Returns for the Nicola Core Portfolio Fund were +0.5% for the month of May 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 -0.3% in May while the iShares Core Canadian Universe Bond Index ETF was flat returning 0.0% for the month. Credit spreads continued their path of widening in Canada, diverging from the US market. Canadian spreads widened by 10 basis points with financials widening the most for the month. We believe that Canadian credit valuations, particularly financials, currently offer good relative value, however, there are technical headwinds. Banks have issued significant amounts of debt and will likely continue to do so for the foreseeable future. Demand for new issuance has been weaker causing softness in the market with the new supply.
The Nicola Global Bond Fund was down for the month returning -0.6%. Pimco Monthly Income was supportive of returns with exposure in Investment Grade and High Yield bonds supporting returns. Our exposure in select emerging market bonds hurt performance for the month. South America saw weakness, namely Brazil and Argentina, while South Korea and Ghana also detracted from returns.
The Nicola High Yield Bond Fund returned -1.8% in May while the iShares US High Yield Bond Index ETF (CAD-Hedged) returned +1.6%. The underperformance gave back some of the 5.3% outperformance we achieved in April. The high yield market was extremely volatile intra-month as during the month we saw a sell-off of -3.8% followed by a 7-day recovery of 4.8%.
Currency detracted -0.7% as the US dollar weakened versus the Canadian dollar. Our exposure in California Carbon credit supported returns while our exposure in closed end funds were a drag on the overall portfolio. Longer term we do not envision having a strategic allocation to closed ended funds, however we believe at times there are tactical opportunities that present themselves. Several funds we track are down approximately -18% year to date and we believe they provide attractive go forward returns. The opportunity highlighted by these closed ended funds is indicative of some of the select pockets of attractiveness we see. Overall, high yield credit spreads remain relatively tight compared to historical averages, however the market has shifted focus to credit and created significantly more dispersion and differentiation within the market.
The Nicola Preferred Share Fund returned +4.4% for the month while the BMO Laddered Preferred Share Index ETF returned +4.3%. The preferred share market rebounded strongly in May to almost fully recover from the April drawdown. 5-year Government of Canada bond yields effectively did not change during the month while BMO C and TRP K preferred shares were redeemed causing a return of $1.5 billion to investors.
The scarcity value of preferred shares remains, as there were no new issues in May and we anticipate an additional $1.5 billion of preferred shares to be redeemed over the coming several months. During the month we were extremely active to pivot from our defensive stance and take advantage of the opportunity that presented itself from the weakness in the market. We focused on buying rate resets that have a spread of 300 basis points that we believe have some potential to be called by their issuer, however, still provide attractive yields in the range of 6% if they are reset.
Returns for the Nicola Primary Mortgage Fund and Nicola Balanced Mortgage Fund were 0.4% and 0.5% respectively in May. Cash held at month end was 1% in the Nicola Primary Mortgage Fund and 12% in the Nicola Balanced Mortgage Fund. The high cash level in the Nicola Balanced Mortgage Fund is a result of a large waitlist draw down to fund a strong pipeline of new loans in June. 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 May was +0.1% vs +0.1%. May was volatile with global markets selling off early in the month due to fears of monetary tightening and the impact on growth from China’s zero-COVID policy. Canada’s S&P/TSX Index was down more than -5% at one point in the month until dip buyers emerged in the final weeks of May to move the index’s performance to flat by month end. Commodity prices were mixed.
Crude oil (WTI +9.5%; Brent +12.3%) was strong on easing lockdown curbs in Shanghai and a deal to ban Russian oil in Europe. Natural Gas (+12.4%) also surged while precious metals (Gold -3.1%; Silver -5.4%) and copper (-2.3%) were lower. Eight TSX sectors were in negative territory with Health Care (-25.5%), Materials (-6.1%) and Technology (-4.9%) falling the most.
Energy (+7.9%), Financials (+1.4%), and Utilities (+0.3%) were the only three sectors in positive territory. Within the Nicola Canadian Equity Income Fund, the top three sectors contributing to the relative outperformance in the month were: Materials, Health Care and Information Technology. This offset negative contribution from Utilities, Consumer Staples and Communication Services.
The Nicola Canadian Equity Income Fund remains overweight Energy, Industrials and Consumer Discretionary. In the month of May, the top performing holdings were Telus International, Suncor Energy and CCL Industries. The worst performers were Aritzia, Shopify, and Nuvei Corp. We added Aritzia and exited Lightspeed Commerce.
The Nicola Canadian Tactical High Income Fund’s performance vs S&P/TSX Composite in April was +0.4% vs +0.1%. The Nicola Canadian Tactical High Income Fund’s performance vs S&P/TSX Canadian Dividend Aristocrats was +0.4% vs +0.4%, with a focus 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. Eight TSX sectors were in negative territory with Health Care (-25.5%), Materials (-6.1%) and Technology (-4.9%) falling the most. Energy (+7.9%), Financials (+1.4%), and Utilities (+0.3%) were the only three sectors in positive territory. The best performing sector in the TSX Aristocrats Index for the month was Energy (+5.9%).
The Nicola Canadian Tactical High Income Fund’s dividend focus has led to sizeable overweight positioning within Energy, where we continue to expect companies with excess capital to deliver significant returns to shareholders in the form of rising dividends and share repurchases. The worst performing sector was Materials (-4.1%). The Nicola Canadian Tactical High Income Fund’s top contributing sectors on a relative basis were Energy, Financials and Real Estate. The primary detractors were Industrials, Materials, and Communications Services. The projected dividend yield is 3.5%. In May, the top performing holdings were Suncor Energy, TC Energy, and Enbridge. The bottom performers were Agnico Eagle Mines, Waste Connections, and Barrick Gold. We introduced Intact Financial and exited Canadian Western Bank.
The Nicola U.S. Equity Income Fund and S&P 500 returns for the month were both +0.2% (USD$). The Nicola U.S. Equity Income Fund’s strong sector allocation (overweight Energy, underweight Real Estate and Consumer Discretionary) was offset by weak security selection within Energy (Cheniere Energy +1.0% & Shell +11.8% vs +15.8% return for the Energy sector), Consumer Discretionary (Ross Stores -14.8% & Hyatt -6.9%) and Consumer Staples (Costco Wholesale -12.3% & Walmart -15.6%).
S&P Global Inc is a new name added to the Nicola U.S. Equity Income Fund. S&P Global Inc is a leading provider of Credit Ratings, Indices, data and analytics to the capital and commodity markets worldwide. S&P Global Inc is a high-quality company with high barriers to entry and pricing power within its Credit Ratings business and highly recurring subscription-based revenue within its Market Intelligence business segment. Pepsi Co and Northrup Grumman were funding sources for the S&P Global Inc trade.
The Nicola U.S. Equity Income Fund also continued to add to its “services” exposure by reducing Lowes and adding to Hyatt Hotels. In terms of income generation, the Nicola U.S. Equity Income Fund wrote Call options on Cheniere Energy which generated a 16% annualized premium while still being 11% out-of-the-money. The U.S. equity markets continue to exhibit bouts of volatility due to geopolitical issues, monetary policy tightening, persistent inflation risks and fears of recession. The high-quality nature of the holdings (high ROEs, strong balance sheets and free-cash-flow generative) in combination with reasonable valuations has helped mitigate the drawdowns experienced by the S&P 500 year-to-date.
The Nicola U.S. Tactical High Income Fund and S&P 500 returns for the month were +1.0% & +0.2% respectively (USD$). Last month’s relative outperformance was partially attributable to sector allocation (underweight Real Estate, Information Technology, Consumer Staples & Consumer Discretionary), but the main source of relative outperformance came from security selection, particularly within Communication Services (Electronic Arts +17.5% and AT&T +12.9%), Financials (JP Morgan +10.8% & Blackrock +7.1%) and Information Technology (NXP Semiconductors +11%, Adobe +8.2% & Seagate Technologies +3.2%).
The Nicola U.S. Tactical High Income Fund was active last month by writing 16 Put options and 11 Covered-Call options. S&P Global Inc is a new name added via Put options. The Nicola U.S. Tactical High Income Fund trimmed Pepsi due to valuation and sold Texas Instruments, Aptiv PLC and Morgan Stanley (the latter two sales were used to fund S&P Global Inc).
In May 2022, the Nicola Global Equity Fund was -0.9% vs the MSCI ACWI Index -1.3%. May was a volatile month for markets as the MSCI ACWI Index was down 5% in the first 3 weeks due to concerns around inflation/interest rates, a worsening COVID situation in China, and earnings misses by retail bellwether names (Walmart, Target) in the US. However, markets rallied for the rest of the month on hopes of peak hawkishness by the Fed and easing of COVID restrictions in China. During the month, US markets were in-line (-1.3%), while International (-0.6%) and Emerging Markets (-1.0%) outperformed.
The Nicola Global Equity Fund outperformed due to its geographic (overweight Japan, Europe Developed, & Latin America) & sector (underweight Info Tech) allocations. Performance of our managers during the month:
- Edgepoint Global Portfolio -0.3% (relative performance benefited from security selection in Info Tech & the US)
- Pier 21 Worldwide Equity -0.4% (relative performance benefitted from security selection in Consumer Discretionary and Japan)
- Nicola EAFE Strategy -0.4%
- JP Morgan Global Emerging Markets -1.3%
- Lazard Global Small Cap -1.9%
- Pier 21 Global Value -2.4% (relative performance was negatively impacted from its overweight position in Consumer Staples & security selection in Europe)
The Nicola Sustainable Innovation Fund returned +4.4% (USD) / +3.2% (CAD) in May and -15.1% (USD) / -15.3% (CAD) year-to-date. Array Technologies, Sunrun, and Alstom were the top performers during the month while Xebec Adsorption, Evoqua Technologies, and Ballard Power Systems were the biggest laggards. During the month we initiated a position in Bloom Energy, a manufacturer of solid-oxide fuel cell systems for on-site power generation. The company offers Bloom Energy Server, a power generation platform that converts fuel, such as natural gas, biogas, hydrogen, or a blend of these fuels, into electricity through an electrochemical process without combustion.
We were active in trading throughout the month including taking some recent profits in names that had rebounded like BYD, Array Technologies, and Siemens Gamesa Renewable Energy and using the proceeds to rebalance into Brookfield Renewable, Boralex, and Hannon Armstrong, among others. Siemens Gamesa saw an uplift during the month on news that Siemens Energy has put forth a bid to acquire the outstanding shares they don’t already own. While a final price and timing are yet to be finalized, if the deal takes place, it will mark our third takeout in the portfolio’s history.
The Nicola Alternative Strategies Fund returned -0.1% in May. In currency neutral terms, the Nicola Alternative Strategies Fund returned approximately +0.6% while the weakening US dollar created a headwind detracting -0.7% to returns for the month. Bridgewater had strong returns for the month offsetting weakness from Renaissance. According to Eurekahedge Hedge, hedge funds broadly were lower for the month. The Eurekahedge Hedge Fund Index was down -0.6% while the Eurekahedge Arbitrage Hedge Fund Index returned -1.2% and relative value strategies were down -0.3%.
The Nicola Precious Metals Fund returned –8.7% for the month continuing the sell off from April. For the month of May underlying gold stocks in the S&P/TSX Composite index returned -9.4% and gold bullion was down 4.7% in Canadian dollar terms. In US dollar terms, gold moved from $1897 to $1837 however, the weakness was compounded by the strength of the Canadian dollar. Gold’s weak returns were influenced by inflation and rate expectations as the implied expected inflation break-even rates fell coupled with large outflows from global gold ETF’s.
The Nicola Infrastructure and Renewable Resources LP returned -0.4% for the month of May in Canadian dollar terms. Currencies were a headwind as the Canadian dollar strengthened against the US dollar and GBP; agnostic to currencies, our assets returned +0.5% for the month. As a result of the heightened investment activity in April, cash levels within the Nicola Infrastructure and Renewable Resources LP are at 2%, with the total amount at $168M.
The Nicola Global Real Estate Fund’s performance vs iShares S&P/TSX Capped REIT Index (XRE) in May was -3.2% vs -3.3%. Markets declined in the month due to on-going concerns surrounding central banks tightening financial conditions and the eventual impact on future economic growth. The emergence of yet another viral contagion and the current geopolitical crisis also added to investor worries.
This month’s negative performance was primarily driven by the portfolio’s industrial exposure and large US REIT holdings. We believe growing ETF-driven redemptions forced managers to sell their largest positions which are typically companies with the strongest fundamentals. Rising rates are a headwind for the sector and volatility in the publicly traded markets are to be expected. Overall, most REITs have demonstrated operational resilience through the pandemic, and we believe that real estate is well positioned as an asset class, offering stability, steady growth and inflation protection.
Nicola Canadian Real Estate LP NAV per unit has increased to $152.9288 (previously $149.7246), effective May 31, 2022. This represents an increase of 2.1% and a positive return for April of 2.6%. YTD return as of April 30, 2022 is 8.0%. Portfolio Leverage is 42.2%. The positive return was primarily a result of increased appraised values of the GTA West Portfolio, ASS – Riverside, and ASS – Maple Meadows.
Nicola U.S. Real Estate LP NAV per unit has increased to US$183.7805 (previously US$179.8385), effective May 31, 2022. This represents an increase of 2.2% and a positive return for April of 2.7%. YTD return as of April 30, 2022 is 10.0%. Portfolio Leverage is 45.6%. The positive return was primarily a result of increased appraised values of Villas at Newnan, Village Walk, and Belterra.
Nicola Value Add Real Estate LP NAV per unit has increased to $209.1488 (previously $204.5435), effective May 31, 2022. This represents an increase of 2.3% and a positive return for April of 2.3%. YTD return as of April 30, 2022 is . In April, we funded $22.3M for Lora Bay, $8.4M for Bronte, $4.7M for Northgate, $1.6M for Colwood, $1.0M for Marina Way, $0.9M for Alpine, $0.6M for Building O, $0.2M for Queen Anne, $0.1M for Cambridge Lands, $0.1M for Ellis, 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.