See the Forest for the Trees : Nicola Wealth

Chairman & Chief Executive Officer

Looking through a dense forest, it is easy to see how a rescuer may search for this downed plane for days and never find it behind the trees. However, from an overhead perspective in the image above, you can now see the entire forest and the plane that is hidden within it.

This is an excellent metaphor for the challenges investors face looking at the future of 2023 and the strategies to follow. 2022 was a brutal year in many ways, so let us begin this journey by reviewing what worked and what did not last year.

Globally, most equity markets were down, as shown by the table below. Dividends, in some cases, lessened the pain, but overall, everything was in the red. (Bloomberg, December 30th, 2022)

A December 23rd article by Bloomberg stated 2022 as the worst year for global equities since 2008:

Investors have dumped equities at a record pace in the days since major central banks signaled they won’t be deterred in their fight against inflation—a fitting end to the worst year for world stocks since the global financial crisis. Equity funds were hit by outflows of almost $42 billion, the highest ever, in a week when the Federal Reserve, the European Central Bank and the Bank of Japan all sounded staunchly hawkish notes in their policy outlook for next year, squashing bets of an imminent return to the era of cheap money.

No Place to Hide

It has also been the worst year in memory for bonds. The image below is from the Wall Street Journal on December 23rd, 2022, reporting on many bond indices in U.S. dollars. The best results were more than 6% down, and the average returns were negative double digits.

(WSJ, December 23, 2022)

In Canada, Pimco’s Canadian Total Return Fund was typical, in our opinion, of most asset managers with a year-to-date (YTD) return (December 23rd, 2022) of -12.59%. Morningstar keeps data on the performance of thousands of funds, including 276 Canadian bond funds and 90 high yield funds. Below are the results YTD, three years, and five years.

(Morningstar & Nicola Wealth, 2022)

*The Average Canadian Bond Fund Return in this chart comprises the average returns of the 276 Canadian bond funds covered by Morningstar as at December 31, 2022

**The Average Canadian High Yield Bond Fund in this chart comprises the average returns of the 90 Canadian high yield bond funds covered by Morningstar as at December 31, 2022

As you can see bonds have delivered relatively poor returns for the last five years and not just since central banks started raising short term rates in 2022.

Ben Jang, Portfolio Manager at Nicola Wealth focused on debt instruments, provides some background on how we have approached bond investing over the last number of years:

The outperformance of both the Nicola Bond Fund and the Nicola High Yield Bond Fund come from a differentiated approach versus many of our competitors who focus on an index. Fixed income indices favor market capitalization, meaning companies who are more indebted have higher weights in the index. At Nicola Wealth, we focus on the credit worthiness of companies regardless of their weight in the index. We endeavour to invest in high quality “bend but not break” corporate bonds and have used prudent amounts of leverage to enhance returns from safer investments such as senior secured bonds in Canada’s big five banks. Over the past two years, our shorter duration strategy has contributed to our outperformance as hawkish central banks have hurt traditional longer duration benchmark-oriented strategies. Additionally, we have been tactical in our positioning. We are patient with capital and deploy into opportunities and take higher risks only when the market presents opportunities, and in our opinion, we are compensated for doing so.

Housing

Higher interest rates have hurt both housing sales and prices. The chart below from Trading Economics (December, 2022) shows that house prices across the U.S. peaked in June 2022 at an average of $410,000 and were at $370,000 in November, a drop of just over 12%. What is the impact over the following months and years as those who have fixed rate mortgages renew?

What about Canada? WOWA—Canada’s largest personal finance encyclopedia—shows that prices in Canada have dropped by about 12% or much the same as in the U.S., while Vancouver and Toronto are marginally better, with an 11% drop from their prior peaks (November, 2022).

Many investors choose to invest in U.S. or Canadian REITs, real estate funds or ETFs. Higher rates and investor panic impacted total returns of these products even more than the general markets. The TSX iShares REIT ETF was down -17.5% in 2022 (TSX was down -8.9%), while the FTSE Nareit Index for U.S. equity REITs was down almost -27% vs. the S&P 500 at -19%. Some of these losses were driven by higher interest rates which raise capitalization rates on real estate and lower prices, much like bonds. But panicked selling means that the overall indices are trading at discounts to the Net Asset Value (NAV) of 20%.

Our preferred method of investing in real estate has been to own strategic properties and use active asset and property management to create returns that the market does not provide. Over the last 17 years with our Canadian real estate pool and 12 years with our U.S. real estate pools, we have outperformed our comparative REIT ETFs by more than 3% annually after fees. The charts below show the results to September 30th, 2022.

Nicola Wealth Canadian and U.S. Real Estate Funds vs. REITs Since Inception

In 2022, the gap between our U.S. and Canadian real estate income pools and comparable REIT ETFs was the largest in a single year since the funds were opened in 2010 and 2005, respectively.

The Nicola Wealth Canadian Real Estate LP had a total return of 13.5%, the Nicola U.S. Real Estate LP was over 22%, and the Nicola Value Add Real Estate LP – the firm’s development real estate pool – was up over 19% in 2022.

Given those exceptional results compared to the public REIT markets, it is reasonable to ask how the difference could be so significant.

The first reason was that we have changed our focus for all real estate, particularly in 2020 as the pandemic unfolded. We significantly reduced our exposure to retail and office and moved to multifamily residential, industrial, and special purpose (self-storage). That has allowed us to add value more efficiently during the entire pandemic, not just this year.
Net operating income increased by almost 15% in 2022 and could overcome the relatively small increase in capitalization rates experienced so far.
We now build-to-own more than 25% of our new Canadian and U.S. assets, which provides a lower cost than buying new while providing us with assets that will require far less capital expenditure in the coming years.
We focus our real estate acquisitions in areas of North America with what we consider favourable demographics and economic growth.
Lastly, as mentioned, REITs are trading well below their NAV and if they were at market, they might have been even or slightly down for 2022. Identifying this value strategy, we will be adding REITs to our real estate portfolio for the first time since the summer of 2008.

Annual returns since the inception of the Nicola Wealth Canadian Real Estate LP (NCRELP), the Nicola Wealth U.S. Real Estate LP (NUSRELP) and the Nicola Wealth Value Add Real Estate LP (NVARELP):

Inception: December 2014

Inception: June 1, 2010 (Nicola U.S. Real Estate LP was opened to external investors in June 2010.)

Inception: December 31, 2014

What about private assets?

We have looked at public assets, including performance in both fixed income, equities, and real estate (REITs vs. our own real estate pools).

So, how did private equity and private debt perform in 2022? In June 2022, an article published by The Economics Review at New York University looked at the change in funds raised for private equity over the last twenty years or so. As you can see, Global Private Equity funds grew from $108 billion in 2003 to just over $1.2 trillion by 2021. However, this chart also includes private real estate and infrastructure.

(The Economics Review, June 10, 2022)

Compared to 2021, when private equity was in a boom, a chart by Preqin highlighted that funds raised worldwide by the third quarter of 2022 were well off the Covid-spurred boom; showing a reversing rally, as seen below.

How did private equity perform in 2022 compared to equity markets? Considerably better, as you can see below. Over the decade leading up to September 2020, private equity earned a net IRR of 14.3% vs. 13.7% for the S&P 500. But if one goes back to 2008, the difference that year was 11% for private equity vs. -36.5% for the S&P 500.

Private equity is not that closely correlated to public markets and we feel it is a good choice to stabilize returns over time. The chart below shows a recent summary of the Canadian Pension Plan’s asset allocation. Credit (private debt) is 16% of the total and private equity is 30% or 2% higher than public equities.

(CNW Group/Canada Pension Plan Investment Board)

Finally, we will look at metrics comparing enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiples for private equity and the S&P 500. The chart also looks at debt ratios used to acquire companies for private equity funds. It is worth noting that this chart is as of September 2022, and current numbers would likely show lower ratios for both EV/ EBITDA multiples and debt. The estimated AUM of the private equity industry is $4 trillion, $1 trillion of which is dry powder (the amount of committed, but unallocated capital a firm has on hand).

The chart below, comprising U.S. data, illustrates several things:

Private equity funds have been paying an increasing multiple of earnings for assets over the last ten years (from about 9 x to 11.5 x). Much of those increases took place in an environment of very cheap debt and that explains why during the same period debt to EBITDA levels rose by more than 20% from 4.7 to 5.9. The era of cheap debt is over, and these ratios will almost certainly drop.
Public market multiples are far more volatile than private equity. In 2010 both were at about 9 x earnings. By 2019 public markets were trading at just over 20 x when private equity was valued at 11 x (45% lower). This more disciplined valuation model is to a large degree due to the lack of liquidity in private markets and the relatively higher levels of knowledge with private equity investors over public market investors.

What about return comparisons between private equity and public markets? Private equity is closer to the small-capitalization Russell 2500 in terms of assets than the S&P 500. In a report recently issued by Cambridge Associates, they compared several key metrics, as shown in the following chart. As you can see, since early 2000, private equity has outperformed in most areas, especially regarding returns: 18.3% to 9.2% from January 2000 to March 2022.

I believe two factors that have nothing to do with the underlying assets in private vs. the Russell 2500 contribute to these much better returns.

Private equity funds are illiquid, so investors can only sell their interest in the funds they invest in once the general partner sells the underlying company. If markets for selling companies are poor, the general partners will hold on until they are better. A much more disciplined approach than being able to buy and sell daily.
General partners always have dry powder, which are funds they can call on to make additional investments in their current portfolio or acquire new companies. If the price of private companies drops because of a recession, for example, they can acquire assets at lower prices, adding to better future returns.

Now, we should look at how private debt performed in 2022, and over the years. To do so, it is critical to understand that private debt runs the gamut of low-risk commercial real estate loans on income producing buildings; where one might expect a 5-6% return in today’s environment. Here there is very low risk of defaults to mezzanine financing for private equity and real estate development, where yields would be well over 10% and credit risk has to be managed very carefully. Below is a table showing 2022 returns for both our mortgage pools and private debt for 2022.

(Nicola Wealth, 2022)

These are better returns than those realized in most bond funds (as shown in the Average bond fund comparison chart earlier). Most of the mortgage and private debt loans within our pools have floating rates, which bodes well for returns looking into 2023 as rates at the end of 2022 were about 400 basis points higher than this time last year. We feel the biggest risk is not the rate of the loan but the creditworthiness. That is where disciplined underwriting makes all the difference.

We analyzed 2022 results of public equities, public debt (primarily bonds), private equity, real estate, and private debt, as in our opinion, these are what are required to have a truly balanced portfolio. For our clients, the Nicola Core Portfolio Fund has allocations to all the major asset classes. This exposure is what has helped it achieve just over a 7% return for 2022 net of fees vs. a net return of negative 8% in a typical balanced fund made up of 60% equity and 40% bond portfolio.

In order to achieve these results, we need:

Each asset class to be well-managed and able to add alpha (value over market returns).
To combine these asset classes into a portfolio that creates balance with low volatility.

Our Core Model

We have been using this diversified approach to asset allocation since 2000. How has it performed when compared to more traditional balanced investment approaches like Morningstar’s Neutral Balanced Index? As the above right chart illustrates, the Nicola Wealth Core Composite has outperformed Morningstar’s Neutral Balanced Index by 2.55% per year from January 2000 to September 2022; enough for an initial investment of $1 million to grow to $2 million. Perhaps more importantly is considering how the Nicola Wealth Core Composite (“Core”) has performed during major economic crises, such as the financial crisis of 2007-2008, the dot-com bubble and 2022 (YTD to November).

*Client returns net of fees refers to the Nicola Wealth Core Composite, “60/40” refers to the Morningstar Neutral Balanced Index. Returns shown as at November 30, 2022. Please see graph above for complete returns since 2000.

We started this newsletter with whether most investors can see the forest for the trees. Do they appreciate the “Big Picture” before getting actively involved in building an investment strategy and a tactical plan to execute it well.

This quote by Christopher Ryan explains the problem well:

"When you’re going in the wrong direction, progress is the last thing you need."

Let us return to our forest and consider the macro issues that, in our opinion, will have a major impact on investment returns in 2023 and for several years after that. Beginning with aging, as seen at the top left of our fictional forest:

An Aging Population and Declining Birth Rates

Almost half of countries worldwide which represent 70% of Global GDP are under a total fertility rate of 2.1 children per woman, which is the number required to maintain a broadly stable population, not increase it. Places like Canada, the U.S., China, and much of Europe are in this declining group. Other countries experiencing a dramatic decline, which may come as a surprise, are Bangladesh and Turkey.

While all of these countries are aging, China’s birth rates are plummeting, and Pew Research and Peter Zeihan feel that China’s birth rate as reported by the United Nations, on Wikipedia, are significantly off and much closer to 1.1 vs. a reported 1.7, and population decline is well on its way to below 1 billion by 2050.

The top left chart shows that China’s working age population peaked in 2010 and has dropped by about 40 million people since, and the top right chart indicates where Pew Research feels rates are now in China. The bottom chart shows the current demography of China, which is an inverted pyramid – meaning the country’s population has now peaked and will be in a long slow decline.

There appears to be two schools of thoughts with respect to aging:

1. Aging is Inflationary

An older population creates a shrinking workforce and large health and pension liabilities for countries. That puts pressure on wages and taxes and overall prices rise. Additionally, older people draw on their savings and reduce capital available for businesses to expand production.

2. Aging is deflationary

Both Japan and German are rich countries with aging – and in the case of Japan, also declining – populations, yet, each has a combination of high productivity and low inflation, apart from 2022 in Germany due to natural gas prices. In our experience most retired people do not spend the capital of their retirement funds, they spend the income or at a rate below their overall returns (this is where the “4% rule” comes in that suggests a safe withdrawal rate for retirees is 4% annually). If the portfolio is growing at 7% per year, then after spending, the portfolio is still growing at 3% per year to combat the long-term impact of inflation over time. The chart below outlines how spending is related to adult age.

(HS Dent 2009)

Our overall opinion is that an aging population would normally reduce inflationary pressures except in areas such as health and travel (which in turn will continue to grow as a percent of spending and therefore GDP). Since 2000, average inflation in Germany and Japan has been around 0-2% depending on the country. The war in Ukraine has had a big impact on Germany with respect to inflation (now at 10%), but less so in Japan (about 4%).

Absent immigration, aging would normally be negative for housing prices. Since 2005, Canada’s average annual house price increase has been 3.5% but with an increase in overall population of more than 6.5 million (20%). In Japan and Italy, we can get a glimpse of a future of aging without immigration. The population in Japan decreased from 128 million people in 2005 to about 124 million in 2022, while Italy’s has risen slightly from 58 million in 2005 to 59 million in 2022, but it is worth nothing it has dropped from its peak of 60.3 million in 2013. The United Nations forecasts that both countries are in a slow but inevitable decline.

Housing is not a wealth building strategy in most countries with declining populations. Where would our house prices be today in Canada if we had the same population of 32 million people in 2023 that we had in 2005. At the margin, the increase of about 6.5 million is the main driver for house prices in Canada.

Supply Chains

In Peter Zeihan’s latest book The End of the World is Just the Beginning, Zeihan tries to make the case that the age of globalization and specialization is coming to an end. This ending will see reductions in global trade, rising geopolitical tensions, and competing global groups.

Globalization was an offshoot of the U.S.’ position as the strongest country by far with the largest military after World War II. It chose to protect trade routes worldwide for all countries as long as they agreed to play by reasonable trade rules, as drawn up by the U.S. That meant that goods – and to a lesser degree services – would be cheaper in countries with lower labour costs than North America or Europe.

For more than 75 years this model has worked incredibly well and helped build world wealth and interdependence. Over the last few years, with geopolitical tensions rising, particularly between China and the U.S. and Russia with nearly everyone, has changed the environment

Countries are looking at shortening their supply chains to reduce both transportation and geopolitical risks. Two years ago, this chart was published on a Mexican website Tetakawi using data from Statista on labour rates:

When globalization started, China had some of the lowest labour rates in the world, a competitive advantage which is now far less. Many countries will look to stabilize their supply chains for both manufactured goods and commodities. Closeness, political stability, and rule of law (think both Russia and China) will be important factors. This will lead to our next issue: reshoring.

Reshoring

Reshoring is the opposite of offshoring. Here is one dictionary definition

the practice of transferring a business operation that was moved overseas back to the country from which it was originally relocated. “reshoring can help us rebalance our economy, create new jobs and cut our trade deficit”

Take note of that last line, which is what every politician wants: bringing the jobs and factories back home. Of course, it is not that simple as there are always reasons why a lot of manufacturing moved offshore. Initially, labour costs were a major reason, then better logistics, bigger scale, and specialization all helped to keep much manufacturing in countries such as China. According to the World Population Review the top manufacturing countries in 2022 were:

China – 28.4%
United States – 16.6%
Japan – 7.2%
Germany – 5.8%
India – 3.3%
South Korea – 3.0%
Italy – 2.3%
France – 1.9%
United Kingdom – 1.8%
Mexico – 1.5%

In the case of the U.S., they could consider reshoring and try to make up for higher labour costs with lower energy or transportation costs, perhaps higher productivity. This concept would sell well with Americans and achieve certain political objectives that the U.S. has with respect to China. The new tech “war” over semiconductors is to some degree meant to limit how quickly China can advance in advanced technology including AI, robotics and other areas that would add to productivity.

Alternatively, the U.S. could go another way and reshore manufacturing in Mexico. Their neighbours in the South have a lot of advantages including geography, low labour rates, lower cost energy, and, relative to China, are far more politically attractive.

Because China has a number of issues including their old zero-Covid policy, a real estate bubble, massive rising debt, and problems with a level playing field when it comes to technology and patents, companies are simply looking for other low-cost alternatives in Asia such as Cambodia, Vietnam, Pakistan, and India, to name a few.

Reshoring is disruptive and requires capital and time to build infrastructure. Reshoring will keep interest rates higher than they might have otherwise been and will likely keep pressure on inflation rates until the reshored companies are fully productive.

For some analysts, Peter Zeihan has a style of writing which exaggerates the dangers in the world and has been known to use hyperbole to make a point. However, in this case, there are many other respected investors and analysts who see the same trends with deglobalization. For example, Howard Marks, co-founder and co-chairman of Oaktree, the largest private debt lender worldwide, recently penned a memo on a great sea change. Blackrock published their 2023 Global Outlook, which suggests investors need a new playbook. And, finally, former Chief Executive Officer of Pimco, Mohamed A. El-Erian, spoke with Entrepreneur, Grant Cardone.

Climate Change

Global warming is likely to be a major game changer with respect to investment strategies but not necessarily next year. Investing in companies that are part of the solution with respect to climate change is a long-term play, around 10 – 30 years. Below are two images: the first from an article published by Scientific American in November, claiming that we will not hit our target of limiting global temperature rise to 1.5 degrees Celsius. The other image is from a year-old Forbes article looking at what areas of the world will suffer economically as a result of global warming and which ones will benefit by 2100. Countries such as India, Saudi Arabia and Nigeria could see a cumulative GDP drop of 40% while Canada could see an increase of 60%.

Of course, predicting anything 80 years from now is, at best, an educated guess. A great example of this is the United Nation’s population estimates for the World by 2100. The low estimate is about 7 billion – which is 1 billion less than today – and the high is 15 billion. These ‘guestimates’ are not particularly helpful in terms of planning, but they do help with direction. More than a few papers indicate that Canada would be a net winner economically because of higher temperatures.

Three years ago we created the Nicola Sustainable Innovation Fund, with a primary focus on renewable energy and clean technology. Since then, the fund has earned a respectable 9.1% return on $234 milion of assets. The challenge with all funds in this space is that they have a very high level of volatility. Those who invest in these particular types of funds in order to align with their values may need to accept a bumpy ride.

However, it is my belief that companies focused on climate change will end up with better returns over the next decade than overall equity markets. Companies investing in renewable energy, battery storage, and infrastructure should grow overall at a significantly faster pace than global GDP .

Areas to consider that might be controversial to some

Nuclear Power – A great overall safety record and lower carbon footprint than hydro. Technically not a renewable energy source, though the U.S. supports it because it improves air quality, requires a small land footprint and has minimal waste. Some scientists believe we are still decades away from nuclear fusion but others see commercial appplications occurring within the next ten years.
Hydrogen Green and Blue – When hydrogen is burned it releases energy and water. There is a lot of research occurring to make it a viable fuel for both transporation and electricity. Green hydrogen is produced by using renewable energy, such as solar and wind, to convert water to hydrogen and oxygen. The entire generation process is clean resulting in power that can be stored and used in transportation. Blue hydrogen is typically made from natural gas so it has a carbon footprint, however, with sequestration techniques it has a much lower carbon footprint overall than simply burning natural gas. The Economist recently published an article on why the hydrogen hype is rising and what will be different about it this time.
Infrastructure – This involves investing in long term assets that help mitigate the impact of climate change; dykes, levees, water storage, building materials, energy efficiency, and technology to create sustainable food production are just some examples.
Fossil Fuels – Not all oil and gas companies are created equally. Fossil fuels will be with us for decades, but which oil companies are making the biggest investment to transition to renewable energy in order to lower their carbon footprint. The charts below put together by Global Data rank the best and worst oil and gas producers using these metrics.

Interest Rates

Of the five factors we are looking at, interest rates are likely to have the biggest immediate impact on asset classes and returns in the short to medium term. It is generally thought that lower interest rates are good for most investments such as stocks, real estate including housing, infrastructure, and private equity since lower debt improves the returns for investors in these asset classes.

That can be true, but it misses a key investment class: fixed income or debt. At the Davos 2022 World Economic Forum, global debt was estimated at approximately $300 trillion U.S. dollars. That is more than all other asset classes combined.

It is an interesting paradox that when calculating our net worth, we add up the assets which include investments in fixed incomes and then we subtract what we owe (debt or someone else’s fixed income asset). Debt is not really a pejorative unless used in excess and when that occurs, default or bankruptcy can easily follow. But, even when it does occur, the borrower is likely to lose 100% of their equity as they try and repay some of the debt. The lender sometimes loses all their capital as well, but often achieves partial recovery. In most cases, debt is less risky than equity and as a result earns lower returns.

Entering 2023, the situation has changed dramatically as a result of major central bank hikes in interest rates to try and defeat inflation. The two graphics below outline the impact higher rates have had on Canadian house prices and that if they continue to rise by another 1.5%, they will be the highest we have seen in twenty years.

Most central banks are committed to bring inflation down to 2% and given we are still over 6% in Canada and 7% in the U.S., that will take quite a while. In the meantime, short term rates are now higher in both countries than 10-year government bonds. That is what is called an inverted yield curve, which occurs infrequently. Why would someone ask for less interest on a 10-year loan to the government than a 30-day loan? It is because investors expect both rates to drop within the next year or two years because of a recession. We have had inverted yield curves nine times in the last forty years and in each case, they have been followed by a recession.

If rates are much higher now than they were a year ago – and likely to rise a bit more – are there any asset classes that could benefit? The answer is yes. While bonds have had their worst year total returns in more than 40 years, debt investments that are based on floating rates have done very well.

The chart below shows the current allocation for the Nicola Core Portfolio Fund as of December 2022. You will notice that fixed income investments are about a third of the total. In our pools, most of that debt is floating or short duration debt that benefits from rising interest rates. The table next to the Nicola Core Portfolio Fund indicates the current expected yields as of the end of December 2022 in our largest fixed income pools. If rates rise more than they have so far these yields will also rise.

We feel that fixed income assets with floating rate bases are a very good option going into 2023 and we will be allocating a greater percentage of our Nicola Core Portfolio Fund to these pools in 2023 as long as we are in this interest rate environment.

This brings us to what our plans are for investment strategy for 2023. Each year we have a business plan as a company and each year we look for a theme that is appropriate. For 2023 we chose “Finding Alpha,” where Alpha is asking the question: what can you find or create that the markets are not already giving you?

Over many years our approach of combining diversified asset allocation (public and private assets) with advanced financial planning (including disciplined investment execution) has allowed our clients to historically earn long term, better risk adjusted returns than the markets provided on their own. Alpha has been earned already. However, we can never be complacent and as such we must recognize when secular changes are occurring in the environment; a Sea Change as Howard Marks wrote.

The next slide will provide some insight as to the approach we will be taking with our three major asset groups in 2023. It will almost certainly be a bumpy ride with investment returns, the economy, and geopolitics in 2023, just as it was in 2022. Our clients earned an average of 7.5% net of fees in 2022 at a time when balanced portfolios lost 8% on average. We will continue to look for Alpha while maintaining the foundation of our Nicola Core Portfolio Fund.

We have recommended the Nicola Core Portfolio model for almost 25 years. Over time it changes, but the key major asset classes that represent fixed income (lending), real estate (primarily investment grade income producing), and equity representing ownership in business (private and public) are the three legs of the stool that matter the most. As noted, this model has performed well against external indices. The chart below shows the asset mix of the Nicola Core Portfolio Fund (“Core”), along with a measurement of how it has performed against other actively managed balanced portfolios (237 of them). This comparison was compiled with data from Morningstar as of September 30th, 2022.

We are pleased with the Nicola Core Portfolio Fund’s performance over an extended period of time, but most of our clients have a bespoke portfolio that is similar to Core but designed for their specific needs. We measure all client returns and the Nicola Core Portfolio Composite is what we post on our website. The Crisis Management chart shown earlier looks at three periods of time where we experienced bear markets. The dot-com bubble (2000-2002), The Great Financial Crisis of 2008, and 2022. It compares our actual client results net of fees to Morningstar Neutral Balanced portfolio.

What is important to see is that this truly diversified asset allocation model when well executed outperforms traditional balanced stock and bond portfolios. Never more so than during periods of crisis.

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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 is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required securities commissions. This is not a sales solicitation.

Investments discussed in this piece are 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. Effective January 1, 2019 Nicola Global Real Estate Fund, Nicola Canadian Real Estate LP, Nicola U.S. Real Estate LP, and Nicola Value Add LP adopted new mandates and changed names from NWM Real Estate Fund, SPIRE Real Estate LP, SPIRE US LP, SPIRE Value Add LP.

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.

The Nicola Core Composite returns represent the total returns of Cdn. dollar denominated accounts of all fee-paying portfolios with a Nicola Core mandate. The composite includes clients who are both fully discretionary and nondiscretionary. Historical net of fee composite performance returns are calculated using individual realized time-weighted client returns net of fees and is presented before tax. The Nicola Wealth inclusion policy is based on clients’ weights at calendar month end. The composite returns are asset-weighted based upon ending monthly market value. The Nicola Core mandate may change throughout time. Additional information regarding policies for calculating and reporting returns is available upon request. The composite returns presented represent past performance and is not a reliable indicator of future results, which may vary; returns are calculated as found here. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions.

Morningstar Canadian Neutral Balanced is a proprietary index developed by Morningstar Canada based on the CIFSC Fund categories (www.cifsc.org). This index includes funds which meet the following criteria: Funds in the Canadian Neutral Balanced category must invest at least 70% of total assets in a combination of equity securities domiciled in Canada and Canadian dollar-denominated fixed income securities and between 40% and 60% of their total assets in equity securities.

See the Forest for the Trees