Returns for the Nicola Core Portfolio Fund were +0.0% for the month of March, and +2.1% for Q1. The Nicola Core Portfolio Fund 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.
The Nicola Bond Fund returned -0.3% in March, while the iShares Core Canadian Universe Bond Index ETF (XBB) returned +1.9%, and the iShares short-term Canadian Bond Index ETF (XSB) returned +1.3%. Quarter-to-date, the Nicola Bond Fund returned +1.5%, while the XBB ETF returned +3.1% and XSB ETF returned +1.7%. Our strategies underperformed as we have a shorter duration of 1.8 years versus 7.4 years duration for the XBB ETF and 2.7 years for the XSB ETF. Canadian and U.S. government bonds rallied as the market believes central banks may cut rates to counteract any systemic risk. As a result, the U.S. 10-year yield dropped by 0.5% to 3.5% while the Canadian 10-Year yield dropped by 0.4% to 2.9%. The broad rally in Canadian government bonds resulted in longer duration strategies outperforming during the month of March. We believe central banks are less likely to cut rates and thereby ease financial conditions as inflation is still too high, but central banks may have a lower terminal rate forecast. In terms of credit, Canadian corporate bond spreads widened 20 basis points during March, ending the month at 1.65%, mainly driven by financials due to the recent banking crisis abroad. Canadian financial corporate spreads are now at 161 basis points, slightly wider than where we started the year. Additionally, all-in bond yields also remain inverted, offering attractive opportunities in front-end yields. As a result, we think there is an opportunity to buy investment-grade financial credits, and we took this opportunity to buy shorter-dated corporate bonds, particularly high-quality A-rated credit.
The Nicola Global Bond Fund was up for the month of March, returning +1.7%. Quarter-to-date, the Nicola Global Bond Fund returned +2.8%. Currency was a tailwind for the month, supporting returns as Asian currencies in the portfolio led by the Thai Baht, Japanese Yen, Indonesian Rupiah, Malaysian Ringgit, South Korean Won, Chinese Renminbi, and Indian Rupee strengthened against the U.S. dollar. Strength in inflation-linked bonds also supported returns in March as global inflation expectations moved slightly higher due to expectations that central banks may become less hawkish as they assess the effects of the recent banking crisis. The global synchronized tightening of monetary conditions appears to be pausing, particularly in Brazil, where their new government has two openings to appoint on their central bank's board of directors. While Brazil's rates are currently at a six-year high, this shift is likely to be dovish as Brazil's president Lula has criticized the current monetary policy asserting that interest rates are hindering economic growth. We continue to gain our emerging market exposure through Templeton Global Bond, which has focused on value opportunities in countries with strong trade dynamics and healthy financial profiles.
The Nicola High Yield Bond Fund returned -0.1% in March, while the iShares U.S. High Yield Bond Index ETF (CAD-Hedged) returned +1.4%. Quarter to date, the Nicola High Yield Bond Fund returned +1.8%, while the above-mentioned ETF returned +3.4%. USD detracted -0.3% from our returns as the U.S. dollar fell -1.0% against the Canadian dollar. Due to the rally in interest rates, the high-yield market had a positive month, despite spreads widening materially to 465 basis points in March. The rally in high yield bonds was concentrated in higher quality BBs as credit deterioration concerns hurt the lower quality portions of the market and returned negatively during the month. CCC names sold off -0.9% for the month, bringing all-in yields to 13.4%. For the portfolio, we added to our position in Canso Corporate Value Fund, which specializes in bottom-up, deep credit research and is a strategy that can benefit from further stress and wider spreads. In addition, we continued to add to high rate-reset Bank Limited Recourse Capital Notes (LRCNs), which are attractive to us as they have similar yields to high-yield bonds but with exposure to Canadian financial institutions, which we believe are good quality credits and are well-capitalized. Overall, we would highlight that our strategies continue to be defensive and hold slightly higher levels of cash and higher-quality credit. The higher yields in our portfolio continue to deliver a consistent monthly carry, and our defensive positioning allows us to take advantage of any additional credit spread widening opportunistically.
The Nicola Preferred Share Fund returned -3.6% for the month of March, while the BMO Laddered Preferred Share Index ETF returned -4.6%. Quarter-to-date, the Nicola Preferred Share Fund returned +1.5%, while the BMO Laddered Preferred Share Index ETF returned +0.6%. During March, the Nicola Preferred Share Fund outperformed the market as we overweighted institutional $1000 rate-reset preferred shares with reset spreads above 4% and the Bolton Dividend Arbitrage strategy. For the general market, the lower Canadian 5-year yield, widening bank spreads, and negative ETF flows all drove rate-resets preferred shares lower. Additionally, the Canadian federal budget presented negative news for the $25 preferred share market in the long run as insurers and banks holding preferred shares will now be taxed at their statutory rate, whereas previously, they received tax-free dividends under certain conditions. While this is negative for the market in the long run, in the short-run, it presents an opportunity for us to add to higher quality, bank rate-reset preferred shares at discounted prices. We also opportunistically added to institutional rate-reset preferred shares during mid-month when concerns over the poor treatment of Additional Tier 1 capital (AT1) asset class during the Credit Suisse-UBS merger sparked short-term fear. Preferred Shares are considered AT1 capital within the capital structure. The Swiss regulator decided to write down all of Credit Suisse's AT1 notes while common shares, the lowest part of the capital stack, received some payment. This is highly unusual and since then, the Office of the Superintendent of Financial Institutions (OSFI), which regulates federally registered banks and insurers, trust and loan companies and certain private pension plans, has reassured Canadians that common share equity would be treated beneath AT1 capital in the event of a trigger event with Canadian financial institutions.
The Nicola Primary Mortgage Fund returned + 0.6% for the month of March and +1.4% for Q1/2023, with a trailing 12-month return of 4.2%. Returns have benefited from a strategic shift in 2022 to invest in more variable interest rate loans. The Nicola Primary Mortgage Fund portfolio comprises 29% variable interest rate loans, priced over the prime rate of major Canadian banks. Senior ranking mortgages secure 97% of the loan portfolio. The Nicola Primary Mortgage Fund was fully deployed at month's end, utilizing its credit facility and having a net cash balance of -2.0%.
The Nicola Balanced Mortgage Fund returned +0.7% for the month of March and +2.0% for Q1/2023, with a trailing 12-month return of 6.8%. Returns have benefited from a strategic shift in 2022 to invest in more variable interest rate loans. The Nicola Balanced Mortgage Fund is now 49% variable interest rate loans, priced over the prime rate of major Canadian banks. Senior ranking mortgages secure 38% of the loan portfolio. The fund was fully deployed at quarter end, utilizing its credit facility with a net cash balance of -1.4%.
For the month of March, the Nicola Private Debt Fund returned +0.6%, bringing the year-to-date return to +1.9%. The primary return driver during the month was contractual interest income from the Nicola Private Debt Fund's portfolio of direct investments. New investments during the month included a US$17.5 million commitment to the first lien credit facilities of Parts Town, a leading global distributor of genuine OEM repair and maintenance parts for customers in the food service industry. Parts Town is a portfolio company of Berkshire Partners, Leonard Green & Partners and Roark Capital.
The Nicola Canadian Equity Income Fund performance vs. S&P/TSX: March 2023 -1.6% vs -0.2%; Q1 2023 +3.9% vs +4.5%. It was a volatile Q1. Recall that 2023 started strongly in January, with China's reopening providing reasons to buy stocks in January. In February, sentiment turned negative on surging interest rates. In March, the narrative changed again with investors digesting information on the global banking crisis and the possibility that the Fed will have to cut rates in response aggressively. In Canada, the 10-year Government of Canada bond yield fell from 3.3% at the beginning of the month to 2.9% at the end of March. In commodities, crude oil prices were weak (WTI -2%; Brent -5%), while precious metals were strong (Gold +8%, Silver +15%). The S&P/TSX Index was down -0.2% in the month. The Nicola Canadian Equity Income Fund underperformed the S&P/TSX index as positive contribution from financials (where we were underweight) and negative contributions from materials and information technology offset real estate. In the month of March, the fund's top-performing holdings were Nuvei Corp, Parkland Corp, and Lundin Mining. The bottom performers were Lumine Group, Pet Value Holdings, and TD Bank. We exited our positions in Agnico Eagle Mines Ltd and Crombie REIT. We added Canadian Apartment REIT.
The Nicola U.S. Equity Income Fund (USD) performance vs S&P 500: March 2023 +1.7% vs +3.7%; Q1 2023 +4.8% vs +7.5% (USD). During the first quarter, the market went through various emotional states; in the month of January, we saw a bounce-back in risk-on activities where growth and meme stocks were bid-up, which was the complete opposite of what happened in 2022. Then, February saw risk-aversion creep back into the market as several economic data points (strong non-farm payroll, high PPI & CPI) raised concerns about interest rates staying higher for longer. Finally, in March, we saw the tale of two halves; in the first half of the month, the market declined over concerns of a potential banking crisis but then staged a strong comeback in the second half of the month as both the Fed and FDIC deployed measures to minimize the impact of any contagion and the market started to discount multiple interest rate cuts in the latter part of the year. The Nicola U.S. Equity Income Fund underperformed the S&P 500 by 2.7% in the first quarter mainly due to being underweight in information technology, the best-performing sector generating a 21.8% return and contributing to over half of the S&P 500's total return. Last month, the Nicola U.S. Equity Income Fund's underperformed the S&P 500 by 2%, mainly attributable to negative relative contributions from information technology and consumer discretionary, which more than offset the positive relative contributions from communication services and financials. The Nicola U.S. Equity Income Fund's top contributors to performance were Microsoft, Alphabet and Adobe. The leading detractors to performance were Bank of America, Shell and Crown Holdings.
Regarding portfolio changes, the Nicola U.S. Equity Income Fund became more defensively positioned by reducing long-only cyclical exposure (banks and energy) and writing more out-of-the-money Put and Call options to take advantage of the spike in volatility and reduce the portfolio's overall market exposure (delta-adjusted equity exposure of 87%). 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 (12% vs 18% for S&P 500).
The Nicola Sustainable Innovation Fund returned -0.2% (USD) / -0.8% (CAD) in March, and -1.0% (USD) / -1.1% (CAD) for the quarter. Our top performers during the month were Brookfield Renewable Partners, Array Technologies, and Boralex, while Enviva, Stem, and Plug Power were the biggest laggards. We received an additional capital call on our Ares Climate Infrastructure Partners investment, taking our position close to 5%. Ares continues to find unique opportunities in climate infrastructure verticals, and the underlying portfolio companies are performing well. March was another volatile month for the public equity markets, primarily driven by turmoil from several bank failures raising concerns of another 2008-level market contagion. Despite this, we saw some positive announcements during the month, which drove strong rebound performance late month in many of our investment themes. In a follow-up to the Inflation Reduction Act (IRA) launched in the United States last year, which included numerous supportive policies and tax credits around clean technologies and renewable energy, we saw both the European Union (E.U.) and Canada bring forward policies during the month to support spending and incentives in these areas. The Green Deal Industrial Plan (GDIP) is the E.U.'s response to the IRA, which aims to boost European manufacturing of key technologies for the energy transition in addition to an expanded carbon pricing scheme with the goal of speeding up the transition process. On March 28, the Canadian Federal Government released its annual budget update, which included some clean energy-focused provisions, including $21B net new spending towards the 'clean economy' over the next five years and estimates of $70B over the next decade. These statements were positive for our Canadian and European exposed renewable energy positions, including Boralex, Northland Power, Iberdrola, and Brookfield Renewable Partners.
The Nicola Private Equity Limited Partnership returned +0.1% during Q1. Performance during the quarter was driven by a valuation write-up in our investment in a lumber mill equipment manufacturer and provider of turnkey management services for the wood-processing industry, driven by continued margin expansion and earnings growth, and a write-up in a microelectronics components business, driven by revenue growth across key product categories and multiple expansion. These returns were partially offset by a loss in our co-investment in a company that provides training systems for the defense sector, which experienced significant challenges from COVID-19 and related travel restrictions. Currency had a -6 basis point impact on fund performance for the period. There were no new investments or realizations for the quarter.
The Nicola Venture Capital Limited Partnership returned -3.4% during Q1. Performance during the quarter was driven by a write-down in the valuation of a co-investment in a technology-enabled logistics business and a decline in valuations in a diversified portfolio of venture and growth equity fund positions that we acquired in 2022.
As public market comparable valuations remain depressed and the venture financing environment remains challenging, we are seeing more attractive pricing in higher-quality businesses in our co-investment pipeline and continue to focus on investing in companies with a seemingly clear path to profitability. In addition, we are gaining traction with U.S. Venture Capital fund managers and continue to target attractively priced, well-diversified secondary opportunities. There were no new investments or realizations for the quarter.
The Nicola Infrastructure and Renewable Resources Limited Partnership returned -0.4% for the month of March and +0.5% in Q1. Overall, currencies had a negative impact over the period, with CAD strengthening against the USD more than offsetting the CAD weakening against GBP. Agnostic to currencies, our assets remained flat. This was driven by Q1 2023 performance in line with expectations from our Canadian farmland fund, offset by ongoing challenges at our North American integrated energy platform fund and updated interest rate assumptions at the U.K. waste management co-investment, where overall performance remains in line with expectations. During the month, the Nicola Infrastructure and Renewable Resources Limited Partnership made a follow-on investment of US$1M into our U.S. district heating and cooling platform co-investment to support the continued expansion of the platform as underwritten in the base case. The Nicola Infrastructure and Renewable Resources Limited Partnership also funded US$1M of existing commitments into our global diversified core infrastructure fund and North American integrated energy platform fund. The Nicola Infrastructure and Renewable Resources Limited Partnership is at $220M of AUM with a waitlist of $31M that is expected to be fully drawn by the end of Q2 2023 from existing fund commitments and the near-term co-investment pipeline.
The Nicola Alternative Strategies Fund returned +1.0% in March. Quarter-to-date, it has returned +2.6%. The month's returns were supported by a steady stream of dividend opportunities within the Bolton Dividend Arbitrage strategy. The U.S. dollar was a minor detractor, and Verition was flat for the month. According to Eurekahedge, overall hedge fund returns were slightly negative for the month, returning -0.3%, while the Eurekahedge Arbitrage Hedge Fund Index returned +0.8% and the Relative Valued Hedge Fund Index returned -0.7%, respectively.
The Nicola Precious Metals Fund returned +10.0% for the month of March and +7.4 quarter to date. Underlying gold stocks in the S&P/TSX Composite index returned +14.1%, and gold bullion was up +6.8% (in Canadian dollar terms) for the month. The rally in Canadian gold stocks was broad-based as even the worst-performing gold stocks, Centerra Gold Inc (+1.3%) and K92 Mining (+3.2%), contributed positively, while the best-performing stocks, such as Equinox Gold Corporation (+40.2%), Osisko Mining Inc (+39.2%) and Torex Gold Resources Inc (+33.9%) all had significant rallies. Gold ETF inflows were positive for the first time in ten months as investors rushed into both physical gold and bullion equities as a result of the recent banking failures. From a global perspective, European funds led inflows in March, a stark reversal to prior months. Europe has accounted for the bulk of global outflows year-to-date due to a hawkish European Central Bank (ECB) who has continued to hike aggressively on a relative basis. Due to seasonality factors and improved sentiment, Chinese ETFs and seasonal wholesale gold demand also rebounded in March.
Nicola Canadian Real Estate Limited Partnership NAV per unit has increased to $155.8701 (previously $155.2880), effective March 31, 2023. This represents an increase of 0.4% and a positive return for February of 0.7%. YTD return as at February 28, 2023 is 1.2%. Portfolio Leverage is 43.29%. The positive return was primarily due to increased appraised values of the Aero Portfolio, Northwoods Business Park, and Golden Drive.
Nicola U.S. Real Estate Limited Partnership NAV per unit has increased to US$199.2304 (previously US$198.6001), effective March 31, 2023. This represents an increase of 0.3% and a positive return for February of 0.7%. YTD return as at February 28, 2023 is 1.5%. Portfolio Leverage is 48.07%. The positive return was primarily due to increased appraised values of Gateway Corporate Center, Hacienda, and Tuscany at Lindbergh.
Nicola Value Add Real Estate Limited Partnership NAV per unit has increased to $238.8668 (previously $236.4163), effective March 31, 2023. This represents an increase of 1.0% and a positive return for February of 1.0%. YTD return as at February 28, 2023 is 1.6%. In February, we funded $4.8M 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.
