Returns for the Nicola Core Portfolio Fund were -0.04% for the month of May. 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 outperformed the iShares Core Canadian Universe Bond Index ETF in May, returning 0.0% compared to -1.6% for the ETF. The Nicola Bond Fund’s emphasis on lower duration contributed to its strong performance as Canadian government bond yields rose in anticipation of the Bank of Canada resuming rate hikes. Our position in Sun Life Short Term Private Fixed Income supported returns with a yield approximately 1.7% higher than Canadian investment-grade corporate bonds. The Nicola Bond Fund’s exposure to the East Coast strategy and Marret Investment Grade Hedge Strategies also yielded positive results due to excellent security selection.
In May, the Nicola Global Bond Fund recorded a return of -0.6%. The Nicola Global Bond Fund faced challenges as the U.S. dollar rallied against most currencies during the month. The weakening of several Asian currencies, including the Japanese Yen, Indian Rupee, Malaysian Ringgit, Indonesian Rupiah, and Thai Baht, negatively impacted the fund's returns. Stronger U.S. inflation and GDP data prompted the Federal Reserve to raise interest rates by an additional 0.25%. This was followed shortly by the Bank of England and the European Central Bank increasing interest rates. Chinese activity remains of concern, highlighted by the poor PMI (Purchasing Managers Index) datapoint of 48.8. A reading below 50 signals contraction. The markets are watching any potential slowdown in the Chinese economy as a leading indicator for weakness in global growth.
The Nicola High Yield Bond Fund achieved a positive return of +0.4% in May, outperforming the iShares U.S. High Yield Bond Index ETF (CAD-Hedged), which experienced a return of -1.2%. The fund's outperformance resulted from positive returns generated by Apollo Credit Strategies and Oaktree Global Credit Plus, mainly driven by floating-rate loan exposure. The fund also capitalized on market dislocations caused by concerns about the U.S. debt ceiling by investing in U.S. short-term treasuries. U.S. High Yield spreads remained mostly unchanged during the month. We maintain our focus on higher-quality assets with good liquidity, anticipating that defaults may increase to historical levels of around 4% as central banks tighten policies in response to stronger short-term economic data.
The Nicola Preferred Share Fund recorded a return of -2.3% in May, outperforming the BMO Laddered Preferred Share Index ETF, which returned -3.7%. One of the drivers of the Nicola Preferred Share Fund's outperformance was its allocation to institutional rate-reset preferred shares, which outperformed broad fixed-reset preferred shares by approximately +1.3%. Additionally, the Bolton Dividend Arbitrage strategy had a strong month, returning +2.1% due to higher special distribution activity. Throughout the month, the Nicola Preferred Share Fund continued to increase its holdings of 2023 and 2024 rate resets, which are expected to reset to higher yields. We targeted higher quality issuers such as large banks, insurers, and major asset managers like Brookfield. Although the relative attractiveness of preferred shares decreased slightly compared to other credit sectors at the beginning of the year, the Nicola Preferred Share Fund will opportunistically add to its holdings in select credits and institutional preferred shares.
The Nicola Primary Mortgage Fund returned 0.4% in May. New investment activity remained limited as the Nicola Primary Mortgage Fund was fully invested for most of May. The Nicola Primary Mortgage Fund held 8.6% in cash and cash equivalents, and 96% of the loan portfolio was secured by senior-ranking mortgages at the end of the month.
The Nicola Balanced Mortgage Fund returned 0.6% in May. Investment activity remains low as the Nicola Balanced Mortgage Fund is fully invested. The Nicola Balanced Mortgage Fund held 0.3% in cash & cash equivalents, with 43% of the loan portfolio secured by senior ranking mortgages at month end.
The Nicola U.S. Mortgage Fund (USD) returned -0.2% in May. The negative return in May is attributed to ongoing fund expenses, following the quarterly distribution of the Nicola U.S. Mortgage Fund’s largest investment earned in April. Although the U.S. commercial mortgage market has seen a decrease in origination volume, there is an active pipeline of new investment opportunities under consideration for the Nicola U.S. Mortgage Fund. The Fund held 34.7% in cash & cash equivalents, with 100% of the loan portfolio secured by senior ranking mortgages at month end.
For the month of May, the Nicola Private Debt Fund returned +1.0%. The primary return driver during the month was contractual interest income from the Nicola Private Debt Fund’s portfolio of direct investments. Investments during the month included a US$20 million commitment to the first lien credit facilities of a leading eye care practice management platform operating over 300 optometry clinics across the U.S.
The Nicola Canadian Equity Income Fund’s performance vs. S&P/TSX in May was -6.2% vs. -4.9%. Canadian investors took a hit in May as both Bonds (FTSE Canada Universe Bond index: -1.7%) and Equities (S&P/TSX: -4.9%) slipped last month. The Government of Canada 10-year bond yield was up 35bps as stubbornly high inflation led to expectations that rate hikes in would resume. 10 out of 11 S&P/TSX sectors were down in the month. The worst performing sectors were materials (-10%), communications services (-8%) and energy (-8%). The only positive performing sector was technology (+10%) as investors flocked to growth stocks. In commodities: crude oil prices (WTI -11%), natural gas (-6%) and precious metals (Gold -1%, Silver -6%). The Nicola Canadian Equity Income Fund underperformed the S&P/TSX Index as positive contribution from materials and financials were offset by negative contribution from consumer discretionary and technology. In the month, our top performing holdings were Lumine Group Inc, Parkland Corp, and Richelieu Hardware Ltd. The bottom performers were Nuvei Corp, Telus International and Aritzia. We exited Brookfield Infrastructure Partners LP. We were active with option writing as we initiated new option trades (call options and writing cash covered puts) for First Quantum Minerals, Lundin Mining Corp, West Fraser Timber, Suncor Energy, and Nutrien. We view the risk-reward tradeoff for option writing as attractive in this climate. We can generate double-digit annualized return while having good downside protection. We are very targeted in our option-writing strategies and target companies that have good balance sheets in industries that we are happy to own for the long-term.
The Nicola U.S. Equity Income Fund (USD) and the S&P 500 returned -1.6% & +0.4% respectively for the month of May. Throughout the year, the information technology and communication services sectors have been driving the market higher, particularly with significant gains from AI-related companies. Although the market returns seem strong, it's important to note that this growth is concentrated in only a few stocks. On the other hand, the average stock has remained relatively flat year-to-date, indicating a narrow market.
Despite concerns about the debt ceiling and underlying weaknesses, investors remained optimistic, as shown by the VIX Index dropping to its lowest level since 2020. However, the Nicola U.S. Equity Income Fund (USD) underperformed the S&P 500 by 2%. This underperformance can be attributed to negative contributions from the materials and information technology sectors, which outweighed the positive contributions from consumer staples, healthcare, and financials.
Among the Nicola U.S. Equity Income Fund’s top contributors to performance were Alphabet, Adobe, and Microsoft, all of which are AI-related companies. Conversely, the top detractors to performance included economically sensitive names affected by worries about slowing global growth (such as Shell and John Deere) and idiosyncratic risks (such as AT&T, which experienced a sell-off due to reports of DISH's potential partnership with Amazon for wireless plans).
The Nicola U.S. Equity Income Fund trimmed exposure to John Deere and Waste Management and added to Wesco International mainly due to valuation differentials. The fund ended the month with a delta-adjusted equity exposure of 87% due option positioning (14% of longs covered and 10% notional Put options).
For May 2023, the Nicola International Leaders Fund was -4.0% vs. -3.2% for the MSCI ACWI ex-USA Index. For the month, international markets (-3.8%) underperformed, while emerging markets (-1.3%) outperformed. European markets (-5.5%) were impacted by concerns over global growth and persistent inflation. Emerging markets benefitted from tech heavy markets such as Taiwan (+7.6%) and South Korea (5.2%), which rallied over optimism around the future growth of artificial intelligence. The MSCI China Index (-8.1%) was one of the worst performing markets in May because of signs of slowing growth.
Main contributors to performance during the month were our holdings in information technology, financials and Taiwan. One of the biggest contributors was TSMC (the market leader in advanced semiconductor manufacturing). Currently, as the sole supplier of Nvidia’s AI chips, TSMC benefited from the tech rally in May.
Main detractors to performance during the month were our holdings in health care and France. One of the biggest detractors was Bayer (diversified company with leading positions in crop science, pharmaceuticals, and consumer health). Bayer sold off during the month as lower glyphosate prices led the company to reduce its 2023 guidance.
For May 2023, the Nicola Global Small-Cap Equity Fund was -3.1% vs -1.9% for the MSCI ACWI Small Cap Index. For the month, U.S. (-1.4%) and emerging markets (+1.5%) small-caps outperformed, while international (-3.8%) small-caps underperformed. U.S. markets were supported by continued progress in the U.S. debt ceiling negotiations and a rally in technology. European markets (-5.7%) were weaker as concerns over global growth and inflation weighed on sentiment. In emerging markets, Taiwan (+7.3%) was the biggest contributor as it benefited from its high technology weighting and the AI driven rally in May.
Main contributors to performance during the month were our holdings in financials, Spain, and the U.S. One of the biggest contributors was Applus (a leading testing, inspection, & certification provider), which moved higher on reports of a potential takeover by private equity firms (Apollo, Apax).
Main detractors to performance during the month were our holdings in consumer discretionary and Germany. One of the biggest detractors was Luk Fook (one of the largest jewelry retailers in Hong Kong and China), which was impacted by the sell-off in China’s market due to signs of weakening growth in the region.
The Sustainable Innovation Fund returned -1.2% (USD) / -1.0% (CAD) in May. Our top performers during the month were Fluence Energy, Beam Global, and Stem Inc. while Enviva, Bloom Energy and Hannon Armstrong Sustainable Infrastructure Capital were the biggest laggards. During the month we exited our position in Enviva, the world’s largest supplier of utility grade wood pellets, following their surprise announcement to eliminate their dividend. Wood pellets have seen particularly strong demand in parts of Europe and Asia where they’re being used as a cleaner base-load power alternative to displace coal. While we still like wood pellets as part of the overall long-term strategy to reduce global carbon emissions, this surprise decision by management led us to reassess our investment thesis and choose to reallocate elsewhere within the portfolio. Another position, Evoqua Water Technologies, was formally acquired by existing fund holding Xylem Inc. for $7.5B, creating a combined entity with some of the world’s most advanced water treatment and technology solutions. This acquisition marks the fund’s fourth takeout in our portfolio’s history, and our first between two of our portfolio companies. Our total return on Evoqua since our first investment in November of 2019 was roughly 66%. During the month we added to existing names Constellation Energy, NextEra Energy Partners, Brookfield Renewable Partners, and Bloom Energy.
The Nicola Infrastructure and Renewable Resources LP returned +0.9% for the month of May in Canadian dollar terms. Overall, currencies had a neutral impact over the period with CAD slightly weakening against the USD offsetting the CAD strengthening against the GBP; agnostic to currencies, our assets returned +0.9%. This was driven by our U.S. energy as a service platform and U.K. waste management co-investments, as well as Q1 2023 performance in line with expectations at three of our global diversified funds focused on super-core, core and core-plus infrastructure. The Nicola Infrastructure and Renewable Resources LP is at $251M of AUM with a waitlist of $14M that is expected to be fully drawn during Q3 2023 from existing fund commitments and the near-term co-investment pipeline.
The Nicola Alternative Strategies Fund returned +0.6% in May. This positive result is largely due to our Bolton dividend arbitrage strategy, which performed well with a +0.6% return for the month. The general hedge fund space achieved a -0.3% return for the month, while the Eurekahedge Arbitrage Hedge Fund Index and the Relative Valued Hedge Fund Index posted returns of -0.9% and -0.2% respectively. Overall, the Nicola Alternative Strategies Fund has remained a resilient driver of returns, delivering a +3.2% year-to-date and a +11.0% return year over year.
The Nicola Precious Metals Fund returned -5.2% for the month of May. This was against a backdrop where gold bullion declined by -1.4% in Canadian dollar terms and the underlying gold stocks in the S&P/TSX Composite index suffered a -7.2% return. During the month of May, gold was under pressure due to a surge in bond yields as both inflation and economic data came in stronger than expected. The weakness in gold equities was widespread as 91% of gold stocks in the S&P/TSX Composite were negative for the month. Additionally, a U.S. debt-ceiling deal averted fear in risk assets.
The Nicola Global Real Estate Fund performance vs. iShares S&P/TSX Capped REIT Index (XRE): May 2023 -2.6% vs -3.9%; YTD +0.6% vs +0.8%. Publicly traded REITs in Canada were down -3.9% in May. Old worries such as higher borrowing rates and debt availability came back into focus and sentiment turned negative. While the potential for financing headwinds needs to be acknowledged, publicly traded REITs in Canada posted strong organic growth and the sector offers attractive yields. Volatility may persist in the near-term as an anticipated economic slowdown and changing expectations on interest rates are reasons to be cautious. However, with a longer-term investment time horizon, we would note that public market valuations appear attractive compared to private markets and that there is an 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 April 30, 2023 is 2.2%. Portfolio Leverage is 43.86%. The positive return was primarily due to increased appraised values of the GTA West Portfolio, 55th Ave, and 25 Watline.
Nicola U.S. Real Estate Limited Partnership (USD) YTD return as at April 30, 2023 is 2.8%. Portfolio Leverage is 48.06%. The positive return was primarily due to increased appraised values of The Maddox, Champions Green, and Canton Mills.
Nicola Value Add Real Estate Limited Partnership YTD return as at April 30, 2023 is 2.3%. In April, we funded $3.2M 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.
