Nicola Core Portfolio Fund
The Nicola Core Portfolio Fund returned +0.5% in June, +1.7% in the second quarter of 2024, and +4.3% 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.
Nicola Bond Fund
The Nicola Bond Fund returned +0.8% in June, +1.3% in the second quarter of 2024, and +2.4% year-to-date. In contrast, the iShares Core Canadian Universe Bond Index ETF returned +1.3% in June, +0.9% for the quarter, and -0.5% year-to-date. During June, the bond index experienced relatively robust performance as yields declined. Specifically, the 10-year Government of Canada bond yield decreased from 3.6% to 3.5%. This trend coincided with the Bank of Canada initiating a rate cut cycle, implementing a 0.25% reduction at its June policy meeting. The central bank hinted at further cuts if inflation continues to ease.
Despite its shorter duration, the Nicola Bond Fund underperformed in June. However, strong credit selection mitigated the impact. Notably, Canadian corporate spreads remained resilient, resulting in a record $21 billion in corporate issuance—the second busiest month on record. Coastal GasLink LP notably issued $7 billion, marking the largest corporate bond deal in Canada’s history.
On the other hand, real estate investment trusts (REITs) lagged as investors redirected capital from top performers to fund new issues. Additionally, the power generation and utilities sectors, particularly AltaGas, faced challenges. S&P revised AltaGas’ BBB- rating outlook to negative due to its heightened exposure to midstream operations and increased construction risk at its Ridley Island Energy Export Facility. Despite this, we believe AltaGas has multiple strategies to maintain its investment-grade credit rating, and we opportunistically increased our positions in the company.
Looking ahead, we anticipate a slowdown in new issuance during the summer months. Elevated yields are expected to continue attracting strong inflows into the asset class. The Nicola Bond Fund remains defensively positioned, allowing us to take profits and adjust exposure as needed—a flexible approach in a dynamic market.
Nicola High Yield Bond Fund
The Nicola High Yield Bond Fund returned +0.5% CAD/+0.1% USD in June, +1.7% CAD/+0.6% USD in the second quarter of 2024, and +3.9% CAD/+0.4% USD year-to-date. The iShares U.S. High Yield Bond Index ETF (CAD-Hedged) returned +1.3% in June, +1.2% in the second quarter, and +2.1% year-to-date. In June, the high yield index benefited from declining U.S. Treasury yields (around 0.1% across the curve). This was driven by signs of stabilizing inflation and expectations of future Federal Reserve rate cuts. Credit spreads remained stable at 3.1%, with higher-quality credits performing well.
The Nicola High Yield Bond Fund underperformed due to its shorter duration. Moody’s downgrade of Allied Properties REIT to high yield contributed to this, although the market had already priced in the risk. Despite uncertain long-term office fundamentals, we strategically added exposure to Allied’s short-dated bonds, considering their attractive credit risk/reward profile. The Nicola High Yield Bond Fund maintains a defensive stance, focusing on higher-quality credits in anticipation of potential challenges in a prolonged higher interest rate environment.
Nicola Canadian Mortgage Fund
The Nicola Canadian Mortgage Fund (CAD) returned +0.7% in June, with a trailing 12-month return of +8.0%. There were five new loans funded in June resulting in a strong second quarter for capital deployed. The second quarter marked the second-largest period for loan fundings over the past five quarters. These loan fundings were offset by several large loans repaying in Q2, the largest amount repaid since Q4-2021. New loan origination activity is picking up, likely spurred by an interest rate cut in early June. The Nicola Canadian Mortgage Fund held 12% in cash and cash equivalents, with 75% 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 +0.2% in June, with a trailing 12-month return of +4.8%. No new loans were funded in June, however new loan origination activity has increased with three new loans scheduled to fund in the next 60 days. The Nicola U.S. Mortgage Fund held 33.5% in cash and 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 0.0% CAD/-0.1% USD in June, +1.5% CAD/+1.5% USD in the second quarter of 2024, and +4.0% CAD/+3.6% USD year-to-date. The primary detractor from performance for the month was a write-down on the net asset value of a legacy fund investment. During the month, this fund manager determined that one of the loans within fund’s portfolio was no longer recoverable. The Nicola Private Debt Fund deployed US$40.5 million and made three new direct investments in the month, including a C$14.6 million participation in a senior term loan to a Vancouver-based independent specialty insurance brokerage firm.
Nicola Canadian Equity Income Fund
The Nicola Canadian Equity Income Fund returned +2.9% in June, +1.4% in the second quarter of 2024, and +6.8% year-to-date.
Early in June, key economic data trends, such as the cooling of core CPI, real GDP growth, and higher unemployment, led the Bank of Canada (BOC) to cut the overnight rate by 25 basis points. While further interest rate relief is expected, the pace and ultimate floor remain uncertain. We believe the BOC will continue to take a data-driven, measured approach to rate reductions to achieve an economic ‘soft landing,’ similar to other central banks globally.
The Canadian equity market initially responded positively to this rate cut, with notable gains in rate-sensitive sectors. However, these gains were short-lived, and the market retreated as the month progressed. The Federal government’s increase to the capital gains inclusion rate on June 25th likely contributed to this selling pressure. In June, the best-performing sectors of the TSX were Information Technology (+6.8%), Health Care (+1.6%), and Industrials (+1.0%). The worst performers were Communication Services (-4.6%), Materials (-4.6%), and Energy (-3.8%).
Nicola U.S. Equity Income Fund
The Nicola U.S. Equity Income Fund returned +4.1% CAD/+3.7% USD in June, +3.7% CAD/+2.6% USD in the second quarter of 2024, and +9.3% CAD/+5.6% USD year-to-date.
Year-to-date, the Information Technology sector contributed over 80% of the S&P 500’s return, with Nvidia being the largest contributor due to its 36%+ increase in stock price and sizable average index weight at approximately 5.6%.
In June, the Nicola U.S. Equity Income Fund outperformed the S&P 500 by +0.1%, mainly due to stock selection within Information Technology, where Adobe and ServiceNow posted returns of +24.9% and +19.8%, respectively. Additionally, the Nicola U.S. Equity Income Fund benefited from holding Casey’s General Stores, a non-benchmark name in Consumer Staples, which returned +15% last month.
Nicola International Leaders Fund
The Nicola International Leaders Fund returned +0.3% in June, +3.1% in the second quarter of 2024, and +12.3% year-to-date.
In June, Emerging Markets (+4.2%) outperformed, while International Markets (-1.4%) underperformed. In Europe, the ECB cut rates as expected, but markets sold off over increased political risk caused by the French elections. In Emerging Markets, Taiwan (+12.4%) was one of the biggest contributors as Nvidia’s keynote address at Computex 2024 drove optimism for AI supply chain beneficiaries.
Main relative contributors to performance during the month were our holdings in Information Technology, Netherlands, Germany and Japan. One of the biggest contributors was ASML (market leader in lithography machines, which are vital in advanced semiconductor manufacturing), as the company indicated that TSMC would receive its first high NA EUV test tool by the end of this year alleviating market concerns over the delayed adoption of next generation tools.
Main relative detractors to performance during the month were our holdings in Health Care and the UK. One of the biggest detractors was GSK (a global leading healthcare company with key franchises in respiratory, HIV, vaccines, cancer and immuno-inflammation), which de-rated on a Delaware court ruling which raised the potential Zantac litigation liability.
Nicola Global Small-Cap Equity Fund
The Nicola Global Small-Cap Equity Fund returned -3.6% CAD/-4.0% USD in June, +1.1% CAD/+0.1% USD in the second quarter of 2024, and +6.2% CAD/+2.7% USD year-to-date.
In June, emerging markets small caps (+3.4%) outperformed, while U.S. (-1.1%) and international (-2.8%) small caps underperformed. In the US, signs of a slowing economy and a more hawkish Fed negatively impacted small caps. In Europe, increased political risk from the French election led to a sell-off, with small caps and stocks with significant exposure to France performing the worst. Conversely, India’s market (+10.3%) rallied as investors anticipated policy continuity following the recent election.
The main relative contributors to performance during the month were our holdings in consumer staples and the United States. The main relative detractors were our holdings in information technology, Germany, and France. The Nicola Global Small-Cap Equity Fund’s European holdings were significantly impacted by the sell-off due to the snap French elections.
Nicola Sustainable Innovation Fund
The Nicola Sustainable Innovation Fund returned -8.7% CAD/-9.1% USD in June, +2.3% CAD/ +1.3% USD for the second quarter of 2024, and -0.5% CAD/-3.8% USD year-to-date. After a significant rally in May for the broader energy transition theme, a series of headwinds re-emerged in June, impacting many of our portfolio holdings. The positive momentum around the growth of AI and data center power cooled last month, as did market expectations for anticipated interest rate cuts, with the Fed awaiting greater confidence in economic data before returning to their long-term target.
Additionally, the first U.S. Presidential debate ahead of the November election introduced renewed uncertainty for renewables and clean technologies, especially with the possibility of a second Trump administration. Throughout the year, we have strategically increased our allocations outside North America and reduced exposure to sectors and technologies we anticipate may face greater political risk, such as EVs, EV charging, and hydrogen, in favour of more established technologies.
Nicola Global Infrastructure Limited Partnership
The Nicola Global Infrastructure Limited Partnership returned +0.2% CAD/+0.1% USD in June, +1.8% CAD/+1.6% USD in the second quarter of the year, +3.2% CAD/+2.1% USD year-to-date. Currency movements had a negative impact on USD and CAD returns for the month. In local currency, our assets returned +0.4% for the month and +7.1% over the last twelve months (LTM). The Nicola Global Infrastructure Limited Partnership made a US$25M commitment to its first global value-add infrastructure fund, with full deployment expected by the end of Q3 2024. Investments in this fund will be directed towards mid-market value-add direct and secondary investments across targeted thematic sectors.
Value-add infrastructure investments provide greater opportunities for value creation and capital appreciation, complementing the Nicola Global Infrastructure Limited Partnership’s existing portfolio of core and core-plus investments. The Nicola Global Infrastructure Limited Partnership currently manages C$358M in assets under management (AUM).
Nicola Private Equity Limited Partnership
The Nicola Private Equity Fund returned +0.1% in June, +1.3% in the second quarter of 2024, and +7.2% year-to-date. This month’s investment return was driven by valuation increases in MDA, a provider of advanced space technology and services that announced a significant new government contract, and Project Mobius, a global omnichannel money transfer platform that continues to perform well and expand its digital business. These gains were partially offset by timing adjustments from Headwater Equity Partners Fund II, a Canadian-based fund focusing on small to medium-sized businesses.
During the month, the Nicola Private Equity Limited Partnership made a US$20M co-investment in MyTown Health Partners, a comprehensive practice management services organization aimed at providing high-quality healthcare to medically underserved communities in rural and urban areas.
Nicola Venture Capital Limited Partnership
The Nicola Venture Capital Limited Partnership returned +6.4% CAD/+5.3% USD in June, +6.4% CAD/+5.3% USD in the second quarter of 2024, and +11.4% CAD/+7.7% USD year-to-date. This quarter’s investment return was driven by a valuation increase in the Project Manhattan investment—a secondary investment made in Q1 involving the acquisition of two mature LP interests in funds managed by a prominent U.S.-based growth equity firm—and improved performance across several venture and growth primary fund investments. These gains were partially offset by a write-down in a co-investment in the robotics sector, which recapitalized at a lower valuation than its prior financing.
Nicola Venture Capital Limited Partnership made a follow-on investment in this recapitalization to preserve our ownership position and invested additional capital into several existing primary funds during the quarter.
Nicola Global Real Estate Fund
The Nicola Global Real Estate Fund returned +0.2% in June, -1.0% in the second quarter of 2024, and -0.6% year-to-date.
Despite the Bank of Canada’s recent shift to monetary policy easing, fund flows into the REIT sector have not significantly increased. Publicly traded REITs experienced slightly negative performance in June as investors remained uncertain about the pace of further rate cuts. Interest rate volatility remains the key to better performance and unlocking the value embedded in the portfolio.
Most economists predict additional rate cuts in Canada, suggesting that the recent cut is not a one-time event. However, the timing of rate cuts in the U.S. remains uncertain, and the Bank of Canada’s actions may be limited by the need to avoid damaging the exchange rate.
Fundamentals are strong across most property types, and REITs are trading at a discount to NAV estimates, well below long-term averages. We believe there is substantial value in holding publicly traded REITs at current prices, despite the potential anxiety from waiting for sentiment to improve.
Nicola Canadian Real Estate Limited Partnership
Nicola Canadian Real Estate Limited Partnership NAV per unit has increased to $152.3720 (previously $152.2416), effective trade date June 30, 2024. This represents an increase of +0.1% and a positive return for May of +0.4%. Returns were positive this month, primarily due to increased appraised values of Advanced – North Vancouver, 68th Avenue, and Advanced - Freeway. Actual YTD return as at May 31, 2024 is +1.5%. Portfolio Leverage is 44.92%.
Nicola U.S. Real Estate Limited Partnership
Nicola U.S. Real Estate Limited Partnership NAV per unit has decreased to US$186.7116 (previously US$187.7089), effective trade date June 30, 2024. This represents a decrease of 0.5% and a negative return for May of -0.2%. Returns were negative this month, primarily due to lower multi-family market rents from an increase in competitive supply. Actual YTD return as at May 31, 2024 is -1.3%. Portfolio Leverage is 48.41%.
Nicola Value Add Real Estate Limited Partnership
Nicola Value Add Real Estate Limited Partnership NAV per unit has decreased to $250.7760 (previously $250.9459), effective trade date June 30, 2024. This represents a decrease of -0.1% and a negative return for May of -0.1%. In May, we funded $4.0 million for existing projects.
Disclaimer
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. Effective October 31, 2023, Nicola Balanced Mortgage Fund changed its name to Nicola Canadian Mortgage Fund. Effective January 1, 2024, Nicola Infrastructure and Renewable Resources Limited Partnership changed its name to Nicola Global Infrastructure Limited Partnership.
