Nicola Wealth Investment Returns: September 2024

Nicola Core Portfolio Fund

The Nicola Core Portfolio Fund returned +1.1% in September. 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. 

Nicola Bond Fund

The Nicola Bond Fund returned +1.8% in September. In comparison, the iShares Core Canadian Universe Bond Index ETF posted a monthly return of +1.9% and a year-to-date return of +4.2%. The index experienced positive returns in September, primarily due to a significant decline in Canadian government bond yields. Softer-than-expected Canadian economic data during the month suggested the potential for further easing by the Bank of Canada, including a possible 0.5% interest rate cut at its October policy meeting. Canadian corporate spreads tightened by 0.1% during the month, supported by the prevailing market narrative that the Canadian economy is on track for a soft landing.

The Nicola Bond Fund performed in line with the index despite its shorter duration, benefiting from strong credit selection and sector allocation that mitigated negative impacts. Top-performing sectors included REITs, bank subordinated debt, and pipelines, while retail and automotive finance bonds underperformed. We added value by maintaining an overweight position in outperforming sectors and adopting a defensive approach in underperforming areas.

Notably, we observed new issuances in the REIT sector during September. RioCan REIT launched a two-tranche deal at tighter spreads compared to secondary levels, which effectively repriced the sector and drove secondary spread performance for both RioCan and the broader REIT market. We also selectively participated in new issues that were attractively priced relative to their credit fundamentals, including the inaugural offering from Stella-Jones, a leading producer of pressure-treated wood products in North America, which positively impacted our performance.

Looking ahead, we anticipate ongoing market volatility as we approach the upcoming US election and navigate heightened tensions in the Middle East. The Nicola Bond Fund remains defensively positioned, allowing us to take profits and adjust our exposure as needed. This strategy provides the flexibility to add risk when opportunities arise in a rapidly evolving market.

Nicola High Yield Bond Fund

The Nicola High Yield Bond Fund returned +1.8% CAD/+1.4% USD in September. The high yield bond market experienced positive total returns in September, primarily driven by a decline in U.S. Treasury yields as the Federal Reserve initiated a rate-cutting cycle in response to signs of a weakening labor market and stabilizing inflation. Notably, the Federal Reserve announced a substantial interest rate cut of 0.5% during the month—the first reduction in borrowing costs since March 2020—and indicated the possibility of two additional cuts by year-end. As a result, credit spreads narrowed slightly to 3.0%, with lower-quality credits outperforming as interest rate cuts favored riskier borrowers.

A key contributor to September’s performance was Allied Properties REIT, which launched a $250 million, four-year bond offering rated investment-grade by the index, although the FTSE Index did not recognize its unsolicited high-yield rating from Moody’s. We increased our exposure to Allied’s bonds in June following Moody’s downgrade, viewing it as a tactical opportunity. With a strong balance sheet and liquidity, we anticipated that Allied could benefit from stabilizing occupancy levels in its high-quality office portfolio.

The new offering attracted strong investor demand and was priced at tighter spread levels than Allied’s existing secondary bonds, effectively repricing the Allied credit curve and tightening secondary spreads by 0.5% to 0.7% in September. Additionally, our investments in Canadian corporate hybrids and bank capital securities continued to perform, becoming top contributors to our internal portfolio. Given the current tight high-yield valuations, the Nicola High Yield Bond Fund maintains a defensive stance, focusing on higher-quality credits, as current spread levels do not seem to account for any significant credit deterioration in the event of a soft-landing scenario failing to materialize.

Nicola Canadian Mortgage Fund

The Nicola Canadian Mortgage Fund returned +0.7% in September, with a trailing 12-month return of 8.0%. There was 1 new loan funded in September as the Canadian commercial mortgage market remains slow, with the level of cash & cash equivalents remaining elevated. The Nicola Canadian Mortgage Fund held 18.5% in cash & cash equivalents, with 74.4% of the direct loan portfolio secured by senior ranking mortgages at month end.

Nicola US Mortgage Fund (USD)

The Nicola U.S. Mortgage Fund returned +0.3% in September, with a trailing 12-month return of +4.5%. There were no new loans funded in September, however 3 new loans are scheduled to fund in October. The Nicola U.S. Mortgage Fund held 27.9% 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 returned +0.7% CAD/+0.8% USD, bringing the last twelve months (LTM) return to +9.0%. This month’s performance was primarily driven by contractual cash interest income from the Nicola Private Debt Fund’s diversified portfolio of direct investments.

During September, the Nicola Private Debt Fund deployed US$82.6 million across five new direct investments, including a US$25.0 million participation in a senior term loan to a leading provider of critical digital transformation services for enterprise and upper middle market clients. Additionally, the Nicola Private Debt Fund realized two direct investments, totaling US$3.7 million.

Nicola Canadian Equity Income Fund

The Nicola Canadian Equity Income Fund returned +3.6% in September.

In September, Canadian equities achieved strong double-digit returns, benefiting from positive contributions across all eleven sectors of the TSX. The third quarter continued the monetary easing initiated by the Bank of Canada (BoC) in June, with additional quarter-point rate cuts in July and September. With the latest CPI reading slowing to 2.0%, well within the BoC's target range, expectations are for further interest rate reductions in upcoming policy meetings. Globally, major central banks are aligning with some level of easing, and aggressive stimulus measures from China have contributed to the TSX reaching an all-time high at the end of September.

For the month, the TSX demonstrated positive performance, driven by gains across all but one sector. Interest rate-sensitive sectors, such as Health Care (+14.5%), Utilities (+6.2%), and Financials (+5.9%), led the way, while the bottom performers included Energy (-1.6%), Consumer Staples (+1.2%), and Industrials (+1.3%).

In September, the Nicola Canadian Equity Income Fund outperformed the TSX by 40 basis points, primarily due to positive security selection, which was slightly offset by negative allocation effects resulting from the Nicola Canadian Equity Income Fund’s underweight position in the Financials sector. The top-performing sectors included Materials (+7.4%), Consumer Discretionary (+6.7%), and Financials (+6.3%). In contrast, the weakest sectors were Health Care (-1.0%), Energy (-0.4%), and Consumer Staples (+3.1%).

Key contributors to the Nicola Canadian Equity Income Fund’s performance were Shopify, Brookfield Asset Management, and TD Bank, while Suncor Energy, Boyd Group Services, and Parkland Corp. were the top detractors. We did not initiate any new positions in September and exited our investment in Saputo Inc. Although we see improving business fundamentals for Saputo, the lack of clear catalysts for a stock re-rating led us to redeploy proceeds from this sale into existing positions with stronger quality scores and more favourable risk-reward profiles.

Nicola U.S. Equity Income Fund

The Nicola U.S. Equity Income Fund returned +1.8% CAD/+1.4% USD in September.

September saw continued market volatility, with disappointing technology earnings and a weak jobs report pulling down the S&P 500 (-4.2%) and NASDAQ (-5.9%) during the first week—the worst start to a month for the S&P 500 since 1953. Sequential core inflation and PPI growth also came in slightly higher than expected. However, the Federal Reserve described inflation data as “roughly in balance,” and policymakers cut interest rates by 50 basis points, signaling a shift toward supporting the job market. The Fed’s dot plot projected another 50-basis-point cut by the end of 2024, with four additional cuts totaling 100 basis points in 2025 and two more cuts in 2026. Markets rallied to all-time highs, further boosted by China’s announcement of a larger-than-expected fiscal stimulus package. The S&P 500 showed improving breadth, driven by Consumer Discretionary and Utilities, while Healthcare and Energy saw the most declines, and Information Technology performance ranked in the bottom half of sectors.

For September, the Nicola U.S. Equity Income Fund underperformed the S&P 500 by -0.7%, primarily due to stock selection in the Information Technology (Adobe) and Consumer Discretionary (Hyatt) sectors, though this was partially offset by outperformance in Communication Services (AT&T) and Consumer Staples (Casey’s). In terms of sector allocation, the Nicola U.S. Equity Income Fund benefited from its higher exposure to Communication Services and its lower exposure to Financials, the third-lowest performing sector.

Top contributors to the Nicola U.S. Equity Income Fund's performance included AT&T, Meta Platforms, and Deere. AT&T announced the sale of its 70% equity stake in DIRECTV for approximately $8B, which exceeded expectations and marked a major step in the company’s de-conglomeration strategy. Proceeds from the sale are expected to be used for debt repayment and share repurchases.

Top detractors included Adobe, Shell, and Electronic Arts. Adobe’s Q3 earnings beat expectations, but its Q4 guidance was weak. The guidance shortfall was largely due to transitory factors, such as timing of major sales contracts, shifting promotional windows, and foreign exchange effects. While Adobe’s near-term outlook remains a topic of debate, its position within the evolving AI landscape will be a focal point for investors.

The Nicola U.S. Equity Income Fund continues to hold high-quality names with healthy balance sheets, robust cash flow generation, and attractive blended forward one-year ROEs (26% vs. 19% for the S&P 500). As of the end of the month, the Nicola U.S. Equity Income Fund's delta-adjusted equity exposure was 94%, considering option positioning, with 2% of long positions covered and 5% in notional put options. It also held approximately 1% of its assets in uncollateralized cash.

Nicola International Leaders Fund

The Nicola International Leaders Fund returned +0.9% in September.

In Europe, the ECB cut rates for the second time this year as inflation continued to approach its target and economic risks persisted. In Emerging Markets, China’s market rallied by +23.9% following a series of policy easing measures, including rate cuts, lending facilities for stock purchases, and reduced down payment requirements on second homes. Additional calls for stimulus at a surprise Politburo meeting further boosted the market.

The Nicola International Leaders Fund’s main relative contributors during the month were holdings in the Utilities sector and Germany. A top contributor was Iberdrola, one of Europe’s largest integrated utilities, which saw its stock rise after the market responded favorably to its data center strategy.

The primary relative detractors were holdings in the Consumer Discretionary sector and the UK. One of the biggest detractors was BAE, Europe’s largest defense contractor, which declined on reports that some of Ukraine’s allies were discussing potential ceasefire scenarios.

Nicola Global Small-Cap Equity Fund

The Nicola Global Small-Cap Equity Fund returned +2.4% CAD/+2.0% USD.

In the U.S., the Federal Reserve began its rate-cutting cycle with a 50 basis point reduction, reflecting increased confidence that inflation is moving sustainably towards its 2% target. In Europe, the ECB also cut rates as inflation continued to improve and growth risks mounted. In Emerging Markets, China’s market surged following policy measures and calls for more stimulus at a surprise Politburo meeting.

The Nicola Global Small-Cap Equity Fund’s main relative contributors for the month were holdings in the Consumer Discretionary sector and Germany. One of the top contributors was Ceconomy (the largest consumer electronics retailer in Europe), which rose after a broker upgraded the sector, citing signs of recovery.

On the downside, Health Care and U.S. holdings were the main relative detractors. A key detractor was Gerresheimer, a leading provider of containers and drug delivery systems for the healthcare industry, which lowered its financial guidance due to a slower-than-expected recovery in its vials business and production delays caused by Hurricane Helene in the U.S.

Nicola Sustainable Innovation Fund

The Nicola Sustainable Innovation Fund returned +6.4% CAD/+6.0% USD in September. Our top performers were Constellation Energy, Ameresco, and Fluence Energy, while Sunrun, Bloom Energy, and NEXTracker were the primary detractors.

During the month, nuclear power-exposed equities, including our largest stock holding Constellation Energy, performed positively. This followed the announcement of a 20-year power deal between Constellation and Microsoft to restart a power plant previously shut down in 2019 for economic, not operational, reasons. This news lifted Constellation shares by more than 30% during the month, bringing the year-to-date performance to well over 100% and the two-year performance to over 200%. Nuclear power has gained renewed interest, particularly from tech companies seeking reliable, low-carbon, on-demand power sources to support the growing needs of data centres as AI investments surge. This trend has provided positive momentum for many of our portfolio holdings, and we expect more announcements as companies secure new long-term power deals.

September also saw a 50 basis points interest rate cut in the United States, the first since the early days of the COVID pandemic. This provided additional support for our portfolio companies, which tend to be more sensitive to capital costs given the capital-intensive nature of developing large-scale infrastructure projects like offshore wind.

We were active in rebalancing throughout the month, exiting positions in Aker Carbon Capture and Array Technologies, while taking profits from Constellation Energy. The proceeds were reallocated towards Boralex, Northland Power, and some of our European holdings, including National Grid, Enel, and Veolia.

Nicola Global Infrastructure Limited Partnership

The Nicola Global Infrastructure Limited Partnership returned +0.7% CAD/+0.6% USD in September. In local currency, our assets returned +0.7% for the month and +7.7% LTM. These returns were primarily driven by our co-investment in Ports America Group, the largest terminal operator in the U.S. with 70 locations across the East, West, and Gulf Coasts. During the month, the Nicola Global Infrastructure Limited Partnership invested US$25M into its first global value-add infrastructure fund, gaining immediate exposure to mid-market value-add direct and secondary investments across key thematic sectors. Value-add infrastructure investments offer greater opportunities for value creation with more capital appreciation potential and will complement Nicola Global Infrastructure Limited Partnership’s existing portfolio of core and core-plus investments. It currently has C$388M in AUM, with a 4% annual distribution rate paid monthly.

Nicola Private Equity Limited Partnership

The Nicola Private Equity Fund returned +0.3%. Returns for the month were driven by valuation increases in FLC Co-Investment Fund V (A fund investment alongside our strategic partner, Fisher Lynch) and Cascadia Windows (A B.C.-based company specializing in the design and manufacturing of energy efficient windows, doors, and related building materials). These gains were offset by a write-down in VTrips (A vacation rental management company that handles property management, marketing, and guest services for vacation homes across various U.S. destinations).

Nicola Venture Capital Limited Partnership

The Nicola Venture Capital Limited Partnership recorded a return of -0.1%. This quarter’s investment return was driven by a valuation increase in our position in Spare Labs, which raised $42M in a Series B financing during the quarter. Spare Labs, a Vancouver-based company, provides an AI-driven software platform that helps transit agencies around the world modernize their paratransit systems and launch micromobility services. Nicola Venture Capital Limited Partnership first invested in Spare Labs' Series A financing in 2021. We also closed a US$7M commitment to a high-quality U.S. venture capital manager known for their disciplined approach and strong investment track record.

Nicola Global Real Estate Fund

The Nicola Global Real Estate Fund returned +2.4% in September.

Since the end of June, publicly traded REITs have delivered solid total returns. Recent bond yield compression, softer inflation, and anticipated global rate cuts are providing key support. After nearly two years of cap rate expansion (which suppresses NAV calculations), we believe there is little risk of further significant cap rate expansion. Stable cap rates should allow NAV estimates to increase as NOI continues to grow across most asset classes. Any cap rate compression would further boost this growth. Fundamentals are strong across most property types, and REITs are trading at discounts to NAV estimates and cash flow multiples well below long-term averages. We believe there is sufficient reward in holding publicly traded securities at today’s prices, and we have been adjusting our asset mix in this direction for the past two years.

Nicola Canadian Real Estate Limited Partnership

Nicola Canadian Real Estate Limited Partnership NAV per unit has decreased to $151.3711 (previously $151.9874), effective trade date September 30, 2024. This represents a decrease of 0.4% and a negative return for August of 0.1%. Returns were negative this month, primarily due to decreased appraised values of industrial properties in the GTA. Actual YTD return as at August 31, 2024 is +1.8%. Portfolio Leverage is 46.54%.

Nicola U.S. Real Estate Limited Partnership

Nicola U.S. Real Estate Limited Partnership NAV per unit has decreased to US$184.3057 (previously US$185.2311), effective trade date September 30, 2024. This represents a decrease of 0.5% and a negative return for August of 0.1%. Returns were negative this month, primarily due to decreased appraised values in US multifamily as well as Seattle office assets. Actual YTD return as at August 31, 2024 is -1.4%. Portfolio Leverage is 49.71%.

Nicola Value Add Real Estate Limited Partnership

Nicola Value Add Real Estate Limited Partnership NAV per unit has decreased to $249.9417 (previously $251.1943), effective trade date September 30, 2024. This represents a decrease of 0.5% and a negative return for August of 0.5%. The main driver for the negative return this month was a change in the foreign exchange rate as the Canadian dollar strengthened, which negatively impacted the value of US assets.  In August, we funded $3.2M for two new projects in the Nicola Multi Family Venterra LP and $15.0M for existing projects.