates staying higher for longer while at the same time many state-of-the-consumer bellwethers (Home Depot and Walmart) provided cautious outlooks on consumer spending. The Nicola U.S. Equity Income Fund underperformed the S&P 500 by 0.1% due to negative relative contributions from Materials, Information Technology and Communication Services more than offsetting the positive relative contributions from Energy, Industrials and Health Care. The Nicola U.S. Equity Income Fund’s top contributors to performance were Wesco International, Shell, and Hyatt. The top detractors to performance were Electronic Arts, AT&T and Alphabet. The Fund added two new names in the REIT sector. The first being Sun Communities, which owns, manages, and develops manufactured housing (MH) communities, recreational vehicles (RV) resorts and marinas, owning 226,800 sites across 41 markets throughout North America. The company benefits from a scale advantage in terms of sites per market relative to closest peer and is favorably exposed to the structural aging demographic trends. The second REIT added was CubeSmart, an integrated self-storage real estate company that designs, develops, acquires and manages self-storage facilities. The company owns and/or manages on behalf of 3rd parties ~1,274 properties (~848,000 units representing ~88MM square feet) across 39 states and DC. The self-storage subindustry is characterized as: (i) fragmented (~50,000 facilities in the US, ~80% of which are privately owned); (ii) low barriers to entry, but becoming more difficult to build in urban areas due to low value land-use; (iii) relatively high net operating income (NOI) margin within the REIT sector due to a low operating cost business model; (iv) stable and sticky consumer demand; and (v) recession resilient. The Nicola U.S. Equity Income Fund sold names Edwards Life Sciences and Northrup Grumman to fund the REIT positions. The Nicola U.S. Equity Income Fund ended the month with a delta-adjusted equity exposure of 89% due option positioning (11% of longs covered and 12% notional Put options).
The Nicola Sustainable Innovation Fund returned -7.1% (USD) / -5.3% (CAD) in February, and -0.8% (USD) / -0.3% (CAD) year-to-date. The fund’s top performers during the month were Aptiv and Evoqua Water Technologies, while Ameresco, Fluence Energy, and Stem Inc. were the biggest laggards. Equity markets remained choppy in February with changing narratives and interpretations around the Fed’s possible actions to combat rising interest rates and fears of a looming recession. Growth focused equities, including many of our portfolio holdings, lost some of their recent gains during the month. In late February, we initiated a starter position in Aker Carbon Capture, a pure-play carbon capture company with solutions, services and technologies serving a range of industries, including the cement, bio and waste-to-energy, gas-to-power and blue hydrogen segments. Based in Norway, Aker has over 10 years of experience with modular carbon capture plants, and over 50,000 operating hours capturing C02 internationally with their proprietary technology. During the month we reallocated recent gains from Evoqua Water Technologies, Aptiv, and TPI Composites towards Constellation Energy, Northland Power, and new holding Aker Carbon Capture.
The Nicola Alternative Strategies Fund returned +1.7% in February. The primary factor was currency as the Canadian dollar weakened during the month versus the U.S. dollar. According to Eurekahedge, overall hedge funds returned -0.5% for the month while the Eurekahedge Arbitrage Hedge Fund Index returned -0.8% and the Relative Valued Hedge Fund Index returned +0.8%.
The Nicola Precious Metals Fund returned -7.8% for the month of February. Underlying gold stocks in the S&P/TSX Composite index returned -11.8% and gold bullion returned -5.3% in Canadian dollar terms. Most gold stocks were down with Equinox Gold, Kinross Gold, Osisko Gold and IAMGOLD all returning -17% or worse. Overall, gold retreated alongside most commodities as the U.S. dollar continued to strengthen. Outflows from gold ETFs globally further exacerbated the decline in physical gold. Developed market central bankers in general moved to more hawkish rhetoric in the face of greater inflationary pressures. If real yields continue to move higher, this would be a further headwind for gold prices. However, there are some potential tailwinds for gold this year including elevated geopolitical risk, a possible peak in interest rates and risks to equity valuations.
The Nicola Global Real Estate Fund performance vs. iShares S&P/TSX Capped REIT Index (XRE): February 2023 -0.6% vs -0.3%. Publicly traded REITs took a small step back in the month due to higher-than-anticipated inflation readings and a global economy that is proving resilient. The race to combat inflation (and the associated ramifications on interest rates) continues to be a headwind for the REIT universe, putting pressure on stock prices. Fundamentally, with the exception of the office sub-sector, companies continue to report robust demand and limited supply which drives rent growth. While near-term volatility will likely persist until visibility on rates and the economy improves, we continue to like valuations. As interest rates stabilize, the market will have a better idea of the cost of capital and therefore be able to better triangulate what real estate values will be going forward which will help lift the uncertainty in REIT share prices. A more stable interest rate environment will allow for discounts to NAVs to normalize. REITs with strong balance sheets, strong real estate portfolios, superior earnings potential and high-quality cycle-tested management teams will ultimately prevail. Investors turn to REITs for income growth and fundamentals appear strong, particularly in the Multi-Family and Industrial sectors which sets the stage for continued growth in dividends.
The Nicola Infrastructure and Renewable Resources Limited Partnership returned 2.2% for the month of February in Canadian dollar terms. Overall, currencies had a positive impact over the period with CAD weakening against the USD more than offsetting the CAD strengthening against GBP; agnostic to currencies, our assets returned 0.8%. This was driven by Q4 2022 performance in line with expectations from our KKR and Brookfield global diversified funds and above expectation Q4 2022 performance from our Canadian farmland fund. The Fund is at $221M of AUM with a waitlist of $23M that is expected to be fully drawn by the end of Q2 2023 from existing fund commitments and the near-term co-investment pipeline.
The Nicola Canadian Real Estate Limited Partnership NAV per unit has increased to $155.2880 (previously $155.1263), effective February 28, 2023. This represents an increase of 0.1% and a positive return for January of 0.5%. YTD return as at January 31, 2023 is 0.5%. Portfolio Leverage is 43.15%. The positive return was primarily due to increased appraised values of the GTA West Portfolio, 55th Ave, and 11 Plymouth.
The Nicola U.S. Real Estate Limited Partnership NAV per unit has increased to US$198.6001 (previously US$197.8831), effective February 28, 2023. This represents an increase of 0.4% and a positive return for January of 0.8%. YTD return as at January 31, 2023 is 0.8%. Portfolio Leverage is 45.97%. The positive return was primarily due to increased appraised values of Champions Green, Canton Mills, and Apex West Midtown.
The Nicola Value Add Real Estate Limited Partnership NAV per unit has increased to $236.4163 (previously $235.1422), effective February 28, 2023. This represents an increase of 0.5% and a positive return for January of 0.5%. YTD return as at January 23, 2023 is 0.5%. In January, we funded $3.9M for two projects that closed (3839 Commercial Street & Colwood buy-out) and $3.1M 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.
