Returns for the Nicola Core Portfolio Fund were +0.9% for the month of March and +1.2% for Q1, 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 -0.1% in March while the iShares Core Canadian Universe Bond Index ETF returned -3.0% for the month. For the quarter, the Nicola Bond Fund returned -1.3% while the iShares Core Canadian Universe Bond Index ETF returned -6.8%. In Canada, credit spreads only widened 2 basis points overall during the month of March, however, the market was bifurcated as the communication and energy sectors saw credit tightening while real estate, securitization, and financials saw spread widening.
Overall, bonds experienced one of the worst quarters on record. Our defensive positioning allowed us to weather a significant portion of the selloff in bonds. Historically, Canadian credit has been less volatile and trades in a narrower band than US credit. Two of the managers we invest with, East Coast and Marret, were defensively positioned coming into the quarter with a larger weight in Canadian names. Both tactically deployed to select credits during March and were able to benefit from a retracement in US credits.
The Nicola Global Bond Fund was down for the month returning -0.6%. For the quarter, the Nicola Global Bond Fund was down -1.4%. The selloff in March was mainly due to our exposure in securitized credit. Our exposure in the Nicola Global Bond Fund continues to mainly be in shorter duration Asian bonds with a focus on South Korean Won, Chinese Renminbi and Indonesian Rupiah.
The recent move in rates globally has reduced the total value of negative yielding debt from $18.5 trillion to below $3 trillion and may influence the flow of funds as international investors start to look at their own domestic markets again as opposed to North America.
The Nicola High Yield Bond Fund returned -1.5% in March while the iShares US High Yield Bond Index ETF (CAD-Hedged) returned -1.2%. For the quarter, the Nicola High Yield Bond Fund returned -3.1% while the iShares US High Yield Bond Index ETF (CAD-Hedged) returned -4.6%.
Rates concerns continue to weigh down the high yield market, coupled with selling pressures from retail investors as fixed income credit continues to see outflows. In neutral currency terms for the month of March, our Nicola High Yield Bond Fund returned roughly -0.8% however, the strengthening Canadian dollar created a headwind of -0.8% to push returns further into negative territory.
In March we initiated a position in the Oaktree Global Credit Plus Fund using proceeds from Oaktree Global High Yield. Our plans are to stagger our position in the Oaktree Global Credit Plus Fund over the next several months while fully exiting our position in Oaktree Global High Yield. The new Oaktree fund has a broader mandate with the ability to invest in high yield, senior loans, direct lending, structure credit, emerging market debt, and convertible bonds. We believe that the multi-asset portfolio better leverages Oaktree’s expertise in the liquid performing credit space. Additionally, with market dislocations becoming shorter and shorter, a nimble diversified portfolio allows investors to more efficiently deploy capital and purchase quality assets at discounted prices.
The Nicola Preferred Share Fund returned -0.4% for the month while the BMO Laddered Preferred Share Index ETF returned +0.3%. For the quarter, the Nicola Preferred Share Fund returned -1.7% while the BMO Laddered Preferred Share Index ETF returned -2.3%. The month of March saw unusual price movements in preferred shares as both floaters and perpetuals sold off while rate resets moved higher.
As noted in last month’s comments, the price movement in preferred shares appears to be liquidity driven by ETF’s and thus not reflective of fundamentals. The first week of March saw a sharp selloff in rate resets, which appeared to be driven from investors looking to fund a new BMO LRCN (Limited Recourse Capital Note) issuance. We used the opportunity to increase our exposure to Brookfield Renewable, Enbridge, and Brookfield Properties which sold off more than their peers.
Returns for the Nicola Primary Mortgage Fund and Nicola Balanced Mortgage Fund were 0.3% and 0.4% respectively for the month of March, and 0.8% and 1.3% for Q1. Cash levels at month end continue to be elevated at 14% in the Nicola Primary Mortgage Fund and 15% in the Nicola Balanced Mortgage Fund following significant investments realized during the month, particularly in the Nicola Primary Mortgage Fund. 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 3.8% for the Nicola Primary Mortgage Fund and 5.5% for the Nicola Balanced Mortgage Fund.
The Nicola Canadian Equity Income Fund’s performance vs S&P/TSX in March was +3.8% vs +4.0% and +7.5% vs +3.8% for Q1, 2022. Benefitting from large commodity exposure, the Canadian market delivered strong gains in Q1 to outperform most major developed markets. In sector terms, Energy (+27.4% in Q1) and Materials (+19.7% in Q1) were the clear leading performers, while Information Technology lost 35.5%.
In March, heightened economic uncertainty drove investors towards Materials (including gold) and Consumer Staples, which were the best performing sectors of the TSX Composite Index in the month. Consumer Discretionary and Technology were the worst performing sectors. Within the Nicola Canadian Equity Income Fund, the top three sectors contributing to relative outperformance last month were: Technology, Energy and Consumer Discretionary. Materials and Real Estate were the biggest detractors.
Surging inflation, rising interest rates, and the continued Russo-Ukrainian conflict prompted us to increase our exposure to higher quality businesses – those with strong balance sheets and competitive positions – where fundamentals should keep healthy in a world of persistent macro uncertainty. As a result, the Nicola Canadian Equity Income Fund remains overweight Industrials, Energy and Consumer Discretionary. In the month of March, the Nicola Canadian Equity Income Fund’s top performing holdings were Nuvei Corp, Definity Financial, and First Quantum Minerals. The worst performers were West Fraser Timber, Richelieu Hardware, and CIBC. We added Labrador Iron Ore Royalty and Waste Connections. We exited Interrent REIT, Onex, and Air Canada.
The Nicola Canadian Tactical High Income Fund’s performance vs S&P/TSX Composite in March was +3.2% vs +4.0%. In Q1 the Fund returned +10.2% vs +3.8%. Fund performance vs S&P/TSX Canadian Dividend Aristocrats in March was +3.2% vs +4.0% and +10.2%% vs +5.6% in Q1.
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 in the Information Technology and Health Care sectors, and a greater allocation to value-oriented sectors. The S&P/TSX Composite Index faired quite well relative to other global equity markets thanks to strong performance in commodities.
The best performing sectors in the Index for the month were Materials (+10.2%), Consumer Staples (+10.1%) and Industrials (+8.2%). The worst performing sectors were Consumer Discretionary (-1.7%) and Technology (-1.1%). The best performing sectors of the TSX Aristocrats Index for the month were Materials (+11.2%), Energy (+7.7%), and Consumer Staples (+6.5%). The worst performing sector was Information Technology (-4.5%).
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 top contributing sectors on a relative basis were Industrials, Energy and Consumer Discretionary. The primary detractors were Real Estate, Materials, and Utilities.
We have written calls on 1% of the portfolio, but as profitability for options rises, we could return to writing options on select positions. In March, the top performing holdings were CP Railway, Loblaw Companies, and Empire. The bottom performers were Labrador Iron Ore, CIBC and Saputo. We introduced Labrador Iron Ore Royalty and Waste Connections in March, and exited Air Canada.
The Nicola U.S. Equity Income Fund returned +2.9% for the month and -1.9% for the quarter vs the S&P 500 returns of +3.7% and -4.6% respectively (USD). During Q1, 2022, the Nicola U.S. Equity Income Fund’s relative outperformance was from stock selection within Industrials (John Deere +21.5% & Northrop Grumman +16%), Materials (Freeport McMoRan +19.6 & Crown Holdings +13.3%) and from being underweight Information Technology (sector returned -8.4%) and overweight Energy (sector returned +39%).
In the month of March, the Nicola U.S. Equity Income Fund’s relative underperformance was mainly attributable to stock selection within Information Technology (Seagate -12.2%) and names within Consumer Discretionary (not owning Tesla +23.8% and underweight Amazon +6.1%); the Nicola U.S. Equity Income Fund was also overweight banks within the financial sector which detracted from performance. New names added to the portfolio were Hyatt Hotels and Ross Stores. Hyatt Hotels is a transformation story, as the company moves to an asset light model similar to Marriott and Hilton. Hyatt is also a reopening play with higher leisure and luxury exposure relative to peers. Ross stores was a switch trade from TJX (owner of TJ Maxx, TK Marxx, Marshalls, Home Sense, Winners and Home Goods); Ross Stores (Ross & dd’s) have a long runway of store growth in the U.S. and are less exposed to international sales relative to TJX.
The Nicola U.S. Equity Income Fund continued to reduce capital markets and international exposure by selling Citigroup, FedEx, and TJX. We ended the month with a delta-adjusted equity exposure of 99% (1.7% in covered calls); consisting of high-quality names with healthy balance sheets, strong free cash flows and attractive consensus forward 12-month ROEs (37% vs 23% for S&P 500).
The Nicola U.S. Tactical High Income Fund returned +2.0% for the month and -0.1% for the quarter vs the S&P 500 returns of +3.7% and -4.6% respectively (USD$). The quarter’s relative outperformance was mainly attributable to sector allocation (underweight worst performing sectors: Information Technology, Consumer Discretionary and Communication Services) and overweight the best performing sector (Energy). Stock selection was also strong within Industrial Capital Goods (Northrup Grumman +16% & John Deere +23.2%) and within Healthcare equipment and services (Medtronic +7.9% & Boston Scientific +4.3%).
Last month’s relative underperformance was due to the general underweight equity exposure (less long-only exposure) and negative stock selection within Consumer Discretionary (not owning Tesla and underweight Amazon). The Nicola U.S. Tactical High-Income Fund was active last month by writing 23 Put options (~$42M notional amount) and 10 Covered-Call options generating double-digit annualized premiums while providing double-digit upside and downside for Call & Put options respectively. New names: Hyatt Hotels and Ross Stores. The Nicola U.S. Tactical High-Income Fund reduced both European and capital markets exposure by selling Citigroup, FedEx and TJX companies, while also trimming back the target weight for Morgan Stanley.
In Q1 2022, the Nicola Global Equity Income Fund was -9.6% vs the MSCI ACWI index -6.5% as high inflation, rising interest rates and the conflict in Ukraine led to a sell-off in equity markets. In March 2022, the MSCI ACWI Index saw a slight rebound (+0.6%) led by US markets (Europe & Emerging Markets were down) due to optimism over a ceasefire in Ukraine/Russia. However, the Nicola Global Equity Fund was -1.6% in the month 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 Worldwide Equity -0.1% (relative performance was negatively impacted by stock selection within Info Tech and Consumer Staples)
- Edgepoint Global Portfolio -0.3%
- Nicola EAFE Strategy -0.8%
- Lazard Global Small cap -2.7%
- JP Morgan Global Emerging Markets -3.1% (MSCI China was down 9.5% in March due to concerns over COVID lockdowns, potential sanctions relating to Russia, rumours of further tech regulation and ADR de-listings. The market saw a recovery in the second half of the month as China clarified their stance on Russia & regulation and announced its intention for policies supporting the economy/markets.)
- Pier 21 Global Value -3.2% (relative performance was negatively impacted by stock selection within Consumer Staples, Industrials, and Consumer Discretionary)
The Nicola Sustainable Innovation Fund returned +5.9% (USD) / +4.2% (CAD) in March and -6.1% (USD) / -7.5% (CAD) year-to-date. EV charging companies Beam Global and ChargePoint were the top performers during the month, followed by Xebec Adsorption and Ameresco, while Siemens Gamesa Renewable Energy, Li Auto, and BYD Co. were the biggest laggards.
No new positions were added in March; however, we were active in trading in several existing holdings throughout the month on various macro news events and announcements. With the ongoing war in Ukraine, energy sourcing and security remains a focus for many European countries as they try to distance themselves from their reliance on Russian oil and gas and push for larger investments into alternatives including renewables.
We saw strong early month recoveries in shares of renewable energy and clean technology companies with European exposure, like Vestas Wind Systems, and we locked in some gains and rebalanced into some of our Chinese EV manufacturers Li Auto, NIO, and BYD. March saw lots of volatility amongst Chinese stocks with negative sentiment surrounding further lockdowns on their zero-COVID policies, as well as concerns about potential delisting of several ADRs from US markets. None of our ADR positions were on the potential delisting shortlist so we chose to add to our positions on this weakness.
On March 16th, China’s top financial policy body stepped in and vowed to provide some stability to their markets and support overseas stock listings after relentless selling pressure, which led to the best trading session on the Hang Seng China Enterprises Index since October 2008. We used this quick recovery as an opportunity lock-in some profits in these Chinese ADRs and add to positions in several Canadian listed renewable companies, including Brookfield Renewable, Boralex, and Northland Power. All have strong international footprints but did not move as much as their European peers during the month.
The Nicola Alternative Strategies Fund returned -0.2% in March. In currency neutral terms, the fund returned approximately +0.7%, however currency was a headwind, detracting -0.9% to returns for the month as the US dollar weakened versus the Canadian dollar. Quarter to date, the Nicola Alternative Strategies Fund returned +1.3%. According to the Eurekahedge Hedge Fund Index, hedge funds broadly were up for the month mainly from the strength of directional strategies. The Eurekahedge Relative Hedge fund index returned +0.5% for March while the Eurekahedge Arbitrage Hedge Fund Index returned -1.4%.
The Nicola Precious Metals Fund returned +6.6% for the month. Quarter to date, the Nicola Precious Metals Fund returned +11.9%. For the month of March, underlying gold stocks in the S&P/TSX Composite index returned +9.8% and gold bullion was up 0.2% in Canadian dollar terms. Gold equities continue to have strong returns and have outperformed bullion since the start of the pandemic.
Despite the ramp up in returns, we believe there to be upside for equities as companies have shown more capital discipline versus previous cycles and stocks relative to gold prices are still trading at a discount of 14%. In addition, we believe there is potential for gold prices to move higher. In addition to gold being influenced by real interest rates and inflation expectations, gold acts as a risk-off asset during periods of heightened risk. During geo-political crises, gold prices have historically ratcheted higher by ~10%. As the conflict in Ukraine continues, we believe that there is potential for gold prices to continue to move higher as well.
As of March 31, approx. 80% of the Nicola Private Debt Fund’s assets were invested in USD denominated investments. Its cash position was 8.5% of AUM at the end of March, falling largely in line with its target of 5-10%. It closed two new direct investments during March including i) a US$10mm participation in a first lien term loan to a network benefit management services provider to hospice care homes, and ii) a US$10mm participation in a first lien term loan to an outsourced food service management provider for the educational, healthcare and corporate markets.
For the month of March, the Nicola Private Debt Fund generated CAD and USD returns of 0.0% and +0.6%, respectively. Quarter-to-date CAD returns were +0.9%, while USD returns reached +1.5%. Currency was a headwind on the unhedged portion of USD investments, detracting approx. 0.6% from CAD performance in March as the US dollar depreciated 2.2% relative to the Canadian dollar.
The Nicola Infrastructure and Renewable Resources LP returned -0.9% for the month of March in Canadian dollar terms. Currency was a headwind, detracting -1.1% as the US dollar weakened versus the Canadian dollar. Quarter to date, the Nicola Infrastructure and Renewable Resources LP returned -1.4%. During the month of March, we received capital calls from both Brookfield and KKR. We are now fully deployed with Brookfield Super-Core Infrastructure Partners and have a remaining $9m USD in undrawn capital commitments with KKR.
Our exposure to these core infrastructure assets provides a strong backbone for the diversified portfolio. These assets do not change hands frequently and thus developing a diversified portfolio can take time. Part of the capital drawn from Brookfield was used to acquire Telia Towers in partnership with Alecta. The portfolio consists of over 4,000 telecommunication tower sites across Finland and Norway and provides the foundation for further digitization in the region while Alecta provides local Nordic presence as a Swedish pension fund managing over $100B USD in assets. Our portfolio now stands at $150 million with 18% in cash and cash like securities. We anticipate three additional capital calls in April, bringing our cash close to 0%.
The Nicola Private Equity LP returned +1.2% during the month of March and +2.1% YTD. Performance contributors included co-investments such as BID and fund investments such as Headwater II. With approximately 70% of the Nicola Private Equity LP’s investments denominated in USD, the weaker USD was a one percentage point headwind to performance. New investments included a co-investment in a North American food business and a direct investment in Canadawide Sports, a sports equipment distributor based in Ontario. In terms of exits, we reduced our exposure to Micross.
The Nicola Global Real Estate Fund’s performance vs iShares S&P/TSX Capped REIT Index (XRE) was -0.1% vs +2.5% in March, and +0.6% vs -0.5% in Q1, 2022. The REIT sector delivered positive performance in March after a slow start to the year. As we look ahead to rising inflation and the resultant higher interest rates, we expect volatility in the public markets as the market digests rate moves coming out of central banks. The 10 Year Canada Bond yield has risen from 1.79% at the beginning of the year to 2.4% as of the end of March. The key question is “will rising interest rates cause cap rates to rise”.
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. We have a bias towards industrial, multifamily and self-storage as these areas tend to be better equipped to deliver cash flow and NAV growth in a rising rate environment. There were no new additions or deletions in March.
The Nicola Canadian Real Estate LP NAV per unit has increased to $147.0868 (previously $145.5927), effective March 31, 2022. This represents an increase of 1.0% and a positive return for February of 1.5%. YTD return as at February 28, 2022 is 2.9%. Portfolio Leverage is 41.92%. The positive return was primarily a result of increased appraised values of the Advanced Self Storage Portfolio, Riverside Way, and 2485 Speers.
The Nicola U.S. Real Estate LP NAV per unit has increased to US$177.3810 (previously US$173.1465), effective March 31, 2022. This represents an increase of 2.5% and a positive return for February of 2.9%. YTD return as at February 28, 2022 is 5.2%. Portfolio Leverage is 45.42%. The positive return was primarily a result of increased appraised values of Tuscany at Lindbergh, The District Universal Boulevard and Chatham Pointe.
The Nicola Value Add Real Estate LP NAV per unit has increased to $201.41 (previously $198.58), effective March 31, 2022. This represents an increase of 1.4% and a positive return for February of 1.4%. YTD return as at February 28, 2022 is 2.3%. In February, we funded $10.1M for Marina Way, $0.9M for York Mills, $0.6M for Douglas Floreani, $0.5M for Building O, $0.5M for Queen Anne, $0.4M for Garden Drive, $0.2M for Gordon Drive, $0.2M for Alpine, $0.1M for Encore, $0.1M for Kelson 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.