Nicola Wealth Investment Returns – April 2022


Returns for the Nicola Core Portfolio Fund were -0.5% for the month of April 2022.  The Nicola Core Portfolio 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 -1.2% in April while the iShares Core Canadian Universe Bond Index ETF returned -3.6% for the month. Credit spreads widened by 16 basis points during the month leading to weakness in corporate credit. Unlike March where spread widening was bifurcated, spreads widened across all sectors with Financials, Communications, and Energy being the worst-hit sectors.

We believe that credit spreads still have room to widen at these levels, however, there are certain pockets of relative attractiveness, mainly banks, which over the last twelve months averaged a credit spread of 74 bps and has since widened to 125 bps. In Canada, interest rates continue to rise as the Bank of Canada raised rates by 50 bps and began quantitative tightening.  This was a signal to the market that the central bank was serious about combating inflation. We believe that there is likely more interest rate hikes to come with another 50 bps increase at the beginning of June.

The Nicola Global Bond Fund was down for the month, returning -1.7%. April was a challenging environment for fixed income with both credit and duration hurting returns. Our diversified portfolio helped mitigate some of the losses as securitized debt through BlackRock, syndicated loan exposure in Pimco, and Asian exposure in Templeton (through India, Indonesia, and Singapore), helped buffer returns in the fund.

The Russia-Ukraine conflict and new lockdowns in China caused renewed fears on a slowdown in global growth. Coupled with a stronger US dollar and high inflation, many emerging market currencies were negatively impacted. Offsetting some of the risks, Japanese pension and insurance investors have sold US treasuries, as the cost of hedging US currency has increased and migrated to other sovereign fixed income.

The Nicola High Yield Bond Fund returned +1.0% in April, while the iShares US High Yield Bond Index ETF (CAD-Hedged) returned -4.3%. Our outperformance was driven by our exposure to California Carbon Credit, Apollo, and our recently added exposure in the Oaktree Global Credit Plus Fund.

The high yield market saw its weakest month since the early start of the pandemic (March 2020) as credit spreads widened by 54 basis points on fears of higher interest rates and growth concerns. CCC names, which have held relatively strong due to support from Energy, sold off as they returned -4.6% versus -3.8% for BB rates names. The absolute levels of distress in HY remain low but a higher number of names are trading under $90, indicating potential stress in the marketplace. We believe that despite the sell off, there remains potential for further spread widening.

The Nicola Preferred Share Fund returned -5.7% for the month while the BMO Laddered Preferred Share Index ETF returned -7.1%. The selloff in the market was largely driven by retail investors redeeming their preferred share exposure via ETF’s which has led to indiscriminate selling and broad-based weakness. Perpetuals were down -8.4% while floaters fared slightly better, down -6.3%.

Adding to the weakness was credit spread widening as TD issued an institutional preferred share at 5.75% leading to some repricing in the marketplace. Despite credit spread widening, we believe that there is emerging value within the preferred share space and have been reducing some of our more defensive positions and buying middle and lower rate resets coming due that we believe have upside potential regardless of if the issue is extended or redeemed.

Returns for the Nicola Primary Mortgage Fund and Nicola Balanced Mortgage Fund were 0.4% and 0.5% respectively in April. Cash held at month end was 1% in for the Nicola Primary Mortgage Fund and 7% for the Nicola Balanced Mortgage Fund as we’ve started the quarter with a good level of capital deployed in both funds. Current annual yields, which are what the funds 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 5.7% for the Nicola Balanced Mortgage Fund.

The Nicola Canadian Equity Income Fund’s performance vs S&P/TSX in April was -5.2% vs -5.0%.  Global Equity markets slumped in April. The economic damage from Russia’s war in Ukraine and expectations of very aggressive central bank tightening cycles sent the MSCI AC World Index down (-8.1%). Canada’s S&P/TSX Index outpaced most indices.

Commodities were mixed as Natural Gas spiked (+28%) after Russia cut off supplies to Bulgaria and Poland. Crude Oil also finished in positive territory (WTI +4.4%; Brent +1.3%). Precious metals suffered (silver -8.1%; gold -2.1%) as rising real rates and a stronger USD hurt sentiment. Copper was also weak (-7.5%). Nine TSX sectors were in negative territory with Tech (-20%), Health Care (-17.8%) and Industrials (-8%) falling the most. Energy (+2.7%) and Staples (+0.4%) were the only two sectors in positive territory.

Within the Nicola Canadian Equity Income Fund, the top three sectors contributing to the relative underperformance in the month were the areas that are economically sensitive: Industrials, Materials, and Consumer Discretionary. This offset positive contribution from Financials, Information Technology, and Energy. The Nicola Canadian Equity Income Fund remains overweight on Energy, Industrials and Consumer Discretionary. In the month of April, the Nicola Canadian Equity Income Fund’s top-performing holdings were Suncor, West Fraser Timber, and Definity Financial Corp. The worst performers were Shopify, Lightspeed Commerce, and TFI International. We added Agnico Eagle Mines. We exited West Fraser Timber and Doman Building Materials.

The Nicola Canadian Tactical High Income Fund’s performance vs S&P/TSX Composite in April was -3.9% vs -5.0%.  The Nicola Canadian Tactical High Income Fund’s performance vs S&P/TSX Canadian Dividend Aristocrats was -3.9% vs -3.8%.  The Nicola Canadian Tactical High Income Fund is focused on investing in companies that pay sustainable, growing dividends. In Canada, this generally results in an underweight to the Information Technology and Health Care sectors, and a greater allocation to Value-oriented sectors. The S&P/TSX Composite Index outperformed other global equity markets thanks to strong performance in energy and also due to having a fairly low weight in Technology.

Nine TSX sectors were in negative territory with Tech (-20%), Health Care (-17.8%) and Industrials (-8%) falling the most. Energy (+2.7%) and Staples (+0.4%) were the only two sectors in positive territory.  An alternative benchmark for the Nicola Canadian Tactical High Income Fund is the S&P/TSX Canadian Dividend Aristocrats Index (TSX Aristocrats).

The Nicola Canadian Tactical High Income Fund performed in-line with the TSX Aristocrats Index. The only sector in the TSX Aristocrats Index that posted a positive return for the month was Energy (+0.6%). The worst performing sectors were Industrials (-7.8%), Information Technology (-7%), and Financials (-6.8%). The Nicola Canadian Tactical High Income Fund’s dividend focus has led to sizeable overweight positioning within Energy and Financials.

In both sectors we continue to expect companies with excess capital to deliver significant returns to shareholders in the form of rising dividends and share repurchases. The Nicola Canadian Tactical High Income Fund’s top contributing sectors on a relative basis were Energy, Real Estate and Consumer Staples. The primary detractors were Materials, Financials, and Industrials. The projected dividend yield on the fund is 3.5%. In April, the top-performing holdings were Suncor, Altagas, and Loblaws Companies Ltd. The bottom performers were TFI international Inc, Labrador Iron Ore, and IA Financial Corp. We introduced Agnico Eagle Mines and Parkland Corp. We exited Doman Building Materials.

The Nicola U.S. Equity Income Fund and S&P 500 returns for the month were -7.0% & -8.7% respectively (USD$). In the month of April, the Nicola US Equity Income Fund’s relative outperformance was equally split between sector allocation and stock selection.  The Nicola US Equity Income Fund benefited from being overweight in Energy, Materials and Consumer Staples and underweight in Information Technology.

Stock selection was positive within Consumer Discretionary (Ross Stores +10.3%, Lowes -1.8% and Hyatt -0.5% vs -13% for the sector) and also positive within the Information Technology sector where most of the Nicola U.S. Equity Income Fund’s holdings outperformed (Visa -3.9%, NXP Semiconductors -7.7%, Seagate Technologies -8.7% vs -11.2% for the sector).  Names sold or reduced during the month include Aptiv PLC, Morgan Stanley, Pepsico, Northrop Grumman, Warner Bros Discovery (reallocated to Netflix).  Netflix was opportunistically added to the portfolio after they reported their Q1 2022 results and provided unfavourable subscriber guidance for Q2 2022.   Netflix is a leading global streaming provider with a subscriber base of over 220 million; despite the recent hiccups Netflix is expected to generate free cash flow and leverage its content spend over an expanding subscriber base.

The Nicola U.S. Tactical High Income Fund and S&P 500 returns for the month were -4.4% & -8.7% respectively (USD$). Last month’s relative outperformance was due to the underweights in the worst performing sectors (Information Technology & Consumer Discretionary) and positive stock selection within Consumer Discretionary (Ross Stores +10.3% and underweight Amazon) and Communications Services (AT&T +5.4% vs -15.7% for the sector).  The Nicola U.S. Tactical High-Income Fund was active last month by writing 35 Put options (~$39M notional amount) and 5 Covered-Call options.  New names: Netflix via Put options (Netflix stock fell 67% from November 17, 2021, to April 20, 2022, when it took its initial position and wrote Put options that were ~25% out-of-the-money).

The Nicola U.S. Tactical High-Income Fund trimmed Pepsi and Morgan Stanley and added to other existing positions (Air Products and Blackrock) and also made some minor changes to the existing target weights by reducing Texas Instruments and Northrop Grumman weight and reallocating to Netflix, John Deere, Waste Management and Shell.

In April 2022, the Nicola Global Equity Income Fund was -4.0% vs the MSCI ACWI Index -5.5% as expectations for further tightening of US monetary policy, COVID lockdowns in China, and the continued conflict in Ukraine weighed on market sentiment. During the month, US markets underperformed (-6.3%), while International (-3.9%) and Emerging Markets (-3.0%) outperformed.

In addition to rising interest rate expectations, US markets were also impacted by disappointing earnings/outlooks from some of the largest constituents in the S&P 500 (Amazon, Apple, Alphabet). Emerging Markets benefited from a rally in China late in the month with the announcement of further stimulus to meet the country’s economic growth targets. The Nicola Global Equity Fund outperformed due to its geographic (underweight US, overweight EM) & sector (overweight Consumer Staples) allocations, as well as security selection within various Funds. Performance of our managers during the month:

  • Pier 21 Global Value +1.8% (relative performance benefited from its overweight position in Consumer Staples & security selection in the US)
  • Edgepoint Global Portfolio -1.7% (relative performance benefited from security selection in Info-Tech & the US)
  • Nicola EAFE Strategy -3.5%
  • Lazard Global Small Cap -4.2%
  • JP Morgan Global Emerging Markets -5.4%
  • Pier 21 Worldwide Equity -6.5% (relative performance was negatively impacted by security selection within Consumer Discretionary and Japan)

The Nicola Sustainable Innovation Fund returned -13.4% (USD) / -11.3% (CAD) in April and -18.6% (USD) / -17.9% (CAD) year-to-date. Enviva, Iberdrola, and BYD were the top performers during the month while Array Technologies, Ameresco, and ChargePoint Holdings were the biggest laggards. We were active in trading throughout the month including taking some recent profits in names that had rebounded like Beam Global, Ormat Technologies, and Xebec Adsorption and using the proceeds to rebalance into Sunrun, Brookfield Renewable Partners, and Hannon Armstrong, among others. It was another very challenging month for the portfolio, largely driven by macroeconomic news and concerns about the Federal Reserve’s actions to fight inflation. In early May, we saw the Fed raise interest rates 50 basis points, something it hasn’t done in 20+ years. Fed Chairman Jerome Powell also suggested that 75 basis point hikes were likely off the table, commentary which provided some comfort to those fearing overreaction from the Fed. With the ongoing capitulation in the markets, we’ve taken the opportunity to build up our positions in our more stable core of dividend-paying, renewable-focused utilities in North America and Europe.

The Nicola Alternative Strategies Fund returned +1.7% in April. In currency-neutral terms, the Nicola Alternative Strategies Fund returned approximately +0.4% while the strengthening US dollar created a tailwind contributing 1.4% to returns for the month. Bridgewater and Renaissance had strong returns, helping to drive positive performance. According to the Eurekahedge Hedge, hedge funds broadly were lower as risk assets sold off. The Eurekahedge Hedge Fund Index was down -0.6% while the Eurekahedge Arbitrage Hedge Fund Index returned -0.5%.  Divergent strategies such as global macro were up 1.1% helping to support overall returns.

The Nicola Precious Metals Fund returned -4.7% for the month, giving back some of the strong returns from the previous month. For the month of April, underlying gold stocks in the S&P/TSX Composite index returned -4.4% and gold bullion was up 0.7% in Canadian dollar terms. The US dollar and hawkish central banks impacted gold as higher interest rates impact the relative attractiveness of bonds and increases the opportunity costs for owning gold. The weakness in gold equities was driven by the overall sell-off in risk assets and the higher beta exposure of small and mid-sized mining companies.  Risk sentiment is high in equity markets, and we expect the markets to continue to focus on the potential for an economic slowdown, inflation, and geopolitical risks which would bode well for safe-haven assets such as gold.

For the month of April, the Nicola Private Debt Fund generated CAD and USD returns of +0.1% and -0.1%, respectively. YTD April CAD returns were +1.0% while USD returns reached +1.4%. The Nicola Private Debt Fund’s AUM was approx. $672 million at month-end. The primary detractor from performance for the month was a write-down on the net asset value of our fund investment in Crown Capital Partners Funding, LP. During the month Crown Capital Partners determined that one of the loans within their fund’s portfolio was no longer recoverable resulting in the write-down. USD returns were also negatively impacted by the weakening Canadian dollar during the month as approx. 14% of the Fund’s AUM is invested in CAD denominated investments. The Nicola Private Debt Fund closed 3 new senior secured term loan investments in April across the US healthcare and financial services sectors. We remain constructive on the outlook for the Nicola Private Debt Fund which stands to benefit from rising benchmark interest rates over the next 12 months.

The Nicola Infrastructure and Renewable Resources LP returned +1.8% for the month of April in Canadian dollar terms. Currency was a tailwind as the US dollar strengthened versus the Canadian dollar, agnostic to currencies our assets returned +0.6% for the month. During the month of April, we deployed capital into three co-investment opportunities. The investments have brought cash levels within the Nicola Infrastructure and Renewable Resources Limited Partnership from 18% to 2% and we are effectively fully invested at $165 million. Our new co-investments include a UK-based specialized waste management business that will complement our exposure in the Energy from Waste sector. We also closed on a group of US-based district energy systems that provide efficient heating and cooling to multiple buildings in a neighbourhood. Finally, we closed on a leading Energy as a Service provider in the US which provides a full suite of engineering, mechanical and electrical capabilities to deliver turnkey energy and sustainability solutions to customers such as universities and hospitals.

The Nicola Global Real Estate Fund’s performance vs iShares S&P/TSX Capped REIT Index (XRE) in April was -0.3% vs -5.0%.  Interest rates continued to march higher in April. The 10 Year Canada Bond yield has risen from 1.79% at the beginning of the year to 2.85% as of the end of April. Rising rates are a headwind for the sector and volatility in the publicly traded markets are to be expected. Private market cap rates are generally sticky, and we expect them to be anchored to low levels barring any sudden and significant changes in property fundamentals as there is a significant amount of private market capital seeking investments.

The Nicola Global Real Estate Fund’s outperformance was mainly attributable to strong relative performance of our International real estate LP investments and currency. Currently, we are repositioning the publicly traded securities to add global diversification and have hired Hazelview Investments. As a result, we are selling our Canadian REIT holdings and with the proceeds Hazelview will manage a global real estate mandate.

Nicola Canadian Real Estate LP NAV per unit has increased to $149.7246 (previously $147.0868), effective April 30, 2022. This represents an increase of 1.8% and a positive return for March of 2.3%. YTD return as of March 31, 2022, is 5.3%. Portfolio Leverage is 41.90%. The positive return was primarily a result of increased appraised values of Aero Portfolio, Avonhead, and Grace Road.

Nicola U.S. Real Estate LP NAV per unit has increased to US$179.8385 (previously US$177.3810), effective April 30, 2022. This represents an increase of 1.4% and a positive return for March of 1.9%. YTD return as of March 31, 2022, is 7.1%. Portfolio Leverage is 45.51%. The positive return was primarily a result of increased appraised values of San Pamilla, Gateway II, and South Shore Lakes.

Nicola Value Add Real Estate LP NAV per unit has increased to $204.5435 (previously $201.4117), effective April 30, 2022. This represents an increase of 1.6% and a positive return for March of 1.6%. YTD return as of March 31, 2022, is 3.9%. In March, we funded $22.3M for Westway Business Park, $4.6M for 858 Ellis Street, $1.4M for Central Surrey, $0.7M for Building O, $0.3M for Queen Anne, $0.1M for Encore, and $0.1M for Railway.

 

 

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information presented here has been obtained from sources believed to be reliable, but not guaranteed. Returns are quoted net of fund/LP expenses but before Nicola Wealth portfolio management fees. Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer, and Investment Fund Manager with the required securities’ commissions. This is not a sales solicitation. 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. 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.