Nicola Wealth Investment Returns: February 2024

Nicola Core Portfolio Fund  

The Nicola Core Portfolio Fund returned +1.3% in February. 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 +0.1% in February. In contrast, the iShares Core Canadian Universe Bond Index ETF posted a monthly return of -0.4%. Canadian government bond yields continued to rise in February, with the 10-year Government of Canada bond yields increasing by 0.2% from 3.3% to 3.5%. In addition, stronger-than-expected employment data tempered investor expectations and shifted the probability of a first central bank rate cut towards the second half of 2024. Canadian spreads tightened by 0.1% to 1.2% as higher all-in yields remained attractive to investors. The Nicola Bond Fund’s relatively short duration and overweight in select sectors contributed to its outperformance in February. From a sector perspective, higher-beta sectors such as REITs, autos, and bank sub-debt outperformed, while lower-beta and more defensive sectors such as industrials and consumer staples underperformed and ended the month mostly unchanged. REITs were the top performers in February and tightened by 0.3% year-to-date despite heavy issuance. We participated in the Dream Summit Industrial REIT new issue, given strong fundamentals in the industrial REIT space driven by continued growth in e-commerce and a lack of supply. We continue to make progress in internalizing assets, with approximately 80% of the fund currently being managed in-house. The Nicola Bond Fund remains nimble, and we are prepared to add risk as we see opportunities arise in a rapidly evolving market. 

Nicola High Yield Bond Fund

The Nicola High Yield Bond Fund returned +0.7% CAD/-0.3% USD in February. 

In contrast, the iShares U.S. High Yield Bond Index ETF (CAD-Hedged) posted a monthly return of +0.4%. Higher all-in yields provided support for high-yield credits and tightened credit spreads throughout the month. Higher-quality BB names underperformed, while CCCs outperformed. The Nicola High Yield Bond Fund outperformed due to its relatively shorter duration, reflecting our cautious stance on the timing of Fed interest rate cuts combined with strong credit selection. Top-performing strategies during the month included the PIMCO Dynamic Income Opportunities Fund and the BlackRock Securitized Investors Fund, which returned +2.7% and +2.5%, respectively, in Canadian dollar terms. Our Canadian corporate hybrid positions also delivered strong returns within our internal portfolio. The fund will continue to prioritize higher-quality credits with better risk/reward characteristics in the near term, as current spread levels do not appear to be pricing in any risk of significant credit deterioration and anticipate the potential return of a “higher for longer” scenario. 

Nicola Canadian Mortgage Fund  

The Nicola Canadian Mortgage Fund (CAD) returned +0.6% in February, with a trailing 12-month return of +8.0%. There is a strong pipeline of new loan opportunities under review, with several loans likely to fund in the next 30-60 days. The Nicola Canadian Mortgage Fund held 8.9% in cash & cash equivalents, with 65.3% 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 February, with a trailing 12-month return of +4.2%. Market activity remains relatively quiet, however, new loans continue to be considered with a larger loan on track to fund before the end of Q1. The Nicola U.S. Mortgage Fund held 28.9% 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/+0.5% USD in January. Returns for the month were primarily driven by contractual cash interest income from the Nicola Private Debt Fund’s diversified portfolio of direct investments, with slightly softer performance attributed to temporarily elevated cash balances resulting from loan repayments. During the month, the Nicola Private Debt Fund deployed US$40.5 million into four new direct investments, which included a US$8.6 million participation in a term loan to a multi-regional residential re-roofing platform primarily focused on insurance-claim demand. Additionally, the Nicola Private Debt Fund realized one direct investment in February, totaling US$12 million. 

Nicola Canadian Equity Income Fund  

The Nicola Canadian Equity Income Fund returned +2% CAD in February. February witnessed another month of healthy positive returns in the Canadian equity market. The most significant economic data released during the period was January's CPI of 2.9%, which came in well below consensus forecasts. This better-than-expected figure places inflation back into the Bank of Canada’s target range (1-3%), at least on a headline basis, and reinforces views that Canada is positioned to cut interest rates ahead of the U.S. However, Canadian government bond yields remained mostly unchanged following the report, and defensive-yield sectors were among the TSX laggards. The best-performing sectors of the TSX in February were Health Care (+8.5%), Industrials (+5.7%), and Consumer Staples (+5.2%). The bottom performers were Communication Services (-4.7%), Utilities (-2.3%), and Materials (-2.1%). 

During February, the Nicola Canadian Equity Income Fund outperformed the TSX by 20 basis points. Canadian equities comprised 90% of assets at month-end. From a sector perspective, performance was led by Materials (+5.6%), Energy (+4.6%), and Utilities (+4.1%). The bottom-performing sectors were Communication Services (-1.7%), Real Estate (-0.6%), and Financials (+0.5%). Security selection was the primary source of value-add, driven by strong performance from Materials holding CCL Industries, which reported solid earnings and an optimistic organic growth outlook for its core label-making business. In terms of equity holdings, the Nicola Canadian Equity Income Fund’s top three contributors were CCL Industries, CPKC Ltd., and Aritzia. The bottom three detractors were Labrador Iron Ore Company, CargoJet, and IA Financial Group. From a trading perspective, we exited Loblaw Companies, a high-quality grocer, due to an above-average valuation. Put options were opportunistically written on Shopify. 

The preferred share allocation of the Nicola Canadian Equity Income Fund returned +0.5% in February. Institutional preferred shares, Bolton Dividend Arbitrage strategy, and the BMO Laddered Preferred Share Index ETF all contributed positively, returning +1.3%, +0.6%, and +0.2%, respectively. During the month, we reduced our exposure to $25 preferred shares due to credit spread tightening, with the preferred share market yielding just under 6%. We prefer higher quality, higher reset institutional preferred shares. One example is the Royal Bank institutional preferred share issued in January, which yields 7% to call. 

Nicola U.S. Equity Income Fund  

The Nicola U.S. Equity Income Fund (USD) returned +0.7% in February, trailing behind the S&P 500, which had a return of +5.3%. The Nicola U.S. Equity Income Fund (CAD) returned +1.7%. 

 The Nicola U.S. Equity Income Fund (USD) underperformed by 4.6%, primarily due to its lower allocation to Information Technology, where Nvidia alone contributed nearly 20% to the benchmark’s return. Stock selection also had a negative impact, with positive picks in Consumer Staples and Consumer Discretionary sectors, such as Costco, Lowe’s & Hyatt, being outweighed by negative stock selection in Industrials, particularly with Wesco International. Wesco International detracted from performance due to disappointing Q4 organic sales growth, lower-than-expected gross margins, and higher-than-expected SG&A. Crown Holdings also detracted from performance as they missed their Q4 revenue and operating income estimates due to weak demand in their European and Asia businesses, and management providing below-street Q1 and 2024 guidance. 

Among the leading contributors to the Nicola U.S. Equity Income Fund were Hyatt Hotels, Casey’s General Stores, and Walmart, while Wesco International, Crown Holdings, and Adobe (concerns over OpenAI’s Sora) were the main detractors. 

During the month, the Nicola U.S. Equity Income Fund reduced its position in International Flavors & Fragrances and increased its position in Crown Holdings, as it sees a positive growth outlook in North America and believes the company’s steps in capacity rationalization and the potential divestitures of non-core assets (Aerosol and Transit Packaging) provide upside to its current valuation. 

The Nicola U.S. Equity Income Fund, characterized by high-quality companies with strong balance sheets and robust free cash flows, ended the month with a blended forward 1-year Return on Equity (ROE) of 27%, surpassing the S&P 500's 19%. The delta-adjusted equity exposure, factoring in option positioning, stood at 81%, with 10% of long positions covered and 12% in notional put options. Additionally, the Nicola U.S. Equity Income Fund closed the month with approximately 4% of its assets in cash, not utilized for notional put collateral. 

Nicola International Leaders Fund  

The Nicola International Leaders Fund returned +3.0% in February. For the month, Emerging Markets (+6.2%) outperformed, while International Markets (+3.3%) underperformed. In Europe, markets were supported by signs of disinflation and improving business activity.  In China (+10%), the market rebounded on better-than-expected economic data, a reduction in 5-year mortgage rates, and a new CSRC Chairman.  

Main relative contributors to performance during the month were our holdings in Industrials, Info Tech, and France. One of the biggest contributors was Schneider Electric (global leader in electrification and industrial automation), as its 2024 guidance gave the market confidence in continued growth in its end markets. 

Main relative detractors to performance during the month were our holdings in Materials and Switzerland. One of the biggest detractors was Rio Tinto (leading global mining conglomerate), as lower iron ore prices impacted the shares.  

Nicola Global Small-Cap Equity Fund

The Nicola Global Small Cap Fund returned +2.7% CAD/+1.7% USD in February. 

For the month, U.S. (+6.8%) small caps outperformed, while International (+1.8%) & Emerging markets +4.2%) small caps underperformed. In the U.S., the market was supported by strong corporate earnings and signs that the economy remains resilient. In Europe, there were signs of continued disinflation and business activity indicators came in better-than-expected. In Emerging Markets, Taiwan and Korea were the 2 biggest contributors to the region’s performance. In Korea (+8%), the market rallied on more news around the government’s “value-up” plans to help reduce the discount on Korean shares.  

Main relative contributors to performance during the month were our holdings in Industrials, Hong Kong and France. One of the biggest contributors was Resideo Technologies (leading supplier of security, air, water, and energy products with an installed base of 150 million households in the U.S.), which benefited from an improvement in its end markets and margin expansion from its cost cutting initiatives. 

Main relative detractors to performance during the month were our holdings in Health Care and the U.S. (underweight). One of the largest detractors was Perrigo (leading global consumer self-care company), which de-rated on lower-than-expected 2024 guidance due to additional investments required to meet the FDA’s new guidelines in infant nutrition.  

Nicola Sustainable Innovation Fund

The Nicola Sustainable Innovation Fund returned -0.2% USD/+0.7% CAD in February. The main publicly traded benchmarks that we track exhibited similar muted returns for the month but have faced steeper selloffs year-to-date with the iShares Global Clean Energy ETF off nearly 11% and the Invesco WilderHill Clean Energy ETF declining roughly -20% as of the end of February. It was a mixed month for the energy transition space with nuclear power producers, electric grid-exposed and utility-scale solar names performing well while residential solar, hydrogen, carbon capture, and electric vehicle (EV) related companies remained challenged. Our top contributors to performance were our two largest equity positions Constellation Energy and Itron following strong earnings reports during the month lifting their shares nearly 40% and 30% respectively, while Aker Carbon Capture, Fluence Energy, and Bloom Energy were our primary detractors. The EV market in particular has been exhibiting greater signs of a slowdown both in consumer demand and manufacturing production in recent months, and we’ve been actively reducing our exposure to this theme from more than 10% at the end of 2023, to less than 3% at the end of February. 

The Nicola Sustainable Innovation Fund exited its position in Innergex Renewable Energy, an independent renewable power producer in Canada, consolidating our position amongst the other Canadian renewable companies we own including Boralex and Brookfield Renewable Partners. The Nicola Sustainable Innovation Fund was active in rebalancing throughout the month, adding to existing positions in Veolia, Itron, First Solar, and Orsted, while trimming allocations in Plug Power, ChargePoint Holdings, and Aker Carbon Capture. We also completed a partial sale and rebalance from our PIMCO California Carbon Access Offshore Fund following a strong 2023 performance. The Nicola Sustainable Innovation Fund ended the month at an 8.5% cash position, leaving some flexibility to further reposition as opportunities present themselves and we continue to look to add to investments that bring new thematic exposure with lower correlation to the rest of the portfolio. 

Nicola Global Infrastructure Limited Partnership

The Nicola Global Infrastructure Limited Partnership returned +0.6% USD/+0.9% CAD in February and is at C$328M of AUM. Currency movements, particularly the CAD weakening against the USD, had a negative impact on the USD sleeve of our assets. Agnostic to currencies, our assets returned +0.9% over the month. This was primarily driven by the Q4 2023 outperformance at our U.S. energy-as-a-service platform co-investment, attributable to improved cash flow profiles on underlying projects, along with Q4 2023 performance in line with expectations at other fund and co-investments in the portfolio. 

 In February, the Nicola Global Infrastructure Limited Partnership committed €15 million to a globally diversified mid-market infrastructure fund. This expansion of the Fund’s relationship with an established manager has proven to be a strong source of co-investment, with two co-investments completed to date. 

Nicola Private Equity Limited Partnership  

The Nicola Private Equity Limited Partnership returned +4.0% in February. Investment return was driven by write-ups in six co-investments in the portfolio because of solid fundamentals and multiple expansions. The top three drivers of performance were our investments in MDA (Canadian space robotics company), Vendasta (e-commerce platform for SMBs), and Blue.Cloud (IT services company). There were no new investments or realizations made in February. 

Nicola Global Real Estate Fund

Nicola Global Real Estate Fund returned +0.7% in February. Like many investors, we believe that the rate cycle has peaked. While the timing of any rate cuts remains a mystery, forward-looking NAV estimates suggest upside exists in the public markets. We believe publicly traded REITs are deeply discounted by historical standards and that stabilization in interest rates will bolster sentiment. The onset of global rate cuts will serve as a catalyst to unlock the value embedded in the portfolio. Currently, over 40% of the Nicola Global Real Estate Fund is invested in publicly traded securities. We have been reducing our allocation to international private real estate LP investments and divesting those investments at NAV so that we can add to publicly traded REITs where we can acquire assets at a discount to NAV. We believe there is better rebound potential in the publicly traded space when Central Banks normalize monetary policy. 

Nicola Canadian Real Estate Limited Partnership

Nicola Canadian Real Estate Limited Partnership NAV per unit has decreased to $152.1689 (previously $152.4982), effective trade date February 29, 2024. This represents a decrease of -0.2% and a positive return for January of +0.1%. Returns were generally flat because of decreases in appraised values due to yield expansion, which were partially tempered by strong leasing activity, an increase in market rental rate assumptions, and net operating income.  Actual YTD return as at February 9, 2024 is +0.1%. Portfolio Leverage is 46.33%.  

Nicola U.S. Real Estate Limited Partnership  

Nicola U.S. Real Estate Limited Partnership NAV per unit has decreased to US$191.4672 (previously US$192.6138), effective trade date February 29, 2024. This represents a decrease of -0.6% and a negative return for January of -0.2%. Returns were generally flat this month because of decreases in appraised values due to yield expansion, which were partially tempered by strong leasing activity, an increase in market rental rate assumptions, and net operating income.  Actual YTD return as at February 9, 2024 is -0.2%. Portfolio Leverage is 50.11%.  

Nicola Value Add Real Estate Limited Partnership  

Nicola Value Add Real Estate Limited Partnership NAV per unit has increased to $248.8633 (previously $247.5735), effective trade date February 29, 2024. This represents an increase of +0.5% and a positive return for January of +0.5%. In January, we funded $1.3M for one new project in the Nicola Multi Family Venterra LP (Cendana District West) and $6.3M for existing projects. Actual YTD return as at February 9, 2024 is +0.5%.