Nicola Wealth Investment Returns: March 2024

Nicola Core Portfolio Fund  

The Nicola Core Portfolio Fund returned +0.8% in March and +2.6% in the first quarter of 2024. 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 +0.6% in March and +1.1% in the first quarter of 2024. In contrast, the iShares Core Canadian Universe Bond Index ETF had a return of +0.5% for the month and a year-to-date return of -1.4%. Canadian government bond yields rose with the 10-year Government of Canada bond yields increasing 0.4% from 3.1% to 3.5% given the return of a “higher for longer” narrative. Canadian spreads were relatively unchanged in March and tightened by 0.1% year-to-date to 1.2% as higher all-in yields remained attractive to investors. 

The Nicola Bond Fund’s relatively short duration, overweight in select sectors, and good credit selection contributed to its outperformance in the first quarter. During the month, we reduced exposure to higher beta sectors such as REITs, autos, and bank subordinated debt given their outperformance in January and February, and we added selectively to banks’ bail-in debt and higher quality credits that lagged. 

The Nicola Bond Fund’s repositioning boded well as we saw subordinated debt new issuance with good concession towards the end of March and we were able to participate in larger size to take advantage of the opportunity. Canadian primary markets continued to be active in March with $12 billion of issuance as conditions remained favourable for issuers amid strong risk tone and healthy inflows into the asset class. 

We participated in First National’s short-dated new issue as we were positive on the credit fundamentals given the valuation and viewed the new issue concession to be meaningful. First National is a Canadian mortgage originator and servicer and it sells the majority of its mortgages to Canada Mortgage and Housing Corporation (CMHC) and institutional investors while retaining servicing rights, which results in limited direct credit exposure. Credit spread of First National’s new issue tightened by 0.15% in March and outperformed. 

We continue to make progress in internalizing assets with approximately 80% of the fund currently being managed in-house. The fund remains defensively positioned and is prepared to add risk as we see opportunities arise in a rapidly evolving market. 

Nicola High Yield Bond Fund

The Nicola High Yield Bond Fund returned +0.5% CAD/+0.7% USD in March and +2.2% CAD/-0.2% USD in the first quarter of 2024. 

In contrast, the iShares US High Yield Bond Index ETF (CAD-Hedged) saw a monthly return of +0.5% and a year-to-date return of +0.8%. High-yield bonds experienced subdued total returns year-to-date as U.S. Treasury yields continued to rise, with 10-year Treasury yields increasing by 0.3% from 3.9% to 4.2%. However, higher all-in yields provided support for credit spreads, which ended the first quarter 0.2% lower at 3.0%. CCC-rated bonds outperformed year-to-date, while higher-quality BB-rated names underperformed. 

The Nicola High Yield Bond Fund outperformed in the first quarter due to its relatively shorter duration, reflecting our cautious stance on the timing of Fed interest rate cuts combined with prudent credit selection. Top-performing strategies during the quarter included the PIMCO Dynamic Income Opportunities Fund and PIMCO Tactical Income Fund, which returned +13.2% and +7.9%, respectively, in Canadian dollar terms. Our positions in Canadian corporate hybrids in the midstream/pipeline sector and Canadian bank capital notes also delivered relatively strong returns in our internal portfolio in Q1. 

We observed record Q1 domestic high-yield issuance of $1 billion, and our participation in recent new issues priced attractively relative to their credit fundamentals contributed to our outperformance. Moving forward, the fund will maintain a focus on higher-quality credits with better risk/reward characteristics in the near term. This approach is warranted as current spread levels do not appear to be pricing in any risk of material credit deterioration, coupled with the potential return of a "higher for longer" scenario. 

Nicola Canadian Mortgage Fund  

The Nicola Canadian Mortgage Fund (CAD) returned +0.7% in March, with a trailing 12-month return of 8.0%. Investment activity remains relatively balanced but is below historical norms, reflecting low market transaction activity. At the end of the month, the Nicola Canadian Mortgage Fund held 4.4% in cash and cash equivalents, with 66.9% of the direct loan portfolio secured by senior-ranking mortgages. 

Nicola U.S. Mortgage Fund  

The Nicola U.S. Mortgage Fund (USD) returned +0.1% in March, with a trailing 12-month return of 4.3%. New loan origination was subdued in Q1; however, our pipeline has remained active, with ongoing review and quotation of new opportunities. The Nicola U.S. Mortgage Fund held 34.5% 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 +0.9% CAD/+1.0% USD in March and 2.4% CAD/+2.0% USD in the first quarter of 2024. The month's performance was primarily fueled by contractual cash interest income from the Nicola Private Debt Fund’s diversified portfolio of direct investments. The Nicola Private Debt Fund allocated US$86.9 million and initiated ten new direct investments during the month. This included a US$10 million participation in a term loan to a national-scale U.S. provider of refrigeration and HVAC repair, maintenance, and construction services to grocery retailers and other cold-chain customers. Additionally, the Nicola Private Debt Fund realized one direct investment in March, totalling US$12 million. 

Nicola Canadian Equity Income Fund  

The Nicola Canadian Equity Income Fund returned +1.8% CAD in March and +5.3% CAD in the first quarter of 2024. 

Positive momentum persisted in March, marking the TSX's strongest monthly returns year-to-date. Geopolitical tensions in the Middle East and the prospect of prolonged inflation drove rallies in gold and oil, lifting precious metal and energy spot prices by roughly 9.0% and 5.0%, respectively. With resource sectors comprising 28.3% of the TSX, the upbeat sentiment in commodities bolstered overall performance. In March, Materials (+15.4%), Health Care (+13.6%), and Energy (+7.3%) were the top-performing sectors, while Communication Services (-6.6%), Consumer Staples (-3.1%), and Information Technology (-0.3%) lagged. 

During the month, the fund trailed the TSX by 230 basis points, largely due to narrow market breadth. The underperformance was primarily attributed to an underweight allocation to Materials and no exposure to precious metals companies. Given the challenges in the metals mining industry, our commodity exposure preference remains in the Energy sector, where we feel businesses demonstrate greater capital discipline, healthier balance sheets, and higher profitability ratios. Within the fund, Energy (+6.5%), Health Care (+5.6%), and Utilities (+3.9%) were the top-performing sectors, while Consumer Staples (-12.4%), Communication Services (-7.0%), and Information Technology (-2.7%) lagged. Notably, top contributors included energy producers like Suncor Energy, Canadian Natural Resources, and Whitecap Resources, while detractors comprised Jamieson Wellness, TELUS Corp., and Alimentation Couche-Tard. 

Trading activity increased compared to the prior month as we trimmed positions with elevated valuations and redeployed into select banks and consumer stocks that have lagged. We initiated a new position in Alimentation Couche-Tard, a leading global operator of gas stations and convenience stores, where we foresee a long runway for impressive returns on invested capital. Additionally, put options were opportunistically written on Shopify and Bombardier Recreational Products. Canadian equities comprised 90.5% of the fund’s assets at month end. 

The preferred share allocation of the fund returned +1.2% in March and +4.8% for QTD and YTD 2024. Positive contributions came from the Bolton Dividend Arbitrage strategy, Institutional Preferred Shares, and $25 preferred shares, returning +1.4%, +1.0%, and +2.6%, respectively. We participated in a $500 million CIBC institutional preferred share new issue during the month, featuring a 7.337% coupon and 390 reset spread. The new issue performed well, benefiting from its relatively smaller deal size and a healthy new issue concession of approximately 20 basis points. 

Nicola U.S. Equity Income Fund  

The Nicola U.S. Equity Income Fund (USD) returned +1.9% in March, trailing the S&P 500, which posted a return of +3.2%. For the first quarter of 2024, the Nicola US Equity Income Fund achieved a return of +2.9% USD, compared to the S&P 500's return of +10.5% USD. The Nicola U.S. Equity Income Fund (CAD) returned 1.7% for the month of March. 

The Q1 underperformance can be attributed to the Nicola U.S. Equity Income Fund’s lower exposure to many high-valuation technology stocks. The Information Technology sector contributed roughly 35% to the S&P 500's return, with Nvidia being the largest contributor due to an 82% increase in stock price during the quarter and its significant index weight of over 4%. 

March showcased the market's resilience, with all 11 S&P 500 sectors posting positive returns. The Energy sector sustained its robust performance, benefiting from falling inventories, ongoing output cuts from OPEC+, and drone attacks on Russian refineries earlier in the month. 

The fund's underperformance against the S&P 500 in March can be traced to sector allocation, with an overweight position in Real Estate and an underweight position in Financials. Stock selection within Diversified Financials and software also detracted from performance. 

Overall, we believe the Nicola U.S. Equity Income Fund comprises high-quality 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 86%, factoring in option positioning (with 1% of long positions covered and 15% in notional put options). Additionally, the fund ended the month with approximately 2% of its assets in cash. 

Nicola International Leaders Fund

The Nicola International Leaders Fund returned +3.2% in March and +8.9% in the first quarter of 2024. In March, International Markets (+3.1%) outperformed, while Emerging Markets (+2.2%) underperformed. In Europe, the ECB left rates unchanged at its most recent meeting but revised down its estimates for inflation, raising the prospects for rate cuts. In Japan, the central bank scaled back large-scale monetary easing measures (negative interest rate policy, yield curve control, ETF purchases) as growth appears to be on a sustainable path. China’s market saw more subdued returns this month compared to February’s stronger performance due to sentiment being impacted by the introduction of more U.S. bills to limit investment in the region. 

Main contributors to performance during the month were our holdings in Financials and Spain. One of the significant contributors was BBVA (the 2nd largest bank in Spain), as the reconfirmation of targets at shareholder meetings increased market confidence in the company achieving its 2024 guidance. 

Main detractors to performance during the month were our holdings in Consumer Discretionary and India. One of the significant detractors was Kering (a luxury goods conglomerate with brands such as Gucci & Yves Saint Laurent), which experienced a de-rating as the sales guidance for the Gucci brand, transitioning under a new creative director, disappointed market expectations. 

Nicola Global Small-Cap Equity Fund

The Nicola Global Small-Cap Equity Fund was +3.3% CAD/+3.5% USD in March and +5.0% CAD/+2.6% USD in the first quarter of 2024. 

For the month, US (+3.5%) & International (+3.5%) small caps outperformed, while Emerging markets (-0.2%) small caps underperformed. In the U.S., the Fed kept rates unchanged for the 5th meeting and continued to forecast 3 rate cuts in 2024. In Europe, the prospects for rate cuts increased as the ECB lowered its estimates for inflation. In Emerging Markets, India’s market corrected (-4.3%) after the regulator warned of stretched valuations in small & mid-cap stocks. 

Main contributors to performance during the month were our holdings in Health Care, Hong Kong, and Germany. One of the biggest contributors was Convatec (a leading provider of medical equipment related to wound care, ostomy care, and continence), which moved higher on upward revisions to its medium-term targets as its reinvestment in its business is driving accelerating sales growth and margin expansion. 

Main detractors to performance during the month were our holdings in Info Tech, Industrials, and the U.S. (underweight). One of the largest detractors was Jabil (one of the largest manufacturing services providers), which de-rated on lower FY24 guidance as the company is experiencing incremental softness in some of its end markets. 

Nicola Sustainable Innovation Fund

The Nicola Sustainable Innovation Fund returned +2.8% USD/+2.6% CAD in March and -5.0% USD/ -2.7% CAD in the first quarter of 2024. The main publicly traded benchmarks we track exhibited muted returns for the month and have faced steeper selloffs year-to-date, with the iShares Global Clean Energy ETF down nearly 10% and the Invesco WilderHill Clean Energy ETF declining roughly 22% as of the end of March. The fund's relative outperformance in Q1 can be attributed to its overweight positions in nuclear and electrical grid-related companies, as well as a relative underweight in residential solar and electric vehicle industries. 

Our top performers were Bloom Energy, Mobileye, and Ameresco, while Aker Carbon Capture, Stem, and Ballard Power Systems were our primary detractors. Bloom Energy (+28% in March) announced an agreement with Shell to explore green hydrogen projects, demonstrating commercial interest in the company’s electrolyzer technology. Bloom and other holdings like Constellation Energy participated in some of the recent AI stock-related rally as market participants started to anticipate future energy needs from the data centers needed to power this growth in AI demand. Many of our portfolio holdings are well-positioned to benefit from this theme given our focus on grids, energy storage, and renewable energy providers. 

The Nicola Sustainable Innovation Fund expanded its strategy with the addition of two new investment themes: Energy Management & Efficiency and Critical Minerals. The Energy Management & Efficiency theme will focus on solutions that help with the reduction of energy consumption and expansion of sustainability-related infrastructure, including companies supporting electrical grids. The Critical Minerals theme will focus on investing in natural materials necessary for the generation, transmission, and storage of renewable energy. By many reports, the world needs to double its current annual supply of several key minerals to meet its climate pledges by the end of this decade. As it relates to newly added themes, the fund added two new positions -- Quanta Services Inc. and Cameco Corp. Quanta Services is a leading specialty infrastructure solutions provider with comprehensive power grid and renewable generation capabilities that will help shape North America’s energy transition and utility grid modernization. Cameco is the world’s 2nd largest uranium producer and the only fully integrated pure play in the West. The nuclear industry is expected to be in a supply deficit with structural tailwinds supporting demand from decarbonization, energy security/independence, and growing electricity consumption. The fund also exited its positions in Plug Power and Ballard Power Systems as we expect further uncertainty in the hydrogen space. 

We were active in rebalancing throughout the month by adding to existing positions like NextEra Energy Partners, Mobileye, and Enphase Energy, and trimming positions that have performed well, such as Constellation Energy and Hannon Armstrong. The Nicola Sustainable Innovation Fund ended the month with a 5.3% cash position, leaving some flexibility to further reposition into thematic exposures with lower correlation to the rest of the portfolio. While the overall equity market continued its strong rally in March, some long-duration themes that are more sensitive to interest rates remained challenged. In particular, the EV space has been experiencing waning demand as consumers struggle with affordability and range anxiety. Further to this, as the November 2024 election cycle unfolds in the US, policy risk remains with evolving debate surrounding the potential repeal of the IRA, which can affect tax credits supporting clean electricity and EVs. While this continues to be a headline risk, we continue to see pockets of opportunities in themes that appear relatively de-risked, such as the expansion of the electric utility grid and growth in nuclear energy. 

Nicola Global Infrastructure Limited Partnership

The Nicola Global Infrastructure Limited Partnership returned -0.1% USD/-0.1% CAD in March, +0.6% USD/+1.4% CAD in the first quarter of 2024 and is at C$333M of AUM. Currency movements, including the weakening of the EUR against the USD and CAD, had a slightly negative impact on both the USD and CAD sleeves of our portfolio. Excluding currency effects, our assets remained flat over the month, returning +1.4% over the quarter. Monthly performance was primarily driven by Q4 2023 performance in line with expectations at our Canadian farmland fund, offset by a Q4 2023 markdown at our open-ended global diversified mid-market fund, largely due to an underperforming asset facing regulatory headwinds. During March, the Nicola Global Infrastructure Limited Partnership funded €4M of its February 2024 commitment to a closed-end globally diversified mid-market infrastructure fund; the proceeds were used as a contribution to the existing seed assets. 

Nicola Private Equity Limited Partnership  

The Nicola Private Equity Limited Partnership returned +0.9% CAD in March and +5.8% CAD in the first quarter of 2024. The investment return for March was primarily driven by write-ups in two co-investments in the portfolio, attributed to solid fundamentals and multiple expansions. Key drivers to performance were our investments in Project Icebox, a manufacturer of refrigerated retail merchandising solutions, and Verisma, a developer of healthcare IT and services focused on the patient health information sector. During March, there were no new investments or realizations. 

Nicola Venture Capital Limited Partnership

The Nicola Venture Capital Limited Partnership returned +4.7% CAD/+2.3% USD in the first quarter of 2024. Performance was influenced by foreign exchange movement, which had a 2.0% impact, as well as valuation increases in two co-investments: Verisma, a developer of healthcare IT and services focused on the patient health information sector and a U.S.-based enterprise software business. Additionally, during the quarter, Nicola Venture Capital Limited Partnership completed an $11 million LP secondary investment. This investment involved acquiring two mature LP interests in funds managed by a U.S.-based growth equity manager. The underlying exposure consists mainly of mature enterprise software businesses with profitable growth, and the assets were acquired at an attractive discount to net asset value. 

Nicola Global Real Estate Fund

Nicola Global Real Estate Fund returned +1.0% in March and +0.4% in the first quarter of 2024. Performance for publicly traded REITs lagged behind broad equity indices in Q1 due to rising bond yields. Valuations have remained below NAV and long-term averages for the past two years, reflecting the impact of higher interest rates. This discount-to-NAV seen in public markets is a result of investor caution, offering a buffer against potential NAV erosion from higher cap rates or lower Net Operating Income. Despite this, fundamentals remain relatively strong across most property types, with a steady earnings outlook. 

We anticipate that global rate cuts will serve as a key catalyst for unlocking the value embedded in the portfolio. However, we do not expect a significant narrowing of the discount until rates begin to normalize. To capitalize on this opportunity, we have been reducing our allocation to international private real estate LP investments, selling them at NAV, and reallocating the proceeds to publicly traded REITs, where assets can be acquired at a discount to NAV. 

We will continue to reposition the portfolio if the valuation disconnect persists, as we believe there is greater rebound potential in the publicly traded space once Central Banks normalize monetary policy. 

Nicola Canadian Real Estate Limited Partnership

Nicola Canadian Real Estate Limited Partnership NAV per unit has decreased to $151.7794 (previously $152.1689), effective trade date February 29, 2024. This represents a decrease of -0.3% in NAV per unit and an overall positive return for February of +0.1%. Returns were generally flat this month because of decreases in appraised values due to yield expansion, which were partially tempered by strong leasing activity, an increase in market rental rate assumptions, and net operating income. Actual YTD return as at February 29, 2024 is -1.2%. Portfolio Leverage is 46.59%.  

Nicola U.S. Real Estate Limited Partnership  

Nicola U.S. Real Estate Limited Partnership NAV per unit has decreased to US$190.2000 (previously US$191.4672), effective trade date February 29, 2024. This represents a decrease of -0.7% in NAV per unit and a negative return for March of -0.3%. Returns were generally flat this month because of decreases in appraised values due to yield expansion, which were partially tempered by strong leasing activity, an increase in market rental rate assumptions, and net operating income. Actual YTD return as at February 29, 2024 is -2.0%. Portfolio Leverage is 49.94%.  

Nicola Value Add Real Estate Limited Partnership  

Nicola Value Add Real Estate Limited Partnership NAV per unit has increased to $249.9028 (previously $248.8633), effective trade date February 29, 2024. This represents an increase of +0.4% in NAV per unit and a positive return for March of +0.4%. In February, we funded $1.2M for one new project in the Nicola Multi Family Venterra Limited Partnership (Avasa at 1604) and $5.8M for existing projects. Actual YTD return as at February 29, 2024 is +0.9%.