Returns for the Nicola Core Portfolio Fund were -0.4% for the month of January. 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 January while the iShares Core Canadian Universe Bond Index ETF returned -3.5% for the month. Canadian investment grade bonds were hurt by both rising yields and credit spread widening. In Canada, investment grade bonds widened from 1.16% to 1.27% while 10-year Canada Bond yields moved from 1.43% to 1.77%.
While the BoC didn’t raise interest rates at the January 26th meeting, the latest inflation indicator showed prices rising at an annual rate of 4.8%, the highest in thirty years, which means imminent interest rate hikes are likely coming. Technicals in the bond market were also weak for the month. Heavy issuance in January was not commensurately met with demand leading to higher new issuance concessions while Asian demand for domestic bonds came in weak as well.
The Nicola Global Bond Fund was down for the month returning -0.2%. Returns for the Nicola Global Bond Fund were supported by Templeton Global Bond fund which was up 0.3% in a challenging market. Emerging market currencies rallied early in January before fading due to a hawkish Fed while Latin America currencies gained strength during the month, offsetting weakness from emerging market currencies in Europe and Asia.
Given we are in a higher inflation environment and there is a lack of capital flow into emerging markets, we do not believe that an increase in US interest rates will have a large follow-on impact in emerging markets, as countries will benefit from an upswing in commodities. In China, the PBOC cut key lending rates for the first time since 2020, while overall emerging market carry differentials versus the US are back to similar levels we saw in the early 2010’s in nominal terms and decade-high levels in real terms.
The Nicola High Yield Bond Fund returned -1.3% in January while the iShares US High Yield Bond Index ETF (CAD-Hedged) returned -3.1%. After a historically strong December to close out the year, 2022 started with a historically poor month reversing gains seen at the end of last year.
Excluding the 2020 crash, BB rated bonds are trading at their widest in 5 years. Higher rated bonds generally have more interest rate sensitivity and liquidity which was likely the cause of BB widening. B rated bonds outperformed BB by 1.18%, the largest outperformance since July 2020 while according to Refinitiv Lipper, U.S. high yield bond ETFs recorded an outflow of $6.5 billion in January, the highest ever.
The Nicola Preferred Share Fund returned +0.5% for the month while the BMO Laddered Preferred Share Index ETF returned +0.2%. The preferred share market was up strongly during the first three weeks of the month before selling off in sympathy with risk assets over concerns of a hawkish central bank. The price action in preferred shares was more muted than equity markets due to a larger portion of the preferred share market positioned to be redeemed over the next couple years, coupled with the benefit of 5-year Canada Bond yields moving 0.37% higher to 1.63%.
During the month, Royal Bank also announced a redemption of one of its perpetuals earlier than the market anticipated. This led to a capital loss for investors as it was trading with a negative yield to call and investors did not expect the perpetual to be redeemed. Unlike rate resets, perpetual preferred shares can be called anytime and thus have large timing risks. We monitor different yield scenarios and currently our Nicola Preferred Share Fund does not own any negative yield to call investments.
Returns for the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund were 0.2% and 0.4% respectively for the month. Cash levels at month end were 16% in the Nicola Primary Mortgage Fund and 11% in the Nicola Balanced Mortgage Fund which remain elevated following record loan repayments in Q4-21. Current annual 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 and in no way is a predictor of future performance, are 3.7% for the Nicola Primary Mortgage Fund and 5.6% for the Nicola Balanced Mortgage Fund.
The Nicola Canadian Equity Income Fund’s performance vs S&P/TSX in January was +2.1% vs -0.4%. Hawkish comments from US Federal Reserve Chair Powell and a re-appraisal of the monetary policy path generated unease among investors in January. Selling hit the Growth trade and Tech equities hard.
The Canadian market outperformed most developed markets because it is generally well-positioned for rising rates but still finished the month in negative territory. Commodities displayed mixed results. Energy prices extended their climb last month with Crude Oil (WTI +17%) and Natural Gas (+30%) gaining on recovering demand and tight supply. Precious Metals (Gold -1.8%, Silver -3.6%) and Copper (-3.1%) slipped. The best performing sectors in the Index for the month were Energy (+12.5%), Financials (+3.6%) and Communications (+1.6%). The worst performing sectors were Technology (-20%) and Health Care (-9%).
Within the Nicola Canadian Equity Income Fund, the top three sectors contributing to relative outperformance in the month were: Technology, Materials, and Energy. Consumer Discretionary, Real Estate, and Consumer Staples 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 is overweight Industrials, Energy and Consumer Discretionary. The top individual contributors to performance of the Nicola Canadian Equity Income Fund were Suncor Energy, Canadian Natural Resources and IA Financial Corp. The biggest detractors were TFI International, Telus International, and Pet Value Holdings. There were no new additions or deletions to the portfolio in January.
The Nicola Canadian Tactical High Income Fund’s performance vs S&P/TSX Composite in January +4.3% vs -0.4%. Another relative comparable, S&P/TSX Canadian Dividend Aristocrats, was +1.8%. 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, and a greater allocation to Value-oriented sectors. Hawkish comments from US Federal Reserve Chair Powell and a re-appraisal of the monetary policy path generated unease among investors in January. Canadian equities saw a rotation out of Growth, and meaningful outperformance from Value, inclusive of dividend focused strategies.
The best performing sectors of the S&P/TSX Composite Index for the month were Energy (+12.5%), Financials (+3.6%) and Communications (+1.6%). The worst performing sectors were Technology (-20%) and Health Care (-9%). The best performing sectors of the TSX Aristocrats index for the month were Energy (+10.3%), Health Care (+5.6%), and Financials (+3.3%). The worst performing sectors were Real Estate (-4.8%) and Consumer Discretionary (-1.9%). The Nicola Canadian Tactical High Income Fund’s dividend focus has led to sizeable overweight positioning within Financials and Energy.
In both sectors we continue to expect companies with excess capital to deliver significant returns to shareholders in the form of rising dividends and share repurchases. The Nicola Canadian Tactical High Income Fund’s top performing sectors on a relative basis were Financials, Energy, and Communication Services.
The primary detractors were Consumer Discretionary and Health Care. At this time, the Nicola Canadian Tactical High Income Fund does not have exposure to Technology or Health Care. We have not written calls on the portfolio, but as profitability for options rises, we could return to writing options on select positions. Top performing holdings in the month were Canadian Natural Resources, Suncor, and IA Financial. Biggest detractors were Dream Industrial REIT, Pet Valu Holdings, and Crombie REIT. No new positions were added or removed. The Nicola Canadian Tactical High Income Fund had an attractive 3.5% dividend yield compared to the TSX Aristocrats at 3.9% and the TSX Composite at 2.7%.
The Nicola U.S. Equity Income Fund returned -2.8% vs -5.2% for the S&P 500 (in USD$). Its relative outperformance for the month was primarily driven by stock selection within Information Technology (VISA +4.4% vs sector -6.9%), Communications Services (AT&T +5.7% and Electronic Arts +0.6% vs sector -6.2%) and Health Care (Boston Scientific +1% and Merck +6.3% vs sector -6.8%).
From an allocation perspective, the Nicola U.S. Equity Income Fund benefitted from its overweight Energy and Consumer Staples, and to a lesser extent, its underweight Information Technology. During the month, the Nicola U.S. Equity Income Fund sold Texas Instruments and trimmed Apple, Seagate Technologies and Citigroup in order to add to AT&T, Shell, Cheniere Energy, and Adobe (new name purchased at a 26% discount from its 52-week high). Adobe is a high-quality subscription-based software company with high returns on equity, high free-cash-flow conversion, net cash on the balance sheet and a large and growing total addressable market for its suite of products (Creative Cloud TAM is expected to grow +30% annually from 2021 to 2024 according to Adobe’s December 16th, 2021 Analyst Day).
The Nicola U.S. Equity Income Fund ended the month with a delta-adjusted equity exposure of 98.5% (it had a 1% in covered calls); and consists of high-quality names with relatively low leverage and attractive consensus forward 12-month ROE (44% vs 22% for S&P 500).
The Nicola U.S. Tactical High Income Fund returned -0.7% vs -5.2% for the S&P 500 (in USD$) which resulted in a +4.5% relative outperformance; this is the best outperformance during a negative month since the Nicola U.S. Tactical High Income Fund inception. The outperformance was due to the overweight in Energy and the slightly below market weight in Financials (two of the best performing sectors last month) while having large underweights in the worst performing sectors (Information Technology and Consumer Discretionary).
Stock selection contributed to outperformance; especially in Health Care where Merck, Boston Scientific, Medtronic and Thermo Fisher Scientific posted positive returns vs -6.8% for the Health Care sector. Stock selection was also strong in Information Technology (VISA +4.4% vs -6.9% for the sector) and Communication Services (AT&T +5.7% vs -6.2% for the sector).
The Nicola U.S. Tactical High Income Fund became very active in the last two weeks of the month to take advantage of the elevated option volatility by writing 25 Put options and 25 Covered-Call options. Adobe Inc is a new name added to the Nicola U.S. Tactical High Income Fund via Put Options. Other transactions during the month included selling Valero Energy and trimming Merck, Citigroup and adding to other high-quality names that have recently sold off (Amazon, Blackrock, Pfizer).
The Nicola Global Equity Income Fund returned -5.0% vs -4.5% for the MSCI ACWI Index (all in CDN$). The Nicola Global Equity Fund slightly underperformed the benchmark due to our relative underweight in Energy, the strongest performing sector during the month, and our regional overweight to Asia Developed Markets, which was one of the weakest regions.
Performance was marginally offset by our relative underweight to Information Technology, which was among the weakest sectors, our overweight to Emerging Markets, and our overweight to Latin America, the best performing region in January. Performance of our managers for the month: JP Morgan Global Emerging Markets -1.6%, ValueInvest -2.6%, Nicola Wealth EAFE -4.2%, EdgePoint -4.7%, Lazard -6.6%, and C Worldwide -7.9%.
The Nicola Sustainable Innovation Fund returned -15.1% (USD) / -14.8% (CAD) in January. It was a tough start to the year following a negative 2021 which saw shares of growth focused and long-duration stocks impacted by several headwinds, including inflation, rising interest rates, supply chain disruptions, and a broader rotation into cyclical and value focused companies. Many of these concerns carried into 2022, and alongside a more hawkish tone from the US Federal Reserve, we saw some of the greatest volatility in equity markets since the onset of the COVID-19 pandemic. This negative momentum carried through much of the month before a sharp rally occurred on January 31st which saw a >6% single-day recovery.
Fluence Energy, Ameresco, and Stem were the biggest laggards in the month. No new companies were added in January; however, we actively used the volatility to rebalance into several existing names including Sunrun, ChargePoint, Hannon Armstrong, Stem, and Fluence Energy.
During the month, we saw several analysts covering the renewable and clean technology sectors upgrade their outlooks following what they felt was overdone selling pressure in many of these companies. As we move through quarterly earnings season, we hope that some of the datapoints we receive from companies in our coverage are positive and provide support against this ongoing price volatility. As a reminder, our portfolio is not solely focused on newer upstart companies that are not generating cash. We’ve always taken a diversified approach in constructing our Nicola Sustainable Innovation Fund, with roughly half of our portfolio companies paying dividends today and the current portfolio yield around 1.2%.
The Nicola Alternative Strategies Fund returned +1.2% in January. Currency was a tailwind contributing +0.2% to returns for the month as the US dollar strengthened versus the Canadian dollar. According to the Eurekahedge Hedge Fund Index, hedge funds broadly returned +0.2% for the month, with large dispersion amongst the sub-strategy indices. The Eurekahedge Relative Hedge fund index was weak for the month at -3.1% while the Eurekahedge CTA/Managed Futures Hedge Fund Index was up 3.5%.
The Nicola Precious Metals Fund returned -4.2% for the month. For the month of January underlying gold stocks in the S&P/TSX Composite index returned -4.5% and gold bullion was down -1.3% in Canadian dollar terms. Large cap mining companies continued their trend of outperforming smaller cap firms with both Barrick Gold Corporation and Ivanhoe Mines having positive returns for the month.
The expected rate increases and stronger US dollar negatively impacted gold, as Powell noted after the January 26th meeting that a March liftoff was likely and opened the door to more frequent and potentially higher hikes than anticipated. Directionally the movement is a negative for gold however longer term the higher levels of real and nominal rates will likely be capped.
In January, the Nicola Private Debt Fund returned +0.6% and AUM reached $641.8mm. The main driver of January performance was cash interest income from the Nicola Private Debt Fund’s diversified pool of co-investments and a cash income distribution received from the Oaktree Middle Market Direct Lending Fund. New direct investments during the month included a US$15mm commitment to a syndicated senior delayed draw term loan to Micross Components, a leading US value-added distributor of high reliability microelectronics.
The Nicola Private Equity LP returned +0.1% during the month. Private equity is an illiquid asset class and valuations of the underlying companies are assessed on a quarterly basis. We receive quarterly statements from our GP’s during the second and third months after quarter-end, so most of our NAV changes (aside from currency impacts) happen then. Thus, in January, there were no material return drivers from our underlying investments. The Nicola Private Equity LP has a small exposure to publicly traded equities from companies that we invested in pre-IPO, namely MDA. Investments in publicly traded companies are valued based on their market price at the end of each period.
The Nicola Private Equity LP has approximately 70% exposure to USD-denominated investments which are translated back to CAD at the end of each month. Impact from currency during the month was positive, approximately 23bps, as the USD strengthened relative to CAD from 1.2678 CAD/USD to 1.2719.
The Nicola Global Real Estate Fund’s performance vs iShares S&P/TSX Capped REIT Index (XRE) January was +0.5% vs -4%. Concerns over rising interest rates weighed heavily on sector sentiment. From our point of view, the sector is well positioned, supported by improving fundamentals, healthy growth outlook, still low rates, and reasonable valuations.
As the Omicron wave diminishes, we expect further gains in economic traction and with it, growth in both NAV and earnings 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. We added Extra Space Storage to the portfolio in January. There were no deletions. We also continue to reduce our Nicola Canadian Real Estate LP and Nicola U.S. Real Estate LP exposure and will use the Nicola Global Real Estate Fund to diversify our exposure globally.
The Nicola Canadian Real Estate LP NAV per unit has increased to $144.3838 (previously $143.5512), effective January 31, 2022. This represents an increase of 0.6% and a positive return for December of 1.0%. YTD return as at December 31, 2021 is 18.4%. Portfolio Leverage is 41.98%. The positive return was primarily a result of increased appraised values of Aero Portfolio, Grace Road and The James at Harbour Towers.
The Nicola U.S. Real Estate LP NAV per unit has increased to US$170.3333 (previously US$168.2628), effective January 31, 2022. This represents an increase of 1.2% and a positive return for December of 1.7%. YTD return as at December 31, 2021 is 11.5%. Portfolio Leverage is 46.55%. The positive return was primarily a result of increased appraised values of Gateway North, Links at Windsor Parke, and West 46th Apartments.
The Nicola Value Add Real Estate LP NAV per unit has increased to $196.7992 (previously $194.9700), effective January 31, 2022. This represents an increase of 0.9% and a positive return for December of 0.9%. YTD return as at December 31, 2021 is 12.9%. In December, we funded $16.9M for W Deer Valley, $15.6M for 101 Doney Crescent, $6.9M for 3499 Douglas Floreani, $6.6M for 9640 McCarthy Road, $0.4M for Building O, $0.2M for Treo, $0.2M for Queen Anne, $0.1M for Kelson.
The Nicola Infrastructure and Renewable Resources Fund returned -0.3% for the month of January in Canadian dollar terms. Impacting the Nicola Infrastructure and Renewable Resources LP was the reorganization of operating partners within our distributed power solutions program with Crown Capital including the repositioning of two OOM-related projects that have been transitioned to Onsite Power Partners.
We currently have four projects operating with ten projects under development, five of which will become operational in the first half of 2022 and the remainder by the end of Q3 2022. We drew down our waitlist at the end of last year of $32 million and fully redeemed our position in Franklin Global Real Assets Fund, as a result we are currently sitting on approximately $50 million cash which we forecast to be deployed by the end of the quarter. We are in final stages of closing two co-investment opportunities for approximately $35 million and believe that our existing commitments will drawdown an additional $15 million within the next two months.
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.