Returns for the Nicola Core Portfolio Fund were +1.8% for the month of July 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 +0.7% in July while the iShares Core Canadian Universe Bond Index ETF returned +4.0% for the month. The difference was largely due to interest rate exposure as the iShares Core Canadian Short Term Bond Index ETF returned +1.3% for the month. Credit spreads remain relatively wide for investment grade bonds, particularly for banks. Corporate issuers have drawn on bank facilities instead of going to the public bond market forcing banks to access capital markets, leading to wider credit spreads. We see this technical dynamic as leading to attractive opportunities for bank debt. In addition, Canadian spreads remain attractive relative to the U.S. market. Historically Canada has traded at tighter levels, however this dynamic has switched. We believe that this situation is temporary and Canadian spreads will revert over the medium term.
The Nicola Global Bond Fund was up for the month returning +1.0%. Our exposure in global inflation linked bonds was the largest driver of returns for the month, returning 3.6%, while the Templeton Global Bond fund was the largest detractor, down 0.4%. Currency positions led to underperformance as the month saw weakness from select emerging countries, including the Argentine peso, Columbian peso, and Ghanaian cedi, which all detracted from returns.
The Nicola High Yield Bond Fund returned -0.4% in July while the iShares U.S. High Yield Bond Index ETF (CAD-Hedged) returned +7.1%. The strong returns in the high yield market reflected a recovery from the losses experienced in June which saw the market sell off -6.9%. We maintained our defensive posture throughout avoiding the volatility both on the downside and upside.
The rally benefitted higher quality names more and led to one of the best months on record. Leading into July, market sentiment was poor, and investors were sitting on large cash balances. The rally was a result of the poor sentiment turning positive and investors reallocating their cash as they interpreted recent Fed comments as a pivot to becoming more dovish. The large move in high yield spreads has brought U.S. back valuations to slightly expensive from fair valued.
The Nicola Preferred Share Fund returned -0.7% for the month while the BMO Laddered Preferred Share Index ETF returned -1.2%. The sell off and subsequent rebound in preferred shares mirrored the path of most risk assets, however preferred shares sold off more during the initial leg down. The larger sell-off was caused by repricing in the marketplace from new institutional preferred shares. These preferred shares mirror many of the characteristics of retail preferred shares with the notable exception that they have a par value of $1,000 versus $25.
Both TD and BMO launched institutional preferred shares during the month at very attractive levels for investors. BMO was priced on July 20th with a 425 basis point spread which led to a dividend yield of 7.37% (approximately equivalent to 9.4% interest yield). The attractiveness of the new issue caused some re-pricing in the secondary market however, we believe that the new issue remains attractive.
Returns for the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund were both +0.3% in July. Cash at month end was 8% in the Nicola Primary Mortgage Fund and 9% in the Nicola Balanced Mortgage Fund. Current annualized yields, which are what both 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 6.0% for the Nicola Balanced Mortgage Fund. The Nicola U.S. Mortgage Fund continues to hold a status as a 3rd party fund while other investment strategies are implemented.
The Nicola Canadian Equity Income Fund’s performance vs S&P/TSX in July was +3.6% vs +4.6%. After a tough June, Canadian Equities rebounded in July. Various leading indicators suggest that inflation will soon top out. The key questions going forward for investors are how fast will inflation decline and will central banks pivot early enough to engineer a soft economic landing. At least in July, the market took an optimistic view to answering these questions.
Commodity prices slipped in July as Crude oil prices (WTI -6.8%; Brent -4.2%) were weak on growing concerns that economic weakness will bring lower demand. Natural Gas (+51.7%) rallied sharply after Russia further restricted gas flows in Europe. Metals were weak with Copper (-3.8%) and Gold (-2.3%) losing ground. Industrials (+10.4%), Technology (+10%) and Consumer Discretionary (+8.2%) were the strongest performing sectors in the S&P/TSX Index. Health Care (-9.6%) and Materials (-0.7%) were the worst performing sectors.
The Nicola Canadian Equity Income Fund underperformed primarily because of negative contributions from Energy, Materials and Financials which more than offset positive contributions from Industrials and Consumer Discretionary. The Nicola Canadian Equity Income Fund remains overweight Industrials, Consumer Discretionary, and Energy. In the month of July, the top performing holdings were TFI International Inc, Aritzia Inc, and Richelieu Hardware Ltd. The bottom performers were Lundin Mining, Barrick Gold Corp, and Agnico Eagle Mines Ltd. We exited our position in Park Lawn and Definity Financial. There were no new additions.
The Nicola Canadian Tactical High Income Fund’s performance vs S&P/TSX in June was +2.4% vs -4.6%. In Nicola Canadian Tactical High Income Fund performance vs S&P/TSX Canadian Dividend Aristocrats was +2.4% vs +4.8% in July. 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. Industrials (+10.4%), Technology (+10%) and Consumer Discretionary (+8.2%) were the strongest performing sectors in the S&P/TSX Index. Health Care (-9.6%) and Materials (-0.7%) were the worst performing sectors.
In July, the Nicola Canadian Tactical High Income Fund underperformed the TSX Aristocrats Index. From a sector standpoint, negative contributions from Materials, Energy, and Utilities were the main reasons for the underperformance. The Nicola Canadian Tactical High Income Fund’s dividend focus has led to a sizeable overweight positioning within Energy. This is where we expect companies with excess capital to deliver significant returns to shareholders in the form of rising dividends and share repurchases. In July, the top performing holdings of the Nicola Canadian Tactical High Income Fund were TFI International, Saputo Inc, and CP Railway. The bottom performers were Lundin Mining, Barrick Gold Corp, and Agnico Eagle Mines. There were no new additions or deletions in the month.
The Nicola U.S. Equity Income Fund returned +8.7% vs +9.2% for the S&P 500 (in USD$). Last month a number of names in the portfolio returned over 20% due to better than expected quarterly results (Netflix +28.6%, Amazon +27% and NXP Semiconductors +24%). Overall, on a relative basis the Nicola U.S. Equity Income Fund underperformed the S&P 500 mainly attributable to being underweight the top two performing sectors (Information Technology and Consumer Discretionary) while also being overweight the worst performing sectors (Communication Services, Health Care and Consumer Staples). Despite the negative allocation effect, the Nicola U.S. Equity Income Fund performed well due to stock selection within Financials, Consumer Staples and communication Services.
The Nicola U.S. Equity Income Fund made some minor rebalancing trades in July by reducing Apple and Seagate Technologies and reallocating to AT&T. We also executed 4 partially covered-call options (VISA, Merck, Pfizer and Costco) that generated double-digit annualized premiums while providing mid-to-high single digit upside. The Nicola U.S. Equity Income Fund ended the month with a delta-adjusted equity exposure of 98% (4% of portfolio in covered calls); this consists of high-quality names with healthy balance sheets, strong free cash flows and attractive consensus forward 12-month ROEs (41% vs 23% for S&P 500).
The Nicola U.S. Tactical High Income Fund returned +6.4% vs +9.2% for the S&P 500 (in USD$). Last month’s relative underperformance was attributable to lower overall equity exposure (~75%) and sector allocation (underweight Information technology and consumer discretionary which were the two top performing sectors). Stock selection was mixed with positive stock selection within Consumer Staples (Costco +13% & Walmart +8.6%), Healthcare (Boston Scientific +10.1% & Thermo Fisher Scientific +10.2%) and Materials (Freeport McMoRan +8.5% & Crown Holdings +10.3%) offset by negative stock selection in Energy (Shell +2.1% vs +9.7% for the sector), Industrials (Northrop Grumman +0.1%, Waste Management +7.6% and Union Pacific +6.6% vs 9.5% for sector). The Nicola U.S. Tactical High Income Fund was active last month by writing 14 Put options (~$19M notional amount) and 15 Covered-Call options. The Nicola U.S. Tactical High Income Fund sold Accenture and reduced the target weight of Lowes while adding more defensive exposure with AT&T.
In July 2022, the Nicola International Leaders Fund was +3.3% vs the MSCI ACWI index +6.5% & MSCI ACWI ex-USA Index +3.0%. Global equity markets posted a strong rally in July as weakening economic data led the market to anticipate a potential pivot in Fed policy. Given this backdrop, the U.S. (+8.7%) outperformed due to its higher weighting to growth equities and International (+4.5%) & Emerging Markets (-0.6%) underperformed. In Europe, markets were impacted by concerns over increasing recessionary risks due to potential gas disruptions. Emerging markets were negatively impacted by China (-9.9%) as renewed concerns over COVID-19 and property weighed on the market. Performance of our managers during the month:
- Pier 21 Worldwide Equity +8.5%
- Lazard Global Small Cap +7.3%
- Edgepoint Global Portfolio +5.9%
- Nicola EAFE Strategy +3.6%
- Pier 21 Global Value +1.8%
- iShares MSCI EAFE Value ETF +1.7%
- JP Morgan Global Emerging Markets +1.7%
The Nicola Global Equity Fund is transitioning to the Nicola International Leaders Fund and currently has over 30% invested in direct stocks. During the month, the Nicola International Leaders Fund continued to exit its sub-advisor positions as planned.
The Nicola Sustainable Innovation Fund returned +12.7% (USD) / +12.1% (CAD) in July and -7.8% (USD) / -6.7% (CAD) year-to-date. Our top performers during the month were energy storage solutions company Stem Inc., Array Technologies, and Enphase Energy while Li Auto, BYD Co., and Xebec Adsorption were the biggest laggards. In late July we received a positive surprise in the form of the ‘Inflation Reduction Act of 2022’ which is a proposed bill in the U.S. that has the support of Democrat Senator Joe Manchin and includes $369B of spending on energy security and climate change. The proposed bill includes new and expanded investment tax credits for domestic solar, wind, hydrogen, nuclear, and carbon capture as well as a $7,500 tax credit for new electric vehicles and $4,000 for used ones.
While this is a stepdown in spending from what was originally laid out in the Build Back Better (BBB) plan, the additional funding for clean energy technologies and unexpected turnaround from Joe Machin provided a strong recovery and support for many of our portfolio holdings which saw numerous positions rise more than 20% during the last week of July. The bill is expected to be voted on in early August before the Senate goes on summer recess. We were active in trading throughout the month including taking some recent profits in names that had rebounded strongly like TPI Composites, Stem, Enphase, and Fluence Energy using the proceeds to add to companies like Bloom Energy, Sunrun, and Evoqua Water Technologies.
The Nicola Alternative Strategies Fund returned -0.3% in July. For the month, strategy performance was relatively flat while currency detracted -0.3% as the USD weakened versus the Canadian dollar. Bolton and Marret Enhanced Tactical Fixed Income helped support returns while Bridgewater detracted from returns giving back some of the strong returns we’ve seen year to date. According to Eurekahedge, hedge funds broadly did well for the month returning 0.7% while the Eurekahedge Arbitrage Hedge Fund Index returned 1.3% and the Relative Value Hedge Fund Index was down -2.7%. As the Nicola Alternative Strategies Fund winds up, we distributed our proceeds from the sale of the Polar Multi-Strategy fund at the end of the month.
The Nicola Precious Metals Fund returned -3.0% for the month continuing the sell off. For the month of July underlying gold stocks in the S&P/TSX Composite index returned -5.2% and gold bullion was down -2.9% in Canadian dollar terms. Large cap gold producers and precious metals streamers suffered during the month with Wheaton Precious Metals, Barrick Gold, and Yamana Gold all selling off more than -5%. Relative to most global currencies, the U.S. dollar strength continued to couple with inflation expectations softening, leading to gold prices falling. The weakness in gold that we have seen for several months was exacerbated by speculative positioning as gold futures turned net short. This is the 5th time the market has turned net short over the past 15 years, and we treat this as a reverse indicator, meaning that we expect some reversion from extremely poor sentiment.
The Nicola Infrastructure and Renewable Resources LP returned –0.1% for the month of July in Canadian dollar terms. Currencies were a headwind as the Canadian dollar strengthened against the U.S. dollar and GBP; agnostic to currencies, our assets returned +0.4% for the month. This was driven by steady performance from our investment in Macquarie’s global infrastructure fund and a mark-up in our U.S. energy as a service platform co-investment. As a result of investment activity earlier in the year, cash levels within the fund are at 1.9%, with the fund at $172 million of AUM.
The Nicola Global Real Estate Fund’s performance vs iShares S&P/TSX Capped REIT Index (XRE) was +1.6% vs +5.8% in July. After a sharp sell-off in Q2, publicly traded REITs rebounded in July. While growing fears of recession, rising interest rates, and higher fuel, food, and housing costs will have an impact on consumption, valuation appears attractive. Our global REIT manager has indicated the listed REITs are trading over 1-standard deviation cheaper on a discount to NAV basis than their 30-year history. Valuation models point to global REITs trading at a 19% discount to forward NAV which includes a conservative estimate of 5-15% decline in asset values. In other words, 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 $155.6264 (previously $154.7239), effective July 31, 2022. This represents an increase of 0.6% and a positive return for June of 1.1%. YTD return as at June 30, 2022, is 11.0%. Portfolio Leverage is 41.9%. The positive return was primarily a result of increased appraised values of Aero Portfolio, Avonhead, and Advanced – Squamish.
The Nicola U.S. Real Estate LP NAV per unit has increased to US$188.1461 (previously US$185.9227), effective July 31, 2022. This represents an increase of 1.2% and a positive return for June of 1.7%. YTD return as at June 30, 2022, is 13.7%. Portfolio Leverage is 45.7%. The positive return was primarily a result of increased appraised values of Preserve at Colony Lakes, Stonecreek Ranch, and Clearwater.
The Nicola Value Add Real Estate LP NAV per unit has increased to $219.5297 (previously $216.5619), effective July 31, 2022. This represents an increase of 1.4% and a positive return for June of 1.4%. YTD return as at June 30, 2022, is 11.6%. In June, we funded $5.1M for Soccerplex, $1.5M for Kelson, $0.9M for Cedar Hills, $0.6M for South Valley Business Park, $0.5M for Frances, $0.5M for Alpine, $0.5M for Westfalls, $0.4M for Allandale, $0.3M for Gordon Drive, $0.3M for Northgate, $0.2M for 8700 Barnard, $0.2M for Bronte Road, $0.2M for Nickel, $0.1M for Ashburn, $0.1M for King City, 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.