Returns for the Nicola Core Portfolio Fund were +1.0% for the month of December, +3.0% for Q4, and 12.0% for 2021. 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 +0.3% in December while the iShares Core Canadian Universe Bond Index ETF returned +1.7% for the month. Quarter to date the Nicola Bond Fund returned +0.1% and year to date the Nicola Bond Fund returned +2.0% while the iShares Core Canadian Universe Bond Index ETF returned +1.6% quarter to date and -2.8% year to date.
The strength of returns for the bond index was mainly due to interest rates as 10-year Canada bond yields moved from 1.57% to 1.43%. Credit spreads in Canada widened from 1.12% to 1.16% while spreads in the US moved tighter by 3 basis points to finish the year at 0.97%.
Our Nicola Bond Fund is positioned defensively with very low duration. As interest rates rise and markets experience elevated rate volatility, our Nicola Bond Fund returns will be significantly less impacted than the index by a rising rate environment. From a credit perspective, we believe that credit spreads will widen in 2022. Given the US credit market generally trades at larger extremes than the Canadian market, we also believe that Canadian credit at 116 basis point spread versus the US at 97 basis point spread offers better relative value. Despite the weak backdrop, we believe that our fund is well positioned to take advantage tactically of opportunities. Additionally, our trading orientated strategies should benefit from new bond issuance concessions which have spiked higher to 5 basis points, the highest all year.
The Nicola High Yield Bond Fund returned -0.1% in December while the iShares US High Yield Bond Index ETF (CAD-Hedged) returned +2.0%. Quarter to date the Nicola High Yield Bond Fund returned +1.6% and year to date the Nicola High Yield Bond Fund returned +7.7% while the iShares US High Yield Bond Index ETF (CAD-Hedged) returned +0.4% quarter to date and +3.6% year to date.
December saw the strongest monthly returns for the high yield index during the year as spreads compressed an enormous 70 basis points and closed the year at 348 basis points despite investment grade bond spreads only tightening 3 basis points in the US. In our view, this moved the high yield market from expensive to very expensive. By ratings, CCC bonds outperformed BB and B bonds, we believe that compared to CCC, safer high yield looks relatively more attractive.
Our relative underperformance for the month was due to more defensive positioning coupled with a currency drag from our US dollar exposure. Currency detracted -0.6% to returns as the US dollar weakened versus the Canadian dollar. The gains from our exposure in the Pimco Tactical Income fund, which returned +5.2% for the month, were offset by low single digit losses in our Carbon credit exposure. Year-end profit taking was understandable given carbon credit returns are up approximately 30% since we initiated mid-year.
The Nicola Global Bond Fund was up for the month returning 0.1%. Quarter to date the Nicola Global Bond Fund returned -0.2% and year to date the Nicola Global Bond Fund returned -1.8%. Returns for the underlying strategies were relatively muted for the month of December as losses in inflation linked bonds, securitized credit, and emerging market bonds were offset by gains from the Pimco Monthly Income fund. We see growing value in emerging market bonds particularly local currency assets with attractive relative valuations from a currency perspective. However, emerging market bonds are not without risks. The inflationary pressures we see in developed markets are not unique and in some countries expansionist fiscal policies are exacerbating domestic inflationary burdens.
Returns for the Nicola Primary Mortgage Fund were +0.6% in December, contributing to a Q4 return of 1.2% year and an end of 2021 return of 5.1%. Returns for the Nicola Balanced Mortgage Fund were 0.5% in December, contributing to a Q4 return of 1.5% and 2021 return of 5.9%. Cash levels at year end remined elevated at 12% for the Nicola Primary Mortgage Fund and 15% for the Nicola Balanced Mortgage Fund following record loan repayments in Q4-21.
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 3.8% for the Nicola Primary Mortgage Fund and 5.4% for the Nicola Balanced Mortgage Fund. The Nicola Primary Mortgage Fund saw a moderate level of new investments in 2021 and experienced minimal AUM growth, while the Nicola Balanced Mortgage Fund saw both record investment activity in 2021 and ended the year at a record high AUM.
The Nicola Preferred Share Fund returned +1.0% for the month, in line with the BMO Laddered Preferred Share Index ETF, which also returned +1.0%. Quarter to date, the Nicola Preferred Share Fund returned +1.9% and year to date has returned +27.6% while the BMO Laddered Preferred Share Index ETF returned +1.9% quarter to date and +23.8% year to date.
The returns from the month came despite 5 Year Canada Bond yields moving 14 basis points lower, from 1.40% to 1.26%. The strength of the market came from the reoccurring narrative of a reduction of supply as nearly $800 million in preferred share redemptions forced investors to reinvest their capital in a shrinking supply pool. We think the move lower in 5-year Canada Bond yields is temporary and that interest rates will rise in 2022. The preferred share market consists predominately of rate resets which have their yield reset based on a spread over the 5-year Canada bond yields. This means that unlike most fixed income products, as interest rates move higher, preferred shares will benefit.
The Nicola Canadian Equity Income Fund’s performance vs S&P/TSX: December +3.8% vs +3.1%; Q4 2021 +6.4% vs +6.5%; YTD +23.6% vs +25.2%. The Canadian market ended the year with its’ strongest performance since 2009. Energy prices finished strong with WTI soaring to $75.21 per barrel (up +14% in December, +55% since the end of 2020). As prospects of an earlier-than-expected increase in benchmark interest rates from the Federal Reserve started to get factored into expectations in December, Value stocks outperformed Growth in the month. The best performing sectors in the Index for the month were Consumer Staples, Consumer Discretionary and Real Estate. Technology was the worst performing sector. Within the Nicola Canadian Equity Income Fund, the top three sectors contributing to relative outperformance were: Industrials, Financials and Materials. Utilities, Communication Services, and Technology were the biggest detractors.
The portfolio remains positioned for a strong pickup in economic activity accompanied by sustained commodity prices. The Nicola Canadian Equity Income Fund remains overweight Industrials, Energy and Real Estate. The top individual contributors to performance were West Fraser Timber, Doman Building Materials, and TFI International. The biggest detractors were Nuvei Corp, Lightspeed Commerce, and Telus International. In December, we added the diversified communications and media company Rogers Communications. We exited Shaw Communications and Northland Power.
The Nicola Canadian Tactical High Income Fund’s performance vs S&P/TSX: December +3.6% vs +3.1%; Q4 2021 +6% vs +6.5%; YTD +23.9% vs +25.2%. The top three sectors contributing to returns in December were Industrials, Real Estate and Financials. The primary detractors in December were Materials, Technology and Utilities. The Nicola Canadian Tactical High Income Fund is focused on investing in consistent dividend payers and growers, and displays an attractive 3.5% dividend yield.
Volatility has remained depressed and we view option writing as unattractive for the dividend paying companies we own. As a result, we have not written calls on the portfolio. As profitability for options rises, we could return to writing options on select positions. Top individual contributors to performance were Bank of Nova Scotia, Crombie REIT and Doman Building Materials. The largest detractors for the month were Nuvei Corp, Telus International, and Constellation Software. During the month, we added Rogers Communications and Altagas Ltd. We exited Telus International, Northland Power, Lightspeed Commerce, First Quantum Minerals, Constellations Software and Nuvei Corp.
The Nicola U.S. Equity Income Fund returned +5.3% for the month of December vs +4.5% for the S&P 500. In Q4 2021, the Nicola U.S. Equity Income Fund returned +11.4% vs +11.0% for the S&P 500 (USD$), and 25.3% versus 28.7% for the S&P 500 during 2021. The Nicola U.S. Equity Income Fund’s relative outperformance for the month was driven by being underweight Consumer Discretionary and Information Technology sectors while being overweight Consumer Staples, Materials and Healthcare sectors.
Stock selection was strong within Information Technology with Accenture PLC, Seagate Technologies and VISA Inc. delivering double-digit returns compared to the Information Technology’s sector return of 3.4%. During the month, the Nicola U.S. Equity Income Fund trimmed Costco, Waste Management and Accenture and added to AT&T, Alphabet, Emerson Electric, Microsoft, VISA, Walmart, John Deere, Northrup Grumman and Crown Holdings.
The Nicola U.S. Equity Income Fund also sold its remaining position in Valero Energy and added to Royal Dutch Shell and Cheniere Energy which are better positioned for the low-carbon energy transition. The Nicola U.S. Equity Income Fund ended the month with a delta-adjusted equity exposure of 99.4% (2.3% in covered calls) and consists of high-quality names with relatively low leverage and attractive consensus forward 12-month ROE (43% vs 22% for S&P 500).
The Nicola U.S. Tactical High Income Fund returned +4.2% for the month of December vs +4.5% for the S&P 500. In Q4 2021, the Nicola U.S. Tactical High Income Fund returned +7.2% vs +11.0% for the S&P 500 (USD$), and 18.0% versus 28.7% for the S&P 500 during 2021. The Nicola U.S. Tactical High Income Fund slightly underperformed due to lower overall equity exposure (delta-adjusted equity exposure was 66%).
Sector contribution was mixed with positive allocation effects from the underweights in Consumer Discretionary and Information Technology which were more than offset by underweights in top performing sectors such as Health Care and Real Estate and Utilities. Stock selection was a strong driver of returns with positive stock selection within Consumer Discretionary (TJX Companies +9.4%), Information Technology (VISA +11.8% & Seagate Technologies +10.8%) and Communications Services (AT&T +7.8% & Electronic Arts +6.3%).
The Nicola U.S. Tactical High Income Fund was active in the options market by writing 29 Put options and 1 Covered-Call options generating double-digit annualized premiums. No new names were added, but the Nicola U.S. Tactical High Income Fund did make some minor changes, such as reducing target weights for Apple, Accenture, Waste Management and Valero, while increasing target weights and adding to AT&T, Royal Dutch Shell, Northrop Grumman and Microsoft.
In December, the Nicola Global Equity Income Fund returned +2.5% vs. +2.7% for the MSCI ACWI Index (all in CDN$). For Q4, the Nicola Global Equity Fund returned +2.9% vs. +6.4% for the MSCI ACWI Index (all in CDN$). Year to date, the Nicola Global Equity Fund returned +10.6% vs. +17.9% for the MSCI ACWI Index (all in CDN$).
December saw the Nicola Global Equity Fund slightly underperform due to our overweight to Emerging Markets in Asia, which underperformed, and underweight to the US, which outperformed. Offsetting this was our overweight to Europe and the UK, which were outperforming regions.
From a sector perspective, our overweight to Consumer Staples and Industrials and underweights to Technology and Communications Services were positive contributors to performance. Conversely, our overweight to Consumer Discretionary and underweight to Utilities were detractors to performance. Performance of our managers for the month: ValueInvest +5.0%, EdgePoint +3.9%, Lazard +3.3%, Nicola Wealth EAFE +3.1%, C WorldWide +1.8%, and JP Morgan Global Emerging Markets -0.2%.
The Nicola Global Real Estate Fund performance vs iShares S&P/TSX Capped REIT Index (XRE): December +1.8% vs +6.5%; Q4 2021 +5% vs +8.2%; YTD +18.8% vs +34%. The REIT sector delivered performance that was well ahead of the broader TSX Composite Index. The strong performance marked a strong reversal of the underperformance in 2020. Listed real estate returns were positive around the world as visibility on fundamentals improved and investors capitalized on discounted valuations. Further gains in economic traction, continued recovery of property fundamentals, and healthy growth in both NAV and earnings are supportive of continued strong returns in the year ahead. We are particularly bullish on the industrial, self-storage, and residential sectors, as these areas are better equipped to deliver cash flow and NAV growth in a rising rate environment. There were no new additions or deletions in December. Subsequent to the quarter, we will continue to diversify the Nicola Global Real Estate Fund and give our clients exposure to high quality international real estate by increasing our allocation to the Invesco Real Estate Asia Fund.
The Nicola Sustainable Innovation Fund returned -5.3% (USD) / -6.2% (CAD) in December, -0.5% (USD) / -1.0% (CAD) for the quarter, and -13.6% (USD) / -14.0% (CAD) for 2021. During the month we initiated a position in Fluence Energy a market leader in energy storage. Fluence was formed as a joint venture between AES and Siemens in 2018 and the new company went public in October of 2021. Fluence was our top contributor to performance in December, followed by American Water Works and Itron Inc. while EV charging company Beam Global, Plug Power and Sunrun were the biggest laggards in the month.
We also trimmed several positions including Evoqua Water Technologies and Enviva, which had particularly strong performance in 2021, and rebalanced into several names, including TPI Composites, Array Technologies, and Sunrun. Our position in Ares Climate Infrastructure Partners L.P also paid out its first distribution near the end of the month resulting from gains on the sale of one of their earliest investments.
2021 proved to be a challenging year for renewable energy and clean technology focused stocks following their stellar performance in 2020. The iShares Global Clean Energy ETF (ICLN) finished -24% for the year and the Invesco WilderHill Clean Energy ETF (PBW) returned -30% in 2021 following triple-digit positive performances the year prior.
While the returns last year in this space are disappointing, they should be viewed in the context of the prior year alongside the supportive backdrop and long-term outlook for many of these companies, which remains positive. Despite the negative returns of many clean energy indexes and ETFs, the year also saw records set for renewable electricity growth, particularly solar and wind, as well as record issuance for ESG-labeled debt, including green bonds up 83% from 2020’s levels. We are not detracted by the recent share price performance and we remain focused on the long-term investment opportunities in this decarbonization theme.
The Nicola Alternative Strategies Fund returned -0.3% in December. Quarter to date the Nicola Alternative Strategies Fund returned +0.8%, and year to date has returned +7.7%. Currency was a headwind detracting -0.7% to returns for the month as the US dollar weakened versus the Canadian dollar. According to the Eurekahedge Hedge Fund Index, hedge funds broadly returned +0.9% for the month with all sub-strategy indices experiencing positive returns. The Eurekahedge Arbitrage Hedge fund index had the lowest return for the month at +0.15%.
The Nicola Precious Metals Fund returned +0.3% for the month. Quarter to date the Nicola Precious Metals Fund returned +7.0% and year to date has returned -10.6%. For the month of December underlying gold stocks in the S&P/TSX Composite index returned +0.6% and gold bullion was up +2.0% in Canadian dollar terms. Relative to gold stocks, our Nicola Precious Metals Fund underperformed due to our overweight in select smaller cap companies. Large cap gold producers such as Agnico Eagle Mining, Kirkland Lake Gold and Yamana Gold Inc all returned north of 5% for the month, helping to drive index returns higher. Gold ETF flows reverted back to their near term trend, experiencing outflows of nearly $350 million in December.
Gold returns for the year were a battle between higher inflationary pressures and bouts of market volatility due to Covid variants and corresponding lock down measures versus higher bond yields and a stronger US dollar. We see similar undercurrents to continue to impact gold as long-term tailwinds from more persistently high inflation will face shorter term challenges from sooner than expected interest rate hikes.
The Nicola Infrastructure and Renewable Resources Fund had Canadian dollar returns of +1.6% (2.0% in US dollar terms) in Q4 2021, bringing Year to date returns to 5.3% (5.8% in US dollar terms). Performance in the quarter was driven primarily by a significant write-up to the Nicola Infrastructure and Renewable Resources Fund’s North American Data Center co-Investment, CBRE Valhalla, as a result of strong lease rates; and standard roll-forward accretion on several fund investments, most notably Fiera Eaglecrest Infrastructure LP and MIRA Infrastructure Global Solutions II.
The Nicola Infrastructure and Renewable Resources Fund’s underlying holdings continue to perform in line with base case underwriting returns and there are currently no assets in a loss position. At Quarter End total AUM was $117MM, with cash / money market fund balances representing ~10% of assets.
To date, a further $40MM has been committed to various fund mandates which is expected to be fully drawn by the end of 2022. Subsequent to Quarter end, the Nicola Infrastructure and Renewable Resources Fund drew down the entirety of the waitlist and closed on a partial redemption for a majority of its holdings in the Franklin Global Real Assets Fund. These proceeds will be used to finance two co-investment opportunities that are in the late stages of diligence and expected to close by mid-February and outstanding commitments on several investments.
In Q4 the Nicola Private Debt Fund returned +2.0% bringing the 2021 return to +10.7% and AUM to $578.9mm. The main driver of Q4 performance was the diversified pool of co-investments, which continue to generate strong and stable contractual interest income. During the quarter, the Nicola Private Debt Fund closed its first US mid-market direct lending separately managed account (“SMA”) in partnership with MidCap Financial, a leading US private lender.
The SMA provides the Nicola Private Debt Fund with consistent access to high quality co-investment opportunities in privately syndicated senior term loans to profitable US mid-market companies owned by private equity firms. The Nicola Private Debt Fund deployed US$90 million into the SMA across 9 different senior term loan investments during Q4. Example investments include i) a US$10mm participation in a senior term loan to Amerivet Partners, a consolidator of US veterinary clinics owned by Imperial Capital and OPTrust, and ii) a US$10mm participation in a senior term loan to Berner Foods, a leading US manufacturer of ready to drink coffee beverages, dips and snacks owned by Peak Rock Capital.
In addition, the Nicola Private Debt Fund invested US$39mm into the Ares Real Estate Enhanced Income Fund which invests in core-plus US commercial first mortgages. During the quarter the Nicola Private Debt Fund also called the entire remaining investor waitlist, and launched a USD share class to give investors the flexibility to invest with US currency.
The Nicola Private Equity LP returned +1.9% during Q4, and 25.2% during 2021. Q4 performance was driven by write-ups in a variety of investments including: a co-investment in Decowraps, a Florida-headquartered floral packaging company which continues to grow earnings; two secondary transactions sourced through our partner Overbay that continues to distribute from older vintage limited partnership: and write-ups in fund investments including Torquest Fund IV and our investments with New York-based manager, Redbird.
These were offset by a decline in value in our direct investment in MDA which we believe is a very attractive opportunity at current levels. New investments include two co-investments in the US healthcare services space as well as Pathfactory, a Toronto-headquartered digital marketing company. Exits during the quarter include our co-investment in Winnipeg-headquartered Frost Fighter, portable industrial heating company which resulted in a great investment.
Nicola Canadian Real Estate LP NAV per unit has decreased to $143.5512 (previously $143.6077), effective December 31, 2021, due to monthly distributions exceeding net income. Although this represents a decrease of 0.04%, November had a positive return of 0.41%. YTD return as at November 30, 2021 is 17.16%. Portfolio Leverage is 40.52%. The positive return was primarily a result of increased appraised values of 2481 Royal Windsor Drive, Advanced – North Vancouver, and 80-84 Golden Drive.
Nicola U.S. Real Estate LP NAV per unit has increased to US$168.2628 (previously US$167.2489), effective December 31, 2021. This represents an increase of 0.61% and a positive return for November of 1.10%. YTD return as at November 30, 2021 is 9.65%. Portfolio Leverage is 47.58%. The positive return was primarily a result of increased appraised values of The Harrison, The Cape at Grand Harbor, and The Park on Wurzbach.
Nicola Value Add Real Estate LP NAV per unit has increased to $194.9700 (previously $191.9991), effective December 31, 2021. This represents an increase of 1.55% and a positive return for November of 1.55%. YTD return as at November 30, 2021 is 11.85%. In November, we funded $7.7M for 75 East 8th, $0.7M for Building O, $0.7M for Treo, $0.4M for Langford, $0.1M for Encore, $0.1M for Cambridge Lands, $0.1M for Cottonwood, $0.1M for King City, 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 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.