Nicola Wealth Investment Returns: July 2024

Nicola Core Portfolio Fund   

The Nicola Core Portfolio Fund returned +1.7% in July. 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 +1.7% in July and +4.2% year-to-date. In comparison, the iShares Core Canadian Universe Bond Index ETF posted a monthly return of +2.2% and a year-to-date return of +1.7%. The index experienced relatively stronger total returns as government bond yields dropped rather significantly in July, driven by signs of a weakening labour market, stabilizing inflation, and rising expectations of further rate cuts by the Bank of Canada later in the year. 

The Nicola Bond Fund’s relative underperformance in July was attributed to its shorter duration. However, strong credit selection and sector allocation helped mitigate the impact. Canadian corporate spreads remained largely stable during the month. We added value through increasing our exposure to short-dated corporate credits in REITs, telecommunications, and automotive finance companies, and reducing our exposure to bank subordinated debt.  

We also added to short-dated Ford Credit bonds following an earnings miss due to higher warranty costs. Despite this miss, Ford maintained its full-year earnings outlook and raised its annual free cash flow target. We remain confident in Ford Credit’s fundamentals, supported by stable credit loss metrics and a robust liquidity profile with $28 billion in net liquidity. The fund remains defensively positioned, and we will continue to take profits and adjust exposure as needed. This strategy allows us to add risk opportunistically as market conditions evolve. 

Nicola High Yield Bond Fund 

The Nicola High Yield Bond Fund returned +1.2% in July and +5.2% year-to-date. In comparison, the iShares US High Yield Bond Index ETF (CAD-Hedged) posted a monthly return of +1.5% and a year-to-date return of +3.6%. High yield bonds saw stronger total returns in July as U.S. Treasury yields fell by 0.3% to 0.5% across the curve, driven by signs of easing inflation and a softening labour market. This bolstered investor confidence in potential rate cuts by the Fed later in the year. Credit spreads ended the month marginally wider at 3.1%, and lower-quality credits outperformed as growing expectations for interest rate cuts particularly benefited riskier borrowers. 

The Nicola High Yield Bond Fund underperformed in July due to its shorter duration, but stronger credit selection helped mitigate the impact. During the month, we increased our positions in high-quality BB issuers with potential ratings upgrades, as they present more favorable risk/reward characteristics at current spread levels. Our investments in Canadian corporate hybrids within the midstream/pipeline sector and Canadian bank capital notes continued to perform strongly, emerging as top contributors in our internal portfolio. Our involvement in recent new issues, which were attractively priced relative to their credit fundamentals, also positively impacted our performance. We participated in the new issue of Wolf Midstream, a private Calgary-based midstream company that owns and operates energy infrastructure assets in Western Canada and is sponsored by the Canada Pension Plan Investment Board. Wolf Midstream benefits from a stable cash flow profile, supported by long-term firm contracts with a weighted average tenor of 21 years. 

Nicola Canadian Mortgage Fund 

The Nicola Canadian Mortgage Fund returned +0.7% in July, with a trailing 12-month return of +8.0%. There was one new loan funded in July which is contrasted by a significant number of loan repayments resulting in an elevated level of cash and cash equivalents. The Nicola Canadian Mortgage Fund held 19.7% in cash and cash equivalents, with 73.7% 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 -0.3% in July, with a trailing 12-month return of +3.8%. The month’s negative return is attributed to asset valuation markdowns in Q2 within the third-party fund investment held by the Nicola U.S. Mortgage Fund. However, this fund investment continued to generate a positive cash distribution yield of +1.9% for Q2. Within the Nicola U.S. Mortgage Fund, one new loan was funded in July, and there are four new loans scheduled to fund in the next 90 days. The Nicola U.S. Mortgage Fund held 24.9% in cash and cash equivalents, with 100% of the direct loan portfolio secured by senior-ranking mortgages at month-end. 

Nicola Private Debt Fund 

In July, the Nicola Private Debt Fund returned +0.8% CAD/+0.8% USD in July and +4.8% CAD/+4.4% USD year-to-date. Returns for the month were 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$56.3m and made five new direct investments in the month, including a US$15.0m participation in a senior term loan to a vertically integrated auto insurance platform.  

Nicola Canadian Equity Income Fund 

The Nicola Canadian Equity Income Fund returned +5.9% in July and +13% year-to-date. 

The most significant macro event in July was the Bank of Canada’s second consecutive 25 basis point cut to the overnight rate on July 24th. Stocks quickly priced in this move following June data that revealed a cooling labour market and core inflation within the BOC’s control range of 1.0% to 3.0%. The TSX Composite Index (TSX) performed well, with all sectors delivering positive returns, especially rate-sensitive areas such as real estate and utilities. 

Gold prices lifted near their all-time highs in the last few days of the month due to heightened geopolitical concerns in the Middle East and increased bets of a September rate cut by the US Federal Reserve. This benefited the Materials sector, with gold miners occupying a 7.4% position in the TSX. The best performing sectors in July were Real Estate (+10.9%), Materials (+9.2%), and Consumer Staples (+8.5%). The bottom performers were Information Technology (+2.5%), Industrials (+2.6%), and Energy (+3.6%). 

The Nicola Canadian Equity Income Fund performed in line with the TSX in July. Value was added through stock selection, with our portfolio of quality companies generating healthy total returns across all but one sector, Industrials. The Nicola Canadian Equity Income Fund’s top performing sectors were Financials (+9.8%), Consumer Staples (+9.8%), and Consumer Discretionary (+9.0%). The bottom performing sectors were Industrials (-0.6%), Energy (+4.8%), and Materials (+4.9%). 

In terms of equity holdings, the Nicola Canadian Equity Income Fund’s top three contributors were Canadian Western Bank, Aritzia, and TC Energy. The bottom three detractors were Cargojet, Royal Bank of Canada, and Gibson Energy. We initiated a position in Boyd Group Services, one of the largest operators of collision repair centers across Canada and the US. Boyd is a “quality compounder” that has delivered a strong financial track record by combining stable organic growth with accretive acquisitions and maintaining an efficient cost structure. Negative read-through from a US-based peer recently led to pressure on Boyd’s stock price, providing an opportunity for us to purchase it at a reasonable valuation. No positions were exited. 

At month-end, Canadian equities comprised roughly 95.0% of the Nicola Canadian Equity Income Fund’s assets and continued to display relatively attractive value and balance sheet characteristics compared to the TSX, such as a lower Price-to-Cash Flow ratio, higher dividend yield, and lower leverage. 

Nicola U.S. Equity Income Fund 

The Nicola U.S. Equity Income Fund returned +3.4% CAD/+2.5% USD in July and +13% CAD/+8.3% USD year-to-date. 

In July, the stock market landscape shifted as AI heavyweights like Nvidia, Microsoft, and Alphabet, which drove 46% of market returns in the first half of the year, saw mid-single-digit declines. Signs of easing inflation and softening job data increased the likelihood of a Federal Reserve rate cut in September, triggering a reallocation of capital. Underperforming sectors earlier in the year, especially those sensitive to interest rates, smaller companies, and value stocks, saw strong gains. In contrast, technology, communications, and large-cap growth stocks lost momentum, with communication and tech sectors dipping by -4% and -2.1%, respectively, while real estate and utilities climbed by +7.2% and +6.8%. 

The Nicola U.S. Equity Income Fund outperformed the S&P 500 Index by 1.3% due to strong stock selection in the industrial sector (Wesco, Union Pacific, and Equifax) and in the Communication Services sector (Electronic Arts and AT&T). In terms of sector allocation, the Nicola U.S. Equity Income Fund benefited from its higher exposure compared to the benchmark in Real Estate, which was the highest-performing sector, and its lower exposure to Information Technology, the second-worst-performing sector. 

Top contributors to the Nicola U.S. Equity Income Fund’s performance were Crown Holdings, UnitedHealth Group, and Prologis, while Microsoft, Alphabet, and Meta Platforms were the top detractors. 

The Nicola U.S. Equity Income Fund has divested its stake in the pharmaceutical company Biogen and introduced two new holdings. Within Information Technology, the Fund invested in Broadcom. Broadcom is poised to gain from the increasing volume of data, which necessitates more silicon across various points, such as telecom base stations, mobile phones, and data centers. With Broadcom’s wide-ranging presence in networking, it profits regardless of where or how quickly data travels, and an astounding 99.9% of all internet traffic interacts with a Broadcom chip at some point. We feel that the company is well-positioned to benefit from advances in artificial intelligence now and in the future. Additionally, Broadcom boasts a strong record of free cash flow generation and a disciplined approach to capital allocation—with approximately 52% returned to shareholders through dividends and share repurchases, while the rest is earmarked for strategic acquisitions and cash reserves. 

The Nicola U.S. Equity Income Fund also invested in Lamb Weston, a global leader in the production, distribution, and marketing of value-added frozen potato products, primarily French fries. Lamb Weston operates in an oligopolistic industry characterized by high barriers to entry, rational competition, and high pricing power. The company’s location in the productive Columbia River Basin affords it long-term competitive advantages, such as lower potato costs and export capacity. The constrained nature of the processed potato market creates a difficult environment for sizeable clients to withdraw from contract negotiations due to their continuous high demand and the lack of alternative suppliers. With a solid balance sheet and robust returns on invested capital in the high teens, the company is trading at its lowest valuation multiples (P/E, EV/EBITDA) compared to its Consumer Staple counterparts and its own historical averages over the past five years, currently at 13x forward P/E versus a 22.6x average over the last five years. 

Overall, we believe the Nicola U.S. Equity Income Fund consists of names with healthy balance sheets, strong free cash flows, and attractive blended forward 1-year ROEs (25% vs. 19% for the S&P 500). At the end of the month, the Nicola U.S. Equity Income Fund’s delta-adjusted equity exposure stood at 93%, factoring in option positioning (with 0% of long positions covered and 8% in notional put options). Additionally, the Nicola U.S. Equity Income Fund ended the month with approximately 0% of its assets in uncollateralized cash. 

Nicola International Leaders Fund 

The Nicola International Leaders Fund returned +3.8% in July and +16.6% year-to-date. 

In July, International Markets (+4.0%) outperformed, while Emerging Markets (+1.3%) underperformed. In Europe (+3.1%), the ECB left rates unchanged, but indicated that there were risks to the growth outlook leaving the possibility for a rate cut in September. In Emerging Markets, Taiwan (-3.1%) reversed last month’s gains as the region was impacted by a rotation out of the Technology sector (78% of the index). 

Main relative contributors to performance during the month were our holdings in Health Care, Info Tech, and Spain. One of the biggest contributors was Infosys (India’s second largest IT services provider), which re-rated as quarterly results showed a pickup in the demand from clients especially in the financial sector. 

Main relative detractors to performance during the month were our holdings in Consumer Discretionary and Japan. One of the biggest detractors was LVMH (leading luxury conglomerate), which moved lower as 1H/24 results indicated that luxury spending continues to slow. 

Nicola Global Small-Cap Equity Fund 

The Nicola Global Small-Cap Equity Fund returned +5.2% CAD/+4.3% USD in July and +11.8% CAD/+7.1% USD year-to-date. 

For the month, US (+8.7%) small caps outperformed, while International (+6.7%) & Emerging markets (+0.9%) small caps underperformed. In the US, weak inflation data led to market speculation for lower rates, which drove a rally in interest rate sensitive asset classes such as small caps. In Europe, the ECB left rates unchanged, but indicated a potential rate cut in September remains on the table. In Emerging Markets, Taiwan (-4.2%) and South Korea (-2.5%) were the biggest detractors suffering from a rotation out of Technology during the month. 

Main relative contributors to performance during the month were our holdings in Consumer Staples, Energy and the United Kingdom. One of the biggest contributors was MatsukiyoCocokara (one of the largest drugstore chains in Japan), which moved higher on better-than-expected sales figures driven by increased tourist traffic and strength in its beauty products. 

Main relative detractors to performance during the month were our holdings in Financials, Consumer Discretionary and the United States. One of the biggest detractors was Yue Yuen (one of the largest OEM manufacturers of athletic footwear and a leading sportswear retailer in China), which de-rated as the stock suffered from negative sentiment after Nike’s weak earnings and continued weakness in China’s sportswear market. 

Nicola Sustainable Innovation Fund 

The Sustainable Innovation Fund returned +3.1% USD/+4.0% CAD in July, and -0.8% USD/+3.6% CAD year-to-date. Our top performers were Sunrun, Enphase Energy, and National Grid, while Mobileye, California carbon credits, and Cameco were our primary detractors. 

Our exposure to the California carbon credit market through PIMCO produced relatively strong returns in 2023, up over 37%, but has struggled year-to-date, declining over 10% in July and more than 18% for the year. Due to ongoing volatility, we’ve placed a partial redemption of our position that will settle in August, with plans to reallocate the proceeds among our public equity positions. 

We were active in rebalancing throughout the month, trimming positions in Sunrun, Ameresco, and Constellation Energy, and adding to recent portfolio additions including Prysmian, Tetra Tech, and National Grid. Our position in Ares Climate Infrastructure Partners provided another net distribution, primarily from proceeds related to the sale of a common equity position in SoftBank Energy. 

Nicola Global Infrastructure Limited Partnership 

The Nicola Global Infrastructure Limited Partnership returned +0.6% CAD/+0.4% USD in July and +3.9% CAD/+2.5% USD year-to-date.  

 In July, the Nicola Global Infrastructure Limited Partnership’s investment in a North American energy-as-a-service platform signed the largest energy-as-a-service project in US history, entering a 30-year partnership with a large healthcare network to deliver cost savings and decarbonization benefits. 

The Nicola Global Infrastructure Limited Partnership is currently at C$364M of AUM and will be doubling its cash distribution rate to 4% per annum starting in August. 

Nicola Private Equity Limited Partnership  

The Nicola Private Equity Limited Partnership returned +0.4% in July and +7.6% year-to-date. There were no material valuation updates this month. In July, the Nicola Private Equity Limited Partnership made a US$9M investment in Roland Foods, a global leader in specialty foods distribution -- through our partnership with FLC.  

Additionally, the Nicola Private Equity Limited Partnership fully exited its shares in MDA Ltd. (TSX: MDA), a Canadian space technology company. The LP initially invested C$17M in MDA in April 2020. MDA went public on the Toronto Stock Exchange in April 2021, raising about $400M in its IPO. The total proceeds from this investment were C$41 million, resulting in a net return of 2.4 times the investment, or a 24% annual return over approximately four years. 

Nicola Global Real Estate Fund 

The Nicola Global Real Estate Fund returned +3.9% in July and +3.3% year-to-date. 

Recent economic data has raised expectations for an imminent easing of interest rates. Lower rates would have several positive implications for real estate and REITs. According to the Nicola Global Real Estate Fund’s global securities manager, our REIT portfolio trades at a 17% discount to intrinsic value and offers a 3.9% dividend yield. These intrinsic value calculations assume no change in applied cap rates and AFFO multiples. However, if interest rates decline significantly over the next 6 to 12 months, valuations, NAV estimates, and price targets may increase. 

We will remain patient, awaiting global rate cuts, which will be the key catalyst for unlocking the value embedded in the portfolio. Fundamentals appear to be relatively strong across most property types, and many REITs are trading at discounts to NAV estimates that are well below long-term averages. 

Nicola Canadian Real Estate Limited Partnership 

Nicola Canadian Real Estate Limited Partnership NAV per unit has decreased to $152.2533 (previously $152.3720), effective trade date July 31, 2024. This represents a decrease of -0.08% and a positive return for June of +0.24%. Returns were positive this month, primarily due to increased appraised values of The James, The Hat at East Village, and Advanced - Riverside. Actual YTD return as at June 30, 2024 is 1.75%. Portfolio Leverage is 46.78%. 

Nicola U.S. Real Estate Limited Partnership 

Nicola U.S. Real Estate LP NAV per unit has decreased to US$185.6513 (previously US$186.7116), effective trade date July 31, 2024. This represents a decrease of -0.57% and a negative return for June of -0.19%. Returns were negative this month, primarily due to lower multi-family market rents from an increase in competitive supply. Actual YTD return as at June 30, 2024 is -1.45%. Portfolio Leverage is 49.46%. 

Nicola Value Add Real Estate Limited Partnership 

Nicola Value Add Real Estate LP NAV per unit has decreased to $250.7196 (previously $250.7760), effective trade date July 31, 2024. This represents a decrease of -0.02% and a negative return for June of -0.02%. In June, we funded $8.0M for existing projects.