Market Commentary: Tempering the Bond “Taper Tantrum”


By Rob Edel, Chief Investment Officer

Highlights this Month

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    April in Review 

    The bull market continued to flex its muscles last month, with most global equity indices delivering strong returns. The S&P/TSX gained 2.4% (in C$’s), which was a little lower than the S&P 500’s 5.4% (in US$’s) gain, but a stronger Canadian dollar gave a boost to Canadian-based asset returns in April. Comparing returns in equivalent US dollar terms, both the S&P/TSX and S&P 500 delivered a rounded 5% return.

    Not surprisingly, these strong results corresponded nicely with some robust economic growth numbers released last month, with Q1 US GDP growing 6.4% and within 1% of its pre-pandemic peak. What is surprising, however, was the contradictory downward direction of 10-year treasury yields, which reversed course in April and started to decline. With the economy continuing to show signs of recovery, and stock traders apparently on board, what were bond traders seeing differently? Because Bond traders, rightly or wrongly, are considered by some strategists as better market forecasters than equity traders, we are hesitant to dismiss the inconsistency in bond yields last month too quickly.

    Bond market taper tantrums and inflation are the top two tail risks.

    According to an April Fund Manager Survey conducted by Bank of America, Institutional money managers still rank a bond market taper tantrum and inflation as their top two tail risks, though slightly less so since compared to the previous month. Gaining a little more attention were the tail risks of higher taxes, the vaccine rollout, and peak economic growth.

    Was this what bond investors were reacting to last month? According to Barron’s April “Big Money Poll”, a similar group of institutional investors had an overwhelmingly bullish outlook for US equities over the next 12 months, and though they may be phrased slightly differently, they identified many of the same tail risks as the Bank of America survey.

    The Big Money poll also ranked rising interest rates as their top risk, which was clearly not a concern last month with yields declining, followed by Covid, higher taxes, a fiscal or monetary policy mistake, and excessive valuations, which the Bank of America survey omitted, but we think has merit.

    The six risk-facing markets as the economy moves forward.

    Using the combined surveys as a guide, we loosely identify 6 separate risk-facing markets going forward. Below is our evaluation of each, its impact on the market and the potential role it may or may not have had in explaining last month’s market action.

    For easy reference, we have numbered the issues below in the order in which we plan to discuss them, not by importance or highest probability. We think Bond traders did get it wrong last month, though we concede it’s possible they were merely early.

    1. Excessive stock valuations
    2. Peak economic growth
    3. Bond market “taper tantrum”
    4. Higher taxes
    5. Inflation
    6. Covid-19 resurgence/new variants

    Equity markets continue to set records.

    With global stock indices continuing to melt higher, it’s no wonder excessive valuations made Barron’s Big Money Poll list of worry, though it was in the last place and wasn’t even identified in the Bank of America survey as a tail risk. Equity markets continue to set records, and no matter which metric you use to measure valuations, only during the dotcom fueled rally of the late 1990’s have stocks been priced so dearly.

    Not surprisingly, investors have taken notice of the strong returns and started to position portfolios accordingly. According to Strategas, 2021 year-to-date cumulative equity ETF flows have already topped annual flows for every year except 2017, despite it being only April. Bonds and the money market appear to be sources of cash.

    Also impressive is the underlying technical strength of the market.

    The percentage of S&P 500 stocks trading above their 200-day moving average exceeded 95% last month, which according to Strategas is extremely rare. After such strong market action, Strategas believes a correction or market pause might be expected but doesn’t believe it will be fatal to the bull market. A divergence between the breadth of the S&P 500 and the Dow versus the Nasdaq is also worth noting. Market leadership may be rotating, and a broader rallying is positive for the durability of the bull market.

    Federal Reserve Chairman Jerome Powell recently conceded parts of the market “are a bit frothy”, and there is no shortage of examples to choose from to confirm his observation. Certainly, the performance of stocks in companies that lose money is head-scratching, but we submit the case of the New Jersey deli valued at $100 million (as hedge fund manager David Einhorn remarked, “the pastrami must be amazing”) and the exponential rise of cryptocurrency joke Dogecoin as perhaps the best examples of a market struggling to live up to its role as an arbiter of fair value.

    What is driving the broader market higher is recovering corporate earnings.

    Are we concerned? Sure, though we tend to avoid investing in money-losing companies and find the deli business not very exciting. Don’t even get us started on cryptocurrency. The point is you don’t have to invest in these frothy segments of the market. What is driving the broader market higher is recovering corporate earnings. More concerning is that despite continuing to surprise to the upside, stronger earnings are getting a less favourable market reaction. Is this because the earnings recovery is already fully discounted, or because traders are concluding the recovery is played out and this is as good as it gets?

    The same question can be asked about the economy itself. Despite month over month personal consumption gaining the most since 1946, retail sales recorded their largest gain in 10 months with broad-based gains across many categories, and rising consumer confidence, bond yields fell. Why? Were investors expecting even more, or are they worried economic growth is peaking?

    With a manufacturing sentiment like the Chicago Purchasing Managers index indicating conditions are their best since 1983, could traders be treating this as a warning? As Strategas recently pointed out, very hot PMI data has historically coincided with a stalled market rally, and on cue, Bloomberg reported in early May a small drop-off in an ISM manufacturing survey. Perhaps this is the first sign the economy might be cooling, and this is what the bond market was reacting to?

    While it is possible, we think it is premature to hit the panic button. While Goldman Sachs believes growth should peak in Q2, this should be expected given the V-shaped nature of the post-pandemic recovery, and it doesn’t mean growth is now set to contract. The complexities of restarting the economy mean the recovery won’t be perfectly linear. Case in point, the US only created 266,000 jobs in April, well short of the estimated 1 million expected. Despite this, many businesses are finding it hard to find workers and needing to resort to offering sign-on bonuses.

    What are the bottlenecks in getting Americans back to work?

    Generous unemployment benefits, lingering Covid concerns, and school closure have created some bottlenecks in getting Americans backs to work. Likewise, supply disruptions and a shortage of semiconductors have led to cutbacks at automakers, further reducing employment. While this is an inconvenience, we don’t see this as fatal to the recovery, or the bull market. We don’t believe the threat of weaker economic growth was behind the decline in yields last month.

    Perhaps the best evidence it wasn’t slower economic growth causing lower bond yields can be found in the Bond market itself. While a decline in Treasury yields could be associated with the threat of slower economic growth, if this were the case, we would also expect credit spreads to widen, which they did not. Credit spreads, in fact, continued to move to record lows, which would indicate investors are not worried about the financial health of corporate America. Also, according to the Financial Times, economists still expect 10-year bond yields to rise, a sentiment shared by RBC’s Mood of the Market survey of institutional investors, with an overwhelming majority believing the 10 Year Treasury will end 2021 well above 1.5%.

    Why did rates move lower last month?

    The fact is, there is no clear consensus on why rates moved lower last month when, based on all the evidence, most would have expected yields to push higher. In trying to explain the apparent contradictory move, some analysts have questioned whether bonds just got over-sold and consolidation in sentiment and flows was needed in the market. Also plausible is foreign demand, with U.S. yields hedged backed into Japanese Yen at five-year highs. If this is the case, foreign demand could help slow or even cap yields from going higher.

    The S&P 500 during Biden’s first 100 days as President. 

    Another tail risk identified by investors is a fiscal or monetary policy mistake or blunder. Could it be bond traders were getting anxious over President Biden’s fiscal policy plans of increased spending and higher taxes? Sleepy Joe marked his 100-day anniversary in office last month and has earned high marks from the equity markets, with the S&P 500 recording its highest return during the first 100 days of any President in at least 75 years. This is high praise from a group likely to lose the most from a President who also wants to raise taxes by the most of any President in at least 50 years. According to BMO, Biden’s proposal to increase corporate tax rates to 28% could shave over 6% off 2022 S&P 500 earnings.

    “Sleepy Joe” has been anything but sleepy.

    Trump referred to Biden during the election campaign as sleepy Joe, but so far he has been anything but. Perhaps “Smokin” Joe would be a better descriptive name for the new President (a nod to GZERO’s Ian Bremmer). In reference to the new President, a recent Bloomberg Businessweek cover caption read “Move Fast and Fix Things”. Biden has certainly been moving fast, issuing more executive orders than any President since FDR, but the real question is whether he is fixing things, or breaking them even more.

    According to RBC’s institutional Equity clients in March, most believe Biden’s policies will be negative for stocks over the next four years, a deterioration over their more bullish view at the end of last year. It is possible Bond traders were picking up on this negatively, and a fiscal policy error is possible, though most believe the error will result in higher inflation, in which case yields should have been rising, not falling.

    As for a policy error by the Fed in starting to tighten monetary policy prematurely, Powell has shown no such inclination and appears at the service of the current bull market. Economists are not so sure, with a majority believing the Fed will start tapering their $120 billion monthly bond and mortgage buying program in Q4 or earlier. The median FOMC participant still believes there will be no rate hikes through 2023, while the market sees liftoff happening sometime next year. In fairness to the Federal Reserve, the market, as implied by financial futures, has historically been early in forecasting rate increases.

    While investors’ track record in forecasting short-term interest rates is mixed at best, fears of higher inflation have convinced many that this time is indeed different. The market-implied probability CPI rises above 3% in the next 5 years reached 30% last month, while raw material prices have moved uncomfortably higher. According to Bloomberg and Bank of America, mentions of inflation on earnings calls have more than tripled. From the Fed’s perspective, it’s not that they are blind to inflation, it’s that they don’t think it will last.

    Getting the inflation question right is key to investor success.

    Inflation isn’t one of the top-tail risks in both the Bank of America and Barron’s Big Money poll for nothing. Getting the inflation question right is key to investor success this year, and probably next. Higher inflation is almost a given based on an easy comparison from last year, supply disruptions, pent-up demand, soaring input prices, and record money supply growth.

    There are offsets, however. Productivity, which has been stagnant for the past decade, has come back to life during the pandemic, with companies forced to embrace digital solutions for an economy forced to social distance. Aggregate economic numbers tell the story, while economic output is nearing pre-pandemic levels, we are still short some 8 million jobs.

    The end product of this is falling unit labour costs and productivity growth. Of course, like inflation, it could also be transitory, but companies may find the new practices they were forced to employ work just fine going forward. As for money supply, while it is true a 25% increase has the potential to create massive inflationary pressures, this is only the case if companies and consumers spend it. Currently, lower money velocity is offsetting much of the increase in money supply, as evidenced by increasing bank deposit rates and stagnant loan growth. For smaller companies, while they may be commenting on it more, very few list inflation as their most important problem. According to the National Federation of Small Business, in 1979 39% of small businesses listed inflation as their single biggest concern, as did 20% in 2008. While it’s true more companies are worried about inflation today than they were at the start of the year, at 6% inflation it is still pretty low on their list of worries. Inflation is definitely a top-tail risk, but again, higher inflation would push yields higher, not lower.

    The pandemic remains a threat to the markets.

    Our last tail risk, the pandemic, remains a threat to markets. While new cases have fallen materially in the US, cases worldwide have hit new highs. South Asia, specifically India, is the new hot spot, with variants and relaxed social distancing conspiring to produce a very concerning health emergency in a region and country lacking the resources to deal with it. According to Bloomberg, the unfolding events in hot spots like India could result in Covid claiming more lives this year than in 2020.

    Closer to home and perhaps more relevant to markets is the declining daily vaccination rate in the US. After peaking in April at over 3 million, daily vaccinations in early May have fallen to just under 2.3 million. Unlike Canada, the decline is not due to supply, the US has access to ample product. The US is running out of people willing to get the vaccine. Regionally, the situation is even worse, with certain States on a trajectory that could see them fall short of herd immunity required to prevent the virus from spreading in the future. Without herd immunity, fully re-opening the economy becomes more questionable.

    What about Canada in terms of the 6 tail risks?

    We actually stack up pretty well. Because Canadian stocks tend to be more value-orientated and cyclical, valuations are not as high or speculative. Like the US, the Canadian economy continues to recover, and according to Bloomberg, GDP is within 1.3% of pre-pandemic levels, and total employment a mere 296,000 jobs short.

    Unlike the US, Canadian Bond traders didn’t seem too concerned last month as 10-year yields didn’t really do much last month, and 2-year yields increased. Fears of a policy mistake may be more of an issue when the Bank of Canada announced plans last month to start tapering their bond-buying program, but the Federal Government is showing no signs of backing away from their fiscal policy plans, announcing a new $100 billion spending package in April.

    Inflation is also an issue in Canada, particularly in the red-hot housing market, but Canadian terms of trade and the Canadian dollar benefit from an increase in commodity prices and the potential for interest rates to increase sooner north of the border. As for Covid, after getting off to a very disappointing slow start on the vaccination front, Canada is making steady progress, and according to Goldman Sachs, could have a larger percentage of people with at least one dose than either the US or the UK by the end of May.

    Why did bond yields fall while stocks rose?

    After digging a little deeper and looking at the tail risks in both Canada and the US, we find ourselves falling a little short in explaining why bond yields fell last month while stocks continued to rise. Perhaps bond traders were concluding the economy and corporate earnings were as good as it is going to get, or covid concerns will linger longer than expected, but we didn’t see evidence of this in credit markets, and it ignores the threat of higher inflation, which we think it a bigger threat.

    We would have expected and even welcomed, the reverse, weaker stocks and higher yields. A pullback in stocks would be healthy for the market given the near uninterrupted nature of the rally. Margin debt is getting uncomfortably high, and short sales have dwindled. The best trading strategy has in fact been buy and hold given the strength of the market. A small bear market or correction to help re-balance markets and blow off a little stream is preferred to a scarier bear market down the road, especially if inflation becomes more problematic. High valuations and rising interest rates are a toxic combination.

    Nicola Wealth Portfolio Results

    Returns for the Nicola Core Portfolio Fund were +0.5% in the month of April. The Nicola Core Portfolio Fund is managed using similar weights as our model portfolio and is comprised entirely of Nicola Wealth 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 April while the iShares Core Canadian Universe Bond Index ETF was flat returning 0.0% for the month. Given both yields and spreads are glued close to historical lows, we remain defensively positioned. We continue to believe that interest rates are likely to rise at a moderate pace with central banks only intervening if that pace starts to accelerate too quickly. A steeper yield curve and improved new issue concessions improve the opportunity to add value trading in the marketplace. At the end of the month, we increased our exposure in Sun Life Short-Term Private Fixed Income to pick up incremental yield versus traditional corporate bonds.

    The Nicola High Yield Bond Fund returned -1.1% in April. Overall returns in local currency terms were positive but currency detracted -1.4% as the US dollar weakened versus the Canadian dollar. We remain sanguine on our strategic allocation to high yield given default rates are likely to move lower and many companies have extended their debt maturities, however, tactically we have concerns about the high yield market.

    Income is the predominant driver of returns in the high yield market and although Government bond yields have moved higher, credit spreads are back at their tightest levels since 2018 and the broad index yields are around record lows. The supply of new bonds is likely to be moderating, and demand from retail has picked up with positive ETF flows, however, valuations look expensive and are not commensurate with high yield risks.

    The Nicola Global Bond Fund was down for the month returning -0.5%. Currency detracted -0.3% from returns as the Canadian dollar strengthened versus the US dollar during the month. Pimco Monthly Income is positioned both for a continued global recovery driven by fiscal, and monetary policies while cognizant of potential short-term volatility. To achieve returns during an environment with a lower yield, the Nicola Global Bond Fund is focused on flexibility and will dynamically adjust positions to take advantage of short-term market dislocations.

    Returns for the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund were 0.2% and 0.5% respectively for the month. Cash levels at month-end were 5% for the Nicola Primary Mortgage Fund and 7% for the Nicola Balanced Mortgage Fund following waitlist drawdowns in both funds. 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 3.9% for the Nicola Primary Mortgage Fund and 5.4% for the Nicola Balanced Mortgage Fund.

    The Nicola Preferred Share Fund returned 2.9% for the month while the Laddered Preferred Share Index returned 2.4%. Government of Canada 5-year yields were lower for the month, but the preferred share market continues to benefit from tailwinds of increasing demand and diminishing supply. ETF flow into Canadian preferred shares was very strong for the month with new inflows of $61 million, both National Bank and Laurentian Bank issued LRCN’s (Limited Recourse Capital Notes) during the month, and Laurentian Bank redeemed a rate reset preferred share. During the month we increased our position in floaters which we believe have potential large capital gains upside if interest rates were to increase and we switched some lines decreasing our exposure to TC Energy while increasing our weight in Enbridge.

    The S&P/TSX was +2.4% while the Nicola Canadian Equity Income Fund was +2.0%. In Canada, the improving macroeconomic backdrop and strong commodity prices supported the TSX which hit a new all-time high. Commodities surged in April posting widespread gains across the board as demand from China and the rest of the world boosted prices. The CRB Index was +8% in April with Natural Gas +12.4%, Copper +12.1%, and Crude Oil (WTI) +7.5%.

    Precious metals were also strong (Gold +3.6%, Silver +6.1%). As a result, Materials was the strongest sector last month at +5.5% followed by Discretionary +5.1%, Real Estate +4.2% and Tech +3.8%. The worst performing sector was Health Care at -9.3%. The Nicola Canadian Equity Income Fund slightly underperformed the index due to our weighting in Utilities where our exposure in the higher valuation renewable sector was a drag on performance and offset positive contributions in Health Care and Industrials.

    The top positive individual contributors to the performance of the Nicola Canadian Equity Income Fund were alternative payments provider Nuvei Corp, transportation and logistics company TFI International and air cargo company Cargojet. The largest detractors were Brookfield Renewable, Northland Power, and Air Canada. We added dairy producer Saputo, information technology provider Telus International, and diversified base metals mining company Lundin Mining in the month of April. We sold our position in Maple Leaf Foods, Minto Apartment REIT, and Ag Growth International.

    The S&P/TSX was up +2.4% while the Nicola Canadian Tactical High Income Fund was +1.7% for April. Strong relative performance in Communication Services and Health Care were offset by our overweight in the renewables sector, which contributed negatively to the Nicola Canadian Tactical High-Income Fund’s returns. The Nicola Canadian Tactical High Income Fund has a Delta-adjusted equity exposure of 95% and the projected cash flow yield on the portfolio is 5%.

    As the equity rally extended in April, volatility has remained depressed which makes option writing strategies less profitable. As a result, we have reduced the amount of option writing we normally do in the Nicola Canadian Tactical High Income Fund temporarily and chosen to hold more of the portfolio long. Top contributors to relative performance were Shaw Communications, Nuvei Corp, and TFI International. The largest detractors for the month were Northland Power Inc, Air Canada, and Brookfield Renewable. During the month, we added Saputo, Telus International, Canwel Building Materials and Lundin Mining. We sold Maple Leaf, SSR Mining, Cenovus Energy, and Ag Growth International.

    The Nicola U.S. Equity Income Fund returned +5.0% vs +5.3% for S&P 500. Positive performance in the Nicola U.S. Equity Income Fund was driven primarily by stock selection in Info Tech (Seagate +21%, Nvidia +12.5% & Visa +10.3%) and Health Care (Boston Scientific +12.8%, Medtronic +10.8%, United Health +7.2% & Pfizer +6.7%). Sector allocation detracted from results due to the underweights in Real Estate, Materials, Communication Services and overweight Industrials & Consumer Staples.

    There were no new names added during the month; however, we did sell our cable position (Comcast) and added to our Google, Apple and Amazon positions. The Nicola U.S. Equity Income Fund ended the month with a delta-adjusted equity exposure of 99% (Fund had 3.5% in covered calls). The Fund consists of high-quality names with relatively low leverage and attractive ROE (34% normalized).

    The Nicola U.S. Tactical High Income Fund returned +2.8% vs +5.3% for S&P 500. The Nicola U.S. Tactical High Income Fund’s positive performance came from stock selection; however, the low net equity exposure (61%) hurt relative returns, which is to be expected during strong equity rallies. Volatility in the market (as measured by the VIX Index) continued to trend down, with the VIX in April below 20 the entire month (the last time we saw a full month below 20 was January 2020). With that being said, we were still able to find opportunities to generate attractive option premiums. No new names were added, but we did buy more Nextera Energy and Google to bring us back to target weights.

    The Nicola Global Equity Fund returned +1.2 vs +2.0% for the MSCI ACWI Index (all in CDN$). The Nicola Global Equity Fund underperformed due to our overweight position in Japan, the weakest region during the month, and our underweight to the US which had the strongest relative performance. Performance was marginally offset by country/region mix (overweight Europe Developed markets) and our overweight position in Financials which were strong performers during the month and our underweight to Energy, the weakest sector in April. Performance of our managers for the month: Lazard +4.0%, EdgePoint +2.3%, C Worldwide +1.8%, ValueInvest +0.9%, Nicola Wealth EAFE +0.9%, and JP Morgan Global Emerging Markets -1.9%.

    The Nicola Global Real Estate Fund return was +0.4% April vs. the iShares S&P/TSX Capped REIT Index (XRE) +4.6%. Currency was a headwind for the Nicola Global Real Estate Fund as C$ was relatively strong in April and 50% of the Nicola Global Real Estate Fund is denominated in non-Canadian currency. The REIT sector continued to deliver positive results in the month. We see more upside within the recovery trade and note that a reversion to pre-pandemic valuation levels suggests solid returns ahead.

    In the short-term investor sentiment will be the primary driver for valuation levels and an acceleration in the vaccine rollout with the hope of an end to the restrictive lockdowns that have been in place will help sentiment. Long-term, property fundamentals (which were weak last year) should recover and will become the focus in determining valuation levels. 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 believe the distributions paid by REITs are safe and represent a large yield pick-up versus government bonds. We added three new positions: Crombie REIT, First Capital REIT, and Americold Realty Trust in April.

    The Nicola Canadian Real Estate LP NAV per unit has increased to $135.2362 (previously $130.0680), effective April 30th, 2021. This represents an increase of 4.0% and a positive return for March of 4.5%. YTD return as at March 31st, 2021 is 6.4%. Portfolio Leverage is 41.05%. The positive return was primarily a result of increased appraised values of the Aero Portfolio, Grace Road, and The James.

    The Aero Portfolio, an industrial property portfolio located in Mississauga, ON, was the biggest contributor experiencing a large increase in value as a result of significant rental rate growth. Since COVID-19 restrictions commenced in March 2020, our average rent collection has been 98.13%. 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.

    Nicola U.S. Real Estate LP NAV per unit has decreased to US$161.0901 (previously US$162.7014), effective April 30th, 2021. This represents a decrease of 1.0% and a negative return for March of -0.5%. YTD return as of March 31st, 2021 is 0.7%. Portfolio Leverage is 48.04%. The negative return was primarily a result of decreased appraised values of 156 2nd Street and Merchants Way.

    156 2nd Street, a single-tenant office building in San Francisco, experienced the largest decrease in value as a result of the tenant vacating. We have several groups interested in leasing the building and we are optimistic that the value of this asset will recover shortly. Since COVID-19 restrictions commenced in March 2020, our average rent collection has been 97.65%. In comparison to the industry, this rate is high and is close to the Nicola U.S. Real Estate LP’s pre-COVID-19 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.

    Nicola Value Add Real Estate LP NAV per unit has decreased to $187.0302 (previously $188.5023), effective April 30th, 2021, as a result of a cash distribution of quarterly profits of $2.9417 per unit. Although this represents a decrease in NAV of 0.8%, March had a positive return of 0.8%. YTD return as at March 31st, 2021 is 1.9%. In March, we funded $0.4M for 86 Ave, $2.1M for Bertram, $0.2M for Garden Drive, $14.4M for Wingreen, $0.5M for Cottonwood, $0.1M for Railway, $0.1M for King City, and $4.2M for Fengate.

    The Nicola Sustainable Innovation Fund returned -2.2% (USD) / -4.5% (CAD) in April and is -8.4% (USD) / -11.6% (CAD) year-to-date. EDP Renewables, Alstom, and Evoqua Water Technologies were the top contributors to performance while EV charging company Beam Global, Plug Power, and Sunrun were the biggest laggards in the month. No additional names were added to the portfolio during April; however, we added to several existing positions including Iberdrola, ChargePoint Holdings, and Orsted.

    During the month we received the cash proceeds from the acquisition of our position in Pinnacle Renewable, marking the second takeout of the portfolio’s history. Pinnacle, a manufacturer and distributor of wood pellets, was one of the earliest positions in the Nicola Sustainable Innovation Fund and our total return on exit was roughly 60%. April was another challenging month for the portfolio as there was ongoing volatility in the public markets and we also saw further re-positioning out of high-duration assets like technology and alternative energy.

    Flows into the Nicola Sustainable Innovation Fund remain strong and we’ve started accumulating some cash to deploy on any subsequent pullbacks we may see. We also saw some positive news during the month with President Joe Biden and the US hosting virtual summits around Earth Day. During these summits, the United States and other world leaders pledged to reduce their emissions as well as outlined specific plans for implementing and supporting various sources of renewable energy and clean technologies. While some skeptics will question the ability of nations to implement and meet these new pledges, it doesn’t detract from the long-term opportunity for investing in these areas.

    The Nicola Alternative Strategies Fund returned -0.9% in April. Currency was a headwind detracting -1.4% for the month. In local currency terms since the Nicola Alternative Strategies Fund was last priced, Millennium returned +1.3%, Renaissance Institutional Diversified Global Equities Fund +3.2%, Bridgewater Pure Alpha Major Markets +0.7%, Verition International Multi-Strategy Fund Ltd 0.0%, and Polar Multi-Strategy Fund +0.3%. Returns in multi-strategy funds were muted during the month as gains in event-driven investing, mainly SPAC’s and merger arbitrage, were offset by equity long-short exposure, while a higher-quality bias led to outperformance for Renaissance.

    The Nicola Precious Metals Fund returned +4.6% for the month while underlying gold stocks in the S&P/TSX Composite index returned +5.5% and gold bullion was +1.3% in Canadian dollar terms. Bullion prices appear to have found a short-term bottom as prices have steadily increased since the end of March. Concerns about rising infections in countries such as India and Japan have created a bid for gold. Japan announced emergency measures in Tokyo to curb rising infection rates while still planning to host the Olympics in July. The juxtaposition of new emergency Covid measures and the push forward of the Olympics highlights the desire for a return of normalcy with the ongoing risks. The month also marked strong physical demand from China and India, particularly in the early stages of the month, prior to New Delhi’s lockdown on April 19th.

     

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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 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. 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. For a complete listing of Nicola Wealth Real Estate portfolios, please visit https://realestate.nicolawealth.com. 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. An investment in Nicola Infrastructure and Renewable Resources Limited Partnership is an investment in alternative asset classes. Investments in alternative funds are highly illiquid and carry a related degree of risk of financial loss. Investors should consult the relevant disclosure and subscription documents for a full listing of risks associated with an investment in alternative assets and consult their Nicola Wealth advisor and relevant professionals regarding any tax, accounting, legal or financial considerations. Effective September 19, 2018, the fund adopted a new mandate and changed its name from the NWM Farmland Limited Partnership.