Returns for the Nicola Core Portfolio Fund were 0.0% for the month of June, +0.5% for Q2 2023, and +2.6% year-to-date. 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.
The Nicola Bond Fund returned +0.2% in June. For the quarter, the Nicola Bond Fund returned +1.5% and year-to-date, the fund returned +3.0%. Our exposure to credit-based strategies added value for the month as East Coast Investment Grade Fund returned +0.9% while Marret Investment Grade Hedge Strategies returned +0.4%. Higher overall bond yields contributed positively to the portfolio, while Canadian corporate spreads were also tighter by 5 basis points, driven by a rally in Canadian bank debt. However, persistent inflationary data compelled the Bank of Canada to raise interest rates by another 25 basis points and adopt a more hawkish stance, leading to a decline in Canadian government bond prices during June. Similar concerns were echoed by the U.S. Federal Reserve, which signalled further rate hikes. In response, we opportunistically reduced exposure to corporate bonds and increased our holdings of Canadian government bonds, which we deemed relatively undervalued. Throughout, we have maintained a shorter duration position in the portfolio of 2.5 years, which has helped mitigate the impact of interest rate volatility. This positioning aligns with our strategy of immunizing against potential downside risks.
The Nicola Global Bond Fund (CAD) was down for the month, returning -0.2%. Quarter-to-date and year-to-date, the fund returned -0.6% and +2.2%,
The Nicola Global Bond Fund (USD) returned +2.5% for the month of June. Quarter-to-date and year-to-date, the fund returned +1.6% and +4.6%, respectively.
Global bonds were slightly negative for the month as emerging market currencies broadly fell against the Canadian dollar. The Nicola Global Bond Fund’s exposure to Asian currencies, such as the Japanese Yen, South Korean Won, Indian Rupee and Malaysian Ringgit contributed negatively to the portfolio. On the other hand, risk assets rallied, and structured credit exposure through PIMCO Monthly Income Fund and BlackRock Securitized Investors contributed positively to the fund. In June, developed-market central banks such as the Bank of England, European Central Bank and Bank of Canada, increased rates and hawkish rhetoric as concerns of stickier inflation were top of mind. Emerging market major central banks could not be more different, with the People’s Bank of China cutting key rates and the Banco Central do Brazil signalling that rate cuts could be on their way as early as August. The Bank of Japan also remained dovish despite the positive Tankan Business Conditions surveys, while their core inflation was up to 4.3%.
The Nicola High Yield Bond Fund (CAD) returned -0.8% in June. Quarter-to-date and year-to-date, the Nicola High Yield Bond Fund returned +0.7% and +2.5%, respectively.
The Nicola Global Bond Fund (USD) returned +1.9% for the month of June. Quarter-to-date and year-to-date, the fund returned +2.9% and +4.9%, respectively.
Currency was a major detractor for the month as the U.S. dollar weakened -2.4% versus the Canadian dollar. High-yield bond spreads are now at 4.2% and yield is at 8.4%. The marketplace was net positive as spreads tightened meaningfully by 0.43%, which more than offset rising government bond yields. Spreads were driven primarily by lower-rated CCCs which rallied by 1.29%, compared to BBs which only rallied by 0.46%. Default activity picked up in June to 2.71% as five companies defaulted and seven completed a distressed exchange during the month. The portfolio remains defensively positioned with adequate liquidity. We expect opportunities to present themselves as corporate finance looks to work out their forward financing plans of 1-2 years in advance of market maturity walls in 2025 and 2026.
The Nicola Preferred Share Fund returned +2.2% in June. Quarter-to-date, the Nicola Preferred Share Fund returned -0.4%, and year-to-date, the fund returned +1.2%. Preferred shares rallied with equity markets as June proved to be a positive 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 3.4% and rising to 3.9% before ending the month at 3.7%. The rally was broad, with most fixed-reset and floaters producing positive returns, while fixed-rate perpetual preferred returns were negative for the month. From a trading perspective, summer malaise has appeared in both the $25 preferred share and institutional preferred share markets as block volume continues to be muted. During the month, we reduced our position in less liquid names, which tend to outperform in weaker markets as pricing isn’t reflected as quickly and will look to deploy into more liquid securities, which benefit as markets stabilize.
The Nicola Primary Mortgage Fund returned +0.4% in June, with a trailing 12-month return of 4.6%. Quarter-to-date and year-to-date, the fund returned +1.3% and +2.7%, respectively.
New investment activity remains low going into the summer months. The Nicola Primary Mortgage Fund held 7.1% in cash and cash equivalents, with 96% of the loan portfolio secured by senior ranking mortgages at month end.
The Nicola Balanced Mortgage Fund returned +0.7% in June, with a trailing 12-month return of 7.4%. Quarter-to-date and year-to-date, the fund returned +2.0% and +4.0%, respectively. Investment activity is balanced as the Nicola Balanced Mortgage Fund is fully invested. The Nicola Balanced Mortgage Fund held 0.4% in cash and cash equivalents, with 46% of the loan portfolio secured by senior ranking mortgages at month end.
The Nicola U.S. Mortgage Fund (USD) returned +0.1% in June. Quarter-to-date and year-to-date, the fund returned +1.2% and +2.3%, respectively.
The Nicola U.S. Mortgage Fund (CAD) was down -2.5% in June. Quarter-to-date, the fund was down –1.0% and year-to-date, the fund was flat at 0.0%.
Although the U.S. commercial mortgage market has seen a slowdown in loan origination volume, new investment opportunities continue to be reviewed. The Nicola U.S. Mortgage Fund held 32.6% in cash and cash equivalents, with 100% of the loan portfolio secured by senior ranking mortgages at month end.
The Nicola Private Debt Fund (CAD) returned +0.4% in June. Quarter-to-date and year-to-date, the fund returned +2.4% and +4.4%, respectively.
The Nicola Private Debt Fund (USD) returned +1.0% in June. Quarter-to-date and year-to-date, the fund returned +3.1% and +5.1%, respectively. The primary return driver during the month was contractual interest income from the Nicola Private Debt Fund’s portfolio of direct investments. U.S. dollar currency translation on the unhedged portion of the Nicola Private Debt Fund’s U.S. dollar investments detracted from returns by approx. -0.4%. The U.S. dollar depreciated -2.6% relative to the Canadian dollar in June, and 92% of the fund’s investments are denominated in U.S. dollars. The Nicola Private Debt Fund targets hedging 85% - 90% of its U.S. dollar currency exposure.
The Nicola Canadian Equity Income Fund returned +2.6% in June. Quarter-to-date, the Nicola Canadian Equity Income Fund was down -1.1%, and year-to-date, the fund returned +2.7%. The first half returns were fairly strong in the Canadian equity market. Given that we are in the most aggressive tightening cycle since the 1980s, investors expected a relatively quick deceleration in GDP growth and inflation, but a strong job market and record amounts of household savings accumulated during the pandemic has mitigated the rate shock for now. Consumer spending has been resilient. Positive growth surprises have been good news for equities but this may force the Bank of Canada to continue their tightening campaign for a while longer. We feel economic growth should slow down in the second half of 2023. In June the S&P/TSX Composite was up +3.4%. The worst performing sectors were Utilities (-2.3%) and Health Care (-2%). The best performing sectors were consumer discretionary (+9%), industrials (+4.8%), and information technology (+4.4%). Our Nicola Canadian Equity Income Fund (+2.6%) underperformed the S&P/TSX Composite Index as positive contribution from materials and utilities were offset by negative contribution from consumer staples and financials. In the month, our top performing holdings were Magna International, Canadian Tire and Lundin Mining. The bottom performers were Neighbourly Pharmacy, Saputo, and Lumine Group. We added global industrial landlord Granite REIT. We also added Jamieson Wellness, the entrenched leader in Canada’s natural health products industry. There were no exits.
The Nicola U.S. Equity Income Fund (USD) returned +6.3% in June. Quarter-to-date and year-to-date, the fund returned +5.2% and +10.2%, respectively
The Nicola U.S. Equity Income Fund (CAD) returned +3.4% in June. Quarter-to-date and year-to-date, the fund returned +2.9% and +7.7%, respectively
Market performance in the second quarter was mainly driven by a select group of stocks aptly named the magnificent 7 (Meta, Apple, Amazon, Alphabet, Microsoft, Tesla and Nvidia). Despite inflation remaining elevated, a tight labour market, and the Fed pausing in June but not ruling out future rate increases, the market seemed to shake off fears of an imminent recession as traditionally defensive sectors such as utilities and consumer staples were among the weakest performing sectors. Last month, the Nicola U.S. Equity Income Fund underperformed the S&P 500 by 0.4%, mainly attributable to negative relative contributions from information technology (underweight sector) and stock selection within healthcare, and not owning certain names within the consumer discretionary sector (Tesla and the cruise lines were among the top 10 performing stocks last month). The Nicola U.S. Equity Income Fund’s top contributors to performance were WESCO International (one of the largest electrical distributors in NA), John Deere (manufacturer of farm and construction equipment) and Crown Holdings (aluminum beverage can manufacturer). The top detractors to performance were Alphabet, Pfizer and UnitedHealth Group.
Regarding portfolio changes, the Nicola U.S. Equity Income Fund reduced exposure in Costco, UnitedHealth Group and reallocated to lower valuation and higher dividend-paying names such as AT&T (fully covered 7% dividend yield) and International Flavors & Fragrances (new name added via Put option). International Flavors & Fragrances sells ingredients, flavour and scent solutions primarily to food, beverage, household products and pharma manufacturers. IFF’s business model is high quality highlighted by high barriers to entry (product breadth is a key success factor), high supplier negotiating power (commodity chemical suppliers do not have pricing power), and high customer pricing power (customers are less price sensitive as taste/smell is a critical success factor for product sales; in addition, flavours and fragrances are a small input cost in the final product). The Nicola U.S. Equity Income Fund consists of high-quality names with healthy balance sheets, strong free cash flows and attractive blended forward 1-year ROEs (23% vs 18% for S&P 500).
The Nicola Sustainable Innovation Fund (CAD) returned -0.2% in June. Quarter-to-date, the fund was down -6.5%, and year-to-date, the fund was down -7.5%.
The Nicola Sustainable Innovation Fund (USD) returned +2.6% in June. Quarter-to-date, the fund was down -4.4%, and year-to-date, the fund was down -5.4%.
The Sustainable Innovation Fund’s top performers during the month were Plug Power, Bloom Energy, and Aker Carbon Capture while Beam Global, ChargePoint Holdings, Innergex Renewable Energy were the biggest laggards. During the month, we exited our position in NextEra Energy Inc., a leading wholesale electric power generator in North America, and added to our position in its renewables-focused subsidiary, NextEra Energy Partners, following the announcement that they would sell all of its natural gas pipeline portfolio and turn their focus towards 100% renewables. NextEra Energy Partners expects to become the leading pure-play renewables company by achieving real zero carbon emissions in 2025. We also received an additional capital call notice on our Ares Climate Infrastructure Partners LP investment, taking our position to roughly 6% of the portfolio and 77% drawn on our $10M U.S. committed investment. The proceeds are being allocated towards a utility-scale solar & storage developer, a premier U.S. renewable energy developer, and several other aligned climate infrastructure investments. The underlying portfolio investments within the Ares LP have performed well so far. During the month, we saw auto manufacturers such as GM, Rivian and Volvo announce that they would follow Ford’s lead in joining Tesla’s EV charging network, the North American Charging Standard (NACS). While this has caused a pullback on EV charging names that adopted other charging standards like the Combined Charging System (CCS), we think this is overdone as companies like ChargePoint Holdings have subsequently announced they would offer NACS adapter options, which highlights their flexibility to accommodate multiple connectors and thus meet charging needs of any electric vehicle.
The Nicola Infrastructure and Renewable Resources Limited Partnership (USD) returned +0.9% for the month of June. Quarter-to-date and year-to-date returns were +2.2% and +2.8%, respectively.
The Nicola Infrastructure and Renewable Resources Limited Partnership (CAD) was down -1.8% for the month of June. Quarter-to-date and year-to-date returns were 0.0% and +0.5%, respectively.
Currency movements from the CAD significantly strengthening against the USD had a negative impact on the CAD fund and a slightly positive impact on the USD fund. Agnostic to currencies, our assets returned +0.1% over the month. This was driven by second quarter performance in line with expectations from our Canadian farmland fund. The Nicola Infrastructure and Renewable Resources Limited Partnership is at $257M of AUM with a waitlist of $8M that is expected to be fully drawn in the third quarter of 2023 from existing fund commitments and the near-term co-investment pipeline.
Nicola Global Real Estate Fund was down -1.1% for the month of June. Quarter-to-date and year-to-date returns were -2.7% and -0.5%, respectively. The S&P/TSX REIT index started 2023 strong, increasing +12% (total return) into early February. Since then, the index has given back nearly all of its YTD gains. In June, the Bank of Canada surprised investors with a 25 basis points overnight rate increase and short-term interest rates are up sharply in the last month (2-year Government of Canada Bond yields are up approximately 100 basis points since mid-May). Rising bond yields tend to put pressure on interest rate sensitive sectors of the market like REITs, telecom, and utilities. Volatility may persist in the near term and changing expectations on interest rates are reasons to be cautious. However, real estate investing is more than making a call on interest rates. Asset values appear to be holding up in sectors that exhibit NOI growth strong enough to offset modest cap rate expansion. Fundamentals remain robust in some sectors as residential REITs continue to benefit from heightened demand for housing and deteriorating housing affordability. Industrial demand remains elevated with limited supply. Retail continues to see strong leasing momentum (in Canada) despite macroeconomic concerns. Office fundamentals, however, will likely remain under pressure in the near term. Public market valuations appear attractive compared to private markets and there is a relatively attractive reversion to the mean investment opportunity. Stabilization in the interest rates will help sentiment. Any material downward pressure could present attractive opportunities to buy REITs, particularly for investors with income needs.
Nicola Canadian Real Estate Limited Partnership YTD return as at May 31, 2023 is +3.0%. Portfolio Leverage is 45.28%. The positive return was primarily due to increased appraised values of Golden Drive, 313 Bernard, and Advanced-North Vancouver.
Nicola U.S. Real Estate Limited Partnership YTD return as at May 31, 2023 is +3.61%. Portfolio Leverage is 48.33%. The positive return was primarily due to increased appraised values of the Dell 5 Portfolio, Ventana, and Gateway Corporate Center.
Nicola Value Add Real Estate Limited Partnership YTD return as at May 31, 2023 is +2.9%. In May, we funded $9.3M 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.
