Nicola Wealth Investment Returns: May 2024

Nicola Core Portfolio Fund  

The Nicola Core Portfolio Fund returned +0.8% in May and 3.9% year to date. The Nicola Core Portfolio is managed using similar weights to 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.

Nicola Bond Fund  

The Nicola Bond Fund returned +1.0% in May and +1.6% year-to-date. In comparison, the iShares Core Canadian Universe Bond Index ETF had a return of +1.8% last month and a year-to-date return of -1.6%. The index experienced a strong positive total return in May as yields dropped, with the 10-year Government of Canada bond yield decreasing by 0.2% from 3.8% to 3.6%. Cooling inflation data and a softer Q1 GDP print led to increased expectations of lower rates in the future. The fund's underperformance in May was due to its shorter duration. However, strong credit selection and sector allocation helped buffer the underperformance.

Canadian corporate credit spreads remained resilient despite interest rate volatility and heavy new issuance. The Canadian primary market ended the month with $13 billion of corporate issuance, marking the second busiest May on record. The focal point in the Canadian new issuance market was the highly anticipated deal from Coastal GasLink LP, a natural gas pipeline project in Western Canada. This deal was anticipated to be the largest corporate bond deal in Canada’s history. Investors proactively reduced credit exposure in similar sectors to make room ahead of Coastal GasLink. As a result, the infrastructure, pipeline, and utilities sectors underperformed in May.

During the month, we increased the fund’s exposure to short-dated corporate credits in REITs, automotive finance companies, and bank sub-debt. These sectors were top performers in May and contributed to our positive performance. We also added exposure to the telecom sector and to Bell Canada specifically, given its significant underperformance year-to-date as management increased leverage targets and Bell was put on negative outlook by rating agencies. We believed the downgrade from BBB+ to BBB was mostly priced in and viewed Bell’s risk/reward as attractive. The fund remains defensively positioned, and we will look to take profits and adjust exposure when appropriate. This gives us the flexibility 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 +0.8% CAD/+1.8% USD in May and +3.4% CAD/+0.3% USD year-to-date, outperforming the iShares US High Yield Bond Index ETF (CAD-Hedged), which posted a return of +0.7% last month and a year-to-date return of +0.7%. High yield bonds experienced strong total returns in May as U.S. Treasury yields decreased by approximately 0.2% across the curve, supported by indications of stabilizing inflation. This bolstered investor confidence in the potential for the Fed to cut rates later in the year. Credit spreads ended the month marginally wider at 3.1%, with higher quality credits outperforming. Despite its relatively shorter duration, the Nicola High Yield Bond Fund outperformed in May primarily due to strong credit selection. Our positions in Canadian corporate hybrids within the midstream/pipeline sector and Canadian banks’ capital notes continued to deliver robust returns. Specifically, corporate hybrids of Enbridge Inc. and Pembina Pipeline returned 2.5% and 2.2%, respectively. Moving forward, the Nicola High Yield Bond Fund will maintain its focus on liquid issuers with strong balance sheets and solid credit fundamentals in the near term. Current spread levels do not seem to reflect significant credit deterioration in a scenario where a soft landing does not materialize.

Nicola Canadian Mortgage Fund  

The Nicola Canadian Mortgage Fund (CAD) returned +0.6% in May, with a trailing 12-month return of +7.9%. Two new loans were funded during the month; however, a sluggish real estate market limited new loan origination opportunities. As of month-end, Nicola Canadian Mortgage Fund held 11.0% in cash and cash equivalents, with 71.2% of the direct loan portfolio secured by senior-ranking mortgages.

Nicola U.S. Mortgage Fund  

The Nicola U.S. Mortgage Fund (USD) returned +0.2% in May, with a trailing 12-month return of 4.7%. There were no new investments as loan origination activity remains low, although new opportunities continue to be considered on an ongoing basis. At the end of the month, the Nicola U.S. Mortgage Fund held 33.6% in cash and cash equivalents, with 100% of the direct loan portfolio secured by senior-ranking mortgages.

Nicola Private Debt Fund

The Nicola Private Debt Fund returned +0.8% CAD/+1.0% USD in May, bringing LTM returns to +9.6% CAD/+10.2% USD. Returns for the month were primarily driven by contractual cash interest income from the fund’s diversified portfolio of direct investments. The Nicola Private Debt Fund deployed US$42.9 million and made six new direct investments during the month. This included a US$15.0 million participation in a senior term loan to a medically focused ophthalmology physician practice management platform in the U.S. Southeast and Midwest. Additionally, the Nicola Private Debt Fund realized two direct investments in May, totaling US$13 million.

Nicola Canadian Equity Income Fund  

The Nicola U.S. Equity Income Fund (USD) returned +3.3% in May, trailing the S&P 500, which posted a return of +5.0%.

The Nicola U.S. Equity Income Fund underperformed the S&P 500 by 1.7%, primarily due to the technology sector, notably Nvidia, which surged approximately 27% last month. Nvidia's strong performance was driven by better-than-expected Q1 Data Centre revenue, gross margins, and optimistic Q2 guidance. Nvidia also announced a 10-for-1 stock split effective June 7th and a dividend increase. Nvidia alone contributed 1.3%, or nearly 26% of the S&P 500's return for the month. While Nvidia is considered a high-quality stock positioned well in the AI infrastructure sector, its current stock price reflects aggressive growth expectations.

The Utility sector also performed strongly, with many companies gaining over 20% due to increasing demand for power related to AI and infrastructure development. The Nicola U.S. Equity Income Fund’s performance was slightly impacted by its lack of exposure to Utilities, given this sector's low weighting in the index (approximately 2.4%).

Key contributors to the Nicola U.S. Equity Income Fund's performance included Wesco, AT&T, and Walmart. Wesco surged 17.5% on the back of improved operating results, a record quarter in free cash flow ($731 million), and increased guidance for free cash flow for the year. On the other hand, Adobe, ServiceNow, and Deere & Co detracted from the Nicola U.S. Equity Income Fund's performance. Adobe and ServiceNow experienced positive returns throughout the month but faced a downturn on May 30th following weaker-than-expected Q2 revenue guidance from Salesforce, which also lowered its full-year subscription revenue and margin forecasts. This announcement negatively affected investor sentiment towards other cloud-based software companies.

During the month, the Nicola U.S. Equity Income Fund made no new additions or sales.

Overall, we believe the Nicola U.S. Equity Income Fund comprises high-quality companies characterized by healthy balance sheets, strong free cash flows, and attractive blended forward 1-year Return on Equity (ROE) of 25%, compared to 19% for the S&P 500. At the end of the month, the fund's delta-adjusted equity exposure was 88%, considering its option positioning (with 3% of long positions covered and 12% in notional put options). Additionally, the Nicola U.S. Equity Income Fund ended the month with approximately 3% of its assets in uncollateralized cash.

Nicola International Leaders Fund

The Nicola International Leaders Fund returned +3.2% in May, with International Markets (+3.1%) outperforming and Emerging Markets (-0.2%) underperforming. In Europe, the region showed signs of economic improvement, and with no major surprises in inflation, the ECB remains on track for a June rate cut. However, in Emerging Markets, South Korea (-4.4%) was a significant detractor due to expectations of sustained higher interest rates and specific issues at Samsung (constituting 31% of the index).

Key contributors to relative performance during the month were holdings in Health Care, Consumer Staples, and Japan. Roche, a global pharmaceutical company with significant franchises in neurology, hemophilia, in-vitro diagnostics, and cancer therapies, notably contributed as its obesity drug candidate reported strong Phase I data.

Conversely, main detractors to relative performance included holdings in Communication Services, Financials, and Switzerland. BBVA, one of Spain's largest banks, faced downward pressure as the market assessed the implications and premium required for its potential acquisition of Banco Sabadell.

Nicola Global Small-Cap Equity Fund

The Nicola Global Small-Cap Fund returned +5.5% CAD/+6.5% USD in May. In May, U.S. small caps (+3.8%) and International small caps (+3.6%) outperformed, while Emerging Markets small caps (-0.2%) underperformed. In the U.S., strong corporate earnings supported the market despite lingering concerns over inflation and interest rates. In Europe, with no major surprises in inflation data, the ECB remains on track to cut rates in June. However, in Emerging Markets, India's market declined as investors awaited the outcome of the upcoming election. 

Key contributors to relative performance during the month were holdings in Consumer Discretionary and Germany. Ceconomy, a leading electronics retailer in Europe, was notably beneficial as quarterly results indicated a recovery in Western and Southern Europe.

Conversely, main detractors to relative performance included holdings in Health Care and Japan. Perrigo, a global leader in consumer self-care products, faced downward pressure as quarterly results missed expectations due to inventory de-stocking at U.S. retailers.

Nicola Sustainable Innovation Fund

The Sustainable Innovation Fund returned +15.8% USD/+14.7% CAD in May, marking its largest single-month return to date. This surge was driven by improving sentiment surrounding our core themes, buoyed by increasing interest in AI and anticipated energy demand growth from technology firms, alongside the necessary expansion of data centers to support broader AI adoption. Top performers included Ameresco, First Solar, and Bloom Energy, while Stem Inc. and Mobileye were notable detractors.

During the month, we exited our position in Stem Inc., a company specializing in energy storage and software solutions, due to ongoing challenges highlighted in their quarterly earnings report and a deteriorating outlook. Concurrently, we initiated positions in two new holdings: Tetra Tech and National Grid. Tetra Tech is a leading provider of specialized management consulting and engineering services focused on water, environmental sustainability, infrastructure, and renewable energy, well-positioned to benefit from the global shift towards net-zero and the increasing importance of water management and flood mitigation. National Grid, a utility company operating in the UK and the US, focuses on electricity and gas transmission and distribution. We seized an opportunity to enter this position during a recent pullback prompted by their announcement of a £60 billion investment plan through 2029, reinforcing their position as leaders in the rapidly growing networks sector.

Throughout the month, we actively rebalanced the portfolio, utilizing proceeds from a partial redemption of PIMCO Carbon Credit LP and available cash to bolster recent additions such as Prysmian, Enel, and Schneider Electric.

Nicola Global Infrastructure Limited Partnership

The Nicola Global Infrastructure Limited Partnership returned +1.1% USD/+0.7% CAD in May and is at C$351M of AUM. The USD returns benefited from currency movements as the USD weakened against the EUR and GBP. Performance was primarily driven by investments meeting expectations both in co-investments and fund investments within the portfolio.

Nicola Private Equity Limited Partnership  

The Nicola Private Equity Fund returned -0.2% in May, contributing to a trailing twelve-month return of +7.6%. This month's performance was driven by valuation increases in Tailwind Concessions, a master airport concessionaire specializing in food, beverage, and retail, as well as in Blue.Cloud, an IT services firm focusing on secure and compliant cloud computing and data management solutions, and USI Insurance, a prominent insurance brokerage and consulting firm. However, these gains were partially offset by write-downs in Project Malt, a designer and manufacturer of beverage equipment systems, and Decowraps, a global provider of floral packaging products.

Nicola Global Real Estate Fund

The Nicola Global Real Estate Fund returned +1.4% in May. In May, publicly traded REITs showed positive performance as bond yields declined. The yield on 10-year Government of Canada Bonds started the month at 3.81% and ended lower at 3.63%. The sector's performance continues to hinge on interest rate volatility, with investors assessing the potential timing and scale of interest rate cuts. We are exercising patience while awaiting global rate cuts, which we anticipate will serve as a key catalyst to unlock the embedded value in our portfolio.

Fundamentals seem to remain robust across most property types, and REITs are currently trading at discounts to Net Asset Value (NAV) estimates that are below long-term averages. We have reduced our exposure to private real estate holdings in Europe and are increasing allocations to public markets where valuations appear more attractive.

Nicola Canadian Real Estate Limited Partnership

Nicola Canadian Real Estate Limited Partnership NAV per unit has increased to $152.2416 (previously $152.0806), effective trade date May 31, 2024. This represents an increase of +0.1% and a positive return for April of +0.4%. Returns were positive this month, primarily due to increased appraised values of Advanced – Queensborough, 55th Avenue, and 208 Wyecroft Road. Actual YTD return as at April 30, 2024 is +1.1%. Portfolio Leverage is 46.15%.

Nicola U.S. Real Estate Limited Partnership  

Nicola Value Add Real Estate Limited Partnership NAV per unit has increased to $250.9459 (previously $250.2423), effective trade date May 31, 2024. This represents an increase of 0.3% and a positive return for April of 0.3%. In April, we funded $13.0M for one new project that closed (Gardena) and $10.7M for existing projects.

Nicola Value Add Real Estate Limited Partnership  

Nicola Value Add Real Estate LP NAV per unit has increased to $250.2423 (previously $249.9028), effective trade date March 31, 2024 . This represents an increase of 0.1% and a positive return for March of 0.1%. In March, we funded $4.9 million for existing projects. Actual YTD return as at March 31, 2024 is +1.1%.