Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

Nicola Wealth Investment Returns – September 2022


Returns for the Nicola Core Portfolio Fund were +0.6% for the month of September, +3.8% for Q3, and +4.6% year-to-date. 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 September in line with the iShares Core Canadian Universe Bond Index ETF. Quarter to date, the Nicola Bond Fund returned +0.5%, while the ETF returned +0.4%. Year-to-date, the Nicola Bond Fund has returned -2.2%, while the ETF has returned -12.1%. Canadian corporate bond spreads widened 15 basis points during the month ending at 1.80%, the widest in the past twelve months. Overall, our strategies performed in line with the market as credit spread widening was broad based amongst sectors. The credit curve remains flat, offering attractive opportunities in front-end yields, particularly high-quality A-rated credit. Excluding the violent correction we saw in the first quarter of 2020, single A-rated paper is nearing the widest levels over the past 10 years.

The Nicola Global Bond Fund was down for the month of September, returning -1.1%. Quarter to date and year to date, the Nicola Global Bond Fund returned +0.3% and -6.9% respectively. Currency was a tailwind for the month supporting returns by 0.9% as the U.S. dollar strengthened versus the Canadian dollar. Weakness in inflation linked bonds was diluted by our positions in securitized debt and the Templeton Global Bond fund. September marked the continuance of hawkish central banks globally.

However, the global synchronized tightening of monetary policy may be in the later innings as central banks in emerging markets, such as Brazil, which paused tightening in September, are potentially closer to their peak rate levels. We continue to gain our emerging market exposure through Templeton Global Bond, which has focused on value opportunities in countries with strong trade dynamics and healthy financial profiles.

The Nicola High Bond Yield Fund returned +1.2% in September while the iShares U.S. High Yield Bond Index ETF (CAD-Hedged) returned -3.9%. Quarter to date, the Nicola High Yield Fund returned +3.2%, while the ETF returned -2.9%. Year to date, the Nicola High Yield Fund returned -1.3%, while the ETF returned -16.1 %. High yield spreads widened materially in September and ended the month at 557 basis points for the overall market. The sell-off in high yield was broad based as recessionary concerns hurt the higher beta portions of the market commensurately. CCC names sold of -5.8% for the month bringing all in yields to 14.6%. Outside of the nadirs of the market in March 2020, CCC high yield bonds have not seen yields this high since the Great Financial Crisis of 2008. Despite the higher yields, we believe that credit spreads in high yield may have room to widen further if the growth outlook continues to deteriorate.

The Nicola Preferred Share Fund returned -5.6% for the month of September, while the BMO Laddered Preferred Share Index ETF returned -6.5%. Quarter to date, the Nicola Preferred Share Fund returned -4.8%, while the ETF returned -5.9%. Year to date the Nicola Preferred Share Fund returned -11.5%, while the ETF returned -14.2%. Despite five-year Bank of Canada bond yields moving higher, sentiment remains poor in the space. Additionally, new LRCN and institutional preferred shares came to market with reset spreads around 4.1% and yielding 7.3%. During the month, increased volatility presented opportunities to purchase BCE floaters at attractive prices, we also increased our exposure in institutional preferred shares. At the end of the month, we received proceeds from Artis REIT from the company’s decision to redeem all series A preferred units. We will use the proceeds to continue to look for attractive opportunities with a focus on emerging institutional preferred shares.

Returns for Nicola Primary Mortgage Fund and Nicola Balanced Mortgage Fund were +0.3% and +0.5% respectively for the month of September. For Q3 2022, the Nicola Primary Mortgage Fund returned +0.9% and the Nicola Balanced Mortgage Fund returned +1.6%, respectively year to date. Cash in both funds at month end was 9% in the Nicola Primary Mortgage Fund and 7% in the Nicola Balanced Mortgage Fund. Current annualized yields (which are what the Nicola Primary Mortgage Fund and Nicola Balanced Mortgage Fund would return if all mortgages presently were held to maturity and all interest and principal were repaid, which is in no way a predictor of future performance) are 4.8% for the Nicola Primary Mortgage Fund and 6.9% for the Nicola Balanced Mortgage Fund. The Nicola U.S. Mortgage Fund continues to hold a third-party fund comprised of U.S. commercial mortgage loans where we continue working to implement additional investment strategies.

For the month of September, the Nicola Private Debt Fund returned +0.8%. The Credit Suisse Leveraged Loan Index returned -2.2% in September as credit investors remained cautious about elevated inflation and the risk of a pending recession. The primary return drivers for the Nicola Private Debt Fund in September were currency translation and interest income from its portfolio of direct investments. The Nicola Private Debt Fund is currency hedged on 85% of its U.S. dollar denominated investments and the U.S. dollar appreciated 5.4% in the month relative to the Canadian dollar. The Nicola Private Debt Fund had one investment realization in September totaling $12.9mm of loan principal repayments.

The Nicola Canadian Equity Income Fund’s performance vs. S&P/TSX: September -2.7% vs. -4.3%; Q3 2022 -0.5% vs. -1.4%; YTD -6.3% vs -11.1%. Sentiment worsened in September as aggressive monetary tightening around the world continued unabated. Worries about a global slowdown sent crude oil prices (WTI -11%; Brent 9%) tumbling. Precious Metals were mixed with the prices of Gold (-3%) being weak and Silver (+6%) being strong in the month.

The DXY (Trade weighted U.S. Dollar index) hit a 20-year high as investors rushed to the U.S. dollar. The S&P/TSX struggled as Materials (+3%) was the only sector in positive territory. The worst performing sectors were Utilities (-9%), Energy (-9%), and Real Estate (-9%). The Nicola Canadian Equity Income Fund outperformed primarily because of a positive contribution from Financials where we are underweight, Industrials and Utilities, which offset negative contributions from Consumer Staples, and Real Estate.

The Nicola Canadian Equity Income Fund remains overweight Consumer Discretionary, Consumer Staples, and Industrials. In the month of September, the top performing holdings were Barrick Gold Corporation, Whitecap Resources, and Richelieu Hardware Ltd. The bottom performers were Magna International, Dream Industrial REIT, and TC Energy. We exited our positions in Bank of Nova Scotia. We added Whitecap Resources.

The Nicola Canadian Tactical High Income Fund’s performance vs. S&P/TSX in September was 3.8% vs. -4.3%; Q3 2022 -3.2% vs. -1.4%; YTD -4.9% vs. -11.1%.  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. The S&P/TSX struggled as Materials (+3%) was the only sector in positive territory. The worst performing sectors were Utilities (-9%), Energy (-9%), and Real Estate (-9%).

From a sector standpoint, positive contribution from Utilities, Financials and Industrials more than offset a negative contribution from Energy. 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 September, the top performing holdings of the Nicola Canadian Tactical High Income Fund were Barrick Gold, Agnico Eagle Mines, and Lundin Mining. The bottom performers were Magna International, Dream Industrial REIT, and TC Energy. We sold our position in Granite REIT. There were no new additions.

The Nicola U.S. Equity Income Fund returns for the month, quarter and YTD were -8.0%, -2.9% and -18.2% respectively, vs. the S&P 500 returns of -9.2%, -4.9% & -23.9% respectively (USD).  During the third quarter, the Nicola U.S. Equity Income Fund’s +1.2% relative outperformance was driven by stock selection within Consumer Staples, Consumer Discretionary, and Industrials.  Sector allocation was neutral to performance as the Nicola U.S. Equity Income Fund’s underweight in Information Technology and Real Estate was offset by the overweights in Materials and Communication Services.

Last month, the Nicola U.S. Equity Income Fund’s relative outperformance was mainly attributable to stock selection within Communication Services (Netflix +5.3% vs. -12.2% for sector) and Energy (Cheniere Energy +3.6% vs. -9.3% for the sector). Sector allocation also contributed to performance as the Nicola U.S. Equity Income Fund was underweight two of the worst performing sectors, namely Information Technology and Real Estate. Late in the month, market volatility increased, and the Nicola U.S. Equity Income Fund took advantage of this by writing out-of-the-money Call and Put options which generated double digit annualized premiums.

Wesco International is a new name added to the Nicola U.S. Equity Income Fund that is expected to capitalize on multiple secular trends pertaining to electrification (energy efficiency, renewables, big data, grid modernization, etc.); funding sources came from trimming Ross Stores and Waste Management, and the full liquidation of Nextera Energy. The Nicola U.S. Equity Income Fund ended the month with a delta-adjusted equity exposure of 97%; consisting of high-quality names with healthy balance sheets, strong free cash flows and attractive consensus forward 12-month ROEs (46% vs 22% for S&P 500).

For Q3 2022 and September 2022, the Nicola International Leaders Fund was -1.8% & -2.9%, vs. the MSCI ACWI ex-USA Index -3.4% & -5.2%, respectively. For the month, International Markets (-4.5%) outperformed and Emerging Markets (-7.1%) underperformed. For International Markets, Europe (-3.9%) was one of the best performing regions. Despite Russia completely halting gas flows through Nord Stream 1, European gas prices ended the month lower as the European Union backed measures to contain the energy crisis in addition to high gas storage levels ahead of winter. Emerging markets were negatively impacted by a hawkish Fed and strong U.S. dollar, which led to a global risk off environment that led all 24 markets in the MSCI EM index to be down for the month (in U.S. dollar terms).

The Nicola International Leaders Fund was in a good position in September 2022 due to its geographical (overweight Europe, underweight Emerging Markets) and sector (overweight Consumer Staples) allocations, as well as security selection in its investments.

The Nicola Sustainable Innovation Fund returned -13.8% (USD)/-9.9% (CAD) in September, +0.1% (USD)/+6.5% (CAD) for the third quarter, and -18.1% (USD)/-11.4% (CAD) year-to-date. Our top performer during the month was Constellation Energy, while Xebec Adsorption, TPI Composites, and Fluence Energy were the biggest laggards. September has always been a challenging month for public equity markets. This year has been no exception, marked by many things including the worst drop for indices like the S&P 500 since March of 2020.

After a bear market rally emerged to start Q3, there was a reversal in equities following the U.S. Federal Reserve meeting in Jackson Hole in late August after more hawkish commentary emerged regarding the macro outlook. This negative momentum carried throughout September alongside further bad macro data points and other global central banks hiking interest rates on recession fears. We continue to see headlines about rising energy prices and potential price caps across Europe as many countries work to diversify their energy supplies away from Russia in preparation for winter.

Achieving energy security domestically has emerged as a key theme worldwide following Russia’s invasion of Ukraine, and while we may see some interim reliance on old coal plants and natural gas facilities, our expectation is this continues the move towards investing more heavily in renewables, batteries, and clean technologies like those of our portfolio companies. There were no new positions added in September, but we were active in trading throughout the portfolio rebalancing away from some of our positions in NIO and Xebec into TPI Composites and the iShares Green Bond ETF.

The Nicola Alternative Strategies Fund returned +4.4% in September. Quarter to date, it has returned +6.7% and year to date, +10.7%. The month’s strong returns were supported by a strengthening U.S. dollar versus Canadian dollar. In local terms, Verition had a strong month as long short equity and credit positions contributed positively to returns. According to Eurekahedge, overall hedge fund returns were weak for the month returning -1.9%, while the Eurekahedge Arbitrage Hedge Fund Index returned -1.4% and the Relative Valued Hedge Fund Index returned -2.6%, respectively.

The Nicola Precious Metals Fund returned +4.7% for the month of September. Quarter to date, it has returned -2.7% and year to date -14.5%. Underlying gold stocks in the S&P/TSX Composite index returned +9.2% and gold bullion was up +2.2% (in Canadian dollar terms). Despite strong returns for the month, there was considerable dispersion among underlying stocks. Reunion Gold, Wesdome Gold Mines, and Kinross Gold all returned above 20% for the month, while Thesis Gold, Cabral Gold, and Marathon Gold all sold off more than -25%. Despite pressures from futures net short and ETF outflows, gold provided a crisis hedge for risk assets as equities sold off during the second half of the month while gold stocks rallied. Additionally, the price of gold has recently been less sensitive to interest rates, potentially signaling an inflection point.

The Nicola Infrastructure and Renewable Resources LP returned +3.0% for the month of September in Canadian dollar terms. Quarter-to-date and year-to-date returns were +5.9% and +7.5%, respectively. Currencies were primarily a tailwind as the Canadian dollar significantly weakened against the U.S. dollar. Agnostic to currencies, our asset returns were flat for the month. The Nicola Infrastructure and Renewable Resources LP is at $182 million of AUM with a waitlist of $26 million that is expected to be fully drawn by the end of the year from a combination of existing fund commitments and co-investment.

After month end, the Nicola Infrastructure and Renewable Resources LP funded a $5 million existing commitment to the KKR fund. The proceeds will be used to fund the acquisition of one of the top-performing UK regulated water and sewerage companies. The acquisition was sourced on a bilateral basis and will provide additional exposure to utilities, which benefit from a regulatory framework with inflation linkages.

The Nicola Global Real Estate Fund’s performance vs. iShares S&P/TSX Capped REIT Index (XRE): -1.1% vs -8.3%; Q2 2021 -6.0% vs -7.6%; YTD -5.4% vs -24.1%.  The tone across equity markets weakened further in Q3 2022. Listed real estate was no exception with the iShares S&P/TSX Capped REIT Index registered a total return of -7.6%, driving its nine-month total return to -24.1%, on pace for its second worst year on record. Similarly, the iShares Global REIT Index ETF was down -22% YTD (Canadian dollar terms). Restrictive central bank policies and hawkish commentary, rising interest rates across the curve, and growing calls for recession across geographies have given investors reason to lighten equity exposure.

For listed real estate, concerns over declining asset values from cap rate expansion and lower net operating income have weighed on sentiment. The sector’s drawdown has driven interest from value seekers who point to improving fundamentals, earnings growth through 2023, rising replacement costs, and strong corporate liquidity. While clarity is needed on the macro front, the sector is trading at the steepest discount to NAV since 2020 Covid lows. 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.

Nicola Canadian Real Estate LP NAV per unit has increased to $156.4646 (previously $156.2788), effective September 30, 2022. This represents an increase of 0.1% and a positive return for August of 0.5%. Quarter-to-date returns as of August 31, 2022 are 2.4%, and the YTD return is 12.4%. Portfolio Leverage is 42.0%. The positive return was primarily a result of increased appraised values of Advanced – Freeway, Golden Drive, and Northwoods Business Park.

Nicola U.S. Real Estate LP NAV per unit has increased to $195.4958 USD (previously $191.5006 USD), effective September 30, 2022. This represents an increase of 2.1% and a positive return for August of 2.5%. Quarter-to-date returns as of August 31, 2022 are 6.6% and the year-to-date return is 19.17%. The positive return was primarily a result of increased appraised values of Balmoral Village, Tree Park, and Retreat at Lakeland.

Nicola Value Add Real Estate LP NAV per unit has increased to $228.6346 (previously $223.3935), effective September 30, 2022. This represents an increase of 2.4% and a positive return for August of 2.4%. QTD returns as of August 31, 2022 are 5.6% and the YTD return is 16.2%. In August, we funded $16.9 million for one new project (GTA Small Bay) that closed and a total of $14.4 million 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.