Returns for the Nicola Core Portfolio Fund were +0.8% in the month of November. 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 0.0% in November while the iShares Core Canadian Universe Bond Index ETF returned +0.8% for the month. Strong returns from our real return bonds offset losses from credit spread widening as Canadian investment grade corporate bonds widened 8 basis points during the month with the Financials sector widening the most at 11 basis points.
We have maintained a larger exposure to credit orientated strategies such as Marret Investment Grade Hedge Strategies and East Coast Investment Grade Fund. These funds have maintained a more defensive posture in light of overall tight credit spreads and were able to balance their credit exposure with certain trades which benefit from credit spread widening as a hedge to manage risk exposure.
The Nicola High Yield Bond Fund returned +1.8% in November. Currency contributed +1.7% to returns as the US dollar strengthened versus the Canadian dollar reversing the -1.6% headwind from currency we encountered last month. In local currency terms, the Nicola High Yield Bond Fund was relatively flat as selective positioning in the Apollo Credit Strategies fund and the Pimco CCA fund helped to offset negative returns from the high yield market which was down 1.2%. Lower quality CCC rated bonds particularly in the Energy sector sold off the most during the month as rate volatility and the Omicron variant weighed on markets. With credit spreads widening during the month, high yield credit spreads are now wider than they were at the start of the year.
The Nicola Global Bond Fund was up for the month returning +1.6%. Templeton rebounded from last month and was up 2.1% contributing to returns. Our exposure to global inflation linked bonds was also accretive to returns up 1.3% in local currency terms and +4.7% in Canadian dollar terms. Pimco Monthly Income has maintained an overweight in non-agency mortgage-backed securities as most fixed income asset classes are now trading at tighter than pre-crisis level credit spreads, except for non-agency MBS, which are still roughly 35 bps wider.
The mortgage market continues to look attractive in the US. While corporate leverage has increased, homeowner leverage remains relatively low. The short-term outlook is uncertain particularly as it pertains to interest rate levels, thus the strategy has maintained a bar-belled approach to investing with a focus on liquidity to be able to be tactical when the opportunity arises.
Returns for the Nicola Primary Mortgage Fund and Nicola Balanced Mortgage Fund were 0.4% and 0.5% respectively for the month. Cash levels at month-end were 9% in the Nicola Primary Mortgage Fund and 8% in the Nicola Balanced Mortgage Fund as a result of above-average loan repayments in both funds. Current annual yields, which are what the 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 3.8% for the Nicola Primary Mortgage Fund and 5.6% for the Nicola Balanced Mortgage Fund. Approaching year-end, there is a good pipeline of new investment opportunities likely to fund in December and January.
The Nicola Preferred Share Fund returned -1.5% for the month while the BMO Laddered Preferred Share Index ETF returned -1.7%. The preferred share market gave back returns after a very strong October. The sell-off is the first one we’ve seen in the preferred share space in over a year. Credit markets were impacted late in the month over concerns of the Omicron Covid-19 variant while interest rates were impacted by central banks turning more hawkish over concerns on inflation. The 5-year Government of Canada bond yields moved from 1.51% to 1.40% during the month.
5-year Preferred shares were called for redemption which will lead to $1 billion being paid back to investors before year end. During the month we purchased more Brookfield Office Properties preferred shares during US Thanksgiving. Historically, the Canadian market has lower liquidity during US holidays, and we felt the limited liquidity exaggerated the sell-off over concerns on the Omicron variant. We used the opportunity to pick up more BPO preferred shares. We also participated in the inaugural new issuance of an institutional Royal Bank preferred share. The structure shares many similarities with retail preferred shares but is only marketed to institutional investors.
The Nicola Canadian Equity Income Fund’s return was -3.3% while the S&P/TSX was down -1.6%. The Omicron variant sparked market jitters in November and all major countries equity indices suffered losses. Crude oil prices (WTI -20.8%; Brent -16.4%) led the commodities lower in November on fears of lower economic growth and as the US announced the release of about 50M barrels from their strategic stockpile.
Warmer-than-usual weather forecasts weighed on Natural Gas (-15.8%). Investors rushed to the safety of government bonds and the 10-year yields in Canada fell 15bps. Six out of eleven sectors were in negative territory. Among the laggards, Health Care (-7.9%), Energy (-5.7%) and Real Estate (-3.8%) fell the most. Growth led the benchmark and sported gains with Tech (+1.4%). Materials (+1%) and Communications (+0.9%) were also relatively strong.
The Nicola Canadian Equity Income Fund underperformed the index mainly due to underweighting and picking underperformers in the Technology sector. The portfolio remains positioned for a strong pickup in economic activity, accompanied by sustained commodity prices and rising bond yields.
Overall, the portfolio is overweight Industrials, Financials, and Energy. The top positive individual contributors to the performance of the Nicola Canadian Equity Income Fund were Pet Valu Holdings, West Fraser Timber and Park Lawn Corp. The largest detractors were Lightspeed Commerce, Nuvei Corp, and TFI International. During the month of November, we sold our positions in Diversified Royalty Corp and Nutrien. We added Richelieu Hardware and Definity Financial Corp.
The Nicola Canadian Tactical High Income Fund’’s return was -3.5% while the S&P/TSX was down -1.6%. The Communications Services and Consumer Discretionary sectors contributed positively to relative returns. Primary detractors in November were Technology, Financials and Energy. The Nicola Canadian Tactical High Income Fund has an attractive dividend yield of 3.4%. Delta-adjusted equity exposure of 97% and the projected cashflow yield on the portfolio is 4.2%.
Top contributors to relative performance were Pet Valu Holdings, Brookfield Asset Management, and Shaw Communications. The largest detractors for the month were Nuvei Corp, Lightspeed Commerce and IA Financial Corp. We exited West Fraser Timber and Brookfield Asset Management to focus the Nicola Canadian Tactical High Income Fund more towards companies that show strong dividend growth. We added a new position in Granite REIT who we see benefiting from strong secular trends in their industrial real estate portfolio in Europe and North America.
The Nicola U.S. Equity Income Fund’s performance vs S&P 500 in November was -1.1% vs -0.7% (USD$). The Nicola U.S. Equity Income Fund’s relative underperformance was driven primarily by being underweight in the Information Technology sector and negative stock selection within the Communication Services sector (Activision Blizzard and Electronic Arts were both down over 11% from game delay announcements). There were some positives last month in terms of stock selection within the Consumer Discretionary sector where Amazon, Lowes and TJX Companies posted returns of +4%, +4.6% & +6.4% respectively versus the sector return of 2%.
Dollar Tree was the Nicola U.S. Equity Income Fund’s top return contributor and was also the 5th top-performing name in the S&P 500 index last month, posting a return of 24.2% after news circulated of Mantle Ridge (activist investor) amassing a $1.8B stake in the company with plans on installing Richard Dreiling (former CEO of Dollar General) to improve execution and profitability at both Dollar Tree and Family Dollar banners.
In addition to the Mantle Ridge news, in late November Dollar Tree officially announced that it will be raising prices from $1 to $1.25 across all stores which will help improve gross margins and product merchandising mix. During the month, the Nicola U.S. Equity Income Fund sold Progressive Corp and Blizzard Activision while adding new positions in Royal Dutch Shell and Cheniere Energy Inc. Progressive Corp continues to be affected by cost inflation, higher auto incident frequency and higher property losses which will take some time to reprice their book.
Blizzard Activision was sold near the beginning of the month as concerns over game delays (Diablo IV & Overwatch 2) as well as company culture issues continue to affect the company’s outlook. Royal Dutch Shell is an energy transition story with a commitment to a low carbon future. Shell is reducing capex to upstream Oil & Gas as well as divesting assets in Nigeria and the Permian basin (sold for $9.5B) while investing/partnering in low carbon projects (sustainable aviation fuel, hydrogen, 2.5M EV charging stations by 2030, low carbon solutions for Google data centers, etc.). Their retail business of 45,000 gas stations alone could be worth over $90B (1/2 of Shell’s current market cap) using comparable peer valuations.
Another energy name added this month was Cheniere Energy Inc which focuses on LNG-related activities including liquefaction of natural gas in the U.S. Gulf Coast. Global LNG is expected to grow as higher CO2 countries evolve their energy mix to lower carbon alternatives (China and India use of coal for power needs is 63% & 70% respectively). The company’s long-term contracted revenue with Investment Grade partners, proven history of solid execution, low risk operational jurisdiction (U.S.) and a cumulative $10B cash flow profile over the 2021-2024 time frame (close to 37% of market cap) along with a prudent capital allocation policy (debt reduction, dividend increases and low-risk brownfield projects) makes this an attractive energy transition investment.
The Nicola U.S. Equity Income Fund ended the month with a delta-adjusted equity exposure of 99.7% (Fund had 0.4% in covered calls); the Nicola U.S. Equity Income Fund consists of high-quality names with relatively low leverage and attractive consensus forward 12-month ROE (42% vs 22% for S&P 500).
The Nicola U.S. Tactical High Income Fund returned -1.5% for the month of November vs -0.7% for the S&P 500 (all in USD$). The Nicola U.S. Tactical High Income Fund’s negative performance was primarily attributable to being underweight the Information Technology and overweight Energy and Consumer Staples. Stock selection was positive within Utilities (Nextera Energy), Industrials (John Deere and Waste Management) and Consumer Discretionary (Dollar Tree & TJX companies), mixed within Health Care (Pfizer’s positive return contributions more than offset Merck’s negative return after preliminary Covid pill efficacy rate announcements indicated Pfizer’s pill was 89% effective in reducing risk of hospitalization and death relative to Merck’s 30% efficacy rate), and negative stock selection within Communication Services (Electronic Arts, AT&T and Activision Blizzard) and Consumer Staples (Walmart).
The market experienced a significant spike in volatility near month-end over concerns about the Omicron variant and the Fed’s retiring the word “transitory” when describing inflation. The Nicola U.S. Tactical High-Income Fund was active in the options market by writing 27 Put options and 19 Covered-Call options generating double-digit annualized premiums. The Nicola U.S. Tactical High-Income Fund sold Activision Blizzard and Progressive Corp and initiated new positions in Royal Dutch Shell and Cheniere Energy Inc. The Nicola U.S. Tactical High Income Fund’s energy weight ended the month at 4.8% vs 2.8% for the benchmark.
The Nicola Global Equity Income Fund returned -0.6% vs +1.0% for the MSCI ACWI Index (all in CDN$). The Portfolio’s relative underperformance was primarily driven from regional allocation having an underweight to the U.S. and overweight to Europe and Asia. Sector allocation also detracted from performance mainly from the Nicola Global Equity Fund’s underweight in Information Technology and overweight in Industrials and Financials.
Performance of our managers in descending order were Pier 21 Worldwide Equity +2.2% (driven by 27% in information technology, 53% US exposure and 15% in consumer discretionary names), Nicola EAFE -0.7%, Edgepoint Global Portfolio -1%, Pier21 Global Value -1.1%, Lazard Global Small cap -1.8%, and JP Morgan Global Emerging Markets -1.9%.
The Nicola Global Real Estate Fund return was +1.1% in November. The iShares S&P/TSX Capped REIT Index ETF fell -4.1% in November even as the yield on 10-year Government of Canada Bonds moved 15bps lower (from 1.72% to 1.57%) in the month. Typically interest rate sensitive sectors like REITs move higher as interest rates fall but trading valuations for REITS are not immune from market volatility related to the emergence of a new coronavirus variant. In particular, sub-sectors whose recovery from the effects of the pandemic such as Seniors Housing, Office, and Retail REITs have meaningfully lagged.
The outperformance of the Nicola Global Real Estate Fund can be attributed to the steady performance of private real estate investments we have made with third party managers. Despite potential macro headwinds ahead, the outlook for real estate remains constructive supported by reasonable valuations, recovering fundamentals, an attractive growth outlook and a strong appetite for real assets. In particular, we expect industrial REITs to continue to benefit from robust tenant demand and higher penetration rates in e-commerce. We also expect residential REITs to benefit from the return to office/school theme and translate into higher occupancy. There were no new additions or deletions in November.
The Nicola Sustainable Innovation Fund returned -5.9% (USD) / -2.8% (CAD) in November, and -8.7% (USD) / -8.3% (CAD) year-to-date. Ameresco, BYD Co, and recent portfolio addition Li Auto were the top contributors to performance while TPI Composites, Vestas Wind Systems, and Itron were the biggest laggards in the month.
No new names were added to the portfolio last month; however, we increased our allocation to the Ares Climate Infrastructure Partners L.P. from $5M USD to $10M USD and received our first capital call. To date, the ACIP portfolio has closed on 14 investments involved in renewable energy, battery storage, and energy efficiency, with a 15th expected to close before year-end. November was another challenging month for the markets with renewed concerns stemming from a new COVID variant, Omicron, that triggered lockdowns in places like Austria and the Netherlands and further restrictions in other countries.
While we await further information on how transmissible this new variant is and the effectiveness of current vaccines, we continue to focus on the long-term decarbonization theme and our stock positioning. Swift market selloffs like those we witnessed at the end of the month provide opportunities for us to look at companies we’ve had on our watchlists but were waiting for a better entry point as well as allow us to build positions in existing holdings that we like for the long-term using our cash balances. During the month we added to several existing positions including Array Technologies, Sunrun Inc., and TPI Composites.
The Nicola Alternative Strategies Fund returned +2.5% in November. Currency was a tailwind contributing +2.0% for the month. In local currency terms, most strategies were positive for the month with the exception being Bridgewater which gave back some returns after having a strong October. According to the Eurekahedge Hedge Fund Index, hedge funds broadly returned -1.0% for the month and most strategies experienced negative returns except for arbitrage funds which gained 0.25%. Our Nicola Alternative Strategies Fund’s positive returns in a risk off market highlights our focus on alternative strategies which provide returns agnostic to market conditions.
The Nicola Precious Metals Fund returned +3.6% for the month while underlying gold stocks in the S&P/TSX Composite index returned +3.6% and gold bullion was up 2.7% in Canadian dollar terms. Gold ETF flows reversed for the month of November experiencing inflows for the first time since July. Gold rallied during the first half of the month supported by decades high inflation in both the US and Europe before falling back during the latter half of the month. Strong contributors to returns included SSR Mining, Barrick Gold, and Orla Mining. SSR Mining benefitted from positive drill results at its Copper Hill project in Turkey and announced that it was increasing its stake in the project from 50% to 70% while assuming the operator role for the project.
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. This summary contains forward-looking information and actual results may vary materially in respect of the investment described in this summary. This summary is not an offering document or an offering of securities in any jurisdiction. Projected cash yields are estimates for the next 12 month yield assuming current yield stays constant (there are no major disruptions to payments, credit spreads, or interest rates) with the level of indicated yield from dividends, interest payments and options premiums annualized based on frequency. Actual cash flow results may vary from the Projected Cash Yield. For a complete listing of Nicola Wealth Real Estate portfolios, please visit https://realestate.nicolawealth.com. All values sourced through Bloomberg.