Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

Market Commentary: Goldilocks and the Two Tails

By Rob Edel, Chief Investment Officer

Highlights this Month


February In Review 

After a rough start to the year, markets recovered in February with the S&P 500 (all returns in Canadian dollar terms) up 2.0%, and the Canadian S&P/TSX increasing nearly 4.4%. Based on the headline indices, it appeared the bull market continued to run last month, but beneath the surface, it was apparent investors were chasing a different breed of stocks.

Rather than growth and technology-orientated names, a broader more cyclical group of stocks were leading the charge. The large-cap growth and technology-heavy Nasdaq 100, in fact, was down 0.8% while the smaller cap and more cyclical Russell 2000 Value ETF gained 8.8%.

The two tails of where economic recovery could go.

Investor preference for smaller companies was seen across the entire market, in fact, with Strategas observing the “average” stock outperformed in every sector last month. While the change in leadership within the equity market was notable, even more significant perhaps was the change of fortune for equities in general compared to bonds. According to Bloomberg, the first 28 trading days of 2021 saw the S&P 500 out-perform the ICE BofA 10-year Treasury index by nearly 9.3%, the most since 2013.

While the bull market in stocks may still be running strong, bond returns have stumbled, with yields moving higher and prices declining. In order to determine what might be happening and the implications for investors going forward, we thought a normal distribution chart by BCA Research titled “Goldilocks and the Two Tails” explained the current outlook in a clear and concise manner. The higher probability Goldilocks scenario is one in which the economy continues its strong post-pandemic economic recovery in a very accommodative monetary environment as central banks continue to expand their balance sheets and keep interest rates near zero.

The less optimistic left tail of the normal distribution is one where the COVID-19 virus reasserts itself and the economy weakens, while the right tail is one in which the economy booms, but perhaps the Fed becomes less friendly. Market action last month was indicative of traders starting to position portfolios in anticipation of the right tail becoming more consensus, and we will use the rest of this commentary to explain why and what the implication might be for markets.

What happens if the pandemic drags on longer than expected?

Before exploring the optimistic right tail, we first need to rule out the more pessimistic left tail, which is one in which the pandemic drags on longer than expected and causes the economic recovery to stall, or even reverse. According to long-term modelling, new variants have the potential to cause a possible third wave greater than the first two, and while new cases in the US and UK have been declining, others have seen a resurgence in new cases, particularly in continental Europe and Brazil. Even in Canada, while we haven’t seen the third wave, new infections have remained stubbornly steady, despite relatively strict social distancing rules remaining in place.

Some worry success in controlling the virus south of the border is leading some States to jump the gun and remove restrictions prematurely, leaving the US vulnerable to what would be the fourth wave of new US infections. Stay at home orders have now been relaxed in most States and most businesses are open for business. Many States have also removed requirements to wear masks, with Texas recently being a notable example. This is dangerous as the virus has shown an extraordinary ability to exploit even the slightest slip in resolve.

Vaccines provide a light at the end of the tunnel.

While variants and pandemic fatigue bolster the case for the left tail, vaccines more than make up the difference in tipping the scales to the right. While Israel leads the way in terms of percentage of population vaccinated, the US and the UK top the list in terms of the total number of vaccinations administered, and by a considerable margin. As of early March, the UK had jabbed over 23 million shoulders, while the US total was over 90 million, with new doses per day recently exceeding 2 million. Adding up all the doses promised by the manufacturers of the three approved vaccines in the US, America could have enough vaccines to cover its entire population by early July. While variants are still a potential concern to vaccine efficacy, the fact new infection rates are declining in the UK and South Africa, countries particularly hard hit by variants, give confidence the vaccines will still be effective and herd immunity will be reached.

When is herd immunity expected to be reached?

The exact timing of herd immunity is hotly debated, but Goldman Sachs believes about 30% of the US population (as of February 24th) have already been exposed and thus are already immune, while another 14% have been vaccinated, bringing the current immunity total to 44%. According to a recent Washington Post article, assuming herd immunity could be reached at 80% of the total population and assuming daily doses administered scaled up to 2.85 million, the US could reach herd immunity by July 19th.

Add some wishful thinking by lowering the herd immunity threshold to 70% and increasing shots per day to 3.5 million, and herd immunity day could be as early as May 28th. This is definitely right tail thinking, but doable. In fact, it could happen even earlier. The faster we get herd immunity, the faster restrictions are lifted and the economy can get back to its pre-pandemic capacity, which is what the market wants to see.

America’s extraordinary economic gamble.

While herd immunity certainly increases the odds of moving us closer to the middle of the normal distribution and avoiding the dreaded left tail, what pushes us closer to the right side of the tail is fiscal policy. President Biden looks on his way to successfully passing a $1,9 trillion stimulus package, called the “American Rescue Package”, of which Strategas estimates $1.4 trillion will be distributed in 2021. At 11.7% of GDP, this is well in excess of the 6.9% of GDP distributed during the 2009 financial crisis and 2% more stimulus than last year during the height of the pandemic. With this additional spending, the US overtakes Canada as the global fiscal stimulus leader during the pandemic, and according to Morgan Stanley, will shock the American economy back to life and push US GDP to rise above its pre-Covid path in Q3 of this year.

What is the capacity of the US economy, how close are we to it, and what happens if the US grows beyond it? The simple answer is no one can really be sure what full capacity is, and we’ll likely only know we have exceeded it after the fact when inflation starts to increase. For its part, the IMF believes the US is closer to full capacity than other larger economies and only expects a modest gap to remain in 2021.

Even without additional stimulus, the CBO believes the output gap should close and the additional Biden stimulus will eliminate excess US capacity. Gavekal questions whether the stimulus will cause the US economy to overheat, a concern also expressed on the cover of a recent issue of the Economist, not only claiming the economy was running hot but referring to it as America’s extraordinary economic gamble.

Perhaps most telling was the reaction of former Treasury Secretary Lawrence Summers. Long a proponent of more fiscal stimulus to cure what he believes is the secular stagnation of the US economy, Summers has spoken out against the massive Biden stimulus package, fearing it is too much and could result in higher inflation.

Concerns on overheating economies and inflation are spilling into the financial markets.

Concerns over the potential overheating economies and inflation are starting to spill over into financial markets, and global bond markets in particular. While the move upwards in US 10-year yields has justifiably received most of the attention, it’s not just US rates that have been moving higher. In fact, while US 10-year rates are still below their pre-Covid levels, many other countries have seen their 10-year yields exceed their January 1st, 2020 levels.

Canada is one of the few exceptions, with our 10-year yields still trading below our Jan 1, 2020 level of 1.7%, though Canadian yields did increase more than US 10 year yields last month. Even though global bond yields may be increasing faster than US yields, it doesn’t necessarily mean US bonds are losing their attractiveness to global investors. On a currency-hedged basis, US 10 year bonds have actually increased in attractiveness to Japanese and Euro-based investors as plentiful US dollars have helped drive hedging costs lower. Increased foreign demand could help slow the increase in US yields.

It was real rates last month doing most of the damage.

Unlike in January, where higher breakeven inflation rates were largely responsible for driving yields higher, it was real rates last month doing most of the damage. This presents as more of a problem for markets as higher real rates represent a more direct threat to financial conditions and could undo some of the stimuli the Federal Reserve is trying to deploy by keeping short rates near zero.

The Federal Reserve would actually welcome higher inflation, but they are likely not as keen to see real rates moving higher. Fortunately, the rise in yields didn’t impact credit spreads, which remain tight and accommodative. If anything, high yield credit spreads continued to tighten last month. Higher real yields are also not such a bad thing when they are rising off a low base. With short rates anchored at zero, rising longer-term rates reflect increased economic optimism. That can’t be such a bad thing, can it?

The problem is too much optimism inevitably starts the argument on when short-term rates should start to move higher, which has an even more direct impact on tightening financial conditions. Until last month’s bond market meltdown, Fed Funds futures were signalling an increase in overnight rates wouldn’t happen until mid- 2023. By the end of February, however, the markets were pricing in a full 25 basis point increase in early 2023 and a substantial probability lift-off could take place even earlier.

Fed Chairman Powell swears they have no intention of increasing rates any time soon, but the market appears keen on testing their resolve. After the Great Financial Crisis, the Fed began normalizing rates from 2015 to 2019 with a series of rate increases. Even before the pandemic began, however, the market pressured the Fed into reversing course and cutting rates again.

Increasing rates, especially the last couple of increases in 2018, is now regarded by many as having been unnecessary, and a mistake. Even though the unemployment rate continued to move lower, inflation was under control and there were no real signs of asset price bubbles. The low unemployment was seen as a positive, bringing many workers back into the labour force. Lesson learned, and rest assured Powell won’t make the same mistake again. With employment still recovering, it is very unlikely the Fed will raise rates until either asset prices or inflation become a real issue. One could argue asset prices are already becoming a problem, but the Fed will want to turn a blind eye as long as possible. As for higher bond yields, a steeper yield curve makes it more profitable for banks to lend, which is good for economic growth. For now, while asset prices and inflation might be hitting the Fed’s radar screen, neither appear targets.

What would it take to force the Fed into action?

This is the question. Certainly, 5-year breakeven inflation rates at levels last seen in 2008 and their historically tight correlation with personal consumption expenditure inflation rates raise concerns, as does rising commodity prices. Perhaps most ominous is the 25% increase in money supply, which if you subscribe to Milton Freidman’s view inflation is always and everywhere a monetary phenomenon, is all you really need to know about the future direction of prices. Offsetting the huge increase in money supply, however, is an equally dramatic decline in the velocity of money, meaning the money that has been created isn’t doing much and thus not creating much inflation. Remove pandemic restrictions and perhaps this money is put to good use? This is the debate markets are having.

Stepping into the real world, inflation is becoming more than just a theory.

According to purchasing and manager surveys, manufacturing and services prices are reporting price increases at 12-year highs and global food prices have inflected sharply higher. According to google trends, searches under the subject “inflation” have also spiked sharply higher. Inflation is the elephant in the room that can no longer be ignored.

It’s really not a question of whether inflation is set to move higher, it’s whether it will remain strong, or spiral even higher. Even the Federal Reserve concedes the economy will see a spike in prices later in the year as supply lines adjust to a re-opening economy full of consumers with pockets full of cash. The Fed believes, however, the inflationary pressures will be transitory, and prices will soon settle back down to their 2% target, or lower. Even breakeven rates show the increase to be temporary, with inflation starting to fall back to the 2% level after about five years. According to current yields on regular and inflation-protected notes, inflation is projected to average about 2.39% over the next five years, the highest it’s been in eight years. Over the subsequent 5 years, however, inflation is expected to fall back to 1.9%.

While this might indeed turn out to be the case, how the market reacts to the inevitable increase in inflation over the next five months is what drove markets last month, and will likely be key to determining the direction for markets the rest of the year. How high will rates go, and at what level does it start to impact equity prices? According to Strategas, the danger zone for stocks is when 10-year Treasury yields trade above 2.5%, only slightly above their 2.39% 10-year pre-covid average. 10-year treasury’s ended February at around 1.4% and a Strategas survey of institutional money managers found most believed the 10 years should end the year below 2%, so there is plenty of room for them to move higher before entering the danger zone.

Given rates are still quite low and well below the danger zone, not only are rising rates not detrimental to the bull market, but rising rates off a low level have typically generated strong equity returns. According to the Leuthold Group, when yields are below 3%, rising rates have historically been better for stocks than declining rates. It’s only when rates are above 3% is the reverse true. Also likely to be a factor is the speed at which rates move higher, and the pace at which rates increased last month certainty got Wall Street’s attention.

Once the market starts believing rates need to move higher, the adjustment typically happens very quickly. In early March, in fact, treasury futures saw a record increase in short positions as speculators started betting rates were headed even higher. It’s something to keep our eye on, but not a reason to sell equities, not at the current level of bond yields anyways. With rates still at these low levels, rising rates should be good for stocks.

There is a new opportunity to rotate into sectors that are more sensitive to the economy.

Not all equities benefit equally, however, and while we don’t think investors will sell the entire market, we do see the opportunity to rotate into sectors that may be more sensitive to the economy and less sensitive to interest rates. In a stronger economy where more companies can report strong earnings growth, investors are less willing to pay as much for growth given it is no longer as scarce.

Higher interest rates also work against growth stocks. With many high-growth stocks, investors care more about future profits and the terminal value of the company than near-term earnings. As interest rates increase, the present value of this terminal value declines as the weighted average cost of capital increases. For value or cyclical stocks, near-term earnings are more important in valuing the company and they are less sensitive to changes in interest rates. In bond terminology, growth stocks are high-duration assets and more sensitive to higher interest rates, while value stocks are low-duration assets.

Last June when interest rates were very low, investors were paying up for high-duration assets. So far this year, investors are more concerned with near-term earnings growth expectations, resulting in the market rotating away from growth and into value. If bond yields continue to move higher as the economy strengthens, we would expect the value to continue to outperform growth.

Most vulnerable in this rotation would be more speculative growth stocks, particularly those with no earning, where the company is being valued entirely based on its terminal value (if there is any). Many of these have been spectacular performers during the pandemic, such as the ARK Innovation ETF, Solar stocks (or anything in the renewable energy sector), Cannabis stocks, and the red-hot IPO and SPAC market. February was a tough month for these and many other highfliers as investors focused more on cyclical sectors, such as energy and financials.

When the economy reopens, what will come of the markets?

It’s hard to be bearish on any asset when economic growth is projected to be strong and the Federal Reserves promised to make money basically free for the foreseeable future. With vaccines and herd immunity signalling restrictions will be lifted and the economy reopened, the magnitude of fiscal stimulus being deployed raised the question of whether inflation will force the Fed to renege and start tightening monetary policy earlier than anticipated.

While this may eventually be the case, higher bond yields should be good for most stocks if it is the result of stronger economic growth. Only when higher yields start to slow growth do stocks fall out of favour. Moving to the far-right tail of the distribution tail might eventually cause the market to retreat, but we’ll enjoy the ride getting there in the meantime.

Don’t expect markets to move continuously upwards, as they did after the March 23rd lows, however. As Strategas points out, the second year of a bull market recovery is more typically volatile, and the threat of higher rates should keep traders more on edge. This is particularly true when more than 18% of the S&P 500 trades in excess of 50 times this year’s estimated earnings and more sensitive to higher inflation, as Empirical Partners recently pointed out. Just removing the threat of the left tail is good news for markets, though we remain somewhat concerned with the future path of variants and the potential inability to vaccinate the developing world. This will be required if we truly want to return to a pre-pandemic world.

Nicola Wealth Portfolio Investment Returns

Returns for the Nicola Core Portfolio Fund were +0.6% in the month of February. 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 -0.2% in February while the iShares Core Canadian Universe Bond Index ETF was down -2.7% for the month. The overall bond market suffered during the month as the yield curve significantly steepened. Financial markets are relentlessly forward-looking and improved expectations on growth and inflation have caused the yield curve to move significantly steeper. The concern is that what was previously a relatively even tug of war between the COVID-19 related economic shutdown and emergency stimulus now may be handily won by a stimulus that would cause an overheating in the economy.

The velocity of the selloff will likely abate. Unemployment in the US is still relatively elevated at 6.2% with slack in the labour market and unknown longer-term economic scarring from the pandemic we don’t see continued in the steepening of the yield curve. We also believe that the market is being overly aggressive and in Canada has now priced in 2.5 rate hikes in 2022 and 4 hikes in 2023. We are currently positioned with low duration and more credit exposure in our portfolio. We have largely avoided the headwind of rising interest rates while benefitting from select positioning in credit. We are overweight BBB names that have seen credit spreads tightened 6 bps for 5-year bonds during the month versus a tightening of 1 bps in A rates names and a widening of 2 bps in AA names.

The Nicola High Yield Bond Fund returned 0.6% in February. Currency detracted -0.5% as the US dollar weakened versus the Canadian dollar. Although the high yield market has less sensitivity to interest rates, the volatility in rates was significant enough in February to blunt returns for the month. Despite default rates in high yield peaking, however, shorter-term technicals remain poor. February was a record month for new issuance in high yield and likely the pace of new issuance will continue into March. The sheer amount of large supply coming into the market may be met with less demand. Most high yield managers experienced net outflows in their funds during the month and the combination of more supply and less demand may weigh on markets further in the short term. During the month our specific credit selection and positions in the convertible bond market and in Pimco Tactical Income Fund helped drive returns and offset weakness in the traditional high yield space.

The Nicola Global Bond Fund was down for the month returning -0.9%. The currency was a large headwind during the month detracting -0.4% from returns as the US dollar weakened. Most strategies were negative for the month as interest rates rose relatively violently hurting returns across fixed income assets with the exception of the Blackrock Securitized Investors fund. Many of these loans are priced against Libor (London Inter-bank Offered Rate and is the basic rate of interest used in lending between banks), these largely immunized loans from rising interest rates and with credit tightening allowed the strategy to achieve a 2.6% in local currency terms for the month.

Returns for Nicola Primary Mortgage Fund and Nicola Balanced Mortgage Fund were 0.7% and 0.4% respectively in February. As loan valuations that impact NAV are updated to reflect improving market conditions, the Nicola Primary Mortgage Fund saw a larger increase given its predominantly senior 1st mortgage positions. Cash levels were 1% in the Nicola Primary Mortgage Fund and 18% in the Nicola Balanced Mortgage Fund at month-end. Current annual yields, which are what the Nicola Primary Mortgage Fun 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 5.3% for the Nicola Balanced Mortgage Fund.

The Nicola Preferred Share Fund returned +6.5% for the month while the Laddered Preferred Share Index returned 5.3%. Returns for the month were driven by the 5-year Government of Canada bonds moving materially higher from 0.46% to 0.88% and by new LRCN (Limited Recourse Capital Notes) that were issued by Empire Life and Manulife. The Manulife LRCN was particularly surprising as it came at a considerable size with the issuance of $2B at 3.375% (283.9 bps spread). This was double what we had anticipated and likely means that Manulife will redeem a number of their outstanding preferred shares. The majority of the upside from both bank and insurance preferred shares has now been realized but we see an upside with non-financial preferred shares particularly rate resets that would benefit from the 5-year Government of Canada bond yield moving higher.

The S&P/TSX was +4.4%% while the Nicola Canadian Equity Income Fund was +4.1%. A rotation towards cyclical sectors materialized last month in Canada with Tech, Discretionary, Energy, Financials and Industrials delivering strong gains. Four sectors suffered losses: Utilities, Materials, Staples and Communications. We would note that within Materials, gold miners suffered steep losses while base metals surged. Investors appear to approve of decelerating COVID-19 cases. Commodities and bond yields rallied over the reflation narrative. The Nicola Canadian Equity Income Fund had a strong performance in Industrials and Financials but poor relative performance in Technology was the main drag on performance. The top positive individual contributors to the performance of the Nicola Canadian Equity Income Fund were Air Canada, IA Financial Corp, and Pinnacle Renewable. The largest detractors were SSR Mining, Kirkland Lake Gold, and Northland Power. There were no new additions or deletions in the month.

The S&P/TSX was up +4.4% while the Nicola Canadian Tactical High Income Fund was +3.7% for February. The Nicola Canadian Tactical High-Income Fund benefited from strong performance in Industrials where our position in Air Canada contributed positively. Financials and Energy also contributed positively to the Nicola Canadian Tactical High Income Fund’s relative returns. This was offset by underperformance in Technology and Materials. The Nicola Canadian Tactical High-Income Fund has a Delta-adjusted equity exposure of 94% and the projected cash flow yield on the portfolio is 6%. Volatility picked up near the end of the month which makes option writing strategies more profitable. We are selectively adding to our option writing positions to increase the yield on the portfolio. There were no new additions or deletions to the portfolio in the month.

The Nicola U.S. Equity Income Fund returned +2.6% vs +2.8% for S&P 500. The Nicola U.S. Equity Income Fund’s positive performance was driven by the cyclical sectors of the economy (Energy, Financials and Industrials). The defensive and negatively correlated interest-rate sensitive sector sold off (Consumer Staples, Healthcare and Utilities). Stock selection was mixed with the positive contribution in Energy (Valero +38%), Consumer Discretionary, Healthcare and Industrials being slightly offset by negative stock selection in Consumer Staples, Communication Services, Financials and Utilities.

The Nicola U.S. Equity Income Fund ended the month with a delta-adjusted equity exposure of 98% (The Nicola U.S. Equity Income Fund had ~4% in covered calls). The Nicola U.S. Equity Income Fund consists of high-quality names with relatively low leverage and attractive ROIC (14% normalized). This month we added more to retail discounter TJX Companies & Mobile phone chipmaker and 5G beneficiary Qualcomm.

The Nicola U.S. Tactical High-Income Fund returned +2.4% vs +2.8% for S&P 500. The Nicola U.S. Tactical High-Income Fund’s positive performance was primarily driven by the continued rotation into cyclical names within Energy (Valero), Financials (Citigroup, Morgan Stanley & JP Morgan) and Industrials (John Deere & Fedex), while the defensive part of the portfolio detracted from returns as utilities, healthcare and consumer staples were the worst performing sectors last month. The Nicola U.S. Tactical High-Income Fund’s equity equivalent exposure was 60% last month, we did not write any Call options (which would have reduced equity-equivalent exposure), but we did write close to $26MM worth of out-of-the-money Put options. Near month-end, we tactically added to our existing Tech names (Apple, Google & Microsoft) where we were significantly underweight.

The Nicola Global Equity Fund returned 2.1% vs 1.6% for the MSCI ACWI Index (all in CDN$). The Nicola Global Equity Fund outperformed the benchmark due to our relative overweight in smaller cap stocks and Industrials which performed well in the month. The performance was marginally offset by country/region mix (underweight United States) and our overweight in Consumer Staples which was one of the weakest sectors during the month. Performance of our managers for the month: EdgePoint +7.5%, Lazard +4.8%, Nicola Wealth EAFE +2.4%, JP Morgan Global Emerging Markets +0.04%, C Worldwide +0.01%, and ValueInvest -1.6%.

The Nicola Global Real Estate Fund return was +0.2% February vs. the iShares S&P/TSX Capped REIT Index (XRE) +4%. Currency was a headwind for the fund as C$ was relatively strong in February and 50% of the Nicola Global Real Estate Fund is denominated in non-Canadian currency. The setup for 2021 appears good for REITs. As the COVID-19 vaccine rollout accelerates, economic recovery should take hold and with it a recovery in property fundamentals in the back half of the year.

With GDP growth, accelerating inflation, and rising real interest rates, shorter-lease duration sectors like Residential, Industrial and Self-Storage should benefit the most. Long-term, we are bullish on the real estate complex and we see 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. There were no new names added or subtracted in February.

The Nicola Canadian Real Estate LP NAV per unit has increased to $129.1073 (previously $129.0467), effective February 28th, 2021. This represents an increase of 0.05% and a positive return for January of 0.55%. YTD Return as of January 31st, 2021 is 0.55%. Portfolio Leverage is 43.05%. The positive return was primarily a result of an increase in the value of the McKenzie, Woodgrove and Dover Pointe.

Since COVID-19 restrictions commenced in mid-March, our average rent collection has been 97.97%. In comparison to the industry, this rate is high and is close to the Nicola Canadian Real Estate LP’s pre-COVID collection rates. This has been accomplished through the hard work of the Real Estate team and supports that our portfolio asset mix, which has a low retail component, can withstand changes in the real estate environment.

The Nicola U.S. Real Estate LP NAV per unit has decreased to US$162.5403 (previously US$162.6036), effective February 28th, 2021, as a result of distributions (cash distribution of US$0.8130 per unit and notional tax distribution of US$0.0459 per unit) exceeding net income for the month. Although this represents a decrease in NAV of 0.04%, January had a positive return of 0.49%. YTD Return as of January 31st, 2021 is 0.49%. Portfolio Leverage is 49.26%.

The positive return was primarily a result of increased appraised values of Champions Green, Mercer Point, and Canton Mill Lofts. Since COVID-19 restrictions commenced in mid-March, our average rent collection has been 97.89%. In comparison to the industry, this rate is high and is close to the Nicola U.S. Real Estate LP’s pre-COVID collection rates. This has been accomplished through the hard work of the Real Estate team and once again supports that our portfolio asset mix, which has a low retail component, can withstand changes in the real estate environment.

The Nicola Value Add Real Estate LP NAV per unit has increased to $187.6227 (previously $186.3626), effective February 28th, 2021. This represents an increase of 0.68% and a positive return for January of 0.68%. YTD return as of January 31st, 2021 is 0.68%. In January, we funded $5.7m for King City, $4.5m for Bertram, $0.2m for Garden Drive, $0.1m for Railway, $0.4m for Cottonwood.

The Nicola Sustainable Innovation Fund returned -7.5% (USD) / -8.2% (CAD) in February and returned -2.2% (USD) / -2.6% (CAD) year-to-date. Itron, Pinnacle Renewable, and Aptiv were the top contributors to performance while Beam Global, Ormat, and Plug Power were the biggest laggards in the month. No new names were added in February; however, we topped up allocations to several existing portfolio names including Xylem, Xebec Adsorption and Alstom. During the month Pinnacle Renewable received a takeover bid from Drax Group PLC, a UK-based operator of coal and biomass power generation, for $11.30/share in cash.

The transaction would close sometime in Q2 or Q3 2021 if they receive approval from shareholders. If completed, this would be the second takeover since our Nicola Sustainable Innovation Fund’s inception following the acquisition of AquaVenture Holdings by Culligan Water which closed in Q1-2020.

February was a volatile month for the markets and in particular momentum and growth companies as there was some re-positioning into defensive and value names. Some of our portfolio companies saw sharp and quick drawdowns as momentum in the market unwound. We have tactically been deploying our cash balances throughout the selloff which has continued into March. While it is difficult to time the market, we are investing in these companies and sectors with a long-time horizon so pullbacks in the market often provide opportunities to enter new names and build our existing positions at cheaper relative prices.

The Nicola Alternative Strategies Fund returned 0.7% in February. Currency was a headwind detracting -0.2% for the month. In local currency terms since the Nicola Alternative Strategies Fund was last priced, Millennium returned +1.9%, Renaissance Institutional Diversified Global Equities Fund -3.7%, Bridgewater Pure Alpha Major Markets -1.2%, Verition International Multi-Strategy Fund Ltd +1.3%, and Polar Multi-Strategy Fund +3.3%.

Last month we finalized our exit of RPIA Debt Opportunities to rebalance the portfolio. The SPAC market (special purpose acquisition company) saw volatility during the month and fell in sympathy with technology names during the second half of the month. However, by taking a prudent risk management approach and focusing on SPACS closer to their $10 floor, our arbitrage strategies were largely able to benefit from market volatility and provide strong returns for the month.

The Nicola Precious Metals Fund returned -10.7% for the month while underlying gold stocks in the S&P/TSX Composite index returned -14.0% and gold bullion was down -6.4% in Canadian dollar terms. As mentioned previously, paradoxically gold acts both as a risk-off asset and an asset that protects against inflation. More recently, the selloff of gold has been due to a rotation into risky assets. Gold has priced well in strong economic dynamics and now provides good value if inflation risks build.


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 provincial securities’ commissions. This is not a sales solicitation. This investment is generally intended for tax residents of Canada who are accredited, investors. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. For a complete listing of Nicola Wealth Real Estate portfolios, please visit All values sourced through Bloomberg. 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.