Returns for the Nicola Core Portfolio Fund were -0.5% for the month of June 2022. The Nicola Core Portfolio Fund is managed using similar weights to our firm’s model portfolio and entirely comprises Nicola Pooled Funds and Limited Partnerships. Actual client returns from our model portfolio may vary depending on specific client situations and asset mixes.
The Nicola Bond Fund was flat in June while the iShares Core Canadian Universe Bond Index ETF returned -2.2% for the month. For the quarter, the Nicola Bond Fund returned -1.4% while the ETF returned -5.7%, and year to date, the Nicola Bond Fund returned -2.7% while the ETF returned -12.4%. Our exposure to credit-based strategies and private markets added value for the month as the holdings East Coast Investment Grade Fund returned +0.2% and Marret Investment Grade Hedge Strategies and the Sun Life Short Term Private Fixed Income Plus Fund returned +0.2% and +0.3% respectively.
We have maintained our short duration position in the portfolio, which continues to immunize most of the pain from rising interest rates. Spreads were marginally wider in Canada while the US saw the worst spread widening since March 2020. The US credit market played catch up to Canada with significant spread widening as during the prior few months, US credit spreads were more resilient. There continues to be headwinds, however after a terrible first six months to start the year. The US investment grade credit market has pockets of attractive value as spreads are back to 2018 levels and yields for the overall market are approaching 5% for the first time since the great financial crisis.
The Nicola Global Bond Fund was down for the month returning -3.6%. Quarter to date and year to date, the Nicola Global Bond Fund returned -5.9% and -7.2% respectively. The Templeton Global Bond fund was a laggard for June, returning -5.3% as the risk off tone hurt emerging market returns. Africa and South America were particularly hit hard with Brazil, Argentina, Columbia, and Chile all suffering more than 5% losses, while Egypt and Ghana saw losses greater than -15%. After the sell off, short-term Brazilian bonds are trading with attractive yields north of 13%.
The Nicola High Yield Bond Fund returned -0.6% in June while the iShares US High Yield Bond Index ETF (CAD-Hedged) returned -6.9%. For the quarter, the Nicola High Yield Bond Fund returned -1.3% while the aforementioned ETF returned -9.4%, and year to date, the Nicola High Yield Bond Fund returned -4.4% while the ETF returned -13.6%. Currency contributed +1.2% for the month as the US dollar strengthened versus the Canadian dollar.
Our defensive stance led to a muted sell-off across our strategies with no material outliers as most strategies returned between -1% to -3% for the month. Overall, the market experienced the worst monthly performance since the nadirs of the market during the start of the Covid sell-off in March 2020. June completed the first half of the year, which saw the worst start of the year ever for the high yield market.
Spreads are now at 600 basis points and yield is at 9.1%. The weakness in the marketplace came from recessionary fears, an uptick in issuer defaults, and fallen angel downgrades. We are starting to see select portions of the market becoming attractive from a valuation perspective, however sentiment remains poor. From a technical perspective, supply to the marketplace remains extremely muted with the limited new issuance coming with significant concessions. There is a building pipeline of M&A activity that needs to be funded and we believe that this may lead to further deterioration in the overall market.
The Nicola Preferred Share Fund returned -3.9% for the month while the BMO Laddered Preferred Share Index ETF returned -3.8%. For the quarter, the Nicola Preferred Share Fund returned -5.3% while the ETF returned -6.7%, and year to date, the Nicola Preferred Share Fund returned -7.0% while the ETF returned -8.8%. Preferred shares fell in sympathy with equity markets as June proved to be a difficult month for risk assets.
Bond yields rose for the month but were volatile in their path upwards, with 5-year Government of Canada bond yields starting the month at 2.74% and rose to 3.59% before ending the month at 3.11%. ETFs saw nearly $160 million in redemptions by investors as sentiment continues to be poor. However, there continues to be a supply mismatch. There were no new issues during the month while three preferred share issues were redeemed totaling $600 million.
Returns for the Nicola Primary Mortgage Fund were 0.1% for June, 0.9% for Q2, and 1.7% year to date. Returns for the Nicola Balanced Mortgage Fund were 0.4% in June, 1.4% for Q2, and 2.7% year to date. Cash held at month end was 1% in the Nicola Primary Mortgage Fund and 7% in the Nicola Balanced Mortgage Fund. The Nicola Balanced Mortgage Fund had a record quarter in terms of capital deployed, as we capitalize on continued interest rate volatility in the Canadian mortgage market.
Current annual yields, which are what the Nicola Primary Mortgage Fund and Nicola Balanced Mortgage Fund would return if all mortgages presently were held to maturity and all interest and principal were repaid (and in no way are a predictor of future performance), are 4.0% for the Nicola Primary Mortgage Fund and 6.0% for the Nicola Balanced Mortgage Fund.
The new Nicola U.S. Mortgage Fund made its first investment in June, into a US commercial mortgage fund managed by Ares Capital, a New York based fund manager well known to Nicola Wealth. This Ares fund consists of a portfolio of floating rate senior mortgage loans secured by institutional quality assets located in core markets across the US.
For the month of June, the Nicola Private Debt Fund returned 0.7% bringing the quarter-to-date and year-to-date returns to 1.0% and 2.0%, respectively. The primary return driver for the month was the full repayment of the Nicola Private Debt Fund’s $12.5 million mezzanine loan to Strad Inc. The Nicola Private Debt team co-led a mezzanine loan to Strad alongside BDC Capital to finance a management buy-out of the company in April 2020. The loan was fully repaid on June 30, 2022, generating a realized net IRR of 25% and a multiple on invested capital of 1.6x inclusive of prepayment fees and the realization of equity warrants.
The Nicola Private Debt Fund has outperformed the broader public credit markets on a year-to-date basis with the Credit Suisse Leveraged Loan Index returning -3.6% and the Bloomberg High Yield Index returning -12.6%. The Nicola Private Debt Fund’s core strategic focus remains senior secured debt financing to mature, profitable and non-cyclical US middle-market companies often owned by private equity firms.
The Canadian Equity Income Fund’s performance vs S&P/TSX in June was -7.6% vs -8.7% . For Q2 2021, the Canadian Equity Income Fund was -12.3% vs -13.2% for S&P/TSX and -5.8% vs -9.8% year to date. Volatility in global equity markets persisted through June with markets selling off on further concerns over high inflation, rising interest rates, and slowing economic growth. Reflecting growth fears and the possibility of recession, the broadly represented Bloomberg Commodity Index experienced its first significant monthly drawdown in over two years with a -10.9% return.
Canada’s S&P/TSX Composite Index (TSX), which had been a relative outperformer due to its high exposure to commodities, saw a total return of -8.7% for the month while our Canadian Equity Income Fund returned -7.6%. All sectors of the TSX delivered negative returns, with Health Care (-18.1%), Materials (-14.8%) and Energy (-11.9%) falling the most. Industrials (-1.1%) and Utilities (-2.9%) were the strongest performing sectors.
Within the Canadian Equity Income Fund, we have been focused on defense and quality. As a result, the top three sectors contributing to relative outperformance in the month were Financials, Consumer Staples and Communication Services. This helped to offset negative contribution from Consumer Discretionary, Industrials, and Materials. The Canadian Equity Income Fund remains overweight Consumer Discretionary, Energy, and Industrials. In the month of June, the Canadian Equity Income Fund’s top performing holdings were Saputo, TELUS International, and Canadian National Railway. The bottom performers were First Quantum Minerals, Nuvei Corp., and Lundin Mining. We exited our position in CIBC. There were no new additions.
The Nicola Canadian Tactical High Income Fund’s performance vs S&P/TSX in June was -7.6% vs -8.7%. In Q2 2021 the Nicola Canadian Tactical High Income Fund returned -10.8% vs -13.2% for the S&P/TSX, and -1.8% vs -9.8% year to date. The Nicola Canadian Tactical High Income Fund’s performance vs S&P/TSX Canadian Dividend Aristocrats was -7.6% vs -7.1% in June, -10.8% vs -10.3% in Q2, and -1.8% vs -5.3% year to date.
The Nicola Canadian Tactical High Income Fund is focused on investing in companies that pay sustainable, growing dividends. In Canada, this generally results in an underweight to the Information Technology and Health Care sectors compared to the S&P/TSX Index, and a greater allocation to Value-oriented sectors. All the S&P/TSX sectors were in negative territory with Health Care (-18%), Materials (-14.8%) and Energy (-11.9%) falling the most. Industrials (-1.1%) and Utilities (-2.9%) were the relative winners but still lost money.
The Nicola Canadian Tactical High Income Fund’s dividend focus has led to a sizeable overweight positioning within Energy where we continue to expect companies with excess capital to deliver significant returns to shareholders in the form of rising dividends and share repurchases. This month, that overweight hurt relative performance, as the worst performing sector in the TSX Aristocrats Index was Energy (-10.2%). As a result, the Nicola Canadian Tactical High Income Fund underperformed the TSX Aristocrats Index in June.
The Nicola Canadian Tactical High Income Fund’s top contributing sectors on a relative basis were Industrials, Consumer Staples and Communication Services. The primary detractors were Energy, Materials and Financials. The projected dividend yield is 3.5%. In June, the top performing holdings were Saputo, Canadian National Railway and Intact Financial. The bottom performers were Lundin Mining, Canadian Natural Resources, and Dream Industrial REIT. We sold our position in CIBC. There were no new additions.
The Nicola U.S. Equity Income Fund returns for the month, quarter and YTD were -7.8%, -14.1% and -15.8% vs the S&P 500 returns of -8.3%, -16.1% & -20.0% respectively (USD). During the second quarter, the Nicola U.S. Equity Income Fund’s relative outperformance was driven by stock selection within Communication Services (AT&T +17.1% and Electronic Arts -3.7% vs -20.8% for the sector) and within Information Technology (VISA -11% and Cadence Design Systems -9% vs -20.2% for the sector).
Sector allocation also contributed to performance as the Nicola U.S. Equity Income Fund was underweight Information Technology and Consumer Discretionary (both sectors were down over 20%) while being overweight Consumer Staples and Energy (among the top 3 performing sectors). Last month, the Nicola U.S. Equity Income Fund’s relative outperformance was mainly attributable to stock selection within Utilities (Nextera Energy +2.3% vs -5% for sector), Materials (Air Products & Chemicals -1.7% and Crown Holdings -11.8% vs -13.8% for the sector) and Energy (Cheniere Energy -2.7% and Shell -11.7% vs -16.8% for the sector).
Sector allocation detracted from performance as the Nicola U.S. Equity Income Fund was overweight Materials and Energy, which were the two worst performing sectors. The Nicola U.S. Equity Fund made minor rebalancing trades in June by reducing Accenture (sold), Apple and Cheniere Energy and reallocating the proceeds in VISA, Hyatt, Bank of America, Walmart, Union Pacific, Ross Stores, Netflix, AT&T and Freeport McMoRan. The Nicola U.S. Equity Income Fund ended the month with a delta-adjusted equity exposure of 99% (with 3% in covered calls); the Nicola U.S. Equity Income Fund consists of what we consider to be 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).
The Nicola U.S Tactical High Income Fund’s returns for the month, quarter and year-to-date were -5.7%, -8.9% and -9.0% vs the S&P 500 returns of -8.3%, -16.1% & -20.0% respectively (USD). The 2nd quarter’s +7.2% relative outperformance was mainly attributable to sector allocation (underweight worst performing sectors: Information Technology, Consumer Discretionary and Communication Services) and positive stock selection within Communication Services, Information Technology and Energy. Last month’s +2.6% relative outperformance was attributable to lower overall equity exposure (~80%), sector allocation (underweight information technology and consumer discretionary) and stock selection within the energy sector (Cheniere Energy -2.7% and Shell -11.7% vs energy sector -16.8%).
The Nicola U.S. Tactical High Income Fund was active last month by writing 25 Put options (~$20M notional amount) and 1 Covered-Call option. There were no new names added last month, but the Nicola U.S. Equity Income Fund slightly reduced Information Technology and Energy exposure by selling Accenture and reducing the target weight of Cheniere Energy, while adding more defensive and reopening names such as Pfizer, Merck, AT&T, VISA and Hyatt hotels.
Year-to-date, the Nicola Global Equity Fund was -18.7% vs the MSCI ACWI index -18.6% as numerous events weighed on market sentiment including high inflation, rising interest rates, Ukraine/Russia conflict, COVID lockdowns in China and recession fears.
In Q2 2022, the Nicola Global Equity Fund was -10.1% vs the MSCI ACWI index -12.9%. In June’22, the MSCI ACWI Index saw the worst monthly decline of the quarter (-6.7%) with international markets (-7.5%) underperforming and the US (-6.5%) & Emerging Markets (-4.9%) outperforming.
Performance of our managers during the month:
- JP Morgan Global Emerging Markets -3.3%
- Pier 21 Global Value -4.6% (relative performance benefitted from its underweight position in Info Tech & security selection in the US)
- Pier 21 Worldwide Equity –5.4% (relative performance benefitted from security selection in Financials and the US)
- Nicola EAFE Strategy -6.5%
- Edgepoint Global Portfolio -7.8% (relative performance was negatively impacted by security selection in Industrials & the US)
- Lazard Global Small Cap -11.8%
In the US, inflation continued to increase as CPI data hit a new 40 year high, which led the Fed to hike interest rates by 75 bps (25 bps higher than guided). Federal Reserve Chairman Jerome Powell stated that failure to curb inflation “is not an option” thereby increasing the probability of a recession. In addition to growth & inflation risks, European markets were impacted by concerns over potential gas shortages and widening of peripheral sovereign debt spreads. Emerging markets benefited from a strong rebound in China (+8.7%) with several macro data points inflecting higher and supporting the re-opening of trade.
The Nicola Sustainable Innovation Fund returned -3.6% (USD) / -1.8% (CAD) in June, -12.8% (USD) / -10.1% (CAD) for the second quarter, and -18.2% (USD) /-16.8% (CAD) year-to-date. Our top performers during the month were EV manufacturers Li Auto, Nio Inc., and BYD Co. while Enviva, Ameresco, and Alstom were the biggest laggards. We were active in trading throughout the month, including taking some recent profits in names that had rebounded, like Li Auto and Sunrun, and using the proceeds to rebalance into some of our more defensive companies like, Brookfield Renewable, Boralex, and Hannon Armstrong.
The first half of the year was a challenging one for equity markets with the S&P 500 closing down over 20%, with its largest first-half decline since 1970, while other growth focused products like the ARK Innovation ETF were off more than 50%. This ongoing market volatility has been driven by a variety of factors including the impacts of rising inflation and interest rates, supply chain delays, and the continuing war in Ukraine.
Despite all these headwinds, there are some reasons to be optimistic in our focus areas. Democrats in the US seem to be making some progress on reviving a climate focused ‘Build Back Smaller’ bill with hopes for a vote in July. This may provide some support for our portfolio of companies like what was seen when Joe Biden first took office, albeit not quite to the level that was initially expected. The war in Ukraine has also put parts of Europe into an energy crisis as countries look to diversify away from their exposure to Russian oil and gas with many customers witnessing soaring energy prices in certain areas. While some European countries may lean on fossil fuel sources for energy imports from friendlier neighbors in the interim, this has reinforced the need for energy security and independence and broadens the support for decarbonization and renewable energy over the long-term.
The Nicola Alternative Strategies Fund returned +0.9% in June. Quarter to date and year to date the Nicola Alternative Strategies Fund returned +2.5% and +3.8% respectively. For the month, currency contributed +1.1% as the US dollar strengthened, creating a tailwind for returns. Bridgewater continues to have strong returns, helping to support the overall performance of the Nicola Alternative Strategies Fund. According to Eurekahedge, hedge funds broadly struggled during the month. The Eurekahedge Hedge Fund Index was down -3.0% while the Eurekahedge Arbitrage Hedge Fund Index returned -2.8% while the Relative Value Hedge Fund Index was down -2.0%.
The Nicola Precious Metals Fund returned –9.7% for the month as it continues the sell-off. Quarter to date and year to date the Nicola Precious Metals Fund returned -21.5% and -12.1% respectively. For the month of June, underlying gold stocks in the S&P/TSX Composite index returned -11.1% and gold bullion was up 0.1% in Canadian dollar terms. The market has been in an environment of tails you lose, heads you lose for gold stocks recently, focusing on higher rates and a stronger US dollar. However, inflation and geopolitical risks remain, as do the benefits of gold as hedge in such environments. The longer-term risk reward dynamics of gold still lies with interest rate hikes, specifically where real rates will stabilize.
The Nicola Infrastructure and Renewable Resources LP returned +1.6% for the month of June in Canadian dollar terms. Quarter-to-date and year-to-date returns were +3.0% and +1.5% respectively. Currencies were primarily at a tailwind as the Canadian dollar weakened against the US dollar. This was slightly offset by the strengthening of the Canadian dollar against the GBP; agnostic to currencies, our assets returned +0.5% for the month.
Despite a pull-back in prices for wheat and canola, our crop diversification has enabled our farmland values to benefit from record high food commodity prices we are experiencing in many crops. The data center’s co-investment continues to remain ahead of budget, with strong lease activity. As a result of investment activity earlier in the year, cash levels within the Nicola Infrastructure and Renewable Resources LP are at 2.4%.
The Nicola Private Equity LP returned +1.6% this last quarter and +3.7% YTD. Performance during the quarter was driven by a writeup of our co-investment into a car wash platform alongside Palladin Consumer Partners. Various fund investments such as Vanedge, Berhman, and RedBird were also contributors. Returns were partially offset by underperformance in Inveris (due to COVID impacts) and MDA.
While there are a number of investments that are expected to close in Q3, notable investments that closed during Q2 include our co-investment into Central Builders’ Supply (“CBS” or the “Company”) alongside Regimen Equity Partners. Based in Courtney, BC on Vancouver Island, CBS is one of the preeminent building product suppliers to Vancouver Island’s growing communities. The Company differentiates itself by offering personalized services and top-tier logistics, resulting in long-tenured customer relationships. Its location on Vancouver Island also provides a natural barrier to new entrants. There were no exits during the quarter.
The Nicola Global Real Estate Fund’s performance vs iShares S&P/TSX Capped REIT Index (XRE) in June was -2.4% vs -10.2%, -5.8% vs -17.5% in Q2, and -5.3% vs -17.9% YTD. The sell-off in equity markets accelerated during the month. This was driven by growing recession fears and the impact on rising interest rates that higher fuel, food and housing costs will have on consumption.
The month’s negative performance was primarily driven by the portfolio’s publicly traded securities. With many publicly traded REITs trading well below NAV and a lack of capital deployment opportunities with deal flow slowing, we have seen a pickup in share buyback activity. The increased share buyback activity reflects management’s strong confidence in the fundamentals, as well as a prudent allocation of capital by the REITs. Buyback activity at these valuation levels is accretive to per-unit AFFO and NAV. We expect REITs to continue to be active so long as valuation remains heavily discounted.
Nicola Canadian Real Estate LP NAV per unit has increased to $154.72 (previously $152.92), effective June 30, 2022. This represents an increase of 1.2% and a positive return for May of 1.7%. YTD return as of May 31, 2022, is 9.8%. Portfolio Leverage is 41.52%. The positive return was primarily a result of increased appraised values of 208-220 Wyecroft Road, 15 West 5th Avenue, and Sunpark Plaza.
Nicola U.S. Real Estate LP NAV per unit has increased to US$185.92 (previously US$183.78), effective June 30, 2022. This represents an increase of 1.27% and a positive return for May of 1.6%. YTD return as of May 31, 2022, is 11.8%. Portfolio Leverage is 45.40%. The positive return was primarily a result of increased appraised values of Ventana, the Dell 5 Business Park, and Westover Oaks.
Nicola Value Add Real Estate LP NAV per unit has increased to $216.56 (previously $209.14), effective June 30, 2022. This represents an increase of 3.5% and a positive return for May of 3.5%. YTD return as of May 31, 2022, is 10.0%. In May, we funded $10.4M for West Island, $8.5M for Barnet Highway, $1.7M for York Mills, $1.1M for Cedar Hills, $1.0M for Langford, $0.6M for Building O, $0.3M for 2410 Columbia St, $0.3M for Queen Anne, $0.2M for Alpine, $0.2M for Kelson, $0.2M for Northgate, $0.1M for King City, and $0.1M for Railway.
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.
