Nicola Core Portfolio Fund
The Nicola Core Portfolio Fund returned +1.0% for the month of November. The Nicola Core Portfolio 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 +2.2% for the month of November, trailing behind the iShares Core Canadian Universe Bond Index ETF, which posted a monthly return of 4.5%—the highest since April 2020. The Canadian bond index witnessed a robust total return in November as credit spreads concluded the month 0.1% lower. Additionally, Canadian government bond yields saw a significant decline, with the 10-year Government of Canada bond yields dropping 0.5% from 4.1% to 3.6%.
Yields tumbled in November as investors increasingly believed the Bank of Canada was finished with rate hikes and might begin cutting them in the first half of the next year. This sentiment was fueled by data indicating a slowing economy, rising unemployment, and cooling inflation. In terms of credit, Canadian spreads tightened by 0.1% to 1.4%, supported by the prevailing market narrative that inflation could retreat to the central bank's 2% target without the economy entering a recession.
From a sector perspective, Telecom, REITs, and autos outperformed, each tightening by 0.2% for the month. In contrast, lower-beta sectors such as Utilities and Infrastructure only narrowed by 0.1%. November witnessed substantial new issuance due to the improved risk tone, and we selectively participated in new issues that we considered attractively priced relative to their credit fundamentals.
The Nicola Bond Fund’s short duration and defensive positioning contributed to its relative underperformance. Noteworthy top-performing strategies during the month include Algonquin Debt Strategies and East Coast Investment Grade Fund, returning 3.8% and 2.5%, respectively, in November.
The Nicola Bond Fund continues to maintain a defensive position and is prepared to add risk as opportunities emerge in a rapidly evolving market.
Nicola High Yield Bond Fund
The Nicola High Yield Bond Fund (CAD) returned +1.2% in November.
The Nicola High Yield Bond Fund (USD) returned +3.3% in November.
The high-yield sector demonstrated robust total returns during the month, fueled by a notable decrease in US treasury yields. The 10-year treasury yields declined by 0.6%, shifting from 4.9% to 4.3%, while credit spreads concluded the month 0.7% lower at 3.7%.
Softening inflation and employment data in the past month have persuaded many investors that the current rate hike cycle is concluding, and there is an expectation that the Federal Reserve will initiate interest rate cuts in 2024. The tightening in credit spreads was reinforced by 'soft landing' economic data, indicating sustained growth while inflation steadily recedes.
Notably, higher-quality credits, such as BBs, relatively underperformed in November, tightening by 0.6% on average, while Bs and CCCs outperformed with spread tightening of 0.8% and 0.9%, respectively. The relative underperformance of the High Yield Bond Fund is attributed to its bias toward higher-quality credits, aligning with our cautious market stance, coupled with a relatively shorter duration.
Top-performing strategies for the month were evident in the PIMCO Tactical Income Fund and PIMCO Dynamic Income Opportunities Fund, delivering returns of +11.6% and +9.8%, respectively, in Canadian dollar terms in November.
Looking ahead, the fund remains committed to focusing on higher-quality credits with notable risk/reward characteristics in the near term. This strategic approach is informed by the observation that current spread levels are either at or near the tight end of the 2023 range and do not seem to be factoring in any significant material credit deterioration.
Nicola Canadian Mortgage Fund
The Nicola Canadian Mortgage Fund returned +0.7% in November with a trailing 12-month return of +7.8%. New loan origination remains healthy with additional loans scheduled to fund before year end. The Nicola Canadian Mortgage Fund held 6.3% in cash & cash equivalents, with 61.8% 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 0.1% in November with a trailing 12 month return of 4.0%. While new loan origination volume has been slow, we remain actively engaged in the review of potential loan opportunities. The Nicola U.S. Mortgage Fund held 28.7% in cash & 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 (CAD) returned +0.9% in November.
The Nicola Private Debt Fund (USD) returned +1.2% in November.
Returns continue to be predominantly influenced by contractual cash interest income derived from the Nicola Private Debt Fund’s diversified portfolio of direct investments. Notably, during the month, the Nicola Private Debt Fund executed three new direct investments and supplemented its portfolio with two add-ons to existing investments. One notable addition was a US$12.0 million participation in a Class C asset-backed securitization linked to a fiber-based broadband internet provider catering to tier 2/3 communities in New England and Colorado.
Nicola Canadian Equity Income Fund
The Nicola Canadian Equity Income Fund returned +6.6% in November. In November, further indications of Canada's economic weakening emerged with the release of a negative real GDP print (-1.1% annualized rate) for Q3. Despite this, longer-dated treasury yields continued to decline rapidly, signaling that inflation may be under control and paving the way for potential interest rate cuts by the Bank of Canada. Equities exhibited relatively strong performance, surpassing October’s decline, with all sectors of the TSX finishing the month in positive territory.
Sectors poised to benefit the most from lower rates emerged as the top performers of the index, with Information Technology (+27.4%), Financials (+10.0%), and Real Estate (+8.2%) leading the way. Even the bottom performers, including Consumer Staples (+1.3%), Energy (+1.5%), and Health Care (+3.5%), delivered respectable absolute returns.
The Canadian Equity Income Fund also recorded positive returns across each of its sector exposures in November. However, it underperformed the Index by 90 basis points, primarily due to its underweight position in the Information Technology and Financials sectors. Notably, the lack of exposure to Shopify had the most significant impact on relative returns. The fund's top-performing sectors for the month were Consumer Staples (+12.5%), Consumer Discretionary (+11.4%), and Information Technology (+11.1%). On the flip side, the bottom-performing sectors were Energy (+0.8%), Materials (+1.7%), and Utilities (+5.0%).
In terms of equity holdings, the fund's top three contributors to performance were Brookfield Asset Management, Jamieson Wellness, and Constellation Software. Conversely, the bottom three detractors were Whitecap Resources, First Quantum Minerals, and Saputo. The decision to exit First Quantum Minerals in November was influenced by rising credit risks associated with the closure of its key mine in Panama. Although no new equity positions were initiated, opportunistic additions were made to select bank and consumer-related holdings.
The Preferred Share allocation of the fund posted positive gains of +6.7% as preferred shares rebounded in November. This resurgence was mainly attributed to the Government of Canada reversing its budget decision to tax dividends received by Canadian financial institutions. Resets were up 10.4%, and the TXPR Index recorded +8.9% gains, marking the most significant increases since April 2020, while Institutional preferred shares lagged the rally, returning 2%.
Nicola U.S. Equity Income Fund
The Nicola U.S. Equity Income Fund (CAD) returned +5.0% in November.
The Nicola U.S. Equity Income Fund (USD) returned +7.3% in November.
The U.S. equity market put an end to its three-month losing streak, recording its best monthly return since July 2022. Positive contributors to this rally included robust company fundamentals that exceeded expectations for third-quarter corporate earnings and impressive economic growth, as Q3 GDP reached 5.2% (upwardly revised from 4.9%). Indications of slowing inflation generated optimism among investors, suggesting a potential conclusion to the Federal Reserve's rate-hiking campaign and the anticipation of rate cuts starting as early as March 2024. Consequently, the 10-year Treasury yield declined from above 5% in October (a 16-year high) to the low 4s, providing a positive catalyst for supporting valuations for risk assets.
Despite the Nicola U.S. Equity Income Fund's performance trailing the S&P 500 by 1.8%, it faced challenges from its underweight allocation to Information Technology, the best-performing sector last month with a gain of +12.9%, and surplus cash in the fund. However, the fund benefited from an overweight position in Real Estate Income Trusts, with many REIT holdings experiencing double-digit gains. Strong stock selection in Energy (Cheniere & Shell), Consumer Discretionary (Ross Stores), Industrials (Wesco), and Financials (Blackrock and S&P Global) further contributed to the fund's performance. Leading contributors to the fund included Wesco, Ross, and Microsoft, while Walmart, Air Products & Chemicals, and Gilead Sciences were the primary detractors.
The Nicola U.S. Equity Income Fund made portfolio adjustments by increasing target weights in Prologis, CubeSmart, and AT&T, while decreasing target weights in Blackrock and Seagate Technology. Notably, Equifax was added to the portfolio within the industrial sector. Operating within an oligopoly market structure with rational pricing among the three major credit bureaus, Equifax is characterized as a high-quality company expected to experience high single-digit top-line growth, with opportunities for margin expansion through new product innovation, geographic expansion, and post-substantial IT investment spend.
The Nicola U.S. Equity Income Fund primarily consists of high-quality companies with solid balance sheets, robust free cash flows, and an attractive blended forward 1-year Return on Equity (ROE) of 29%, surpassing the S&P 500's 19%. At the end of the month, the fund's delta-adjusted equity exposure stood at 87%, factoring in option positioning (with 0% of long positions covered and 4% in notional put options). Additionally, the fund ended the month with approximately 9% of its assets in cash.
Nicola International Leaders Fund
The Nicola International Leaders Fund returned +4.5% in November. In Europe, the market experienced a robust rally as inflation slowed more than anticipated, prompting speculation that interest rates may have peaked and could potentially be cut soon. However, European Central Bank (ECB) president Christine Lagarde expressed caution, stating that it is too early to declare victory on inflation, and policy will remain "attentive" until inflation is firmly heading back toward the ECB's target.
In China, the market posted a more modest gain, influenced by mixed economic data and disappointing corporate earnings.
The main relative contributors to performance during the month were our holdings in Utilities, Consumer Staples, and Germany. Siemens, a global conglomerate with leading positions in automation, electrification, medical imaging, and transportation, stood out as one of the significant contributors. Siemens traded higher on the back of stronger-than-expected quarterly results and improving order trends in its automation business.
Conversely, the main relative detractors to performance during the month were our holdings in Financials, Healthcare, and Japan. Bayer, a diversified company with leading positions in crop science, pharmaceuticals, and consumer health, faced notable setbacks. Bayer experienced a sell-off as one of its key pipeline drugs failed its trial, coupled with setbacks in ongoing litigation in its crop science division.
These relative performance factors underscore the dynamic nature of the global markets, where varied economic data, corporate earnings, and geopolitical developments play crucial roles in influencing investor sentiment and market movements.
Nicola Global Small-Cap Equity Fund
The Nicola Global Small-Cap Equity Fund (CAD) returned +3.4% in November.
The Nicola Global Small-Cap Equity Fund (USD) returned +5.6% in November.
In the past month, International and Emerging Markets small caps demonstrated strong outperformance, while U.S. small caps lagged behind. In the U.S., indicators of disinflation, coupled with resilient economic data, fueled optimism for a soft landing in the economy. In Europe, continued progress on controlling inflation sparked speculation that interest rates may have reached their peak. Within Emerging Markets, Taiwan emerged as one of the major contributors, benefiting from falling yields in the tech-heavy market.
The main relative contributors to performance during the month were our holdings in Consumer Discretionary and Germany. Notably, the Watches of Switzerland Group, a leading retailer of luxury watches and the largest Rolex dealer globally, stood out as one of the significant contributors. The company's re-rating occurred as its new long-run targets surpassed market expectations.
Conversely, the main relative detractors to performance during the month were our holdings in Info Tech and the U.S. (underweight). Patterson Companies Inc., one of the largest distributors of dental supply and animal health products in the U.S., faced notable de-rating as softening economic conditions led the company to miss quarterly expectations.
These relative performance factors underscore the nuanced dynamics in different regions and sectors, where economic trends, inflation expectations, and sector-specific developments play pivotal roles in shaping market outcomes.
Nicola Sustainable Innovation Fund
The Nicola Sustainable Innovation Fund (CAD) returned +7.3% in November.
The Nicola Sustainable Innovation Fund (USD) returned +9.6% in November.
In November, equity markets witnessed a risk-on rally in response to signs of cooling US consumer spending, inflation, and labor market data. These indicators signaled to the market that we might be approaching an inflection point for the Federal Reserve on interest rates. The impact of higher rates was particularly felt in the clean energy sector, where many companies rely on borrowing for large projects such as wind farms or solar plants. The rise in borrowing costs has adversely affected the sector, impacting companies involved in financing electric cars or solar panels for consumers.
Top performers in the Nicola Sustainable Innovation Fund during the month included Fluence Energy, Hannon Armstrong, and Bloom Energy. However, the performance was weighed down by Plug Power, TPI Composites, and Stem, which were the biggest drags.
In response to market conditions, we actively repositioned our portfolio during the month. We exited positions in the EV charging company Beam Global and wind blade manufacturer TPI Composites. Conversely, we increased our positions in Ameresco, NextEra Energy Partners, and nuclear power operator Constellation Energy.
Our cash position at the end of the month stood at around 7.7%, providing us with flexibility to further reposition tactically if ongoing market weakness is observed. This strategic approach underscores our readiness to adapt to changing market dynamics and optimize the portfolio for potential opportunities.
Nicola Infrastructure and Renewable Resources Limited Partnership
The Nicola Infrastructure and Renewable Resources Limited Partnership (CAD) returned +0.1% in November.
The Nicola Infrastructure and Renewable Resources Limited Partnership (USD) returned +2.2% in November.
In November, currency movements, particularly the strengthening of the EUR and GBP against the USD and CAD, had a positive impact on the USD and CAD sleeves. Additionally, the CAD strengthening against the USD provided an additional positive impact on the USD sleeve. Irrespective of currency fluctuations, our assets returned +1.3% over the month.
This positive performance was primarily driven by the Q3 2023 fund and co-investment results aligning with expectations. Notably, there was a significant contribution from the first markup of our global water services provider co-investment from cost.
During November, the Nicola Infrastructure and Renewable Resources Limited Partnership took action by funding a US$2 million existing commitment to our globally diversified infrastructure secondaries fund. The proceeds were strategically utilized to acquire assets managed by top-tier GPs at attractive discounts.
Nicola Global Real Estate Fund
The Nicola Global Real Estate Fund returned +2.6% in November. In November, there was a significant downward movement in bond yields, particularly notable in the 10-year Government of Canada Bond. Starting the month at 4.06%, it concluded at 3.55%, marking a substantial decrease. This shift positively influenced sentiment in the public markets, leading to a rebound in publicly traded securities following a lacklustre performance in October.
The focus remains on interest rates and maturing debt, especially through 2024 and 2025. The rise in financing costs for upcoming debt maturities may potentially result in lower net cash flow growth. Consequently, attention is directed toward companies with strong balance sheets and conservative debt maturities staggered over time. The goal is to avoid being exposed to positions in publicly traded REITs that might be compelled to suspend or reduce their annual distributions.
Despite concerns, publicly traded REITs are perceived as deeply discounted compared to historical standards. Anticipating stabilization in interest rates is crucial, and the potential for lower long bond yields could contribute to improved earnings growth and alleviate concerns about cap rate expansion. The strategic reduction in allocation to the Invesco Real Estate Asia LP in November reflects a proactive approach, considering the fund's robust performance (+8.5% on a gross basis in local currency over the past year) and aligning the portfolio with evolving market conditions.
Nicola Canadian Real Estate Limited Partnership
Nicola Canadian Real Estate LP NAV per unit has decreased to $156.9662 (previously $157.6372), effective November 30, 2023. This represents a decrease of 0.4% and a negative return for October of 0.1%. YTD return as at October 31, 2023 is +4.4%. Portfolio Leverage is 45.64%. Decreases in appraised values due to yield expansion were partially tempered by strong leasing activity, an increase in market leasing assumptions, net operating income, and an increase in value of development properties.
Nicola U.S. Real Estate Limited Partnership
Nicola U.S. Real Estate Limited Partnership NAV per unit has decreased to US$199.1475 (previously US$200.5565), effective November 30, 2023. This represents a decrease of 0.7% and a negative return for October of 0.4%. YTD return as at October 31, 2023 is +4.3%. Portfolio Leverage is 49.75%. Decreases in appraised values due to yield expansion were partially tempered by strong leasing activity, an increase in market leasing assumptions, net operating income, and an increase in value of development properties.
Nicola Value Add Real Estate Limited Partnership
Nicola Value Add Real Estate Limited Partnership NAV per unit has increased to $247.8393 (previously $246.2882), effective November 30, 2023. This represents an increase of 0.6% and a positive return for October of 0.6%. YTD return as at October 31, 2023 is +5.4%. In October, we funded $8.1M for two new projects that closed (GTA Multi-Family and 88th Ave) and $19.9M 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.
