For an investment management company that stresses the importance of looking beyond stocks and bonds, Nicola Wealth Management has a proven record of performance in public assets too.
"On a 5-Year basis, we were top-quartile in seven out of ten funds, and we were in the top two quartiles in nine out of ten funds," says Portfolio Manager Ben Jang. "In several categories, Nicola Wealth was in the top decile among Canadian asset managers. And in at least one, we were in the top percentile: the Nicola Bond Fund ranks in the top 1% of 209 funds in the Canadian Fixed Income marketplace over three- and five-year periods, as compared to fund returns sourced from Morningstar as of December 31, 2022."
Jang attributes this record to doing things differently than most other asset managers. First, on both the stock and bond side, Nicola Wealth aims to be benchmark-agnostic. Where other managers might hold 100 stocks in a portfolio, our equity portfolios feature about 40. We make no attempt to match the sector weighting of the index nor provide equal weight to each sector or security.
"We invest in the areas where we see value and avoid the areas we don't," Jang says. In terms of investing style, Nicola Wealth managers target a blend of quality and value. We look for companies with a wide "moat" (competitive advantage), robust free cash flow and historically stable earnings. When we identify quality companies we like but are slightly too expensive, we implement option-based strategies that not only enhance the portfolio's yield but also enable us to acquire quality stocks at such times as they fall into our price range.
Likewise, with fixed income, Nicola Wealth eschews the benchmarks. Where an index-focused fund might have an average duration of seven or eight years, ours in 2022 was around one year.
"We didn't see value in going out to the long end of the curve," Jang says. Further, the way bond indices are designed, by capitalization, they give highly indebted companies a greater weighting than companies with modest debt. "For an investor, it's a little bit of a perverse way of benchmarking yourself. We think it doesn't make sense to have a larger position in a company with more debt," he says.
In 2022, the Nicola Bond Fund focused on investment-grade corporate bonds that could leverage certain high-quality assets to enhance returns. This gave the portfolio about the same level of volatility as the broad market but with a higher return. Given the unlikelihood of, say, TD or Royal Bank going out of business, we felt the risk of a permanent loss of capital was still small.
"Even in a bad environment [for fixed income], we were able to preserve capital for our clients and achieve higher returns," Jang says.
Going forward, Jang foresees global market conditions that will continue to favour Nicola Wealth's active strategies. In contrast to the past decade of high average returns and low volatility, his team believes inflation and interest rates will stay higher for longer than the market expects, resulting in lower returns and higher volatility. In this environment, passive strategies could languish. But with the team's benchmark-agnostic focus and active strategies, Jang says, "we feel we're well positioned to outperform."
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. Past performance is not indicative of future results. All investments contain risk and may gain or lose value. Returns are net of fund expenses charged to date. This is not a sales solicitation. This investment is intended for tax residents of Canada who are accredited investors. Residency restrictions apply. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required securities commissions.
