Nicola Wealth Portfolio Results – August 2021 - Nicola Wealth

Nicola Wealth Portfolio Results – August 2021


Returns for the Nicola Core Portfolio Fund were +1.5% in the month of August.  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 +0.2% in August while the iShares Core Canadian Universe Bond Index ETF returned -0.3% for the month. Slight yield curve steepening provided a tailwind to our short duration positioning as Government of Canada 2-year bond yields moved lower from 0.45% to 0.425% while Government of Canada 10-year bond yields moved higher from 1.20% to 1.216%.

Overall credit spreads were flat in Canada and slightly wider in the US with low dispersion amongst both by sectors and by investment grade ratings. From a technical perspective, demand remains high with short duration Investment Grade funds. August saw a pick-up in corporate bond purchases by Asian investors along with high demand from domestic investors for both actively managed funds and ETF’s.

The Nicola High Yield Bond Fund returned +1.7% in August. Currency contributed 0.6% to returns as the US dollar strengthened versus the Canadian dollar. Our positions in Pimco Tactical Income Fund and the Pimco Tactical Income Opportunities Fund continue to be supportive of returns. We have opportunistically traded our positions in the names and slightly reduced our weight in August. Our recently initiated position in California Carbon Allowances (CCA) had a strong start returning 8.2% in local currency terms in August. The strong returns for CCA were driven by strong demand during the CCA auction on August 18th which saw an oversubscription of 1.85x. This high demand led to over 71 million CCA’s selling at a price of $23.30 which was a $5.59 premium to the floor auction reserve floor price of $17.71.

The Nicola Global Bond Fund was up for the month returning +1.1%. Currency contributed 0.2% to returns as the Canadian dollar weakened versus the US dollar during the month. Returns were supported by exposure in the Templeton Global Bond Fund which benefited from broad based strength in emerging market bonds particularly in Columbia, India, and Indonesia. The Nicola Global Bond Fund continues to have a low duration and higher cash levels to take advantage opportunistically of market dislocations.

Returns for the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund were 0.5% and 0.4% respectively for the month. Loan valuations that impact NAV are updated to reflect improving market conditions. Since experiencing a decrease in early 2020, the Nicola Primary Mortgage Fund saw a higher overall return for the month.

Cash levels at month-end were 2% in the Nicola Primary Mortgage Fund and 5% in the Nicola Balanced Mortgage Fund. Current annual yields, which are what the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund 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 5.6% for the Nicola Balanced Mortgage Fund.

The Nicola Preferred Share Fund returned +0.9% for the month while the BMO Laddered Preferred Share Index ETF returned +1.5%. The preferred share ETF traded approximately 0.5% above the value of the underlying holding which returned +1.0% for the month. We anticipate the ETF price will come back in line with its holdings as the ETF market makers resolve the pricing gap.

Part of the discrepancy between the ETF’s price and the value of the preferred shares it holds is due to the continued pressure on both supply and demand. ETF’s received over $60m of new money during the month while $1.44 billion of preferred shares were redeemed as National Bank, BMO and Royal Bank all redeemed issues. With the strong run-up in prices, more and more preferred shares are approaching fair value.

To diversify our exposure, we recently initiated a position with Bolton Capital focusing on dividend arbitrage. In this strategy, we are purchasing long stock equity of some of the largest blue chip companies in Canada and hedging out our price risk with the use of derivatives. By doing so we are able to extract returns from the dividends of companies while significantly reducing our price risk from the underlying stock.

The Nicola Canadian Equity Income Fund returned +1.8% compared to the S&P/TSX Composite Index return of 1.6% on a total return basis. The TSX experienced broad-based strength across most sectors except Energy, Materials, and Consumer Discretionary. Generally, weak commodity prices (e.g. WTI Oil -7.9%, Copper -1.8%, Gold -0.9%) led to negative returns in the former two sectors, while the latter was largely impacted by semiconductor shortages and resulting lower production in the Automotive sub-sector.

Over the month, most Canadian companies reported Q2 earnings, which were described by Scotia Capital as “one of the best TSX reporting seasons ever.” The Index saw record profit margins and strong EPS ‘beats’ from all but two sectors. Inside the Fund, the top-performing sectors were Info Tech, Utilities, and Energy. Despite an underweight to the Info Tech sector, strong security selection effects drove 119bps of relative outperformance.

The top three contributing stocks in the period were: Nuvei, West Fraser, and Telus International. The Nicola Canadian Equity Income Fund’s bottom-performing sectors were Industrials, Financials, and Real Estate. The largest detractors from a holdings perspective were all commodities-related: Franco-Nevada, Lundin Mining, and Suncor Energy. Trading activity was higher than normal as we work towards balancing the quality and cyclical exposures in the Nicola Canadian Equity Income Fund. Over the period, we marginally added to our cyclical exposures – Lundin, Doman, and Suncor – on share price weakness, while building up our quality tilt through Intact Financial, Toromont, Telus International, and TC Energy.

We introduced two new holdings to enhance the Nicola Canadian Equity Income Fund’s quality and growth attributes: Loblaw Companies – the dominant discount grocery retailer in Canada that has revamped its management team to kick-start return on assets – and Lightspeed Commerce – an e-commerce software solutions provider to small/medium-sized retailers that is well-capitalized to take advantage of its long growth runway. To fund these purchases, we trimmed back on Northland Power, Brookfield Renewable Partners, and Restaurant Brands, as well as exited Manulife Financial, Kinaxis, and Brookfield Business Partners.

The Nicola Canadian Tactical High Income Fund returned +1.6%, in line with the S&P/TSX Composite Index return on a total return basis. The Nicola Canadian Tactical High Income Fund has a Delta-adjusted equity exposure of 98%. Similar to recent months, depressed volatility has led to very little option writing, opting to hold a greater proportion of the portfolio long.

Inside the Nicola Canadian Tactical High Income Fund, the top performing sectors were Info Tech, Energy, and Utilities. Despite an underweight to the Info Tech sector, strong security selection effects drove 114bps of relative outperformance. The top three contributing stocks in the period were: Nuvei, Canadian Western Bank, and West Fraser.

The Nicola Canadian Tactical High Income Fund’s bottom performing sectors were Industrials, Real Estate, and Materials. The largest detractors from a holdings perspective: Lundin Mining, Canadian Pacific Railway, and Allied Properties. Trading activity was higher than normal as we work towards balancing the quality and cyclical exposures in the Nicola Canadian Tactical High Income Fund.

Over the period, we marginally added to our cyclical exposures – Doman and Suncor – on share price weakness, while building up our quality tilt through Toromont, Telus International, and TC Energy. Like the Nicola Canadian Equity Income Fund, we introduced two new holdings to enhance the Nicola Canadian Tactical High Income Fund’s quality and growth attributes: Loblaw Companies and Lightspeed Commerce. To fund these purchases, we trimmed back on Northland Power, Brookfield Renewable Partners, and Restaurant Brands, as well as exited Manulife Financial.

The Nicola U.S. Equity Income Fund’s performance vs S&P 500 in July was +2.3% vs +3.0% (USD$).  The Nicola U.S. Equity Income Fund’s relative underperformance in August was driven primarily by our underweight in Information Technology and our overweight in the Consumer Staples and Industrial sectors.  Stock selection was strong within Financials (BlackRock & Morgan Stanley both +8.8%) and within Consumer Staples (Costco +6% & Walmart +4%) but was more than offset by negative stock performance within Information Technology (Visa -6.9%), Communication Services (AT&T -2.3% & Activision Blizzard -1.5%) and Consumer Discretionary (Dollar Tree -9.3% & Aptiv -8.8%).

We have sold part of our Qualcomm position and initiated a new position in NXP Semiconductors.  Relative to Qualcomm, NXP has lower geopolitical risk (less China exposure) and is exposed to more attractive end markets (Auto and Industrial vs Communications).  NXP capital allocation policy is shareholder friendly as they plan on returning 100% of free-cash-flow to shareholders in the form of dividend increases and share buybacks as long as leverage remains sub-2x net debt/EBITDA (currently at 1.9x).  The Nicola U.S. Equity Income Fund ended the month with a delta-adjusted equity exposure of 99.6% (Fund had 0% in covered calls).   The Nicola U.S. Equity Income Fund has an active share of 72% and consists of high-quality names with relatively low leverage and attractive consensus forward 12-month ROE (36% vs 22% for S&P 500).

The Nicola U.S. Tactical High Income Fund’s performance vs S&P 500 was +1.6% vs +3.0%. (USD$).   The Nicola U.S. Tactical High Income Fund’s positive performance was primarily attributable to stock selection within Financials where Morgan Stanley, Citigroup and JP Morgan represented close to 30% of the Nicola U.S. Tactical High Income Fund’s total return for the month.  Overall, the positive contribution in our stock selection was not enough to offset our lower equity-equivalent weight (~62%) and the allocation effect from our underweight/overweight Information Technology & Consumer Staples, respectively.

In terms of the option market, volatility in the market (as measured by the VIX Index) declined 10% this month, but we did see a temporary spike mid-month from geopolitical events (Taliban taking back control of Afghanistan) and concerns that the Fed might start tapering prior to year-end.  We were able to find opportunities to generate attractive option premiums by writing 30 Put options and 2 Call options.  We trimmed our Qualcomm Position and initiated a new position in NXP Semiconductors.

The Nicola Global Equity Income Fund returned +3.0% vs +3.8% for the MSCI ACWI Index (all in CDN$).  The Nicola Global Equity Fund underperformed the benchmark due to our relative overweight to Asian Developed markets, the worst performing group during the month, and our relative underweight to the US, which was one of the strongest markets in August. Performance was marginally offset by an overweight to Japan which performed well and our overweight position in Financials, which was the top performing sector during the month. Performance of our managers for the month: JP Morgan Global Emerging Markets +5.4%, C Worldwide +4.5%, Lazard +3.1%, Nicola Wealth EAFE +2.9%, EdgePoint +0.8%, and ValueInvest +0.6%.

The Nicola Global Real Estate Fund return was +1.9% in August vs. the iShares S&P/TSX Capped REIT Index (XRE) +1.1%.  Listed real estate continued to deliver positive results in August. The TSX REIT Index has rebounded well this year. Aided by exceptionally strong fundamentals and proposed M&A, the Industrials subsector has led the way by a wide margin (+43%).  The drivers for continued strong performance for REITs include 1) an acceleration of economic activity as economies re-open 2) recovering property fundamentals 3) improving earnings growth and upside to net asset value calculations and 4) corporate liquidity near record highs. With reasonable valuations, improving fundamentals, an attractive growth outlook and a strong appetite for real assets, we continue to like the prospects for the Nicola Global Real Estate Fund. There were no new additions or deletions to the portfolio.

The Nicola Canadian Real Estate LP NAV per unit has increased to $141.2376 (previously $139.0414), effective August 31, 2021. This represents an increase of 1.6% and a positive return for July of 2.1%. YTD Return as at July 31, 2021 is 13.2%.  Portfolio Leverage is 39.20%. The positive return was primarily a result of increased appraised values of the GTA West Portfolio, Plaza 400, and Dover Pointe. YTD average rent collection as at August 31, 2021 is 98.74%.

The Nicola U.S. Real Estate LP NAV per unit has increased to US$164.8051 (previously US$163.6202), effective August 31, 2021. This represents an increase of 0.7% and a positive return for July of 1.3. YTD return as at July 31, 2021 is 5.3%.  Portfolio Leverage is 45.70%.

The positive return was primarily a result of increased appraised values of Cobblestone, The Maddox, and Coles Crossing. YTD average rent collection as at August 31, 2021 is 98.16%.

The Nicola Value Add Real Estate LP NAV per unit has increased to $194.3801 (previously $191.8647), effective August 31, 2021. This represents an increase of 1.3% and a positive return for July of 1.3%. YTD return as at July 31, 2021 is 7.0%.  In July, we funded $32.0M for Queen Anne, $23.3M for Kelson, $5.5M for Cambridge Lands, $0.9M for Allandale, $0.4M for Treo, $0.3M for Cottonwood, $0.3M for Encore, $0.2M for 5th & Columbia, $0.1M for Northgate, $0.1M for Railtown, and $0.1M for King City.

The Nicola Sustainable Innovation Fund returned +2.3% (USD) / +3.6% (CAD) in August, and -7.3% (USD) / -8.2% (CAD) year-to-date. Array Technologies, Evoqua Water Technologies, and EDP Renewables were the top contributors to performance while Xebec Adsorption, Sunrun, and Itron Inc. were the biggest laggards in the month.

We also saw positive contribution from our recent investment in the PIMCO California Carbon Access Offshore Fund, L.P. following a strong CCA auction during the month which was 1.85x oversubscribed and saw increasing participation from financial entities. In August we added to several existing positions including Itron, ChargePoint Holdings, TPI Composites and Aptiv. In early August an updated report from the UN-backed Intergovernmental Panel on Climate Change (IPCC) was released with a series of pretty bleak statements. “It is unequivocal that human influence has warmed the atmosphere, ocean and land.” This 6th report from the group of more than 200 scientists was the first released in more than 8 years and had the critical claim that the planet will warm by 1.5 degrees Celsius in the next twenty years unless drastic actions are undertaken to reduce and eliminate greenhouse gas pollution.

The report follows a severe heat wave and fires on the West Coast as well as deadly flooding in parts of Europe and China which provide impactful examples of climate change in our lives today, not the distant future. The data in this report continues to find a direct relationship between carbon dioxide emissions and changing temperatures and so one takeaway is that finding ways to mitigate or reduce further emissions should help stop rising temperatures. While many of these findings are grim, they are supportive of the long-term investment opportunities in renewable energy and clean technologies.

The Nicola Alternative Strategies Fund returned +1.0% in August. Currency was a tailwind contributing 0.7% for the month. For the month of August, in local currency terms since the funds were last priced, Millennium returned +0.9%, Renaissance Institutional Diversified Global Equities Fund +4.8%, Bridgewater Pure Alpha Major Markets +0.5%, Verition International Multi-Strategy Fund Ltd -0.3%, and Polar Multi-Strategy Fund +0.1%. Renaissance continued with strong returns after posting solid returns in July. For Verition, global credit contributed to weakness along with global quantitative trading which were partially offset by gains in convertible bonds and capital structure arbitrage.

The Nicola Precious Metals Fund returned -3.3% for the month while underlying gold stocks in the S&P/TSX Composite index returned -5.3% and gold bullion was up 1.1% in Canadian dollar terms. The weakness in gold stocks was broad based with the majority of names selling off. Large cap names were not immune as Agnico Eagle Mines was down almost 10% for the month.

Select positioning in our Nicola Precious Metals Fund in names such as SSR Mining and our gold bullion exposure helped support returns despite the weak gold equity environment.  Gold bullion prices were impacted by technical headwinds as larger US funds experienced outflows in August. The end of August marked the Jackson Hole summit which potentially saw Fed Chair Jerome Powell’s last speech as head of the Federal Reserve. Powell’s dovish comments will likely further stoke inflationary pressures in the marketplace providing support to gold prices.

Disclaimer

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.