Market Commentary: As the End of the Tunnel gets Brighter, the Tunnel is a Little Darker


By Rob Edel, CFA

 

Highlights this Month

 

November In Review 

November was another risk on month for markets, with global stocks recording their highest monthly returns since 1988 as the MSCI ACWI (All Cap World Index) +increased 12.4% in US dollar terms, or +9.3% in Canadian dollars.

US markets continued to hit all-time highs, with the Dow Jones Industrial Index topping 30,000 for the first time ever on November 24th. The Dow went on to lose a little ground before month-end, but the S&P 500 and the NASDAQ both ended the month at record highs. For the S&P 500, November’s 10.9% gain was the highest return in the month of November since 1950. Even more welcome was the fact it wasn’t just technology and growth stocks moving higher.

Fueling the rally was good news on the vaccine front and relative calm on the political front. Balancing off the good news was rising COVID-19 infection rates and a stalling economy. Low-interest rates and central bank liquidity have kept investors safe during the pandemic, while government aid and stimulus has provided a bridge to help consumers and businesses survive until herd immunity is reached and social distancing and government-imposed lockdowns are eased. The end is in sight, but how much of the good news is already priced in, and perhaps more importantly, what could cause a stumble before we reach the finish line? We break it all down below.

Markets are overbought, perhaps uncomfortably so.

After the strong rally off the March 23rd lows and a record-breaking November, it should come as no surprise that markets are overbought, perhaps uncomfortably so. According to Strategas, momentum rivals that of late 2009 while investor intelligence sentiment has turned decidedly bullish. As a consequence, flows into US stock mutual funds and ETF’s have turned sharply higher. Better than expected (or feared) earnings have helped, but much of the move has been due to higher valuations, which are hitting levels not seen since the dot-com bubble of the late 1990s. Earnings forecasts for the next couple of years might also be too optimistic.

It’s one thing to expect a recovery, but some forecasts are starting to factor in an acceleration in growth. According to FactSet, the compound annual earnings growth rate of most S&P 1500 sectors from 2019 to 2022 is expected to exceed that of the nine years before the pandemic (2011 to 2019), even though the Trump tax cuts help inflate the pre-pandemic earnings growth rate. It’s a high hurdle analysts are building in, though perhaps they are just taking corporate America’s word for it. According to Axios, CEO confidence is also higher now than before the pandemic.

An even higher hurdle is being discounted by retail and momentum traders in the alternative energy, IPO (Initial Public Offering), and big-cap technology sector. While it can be argued the broader market is overbought or extended, many stocks in these groups are looking more and more like a red-hot bubble ready to burst into flames. Easily beating the S&P 500, many retail investors are sporting returns that put most hedge fund managers to shame.

So strong has been the outperformance of many growth stocks, some started referring to the phenomenon as a looming grey rhino event, a large obvious situation that is ignored until it charges. Last month the rhino charged as momentum abruptly shifted away from favouring growth to that of value. The rapid shift out of momentum and into value was one of the biggest factor shifts in market history.

Small-cap, economically sensitive and cheap finally became in demand.

While historically an abrupt shift like this would likely signal negative market returns, this was not the case last month. As a result of some very good vaccine trial results from Pfizer, hopes the end of the pandemic is in sight led to a massive rally in economically sensitive stocks that would benefit from an economic recovery, particularly those most impacted by social distancing and lockdown measures. The momentum names fell, but not significantly, and not for long. It wasn’t so much the case the leaders faltered, but it was time for the so-called “B Team” to take the field. Small-cap, economically sensitive and cheap finally became in demand. As a result, the market rally widened, which is what we were looking for in order to have confidence stocks could continue to move higher.

The two factors responsible for last month’s shift and their future impact.

In order to determine how sustainable the shift in momentum towards value is we need to look closer at the two factors responsible for last month’s move and their future impact on economic growth, namely the pandemic and politics. The pandemic was, of course, front and center, with the light at the end of the tunnel getting brighter, but the tunnel leading to it a little darker. New cases continue to move higher in most regions, exceeding numbers experienced during July’s second wave and March and April’s initial outbreak. Increased testing, however, makes it harder to compare today’s numbers against earlier time periods. Hospitalization and death rates are more comparable and indicate the US is actually close to levels seen during the summer. If infection rates continue to rise, however, hospitalization rates and deaths will likely rise above previous levels and the health care system risks becoming overwhelmed. While it is true we know a lot more about COVID-19 than we did back in March, a recent research report by Bernstein maintains the case fatality rate has been relatively stable since July and there is no reason to believe it is set to fall meaningfully in the short term. Bottom line, more cases will lead to more people in the hospital, and regrettably, more deaths.

COVID-19 vaccine brings hope to the markets.

If the rising case count is the dark tunnel, the prospects for a vaccine is the light at the end, and the light got a lot brighter last month. On November 9th, Prizer and BioNTech announced late-stage clinical trial results for their messenger RNA vaccine indicating over 90% efficacy. A later update increased the effective rate by up to 95%. Pfizer’s stunning results were validated a week later when Moderna, using the same mRNA technology, announced a similar 95% effective rate. According to McKinsey, the positive trial results mainly served to reduce the tail risk around the timeline to reach herd immunity, which they estimate to be between Q3 and Q4 next year, with probabilities now skewed more towards Q3.

According to super forecaster Good Judgement Inc., a majority of Americans now believe that enough vaccine to innoculate 200 million people will be available in the US in the first half of 2021. Between 2015 and 2019, the FDA review process for vaccines lasted anywhere from four months to a year. With Britain and Canada already giving the green light, the FDA is expected to give approval immanently (which they did on December 11th).

Don’t pop the champagne corks yet, however, next comes the logistics of producing and distributing the vaccines to as many people that agree to take it. Both the Pfizer and Moderna vaccines need to be stored at temperatures well below freezing. Pfizer, which has designed a special container for its vaccine, requires minus 70 degrees Celcius, while Moderna’s threshold is a relatively balmy minus 20 degrees. For reference, the average temperature in Antarctica is minus 50.

Both vaccines require two jabs, about three weeks apart, with immunity achieved about a month after the first dose. They are also hard to produce, and expensive, with Moderna’s vaccine estimated at $37 a dose and Pfizer’s at $20. Perhaps a better option will be Johnson and Johnson’s vaccine candidate, a one-dose option believed to be priced at only $10. The trial results are eagerly anticipated in January. AstraZeneca-Oxford’s viral vector vaccine candidate is even cheaper, at $4 a dose, and is easier to manufacture and distribute than the more challenging mRNA vaccine being developed by Pfizer and Moderna.

Along with Pfizer and Moderna, AstraZeneca has been one of the front runners in the vaccine race and is currently outpacing its rivals with orders for nearly 4 billion doses. AstraZeneca’s trial results, however, were not quite as good as it’s competitors. At an overall 70% efficacy rate they are likely good enough to get approved, but AstraZeneca inadvertently ran two trials, one with an initial full dose, and another with participants accidentally only getting an initial half dose. Interestingly, the group only getting the half dose had significantly better results. It could be Astra Zenica might have to run another trial, which will delay the rollout of their vaccine. This is unfortunate and could delay herd immunity plans for many counties, particularly those outside of the US and Western Europe.

In order to get the World back to normal, a global solution will be needed, but in the short term expect countries to take a more nationalist approach. Fortunately, Canada and the US lead the world when it comes to vaccine orders. Canada actually leads the world with enough vaccines on order to innoculate the entire population of Canada more than four times over, with good diversification over different platforms and companies. Our orders with Pfizer alone would be enough to do the job, and our Moderna orders are not far behind. Canada actually has relatively little exposure to the AstraZeneca vaccine. Of course, there is some controversy over when we will get the vaccines, given it appears we were a little tardy in placing our orders. Perhaps that is why the Federal Government has ordered so much? Regardless, Canada and the US are in good shape with ample orders for what is looking to be the first vaccines to be approved.

Goldman Sachs estimates vaccine supply will exceed demand by April in North America, and the Public Health Agency of Canada believes the vaccination process for the general population should start in April with all Canadians inoculated by the end of August. Going forward, risks will shift away from the efficacy and safety of vaccines towards the complex logistics around distributing the multiple vaccines expected to be available in a speedy and efficient manner. Any hiccups could result in a short term increase in market volatility, but with so much supply on the way, it would likely only be temporary. Only if serious safety issues develop will the timeline slip and tail risks increase.

While this is obviously good news and a major reason for November’s strong rally, it can’t come soon enough. American Thanksgiving is expected to result in a further spike in new COVID-19 cases as it is likely social distancing recommendations fell short. The damage will be even worse with the Christmas season quickly approaching. Lockdown fatigue is taking a toll and it is becoming increasingly difficult to convince people to remain isolated. As a result, cases are increasing, and ICU beds are becoming scarce. A vaccine can’t come soon enough, because the tunnel could get darker as we get deeper into winter.

What is needed is strong leadership as Joe Biden prepares for office.

What is needed is strong leadership, but unfortunately, that doesn’t officially arrive until January 20th, Joe Biden’s inauguration day. President-Elect Biden isn’t waiting, however, and the transition to the Biden Administration is continuing to gain momentum as Biden announces his picks for the various cabinet positions. Fears of violent demonstrations fueled by a President who refuses to leave the White House have largely disappeared, which removed one more tail risk for the market last month.

There are still some loose ends that need to be mopped up, however, like the January 5th Georgia run-off election that will decide which party controls the Senate. Republicans are expected to take at least one of the two seats, which is all they need in order to maintain control of the upper chamber. If they lose both, however, Democrats would take control of Congress and allow President-Elect Biden to follow a more progressive agenda. With former Federal Reserve Chairman Janet Yellen being tapped by Biden as his Treasury Secretary if Democrats take the Senate expect the spending spigots to be turned fully open given her past views on spending and deficits.

Markets might like the short-term boost to economic growth but would react poorly to the accompanying higher corporate taxes and longer-term debt concerns. We are also waiting to see if Congress can agree on more fiscal stimulus, which is sorely needed to help the US economy bridge the gap until a vaccine arrives. Lawmakers appear to be closing in on a deal in the $900 billion range, but state aid and liability protections for companies remain sticking points. A deal will happen, it’s just a matter of when. We would expect an increase in bipartisan cooperation after the January 5th run-off elections as the stakes for both sides are very high before then with control of the Senate hanging in the balance.

One of the reasons Republicans have been able to hold off so long in agreeing to a deal is the economy has been stronger than expected, both domestically and globally. With the second or third wave of the pandemic causing more lockdowns, however, economic growth is starting to slow. The US jobs recovery is losing steam and without a new stimulus deal extending Federal employment programs, many Americans could be left without support by the end of the year. Again, it will get done, but the longer it takes, the more permanent damage will be done. So far, the market doesn’t appear concerned with either the Georgia run-off elections or the lack of a stimulus bill.

Should we be concerned with economic growth in 2021?

Rather than be concerned with a potential downturn in economic growth in early 2021, perhaps more on the market’s radar screen is a spike in growth once the economy re-opens next year as pent-up demand is unleashed, spurred on by easy monetary conditions and low (no) interest rates. The Federal Reserve has said they have no intention of raising interest rates, even if inflation moves above their 2% target, but surely they would start the tightening process by tapering their quantitative easing program?

Janet Yellen might not care about asset bubbles, but what about current Chairman Jay Powell? To gauge the market’s sensitivity to such an event, we look towards the bond market, which last month remained rather subdued. 10 and 30-year bond yields did move a little higher after the Pfizer vaccine trial results, but they have since fallen back. According to Strategas, most sell-side analysts don’t see 10-year yields moving materially higher next year, with only 4 out of 54 forecasting 10-year yields will exceed 1.5% by the end of next year. For reference, 10-year yields ended last month at 0.84%, down significantly from its year-end 2019 level of 1.92%.

Virtually no one expects 10-year yields to get anywhere close to where they were just a year ago. Inflation breakeven rates have moved higher, which bears some watching since the market’s view on inflation will be crucial in determining where valuations will go next year, but real rates haven’t gotten any traction. It is likely the Fed will let nominal 10-year yields move up a little, with a steeper yield curve helping motivate banks to increase lending, but they will generally keep a pretty tight reign over yields.

This is likely why the bond market doesn’t see yields move much higher, despite the rosy economic forecast being discounted by the equity market. This is all good as far as risk assets (like equities) go. Higher, but not too high, inflation is a sign the economy is recovering, but as long as real interest rates remain low (and preferably negative), valuations (for equities) can continue to remain elevated.

While strong global economic growth and low-interest rates are good for risk assets like equities, it’s apparently not so good for the US dollar. After a 10-year bull market, the greenback has started to roll over, down 2.3% last month on a trade-weighted basis, and -4.7% year to date. While looking a little oversold, according to BCA Research, Asset Managers believe it can go even lower, with US dollar short positions reaching record levels last month.

When global growth turns higher, the US dollar comes under pressure.

The US dollar is generally seen as a countercyclical currency, meaning when global growth turns higher, the dollar comes under pressure. Also causing traders to bet against the greenback is the growing twin deficits, budget and trade. Higher budget deficits mean more dollars in the form of Treasury Bonds will be in circulation, and a higher trade deficit means more dollars will find their way into the hands of foreign exporters. It’s the opposite situation global currency markets found themselves in at the beginning of the pandemic. Everyone wanted dollars because it was seen as a safe haven. Now there is plenty to go around.

Low real interest rates also make the dollar less appealing. As mentioned above, if US inflation is allowed to move higher, but bond yields are kept low, real interest rates will stay low (they are negative right now) or even go lower. Foreign holders of US Treasury Bonds, of which there are many, would likely look to hedge their positions in this scenario by swapping their exposure back into home currency. Not to get too technical, but this would result in more US dollar selling and a weaker US dollar.

As for the Canadian dollar, it benefits on two fronts.

In general, the loonie is viewed as a cyclical currency, given our exposure to natural resource exports, particularly oil. A stronger global economy should benefit Canada. The C$ should also appreciate just based on the weakness in the US dollar. It’s not so much the loonie is going up, but the US dollar is going down. The Canadian dollar was up 2.4% in November but has basically done a round trip this year.

After falling nearly 12% during the depths of the pandemic correction, the loonie has rallied and ended November back to where it started the year, unlike the Euro and even the Australian dollar which are both in positive territory. Working against the Canadian dollar is low oil prices, which many fear (or hope) has seen peak demand, even if the global economy recovers. Canada also suffers from a perennial current account deficit that requires a steady stream of foreign capital to fund. If currency traders fret over US deficits, they are not going to like what Canada has done during the pandemic given government deficits as a percentage of GDP in Canada have been the largest in the developed world.

The US dollar has the luxury of being the World’s reserve currency, so there is always going to be a demand for greenbacks. Canada doesn’t have the same exorbitant privilege. Fortunately for the C$, Canadian fixed income, both government and corporate, are still in vogue, especially given yields are in positive territory versus yields in many other developed economies. Most forecasters have the loonie continuing to gain ground on the greenback next year, but not materially.

Given high consumer debt in Canada, we see the Bank of Canada lagging the US in tightening monetary policy, which could provide a headwind to any rally in the loonie. Canada needs to continue to diversify its economy away from natural resources, and a stronger currency won’t help the cause. On balance, there probably isn’t a lot to choose from between the loonie and the greenback. The trend is in favour of the Canadian dollar, but we are cautious on the longer-term outlook.

Gold suffered its worst month in four years.

With a weaker US dollar, growing deficits, and low real interest rates, one would be excused for thinking last month must have been a good month for gold, right? Sadly no, gold suffered its worst month in four years, down over 5% in US dollars and nearly 8% in Canadian dollars. What was interesting was that gold corrected, despite real interest rates remaining virtually unchanged.

The short term risk to gold is a stronger economy causes nominal rates to move higher in anticipation of higher inflation, but without reported inflation actually strengthening. Under this scenario, real rates move higher, which is bad for gold. As described above, this isn’t what happened last month. Real rates actually moved down a little. The decline in gold was probably due to little profit-taking after its strong year to date returns.

Gold is also seen by some as a safe haven asset, which might be less in demand after last month’s vaccine news. Traders likely liquidated their positions in order to allocate to more cyclical risk-on assets. Longer-term, if the Fed really does want to see higher inflation, while at the same time recognizing the need for nominal interest rates to remain low in order to keep debt service cost manageable, real interest rates can be expected to stay negative. This is bullish for gold.

Bitcoin is up over 170% but terrible for the environment.

While this explains what happened with gold last month, we’re not sure how to reconcile this with the +40% move in Bitcoin. The investment case for the cryptocurrency is typically similar to gold, an alternative to fiat currencies that can’t have its purchasing power eroded by central banks’ money printing. Recently, however, Bitcoin appears more correlated to risk assets like stocks than a safe haven like gold. Year to date, in fact, Bitcoin is up over 170%, even outpacing the high flying Nasdaq, topping its 2017 high above $19,000 US per token.

When Bitcoin’s price per token went parabolic a few years ago, it was mainly driven by tech-savvy early adopters while the mainstream investment industry largely dismissed it as a passing fad. In its current second act, the diehards and true believers are still pounding the table, but so are some very respected traders and hedge fund managers. Just the fact Bitcoin has managed to remain relevant after so many years makes one at least give it some respect, but with the Chicago Mercantile Exchange (CME) and Intercontinental Exchange now trading Bitcoin derivatives, institutional investors have a more legitimate source for price discovery.

Online platforms like Square, Robinhood, and PayPal also allow Bitcoin to be purchased and held in digital wallets, making it easier for retail investors to buy and hold. Proponents will point out the there is still plenty of upsides left in Bitcoin. Financial Historian Niall Fergusson, argued two years ago that if the world’s millionaires, estimated by Credit Suisse to number 36 million with $128.7 trillion in total wealth, were to collectively allocate just 1% into Bitcoin, the price per token would soar to $75,000.

In a recent Barron’s article, Fergusson reiterated his positive views, citing Bitcoin as his number one post-pandemic investment to watch. Of course, there are a few things investors need to get their heads around if they want to participate. It is very volatile, and no one really knows who holds it and thus who is behind the recent rally. While there are more individual accounts holding bitcoin, according to researcher Flipside Crypto, ownership remains very concentrated, with just 2% of holders controlling 95% of Bitcoin supply.

It’s also not very environmentally friendly. The power needed to drive the mining and “proof of work” algorithms behind the Bitcoin infrastructure is believed to be equivalent to just under 50% of Argentina’s annual consumption. And where are many of the Bitcoin miners located? China, where there is access to cheap power, likely fueled by coal. Just saying. It takes a lot of energy to mine gold as well, but at least we have a better idea of where it comes from, and who holds it. It’s tempting to ride the Bitcoin wave, but it’s not for the timid, or environmentally conscious.

Overall, returns were strong last month as investors looked beyond the dark tunnel caused by the pandemic as we moved closer towards the bright light of vaccines and stronger economic growth. There are still some political risks, with the upcoming Georgia Senate runoff on January 5th and the impasse between Republicans and Democrats in passing a much need fiscal stimulus package, but an orderly transition of power on January 20th is now a near given, removing a potential big tail risk for the market.

Backstopping any missteps is a central bank willing to keep interest rates low, monetary conditions easy, and liquidity plentiful, which is music to the market’s ears. This doesn’t mean the investor’s job is done, as not all assets are created equal, and the market won’t treat them as such. Some have more upside than others in an economic recovery, and high valuations and the ever-present threat of a correction remain constant threats during what is expected to be an eventful 2021. More on that next month.

Nicola Wealth Portfolio Results

Returns for the Nicola Core Portfolio Fund were +3.1% in the month of November. 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.

The Nicola Bond Fund returned 1.4% in November. Our low duration, the credit-focused strategy was in favour for the month as we were able to avoid the headwinds from a steepening yield curve while benefiting from credit spreads tightening. Credit spreads narrowed across the spectrum but was more prominent in BBB names, particularly in Canadian real estate. During the month, the Bank of Canada confirmed its commitment to keeping interest rates unchanged and will likely keep rates at 0.25% until 2023. Although the Bank of Canada reduced its purchase program from a minimum of $5 billion to $4 billion, they will now focus more on longer-dated bonds. These actions effectively anchor the short end of the curve while also influencing the longer end of the curve reducing risk overall for fixed income.

The Nicola High Yield Bond Fund returned 0.2% in November. We lagged the market as the iShares iBoxx High Yield Corporate Bond ETF was up 3.4%. The difference in returns came from mainly two contributing factors: the weakness in the US dollar caused a headwind of -1.6% for the Nicola High Yield Bond Fund and underweight of sectors that have been severely hurt by the virus. The strong returns in the index for the month were largely driven by CCC-rated bonds in industries hardest hit by COVID-19, mainly Energy, Airlines, and Retail where the total return for CCC names was roughly 6% for the month.

We have positions in these industries but are more defensively orientated as we are underweight Covid-centric industries and our positions in the space are generally senior secured and thus have less downside risk but also less upside participation. While default rates ticked up for the month to 6%, going forward it appears that the default rate may subside to 4% by year-end 2021. We initiated a position in the Pimco Tactical Income Fund at the end of October. With just over a month of returns, the investment is up approximately 4%. We have known the Pimco PM for many years and have invested with the team in our global bond mandate. We were offered the fund during its IPO at a 1.6% to Net Asset Value which gave us an attractive entry price.

The Nicola Global Bond Fund was up 0.2% for the month. Pimco Monthly Income had a strong month returning 2.5% while other strategies were relatively flat. Pimco’s returns were offset by a currency headwind as the US dollar weakened causing a drag of -0.4% in the portfolio. We remain defensively positioned in the portfolio but there is potential upside coming in 2021. As PMI’s (Purchasing Managers’ Index) in the US return to expansionary territory and with a vaccine on the horizon, global economies have a higher likelihood of reopening and global growth should resume. The result may be a pivot of investors from safe-haven Treasuries to higher-yielding emerging market bonds.

Returns for the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund were -0.13% and +0.39% respectively for November. The negative return for the Nicola Primary Mortgage Fund is a result of a downward adjustment to the valuation of a loan in default. Despite the lower valuation of this loan, we are optimistic that there will be a full recovery over time. We continue to review a high number of new investment opportunities for both the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage fund.

The Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund had strong net subscriptions in November which contributed to elevated cash levels of 19.6% in the Nicola Primary Mortgage Fund and 26.3% in the Nicola Balanced Mortgage Fund at month-end. These cash levels are expected to moderate somewhat as there are a number of loans in both funds scheduled to fund in December. Current annual yields, which are what the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund would return if all mortgages presently were held to maturity and all interest and principal were repaid and in no way is a predictor of future performance, are 4.0% for the Nicola Primary Mortgage Fund and 5.2% for the Nicola Balanced Mortgage Fund.

The Nicola Preferred Share Fund returned +7.2% for the month while the Laddered Preferred Share Index returned 6.4%. The risk-on tone assisted returns for preferred shares despite ETF outflows in the space. During the preferred share rebound, banks and insurers have led the charge in support of Limited Recourse Capital Notes taking the place of preferred shares.

November marked a month where the value was highlighted in other industries as well. BCE announced a buy-back program up to 10% of outstanding issues over the next year helping to support BCE preferred share prices. Additionally, our investment in Artis REIT preferred shares appears to be moving faster than anticipated. With pressure from an activist investor, Sandpiper, the CEO and CFO of Artis have retired and Sandpiper’s five nominees have been appointed to the Board. We are constructive on the changes the board and new management will make on unlocking value in Artis, specifically as they review their capital structure.

The S&P/TSX was +10.5% while the Nicola Canadian Equity Income Fund was +11.8%. The strong performance in the Financials and Energy sectors were the largest positive contributors to Index returns in November as positive news on a vaccine propelled the market higher. With risks seemingly declining, Gold took a step back as the Materials sector was the only negative contributing sector to Index returns. Strong performance in Real Estate, Industrials and Financials where our Nicola Canadian Equity Income Fund is overweight drove the outperformance in the month. The top positive individual contributors to the performance of the Nicola Canadian Equity Income Fund were Air Canada, Methanex, and IA Financial Corp. The largest detractors were Kirkland Lake Gold, Open Text and Kinaxis. We added a new position in electronics payment processor company Nuvei in November. We sold Open Text Corp.

The Nicola US Equity Income Fund returned +11.6% vs +11.0% for S&P 500. The Nicola US Equity Income Fund’s performance during the month was driven by its exposure to energy (Valero +42%), financials (Citigroup +33% & Morgan Stanley +28%) and consumer discretionary (Dollar Tree +25%) which all benefited from positive vaccine announcements and the continuation of a rotation from growth to value stocks (i.e. U.S. economy re-opening stocks). During the month, we sold Viatris (Pfizer spin-out), trimmed back Comcast and Valero and added to Boston Scientific and TJX Companies. The Nicola US Equity Income Fund ended the month with a delta-adjusted equity exposure is 95% with an annualized cash flow is 3.2%. No option writing during the month.

The Nicola U.S. Tactical High Income Fund returned +7.8% vs +11.0% for the S&P 500. The Nicola U.S. Tactical High Income Fund’s performance during the month was driven by its exposure to Energy (Valero), Financials (Citigroup & American Express) and Consumer Discretionary (TJX Companies) which all benefited from positive vaccine announcements and the continuation of a rotation from growth to value stocks (i.e. U.S. economy re-opening stocks). The  Nicola U.S. Tactical High Income Fund purchased $31MM of existing names and scaled back call-option and put-writing activities which helped returns during the month (gross long positions increased from 35% to 45%).
We sold our Carlisle position and trimmed Cheesecake Factory and Oshkosh in order to more closely align the Nicola U.S. Tactical High Income Fund with the Nicola US Equity Income Fund.

The Nicola Global Equity Fund returned +9.1% vs +9.3% for the MSCI ACWI Index (all in CDN$). The Nicola Global Equity Fund Portfolio’s strong performance was driven primarily by its large exposure to developed Europe (27.5%), continued strength in small-cap over large-cap, and a rotation into cyclical sectors (Energy, Financials, Industrials & Materials). Performance of our managers in descending order was Edgepoint Global Portfolio +13.2%, Nicola EAFE +11.6%, Lazard Global Small-cap +10.4%, Pier21 Global Value +7.9%, Pier 21 Worldwide Equity +6.7%, JP Morgan Global Emerging Markets +6.7% and BMO Asian Growth & Income +5.4%.

The Nicola Global Real Estate Fund return was +1.9% in November vs. the iShares S&P/TSX Capped REIT Index (XRE) +17.6%. YTD, the publicly-traded REITs have lagged the broader Canadian market by a wide margin as the iShares S&P/TSX Capped REIT Index is down -11% as of the end of November. Q3 results for publicly-traded REITs exceeded expectations and we are encouraged by the relative stability of in-place occupancy rates and the sharp rebound in rent collections. The announcement of positive results from COVID-19 vaccine trials has increased our confidence in a recovery in fundamentals. We are bullish on the real estate complex and we view that the distributions paid by REITs are safe and represent a large yield pick-up vs. government bonds. We also believe that the sector trades cheaply compared to what the underlying property portfolios are worth. We continue to favour the Multi-family and Industrial sectors and are overweight in those areas in the portfolio. There were no new names added or subtracted in November.

The Nicola Sustainable Innovation Fund returned +14.4% (USD)/ +11.6% (CAD) in November and has returned +48.5% (USD)/ +48.5% (CAD) year-to-date. Plug Power, Ballard Power, and Alstom were the top contributors to performance while new holding Beam Global was the lone negative position in the month. Two new names were added to the portfolio this month: Array Technologies – the second largest global designer and manufacturer of solar tracking equipment and Beam Global – a developer of unique solar-powered EV charging and energy storage solutions. Heading into the US election we carried a larger cash position in anticipation that there may be volatility in the renewable energy sector and related names and we tactically added to existing names on weakness during the month.

While we await a pair of Georgia Senate runoff elections in January to determine if the Democratic ‘Blue Wave’ materializes, the base case appears to be a Republican-controlled Senate which means some of the more aggressive climate policies President-Elect Biden hoped to enact will be lessened. Even with a divided US government, we still see attractive long-term investment opportunities in renewable energy and clean technologies, and we continue to look outside of North America for prospective investments as well. Our cash position has drifted back near 10% and we will continue to use this to opportunistically deploy into names we like between now and the end of 2020.

The Nicola Alternative Strategies Fund returned -1.4% in November. The currency was a large headwind detracting -1.5% for the month. In local currency terms since the Nicola Alternative Strategies Fund was last priced, Winton returned -0.4%, Millennium +0.7%, Renaissance Institutional Diversified Global Equities Fund -6.7%, Bridgewater Pure Alpha Major Markets +3.5%, Verition International Multi-Strategy Fund Ltd +1.5%, RPIA Debt Opportunities +1.3%, and Polar Multi-Strategy Fund +0.1%. Bridgewater benefited from the strong returns in the overall market as their net long exposure to equities drove returns higher for the month while RPIA benefited from strong credit spread compression particularly in BBB-rated names.

The Nicola Precious Metals Fund returned -6.3% for the month while underlying gold stocks in the S&P/TSX Composite index returned -12.3% and gold bullion was down -7.6% in Canadian dollar terms. The weakness in gold stocks was more prominent in large-cap names as investors concentrated on more liquid stocks as they looked to reduce their gold exposure. Our exposure to smaller cap names, namely Marathon Gold, Orla Mining, and K92 Mining helped mitigate some of those losses. After a strong start to the year, gold has sold off over the past few months as investors have pivoted away from the safe-haven asset. Despite the sell-off, our Nicola Precious Metals Fund is still up 30% for the year and we believe that as we get closer to a vaccine and a more normalized environment, concern on inflation should support gold prices in the longer term.

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