Returns for the Nicola Core Portfolio Fund were +1.4% for the month of August 2022. 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 0.5% in August, while the iShares Core Canadian Universe Bond Index ETF returned -2.9% for the month. Credit spreads tightened five basis points in Canada and ended the month at 1.65%. Ten-year Government of Canada yields moved from 2.61% to 3.12% creating a headwind for duration assets. We believe interest rates will likely continue to increase, and the market has yet to fully price future increases with the belief that the central bank will pivot from its hawkish position. Jerome Powell, chair of the Federal Reserve, provided support to our views recently as he spoke at Jackson Hole, emphasizing the Fed’s focus on getting inflation to 2%.
The Nicola Global Bond Fund was up for the month, returning 0.4%. Our exposure in BlackRock Securitized Investors LP contributed strongly for the month, up 5.1%, while Templeton Global Bond and Pimco Monthly Income returns offset each other. The Pimco Monthly Income fund remains bar belled in its approach to achieving superior risk-adjusted returns, in spite of potential recessionary risks. To balance risks, higher-yielding assets have been positioned towards seniority in the capital structure and diversification amongst corporate, securitized, and emerging market debt.
The Nicola High Yield Bond Fund returned +2.4% in August, while the iShares U.S.High Yield Bond Index ETF (CAD-Hedged) returned -5.6%. The U.S. dollar strengthened during the month, supporting returns of 1.4%. Our strong returns also benefited from select positioning in closed-end funds and CLO equity (collateralized loan obligation equity), which helped drive returns higher in a challenging environment for traditional high yield. Specifically, Pimco Multi-Sector Income Fund returned +3.6% for the month. We actively traded closed-ended funds and believe the Pimco Multi-Sector Fund currently has attractive characteristics as it trades at a -5% discount to its Net Asset Value while its income has increased during the month, indicating an annualized yield of 8.5%.
The Nicola Preferred Share Fund returned +2.4% for the month, while the BMO Laddered Preferred Share Index ETF returned +1.8%. Five-year Government of Canada bond yields moved from 2.62% to 3.29%, which helped support preferred share returns, offsetting continued poor sentiment as ETFs experienced outflows. Artis REIT announced the redemption of their Series A preferred share on August 24th. We have profited well from our positioning in Artis as they continue to strengthen their balance sheet with accretive monetization of certain assets. During the month, we focused on increasing our weight in financial preferred shares that are resetting six to twelve months from now, providing enhanced upside with rising interest rates.
Returns for Nicola Primary Mortgage Fund and Nicola Balanced Mortgage Fund were +0.3% and +0.7%, respectively, for the month of August. Cash in the funds at month end was 6% in the Nicola Primary Mortgage Fund and 7% in the Nicola Balanced Mortgage Fund. Current annualized yields, which are what they 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 4.5% for the Nicola Primary Mortgage Fund and 6.5% for the Nicola Balanced Mortgage Fund. The Nicola U.S. Mortgage Fund continues to hold a 3rd party fund comprised of U.S. commercial mortgage loans while other investment strategies are implemented.
For the month of August, the Nicola Private Debt Fund returned 0.4%, bringing the year-to-date return to 3.0%. The primary return driver for the month was interest income from the Nicola Private Debt Fund’s portfolio of direct investments. New investments during the month included a US$10 million participation in a syndicated senior term loan to a U.S. distributor of lab supplies. The Nicola Private Debt Fund also had two investment realizations during the month totalling $3.1m of principal repayments.
The Nicola Canadian Equity Income Fund’s performance vs S&P/TSX in August was-1.3% vs -1.5%. Hawkish remarks from Federal Reserve chair Powell exacerbated U.S. and Canadian Yield Curve inversion. The Canadian Yield Curve inverted further, with 2-year yields of 3.65% and 10-year yields of 3.12% rising 69bp and 51bp, respectively. This suggests that the market as a whole is becoming more pessimistic about the economic prospects for the near future.
Commodities were generally weak as crude oil prices (WTI-9.2%; Brent -12.3%) and precious metals (Silver -11.6%; Gold -3.1%) both declined. The TSX struggled with only Health Care (+9.4%), Discretionary (+1.3%) and Utilities (+0.8%) advancing. The worst performing sectors were Tech (-7.6%), Real Estate (-4.8%) and Financials (-2.3%). The Nicola Canadian Equity Income Fund outperformed primarily because of positive contributions from Financials, where we are underweight, Consumer Staples and Technology, which offset negative contributions from Energy, Industrials and Materials.
The Nicola Canadian Equity Income Fund remains overweight on Industrials, Consumer Discretionary, and Energy. In the month of August, the top performing holdings were Brookfield Infrastructure, Waste Connections Inc, and Telus International. The bottom performers were Parkland Corp, Nuvei Corp and Richelieu Hardware Ltd. We exited our position in Franco Nevada. We added Crombie REIT, Neighbourly Pharmacy Inc, Canadian Western Bank, and Magna International.
The Nicola Canadian Tactical High Income Fund’s performance vs S&P/TSX in August was -1.7% vs -1.5%. Fund performance vs S&P/TSX Canadian Dividend Aristocrats was -1.7% vs -2.2% in August.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 compared to the S&P/TSX Index, and a greater allocation to Value-oriented sectors. Health Care (+9.4%), Discretionary (+1.3%) and Utilities (+0.8%) were the strongest performing sectors in the S&P/TSX Index. The worst performing sectors were Tech (-7.6%), Real Estate (-4.8%) and Financials -2.3%.
In August, the Nicola Canadian Tactical High Income Fund outperformed the TSX Aristocrats Index. From a sector standpoint, positive contributions came from Consumer Staples, Real Estate, and Technology. The Nicola Canadian Tactical High Income Fund’s dividend focus has led to sizeable overweight positioning within Energy, where we expect companies with excess capital to deliver significant returns to shareholders in the form of rising dividends and share repurchases. In August, the top performing holdings were Brookfield Infrastructure, Waste Connections Inc, and Saputo Inc. The bottom performers were Parkland Corp, Granite REIT and TC Energy. We sold our position in Franco Nevada. We added Neighbourly Pharmacy Inc, Canadian Western Bank, and Magna International.
The Nicola U.S. Equity Income Fund returned -2.9% vs -4.1% for the S&P 500 (in USD$). The relative outperformance came from sector allocation (underweight Information Technology) and positive stock selection within Consumer Discretionary (Hyatt +8.3% and Ross Stores +6.2%) and Industrials (John Deere +6.4% and Waste Management +2.7%). The Nicola U.S. Equity Income Fund made minor rebalancing trades in August by reducing Cadence Designs, Waste Management, Cheniere Energy, United Health Group and Nextera Energy, and adding to Crown Holdings, S&P Global, Electronic Arts, AT&T, and Arthur J Gallagher (new position).
Arthur J. Gallagher is one of the world’s largest commercial insurance brokers and we are expecting to benefit from higher claim frequency, interest rates, inflation and the secular trend of growing insurable events (supply chain risk, cyber security, climate change, etc.). The Nicola U.S. Equity Income Fund also executed one partially covered-call options on Cheniere Energy and ended the month with a delta-adjusted equity exposure of 99% (4% in covered calls); the Nicola U.S. Equity Fund consists of high-quality names with healthy balance sheets, strong free cash flows and attractive consensus forward 12-month ROEs (40% vs 23% for S&P 500).
The Nicola U.S. Tactical High Income Fund returned -2.1% vs -4.1% for the S&P 500 (in USD$). Last month’s outperformance was attributable to lower overall equity exposure (~81%) and sector allocation (underweight Information technology and Real Estate, while being overweight Consumer Staples). Stock selection within Industrials and Consumer Discretionary also contributed to relative performance, with names such as John Deere, Waste Management, Hyatt and Ross Stores all posting positive returns while their respective sectors were in negative territory.
The Nicola U.S. Tactical High Income Fund was active last month by writing 9 Put options (~$17M notional amount) and 3 Covered-Call options. The Nicola U.S. Tactical High Income Fund reduced the target weights for Cadence Design Systems and Nextera Energy to make room for a new position in Arthur J. Gallagher.
In August 2022, the Nicola Global Equity Fund was -2.1% vs the MSCI ACWI ex-USA Index -1.1%. International Markets (-3%) underperformed and Emerging Markets (+3%) outperformed. For International Markets, Europe (-4%) was one of the worst performing regions as its growth outlook continued to deteriorate with continued high inflation prompting calls for a 75 bps rate hike by the ECB, as energy costs escalated due to natural gas supplies, and business activity contracted for the second month. The main drivers of performance in Emerging markets were India & China. In China (+2%), the market rallied on the announcements of additional stimulus measures, interest rate cuts and a preliminary agreement with the U.S. over audit inspections.
The Nicola Global Equity Fund underperformed in August’22 due to its geographic (overweight in Europe, underweight in emerging markets) & sector (underweight Energy) allocations, as well as security selection in its investments. Performance of our investments during the month are as follows:
Edgepoint Global Portfolio -1.4%
- Direct Stocks -2.0%
- iShares MSCI EAFE Value ETF -2.5%
- Nicola EAFE Strategy -2.8%
The Nicola Global Equity Fund currently has over 50% invested in direct stocks and will continue to exit its investments as planned.
The Nicola Sustainable Innovation Fund returned +3.1% (USD) / +5.4% (CAD) in August and -4.9% (USD) / -1.7% (CAD) year-to-date. Our top performers during the month were Fluence Energy, Stem Inc., and Plug Power, while Itron, Orsted, and BYD Co. were the biggest laggards. August saw a continuation of the positive momentum for our portfolio holdings that started last month with the surprise announcement of the Inflation Reduction Act in the United States, which President Joe Biden subsequently signed into law on August 16th.
We added a new company to the portfolio, Constellation Energy, the leading investor-owned nuclear energy provider in the United States. They were big winners from the Inflation Reduction Act as it included further funding and production tax credits for the nuclear industry. Constellation Energy operates more than 20% of the existing nuclear plants in the U.S. today and has the cleanest emissions profile and lowest carbon intensity of all the U.S. utilities. We were active in trading throughout the month, including taking some recent profits in names that had rebounded strongly, including TPI Composites, Array Technologies, Fluence Energy, and Stem Inc., using the proceeds to add to Constellation Energy, Itron, and Evoqua Water Technologies.
The Nicola Alternative Strategies Fund returned +2.5% in August. For the month, USD strengthened versus the Canadian dollar supporting returns by 1.5%. Millennium had a strong month, which helped drive returns higher. According to Eurekahedge, hedge funds were marginally higher for the month, returning +0.2%, while the Eurekahedge Arbitrage Hedge Fund Index was up strongly, returning +0.8%, and the Relative Value Hedge Fund Index was flat, returning 0.0%.
The Nicola Precious Metals Fund returned -4.2% for the month of August. Underlying gold stocks in the S&P/TSX Composite index returned -5.2%, and gold bullion was down -0.6% in Canadian dollar terms. Wheaton Precious Metals continued its sell-off as it finished the month -8.4%. Weaker gold was caused by higher yields and a stronger U.S. dollar, which continues to pressure the space. Higher rates will likely persist and be a drag on gold returns in the immediate future, however, gold has historically been a strong diversifier during recessions, and economic risks continue to mount.
The Nicola Infrastructure and Renewable Resources LP returned +2.8% for the month of August in Canadian dollar terms. Currencies were primarily a tailwind as the Canadian dollar weakened against the U.S. dollar; agnostic to currencies, our assets returned +1.8% for the month. This was driven by Q2 2022 performance in line with expectations from the underlying funds and co-investments. In addition, the UK waste management co-investment benefited from revised inflation forecasts and made a special distribution during the month driven by the release of excess working capital.
The KKR fund investment and U.S. district heating and cooling co-investment completed in Q2 2022 remain held at cost. As a result of investment activity earlier in the year, cash levels within the fund are at 2.8%, with the fund at $177 million of AUM. The waitlist is at $19 million and is expected to be fully drawn by year-end from a combination of existing fund commitments and co-investment.
The Nicola Global Real Estate Fund’s performance vs iShares S&P/TSX Capped REIT Index (XRE): -0.6% vs -4.8%. Corporate earnings frequently beat expectations, which suggests commercial and residential real estate fundamentals are on strong footing. For example, of the 109 U.S.REITs reporting second-quarter results, 70% beat earnings estimates, with nearly 66% of REITs that report full-year guidance increasing their estimates versus ~29% that kept guidance the same.
Nonetheless, the sector continues to encounter stiff headwinds from higher rates and growing recession fears. The key question that needs to be answered is, “will higher debt costs result in portfolio fair value losses?”. Write-downs were very limited in Q2 but will that change in 2H/22? Valuation models point to global REITs trading at a steep discount to forward NAV, so it appears that a lot of bad news has been priced into share values. With many publicly traded REITs trading well below NAV and a lack of capital deployment opportunities with deal flow slowing, we have seen a pickup in share buyback activity. The increased share buyback activity reflects management’s strong confidence in the fundamentals, as well as a prudent allocation of capital by the REITs. We expect REITs to continue to be active so long as valuation remains heavily discounted.
The Nicola Canadian Real Estate LP NAV per unit has increased to $156.2788 (previously $155.6264), effective August 31, 2022. This represents an increase of 0.4% and a positive return for July of 0.8%. YTD return as of July 31, 2022, is 11.9%. Portfolio Leverage is 41.32%. The positive return was primarily a result of increased appraised values of Advanced – Queensborough, Advanced – Maple Meadows, and 500 Brooksbank.
The Nicola U.S. Real Estate LP NAV per unit has increased to US$191.5006 (previously US$188.1461), effective August 31, 2022. This represents an increase of 1.8% and a positive return for July of 2.2%. YTD return as of July 31, 2022, is 16.2%. Portfolio Leverage is 45.42%. The positive return was primarily a result of increased appraised values of The Maddox, Northbridge at Millenia Lakes, and Cobblestone at Eagle Harbor.
The Nicola Value Add Real Estate LP NAV per unit has increased to $223.3935 (previously $219.5297), effective August 31, 2022. This represents an increase of 1.8% and a positive return for July of 1.8%. YTD return as of July 31, 2022, is 13.5%. In July, we funded $17.6M for two new projects that closed (Orangeville and West Illinois) and a total of $5.7M for existing projects.
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.