Returns for the Nicola Core Portfolio Fund were +0.6% in the month of May. 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 0.4% in May while the iShares Core Canadian Universe Bond Index ETF returned 0.7% for the month. Credit was roughly flat to marginally tighter during the month while returns for the index were larger driven by duration exposure as 10-year Government of Canada yields moved from 1.55% to 1.49% during May. Overall, we are maintaining our defensive posture in fixed income. Historically, there is lower volume and issuance during the summer months. We anticipate the trend of a relatively tranquil summer to continue, however, we have some concerns on the potential that a Fed tapering may induce some turbulence on the coming months.
The Nicola High Yield Bond Fund returned -0.8% in May. Overall returns in local currency terms were positive but currency detracted -1.0% as the US dollar weakened versus the Canadian dollar. Lower quality high yield, namely CCC’s once again lead returns for the market. The continued trend of CCC outperformance has led to a reduction in the bifurcated market as the mean and median of high yield spreads have converged. Retail flows reversed their trend from last month and turned sharply negative, potentially in anticipation of the Fed tapering. Given our view on valuations for the high yield market, we are looking to diversify our exposure with investments that have similar characteristics to the high yield market but currently offer better risk-return profiles.
The Nicola Global Bond Fund was down for the month returning -0.4%. Currency detracted -0.2% from returns as the Canadian dollar strengthened versus the US dollar during the month. The continued weakness of the Yen contributed to underperformance as the Yen versus the Canadian dollar moved from 88.93 to 90.84. Given the recent strength of commodities and the lack of commensurate response in EM currencies coupled with an improvement in current account balances, we believe that emerging market currencies are currently undervalued.
Returns for Nicola Primary Mortgage Fund and Nicola Balanced Mortgage Fund were +0.3% and +0.5% respectively for the month. Cash levels at month-end were 2% for the Nicola Primary Mortgage Fund and 10% for the Nicola Balanced Mortgage Fund. Current annual 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 3.9% for the Nicola Primary Mortgage Fund and 5.5% for the Nicola Balanced Mortgage Fund.
The Nicola Preferred Share Fund returned +4.1% for the month while the Laddered Preferred Share Index returned 3.4%. The narrative from last month continued in May, Government of Canada’s 5-year yields were marginally lower for the month down -0.02%, but the preferred share market had a strong month. Strong demand coupled with diminishing supply continues to be the prevailing dynamic helping drive returns higher. ETF flow into Canadian preferred shares was once again very strong, surpassing last month’s $61 million, with $103 million invested in May. There were no new issues or redemptions during the month, however, we anticipate approximately $4.7 billion of preferred shares will be redeemed in the future, further constraining supply. In terms of relative performance, our overweight in Shaw preferred shares helped add value. We continue to see potential hurdles for the merger between Rogers and Shaw to be finalized but have taken the position of redemption of Shaw preferred shares. This was highly likely as it represented the path both companies wanted to proceed towards and cleaned up the capital structure for the potential combined entity.
The S&P/TSX was +3.4% while the Nicola Canadian Equity Income Fund was +2.9%. Commodities were strong again as the uptrend in Crude Oil prices (WTI +4.3%, Brent +3.1%) extended into May on easing mobility restrictions ahead of driving season. Precious metals were also strong (Silver +8.1%, Gold +7.8%) as a falling USD and volatility in cryptocurrencies supported the metals and the stocks (Gold Miners +10.1%). Materials (+7.8%), Financials (+4.3%), Staples (+4.3%) and Energy (+3.9%) outperformed the broad S&P/TSX Index while Health Care (-3.5%), Utilities (-0.9%) and Consumer Discretionary (-0.9%) suffered losses.
The Nicola Canadian Equity Income Fund slightly underperformed the index due to performance in Materials and Technology offsetting strong gains in Industrials. The top positive individual contributors to the performance of the Nicola Canadian Equity Income Fund were CIBC, Air Canada, and Kirkland Lake Gold. The largest detractors were Kinaxis Inc, Doman Building Materials, and Lundin Mining. We added a position in a high-quality Industrials company called Toromont Industries Ltd. Demand recovery is occurring in Toromont’s territories and there is optimism around infrastructure investment and resource development. We sold our positions in Boardwalk REIT, Hereoux-Devtek, and Wheaton Precious Metals.
The S&P/TSX was up +3.4% while the Nicola Canadian Tactical High Income Fund was +3.5% for May. Strong relative performance in Industrials and Real Estate were offset by our holdings in the Materials and Technology sectors which contributed negatively to the Nicola Canadian Tactical High Income Fund’s returns. The Nicola Canadian Tactical High Income Fund has a Delta-adjusted equity exposure of 99% and the projected cash flow yield on the portfolio is 4%.
As the equity rally extended in May, volatility has remained depressed which makes option writing strategies less profitable. As a result, we have very little option writing exposure currently and have chosen to hold more of the portfolio long. Top contributors to relative performance were Air Canada, CP Railway, and Canadian Natural Resources. The largest detractors for the month were Kinaxis Inc, Lundin Mining Corp, and Nutrien. During the month, we added Toromont Industries Ltd and Crombie REIT. We sold Boardwalk REIT, CAP REIT, and Wheaton Precious Metals.
The Nicola U.S. Equity Income Fund returned +0.8% vs +0.7% for S&P 500. The Nicola U.S. Equity Income Fund’s positive performance was driven primarily by sector allocation due to being overweight in Financials, Industrials, Healthcare and Staples, while being underweight 3 out of the 4 worst performing sectors last month (Information Technology, Communication Services and Utilities). Stock selection also contributed to returns from certain positions in Financials (Morgan Stanley +10.2%, Citigroup +10.5%, Blackrock +7%), Industrials (FedEx +8.4%, Xylem +7%) and Energy (Valero +10%). Caleb Ho (who joined our U.S. Equity Team in late March) contributed two new names to the portfolio this month that are uniquely positioned within their respective industries:
1) Air Products & Chemicals Inc. is a high-quality industrial gas player that will be part of the solution in the development of the green hydrogen economy
2) AT&T is the 3rd largest U.S. wireless carrier, but more importantly, they are the best positioned in terms of fibre footprint and Business-to-Business exposure.
With the recent announcement of the combination of Warner Media with Discovery, AT&T will be able to accelerate their fiber build-out faster than expected. We also added Freeport McMoRan, which is one of the largest copper producers in the world and will benefit from the secular transition to the green economy while also providing some inflation protection to the portfolio. To fund these new positions, we sold Verizon Communications and trimmed Progressive Corp, Tractor Supply Co, Pfizer, Xylem, United Health and John Deere.
The Nicola U.S. Equity Income Fund ended the month with a delta-adjusted equity exposure of 98%. The Nicola U.S. Equity Income Fund primarily consists of high-quality names with relatively low leverage and attractive ROEs (75% vs 20% for S&P 500).
The Nicola U.S. Tactical High Income Fund returned +1.0% vs +0.7% for S&P 500. The Nicola U.S. Tactical High Income Fund’s positive performance was primarily attributable to stock selection within Financials (Citigroup & Morgan Stanley were the highest contributors) and Industrials (Emerson Electric +6.3% & FedEx +8.4%). While the Nicola U.S. Tactical High Income Fund had a low overall net equity exposure (62%), we did have positive sector allocation effects by having significant underweights to the worst-performing sectors (Communication Services, Info Tech and Consumer Discretionary).
In terms of the option market, implied volatility in the market (as measured by the VIX Index) started and ended the month in relatively the same position, but fluctuated intra-month as rising input costs and a tight labour market flamed concerns about inflation and the Fed potentially being behind the curve. We were able to find opportunities to generate attractive option premiums by writing 29 Put options. We also wrote 2 Call options. Two new names were added in Air Products & Chemicals Inc and AT&T Inc. We sold Comcast Corp and Verizon Communications Inc.
The Nicola Global Equity Income Fund returned +0.2% vs -0.2% for the MSCI ACWI Index (all in CDN$). The Portfolio’s positive relative performance was primarily driven by regional allocation (underweight U.S. & overweight developed Europe) and sector allocation (overweight Financials, Consumer Staples and underweight Communication Services and Info Tech). Performance of our managers in descending order was Nicola EAFE Fund +2.4%, Pier21 Global Value +1.9%, JP Morgan Global Emerging Markets +0.7%, Edgepoint Global Portfolio +0.3%, Lazard Global Small-cap -0.9% and Pier 21 Worldwide Equity -1.3%.
The Nicola Global Real Estate Fund return was +0.7 in May vs. the iShares S&P/TSX Capped REIT Index (XRE) +2.7%. Currency was a headwind for the Nicola Global Real Estate Fund as the C$ was relatively strong in April and 50% of the Nicola Global Real Estate Fund is denominated in non-Canadian currency. The REIT sector continued to deliver positive results in the month. After a relatively quiet transactional environment in 2020, private market M&A activity has accelerated according to CB Richard Ellis.
Canadian real estate transaction volumes in Q1 equalled ~10.8B which is up 5.7% YoY with the demand for Industrial and multi-family assets being particularly strong making up over half of that amount. Near-term, private market transaction activity can further validate underlying NAV growth, highlight cap rate compression, and act as another positive catalyst for higher Canadian REIT valuations for companies focused in those sectors. We see more upside within the recovery trade and note that a reversion to pre-pandemic valuation levels suggests solid returns ahead. With GDP growth, accelerating inflation, and rising real interest rates, shorter-lease duration sectors like Residential, Industrial and Self-Storage should benefit the most so we continue to have a large weighting in those sectors. There were no new names added.
The Nicola Canadian Real Estate LP NAV per unit has increased to $137.0354 (previously $135.2362), effective May 31, 2021. This represents an increase of 1.33% and a positive return for April of 1.81%. YTD Return as at April 30, 2021 is 8.30%. Portfolio Leverage is 41.27%. The positive return was primarily a result of increased appraised values of the GTA West Portfolio and the Advanced Storage Portfolio. Since COVID restrictions commenced in March 2020, our average rent collection has been 97.61%. In comparison to the industry, this rate is high and is close to the Nicola Canadian Real Estate LP’s pre-COVID collection rates. This has been accomplished through the hard work of the Real Estate Team and supports that our portfolio asset mix, which has a low retail component, can withstand changes in the real estate environment.
The Nicola U.S. Real Estate LP NAV per unit has increased to US$161.8601 (previously US$161.0901), effective May 31, 2021. This represents an increase of 0.48% and a positive return for April of 1.03%. YTD Return as of April 30, 2021, is 1.73%. Portfolio Leverage is 47.52%. The positive return was primarily a result of increased appraised values of Village Walk, Villas at Newnan Crossing, and Belterra. Since COVID restrictions commenced in March 2020, our average rent collection has been 97.97%. In comparison to the industry, this rate is high and is close to the Nicola U.S. Real Estate LP’s pre-COVID collection rates. This has been accomplished through the hard work of the Real Estate Team and supports that our portfolio asset mix, which has a low retail component, can withstand changes in the real estate environment.
The Nicola Value Add Real Estate LP NAV per unit has increased to $188.0090 (previously $187.0302), effective May 31, 2021. This represents an increase of 0.52% and a positive return for April of 0.52%. YTD return as of April 30, 2021, is 2.47%. In April, we funded $0.4M for Bertram, $0.3M for King City, $0.1M for Railway, and $0.8M for Emery.
The Nicola Sustainable Innovation Fund returned -1.7% (USD) / -3.4% (CAD) in May and is -10.0% (USD) / -14.7% (CAD) year-to-date. Xebec Adsorption, BYD, and Evoqua Water Technologies were the top contributors to performance while Array Technologies, Ballard Power, and Beam Global were the biggest laggards in the month. Array Technologies, a designer and manufacturer of solar tracking equipment was the biggest drag on returns after missing on their quarterly earnings and removing guidance after seeing rising impacts in their steel and freight costs. No additional names were added to the portfolio during May; however, we used the selloff in several existing positions to add back to our long-term targets including Array, Beam Global, and Plug Power.
During the month, the International Energy Agency (IEA) released an updated report noting the growth in renewable energy sources in 2020 was the fastest in more than two decades with 280 gigawatts added, or a 45% year-over-year increase. The report cited favourable policy decisions in both the United States and China as contributing factors that helped offset disruptions to supply chains resulting from the pandemic.
Last year renewables accounted for roughly 90% of global new power capacity expansion and the IEA suggests that solar will continue to gain share amid falling costs. Despite what has been a difficult start to the year for our portfolio companies, positive data points like these support our long-term investment thesis in these areas.
The Nicola Alternative Strategies Fund returned -0.6% in May. Currency was a headwind, detracting -1.0% for the month. In local currency terms since the Nicola Alternative Strategies Fund last priced, Millennium returned +0.7%, Renaissance Institutional Diversified Global Equities Fund +3.8%, Bridgewater Pure Alpha Major Markets +4.3%, Verition International Multi-Strategy Fund Ltd +0.15%, and Polar Multi-Strategy Fund -0.4%. Strong returns in Renaissance were driven by the outperformance of value relative to growth in equity markets while Bridgewater returns were supported by an overweight position in precious metals.
The Nicola Precious Metals Fund returned +9.4% for the month while underlying gold stocks in the S&P/TSX Composite index returned +10.3% and gold bullion was up 5.8% in Canadian dollar terms. Gold continued its rebound from recent lows reached on March 30th. Strength in gold was driven by positive ETF flows, a weaker US dollar, and lower real rates.
The technical backdrop for gold appears to be improving as net long positions in gold futures rose to their highest level since February and gold ETFs saw their first net positive inflows since January. Historically there is a lag of a couple of months with ETF flows and mutual fund flows, thus we believe that there will be continued support for gold equities as investors reposition their investments.
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 provincial 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. Effective January 1, 2019 Nicola Global Real Estate Fund, Nicola Canadian Real Estate LP, Nicola U.S. Real Estate LP, and Nicola Value Add LP adopted new mandates and changed names from NWM Real Estate Fund, SPIRE Real Estate LP, SPIRE US LP, SPIRE Value Add LP.