Portfolio Investment Returns June 2021 - Nicola Wealth

Portfolio Investment Returns June 2021


Returns for the Nicola Core Portfolio Fund were +2.3% in the month of June.  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 June while the iShares Core Canadian Universe Bond Index ETF returned 1.1% for the month. Quarter to date the Nicola Bond Fund returned 0.8% and year to date the Nicola Bond Fund returned +1.3%. For the month of June in Canada, credit spreads were marginally wider for most industries except for securitization.

Returns for the index were largely influenced by interest rate movements as the yield curve flattened. 2 Year Government of Canada Bond yields moved higher from 0.32% to 0.45% while 10 Year Government of Canada Bond yields moved from 1.49% to 1.39%. The move-in interest rates caused short-dated corporate bonds to return -0.19% while long-dated corporate bonds returned +2.7%. Our positions in real return bonds, Marret, East Coast, and Sun Life all contributed positively to returns for the month.

The Nicola High Yield Bond Fund returned +2.4% in June. Quarter to date the Nicola High Yield Bond Fund returned +0.4% and year to date the Nicola High Yield Bond Fund returned +2.4%. Currency contributed 1.4% to returns last month as the US dollar strengthened versus the Canadian dollar. The largest contributor to returns in local currency terms was the Pimco Tactical Income Fund which returned +4.5% for the month as securitized credit outperformed.

We believe there continues to be value in the securitized market and during June we initiated a position in the Pimco Tactical Income Opportunities Fund. The fund is structured as a closed-end fund and we were able to purchase the fund at a 1.6% discount to the $10 net asset value at the IPO.

The Nicola Global Bond Fund was up for the month returning 1.2%. Currency contributed 0.4% to returns as the Canadian dollar weakened versus the US dollar during the month. Quarter to date the Nicola Global Bond Fund returned +0.3% and year to date the fund returned -2.1%. Emerging market debt had a strong month with Brazil, Ghana, and Argentina all contributing strongly to returns. Real return bonds and securitized debt also had a strong month further supporting th Nicola Global Bond Fund.

Returns for Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund were 0.3% and 0.4% respectively for the month of June, +0.8% and +1.4% for Q2, and +2.6% and 2.8% year to date.  Q2 saw a particularly high level of capital deployment in the Nicola Balanced Mortgage Fund. Cash levels at month-end were 3% for the  Nicola Primary Mortgage Fund and 3% for the  Nicola Balanced Mortgage Fund. 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 presently 3.9% for the Nicola Primary Mortgage Fund and 5.7% for the Nicola Balanced Mortgage Fund.

The Nicola Preferred Share Fund was flat for the month, while the BMO Laddered Preferred Share Index ETF returned +0.3%. Quarter to date the Nicola Preferred Share Fund returned +7.0% and year to date the fund returned +21.6%. During the month of June, the yield curve flattened as 5-year Government of Canada bond yields increased 0.07% while 10-year Government of Canada bond yields decreased by 0.09%. Over the past few months, we have been increasing our weight in insurance companies, particularly Sunlife, in anticipation of LRCN issuance (Limited Recourse Capital Note).

In June, Sun Life Financial announced their inaugural LRCN issuance at $1 billion with a 3.6% coupon. The note was twice as large as we had been anticipating and highlights that despite the strong returns during the past year, there remains a valuation gap between notes and preferred shares in some pockets of the market.

The Nicola Canadian Equity Income Fund‘s performance vs S&P/TSX in June was +1.1% vs +2.5%.  In Q2 it was +6.1% vs +8.5%and YTD +15.1% vs +17.3%.  While the first half ended with major equity indices near all-time highs, June was marked by an abrupt change in leadership, with Growth stocks surging while Value counterparts lagged. Canada’s Technology sector (+18%), Energy Sector (+6%), Real Estate (+4.2%) and Communication Services (+3.8%) outperformed the broad S&P/TSX Index in June while Materials (-6.3%) suffered losses.

The Nicola Canadian Equity Income Fund underperformed the index mainly due to outperformance in Technology stocks where we are underweight. The portfolio remains positioned for a strong pickup in 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 electronic payment processing company Nuvei Corp, Kinaxis, and Dream Industrial REIT. The largest detractors were Air Canada, Saputo, and Lundin Mining. We added to our cyclical exposure by initiating a position in Linamar which is a manufacturing company with global operations in two primary segments: Transportation and Industrial. We sold our position in Canadian Apartment REIT.

The Nicola Canadian Tactical High Income Fund‘s performance vs S&P/TSX in June was +0.7% vs +2.5%.  In Q2 it was +6.0% vs +8.5% and +16.2% vs +17.3% YTD.  The top three sectors contributing to returns in June were Real Estate, Materials, and Energy. The primary detractors over the period were Information Technology, Industrials, and Financials. The Info-Tech sector represents 60% of the Nicola Canadian Tactical High Income Fund’s relative underperformance in the month, of which half is attributed to the Fund’s underweight positioning.

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 3.5%. As the equity rally extended in June, 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 Kinaxis, Dream Industrial REIT and Nuvei. The largest detractors for the month were Air Canada, Lundin Mining Corp, and Barrick Gold. During the month, we added Linamar. There were no deletions.

The Nicola U.S. Equity Income Fund‘s performance vs S&P 500 in June was +0.6% vs +2.3%.  In Q2 it was + 6.4% vs +8.6%, and +12.6% vs +15.2% YTD.  The Nicola U.S. Equity Income Fund’s relative underperformance in June was driven primarily by being underweight in Information Technology (sector returned 7% and contributed ~78% of the S&P 500’s total return), while also being overweight in the month’s worst performing sectors (Financials, Materials, Industrials and Staples).

Stock selection was positive within Consumer Staples (Costco +4.6%) and Utilities (Nextera Energy +0.6%) but was more than offset by negative stock performance in Financials (Citigroup -10% & JP Morgan -5.3%), Energy (Valero -2.9%) and Materials (Freeport McMoRan -13%).

Crown Holdings is a new position we added.  Crown is one of the largest producers of aluminum beverage cans globally with attractive geographic exposure (EMEA & APAC).  Crown is undergoing strategic initiatives which are shareholder-friendly; selling their European tin plate business to focus more on beverage cans, deleveraging balance sheets, paying a modest dividend and share buybacks ($1.5B share repurchase program authorized thru 2023 in which they could buyback ~10% of their outstanding shares).

During the month we trimmed some Pepsi, Qualcomm, Tractor Supply Company and completely sold Organon (8bps weight from Merck spin-out) in order to fund the new position and raise cash for month-end rebalancing.  The Nicola U.S. Equity Income Fund ended the month with a delta-adjusted equity exposure of 99.4% (Fund had 0% in covered calls).   The Nicola U.S. Equity Income Fund consists of high-quality names with relatively low leverage and attractive ROE (33% vs 21% for S&P 500).

The Nicola U.S. Tactical High Income Fund‘s performance vs S&P 500 in June was +0.6% vs +2.3%.  In Q2 it was + 4.4% vs +8.6%, and +9.8% vs +15.2% YTD.  The Nicola U.S. Tactical High Income Fund’s positive performance was primarily attributable to stock selection within Healthcare (Merck +8.4%), Information technology (Microsoft +8.5% and Apple 9.9%), Consumer Discretionary (Amazon +6.7% & Aptiv +4.6%) and Consumer Staples (Costco 4.6%).

For relative purposes, the Nicola U.S. Tactical High Income Fund underperformed the broader market due to a low net equity weight (65% equity equivalent exposure) and by being underweight the best performing sector (Information Technology +7% last month).

In terms of the options market, volatility in the market (as measured by the VIX Index) was downward trending despite reaching 21% just days after the Fed mid-June meeting, with the VIX ending the month at 15.8.  We were still able to find opportunities to generate attractive option premiums, however, and wrote 22 Put options ($29M notional exposure) and 2 Call options.

Two new names were added in Freeport McMoRan and Crown Holdings.   We trimmed our positions in Pepsi and Progressive Corp and sold the small position in Organon (1bps weight–spinoff from Merck).

In June, the Nicola Global Equity Income Fund returned +2.3% vs. +4.2% for the MSCI ACWI Index (all in CDN$). For Q2/21, the Nicola Global Equity Fund returned +3.8% vs. +6.1% for the MSCI ACWI Index (all in CDN$) and YTD, the Nicola Global Equity Fund returned +7.7% vs. +9.4% for the MSCI ACWI Index (all in CDN$).

For the month of June, the Nicola Global Equity Fund underperformed due to our underweight to the US, which was one of the best performing regions. An overweight to the Asia Developed region also contributed to the underperformance against the MSCI ACWI Index, while overweight in Latin America was a slight positive contributor to performance. From a sector perspective, we underperformed due to our underweight in Information Technology, which was the best performing sector, though an overweight in Consumer Discretionary, one of the best performing sectors, and underweight in utilities, one of the worst-performing sectors helped partially offset the relative underperformance.  Performance of our managers for the month: C Worldwide +3.8%, Lazard +2.9%, JP Morgan Global Emerging Markets +2.5%, ValueInvest +2.4%, Nicola Wealth EAFE +1.6%, and EdgePoint +1.2%.

The Nicola Global Real Estate Fund return was +3.4 in June, +4.5% in Q2, and +7.6% YTD vs. the iShares S&P/TSX Capped REIT Index (XRE) +3.4%, +11.0%, and +21.1% respectively.  Currency was a tailwind for the fund in June as the C$ was relatively weak in June and roughly half of the fund is denominated in non-Canadian currency.

The REIT sector continued to deliver positive results. The REIT recovery is not unique to Canada as listed property market returns are positive across the globe after posting poor returns in 2020. As regional economies re-open over the balance of the year, it is expected that economic activity accelerates, which would provide support to property-level fundamentals. As economic activity builds and pandemic pressures fade, we believe this sets up for a combination of multiple expansion and NAV growth.

Risk/reward looks particularly good in the residential and industrial asset classes. 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. 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 additions in June. We sold our position in WPT Industrial REIT, Morguard North American REIT, and our temporary holding in the iShares Capped REIT Index ETF.

The Nicola Canadian Real Estate LP NAV per unit has increased to $137.7791 (previously $137.0354), effective June 30, 2021. This represents an increase of 0.5% and a positive return for May of 1.0%. YTD return as at May 31, 2021 is 9.4%.  Portfolio Leverage is 40.59%.  The positive return was primarily a result of increased appraised values of the Advanced Storage Portfolio, Avonhead, and Golden Drive.

Since COVID restrictions commenced in March 2020, our average rent collection has been 97.81%. 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 Nicola Wealth 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$162.1141 (previously US$161.8601), effective June 30, 2021. This represents an increase of 0.2% and a positive return for May of 0.7%. YTD Return as at May 31, 2021 is 2.5%.  Portfolio Leverage is 47.69%.  The positive return was primarily a result of increased appraised values of Gateway Corporate Center, Forest View, and Timbermill.

Since COVID restrictions commenced in March 2020, our average rent collection has been 98%.  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.

The Nicola Value Add Real Estate LP NAV per unit has increased to $189.9428 (previously $188.0090), effective June 30, 2021. This represents an increase of 1.0% and a positive return for May of 1.0%. YTD return as at May 31, 2021 is 3.5%. In May, we funded $2.7M for Allandale, $0.1M for King City, $0.1M for Railway, $9.9M for Leaside, $6.0M for The Lex, $0.5M for Emery, and $0.2M for Encore.

The Nicola Sustainable Innovation Fund returned +4.5% (USD) / +7.3% (CAD) in June, +0.5% (USD) / -1.0% (CAD) for Q2, and -5.9% (USD) / -8.4% (CAD) year-to-date. EV charging companies ChargePoint Holdings and Beam Global were the top contributors to performance alongside BYD, and Sunrun while Xebec Adsorption, Iberdrola, and Alstom were the biggest laggards in the month.

We initiated a new position in Stem Inc., the first publicly traded pure-play smart energy storage company. They source energy storage hardware from global leading battery manufacturers such as Tesla and deliver these alongside their proprietary Athena software which can help save customers as much as 30% on their energy costs. Stem’s software-enabled systems help to create a more resilient grid by addressing intermittency issues by regulating the delivery of the energy where and when it is needed most.

During the month we trimmed some of our position in Plug Power following a ~70% rebound from early May and used some of the proceeds to fund our new position in Stem. We also used cash to add to existing positions in Sunrun, Orsted, Xebec, and EDP Renewables among other names. In late June, Bloomberg New Energy Finance (BNEF) provided their latest analysis of energy costs and they found that in countries representing 46% of the world’s population it is now cheaper to build and operate large-scale wind or solar plants than to run existing coal or gas-fired power plants. Renewable energy costs have fallen precipitously over the last 10+ years with solar and onshore wind declining 90% and 70% respectively from 2009 levels and the cost of coal increasing by 1% over the same period.

The Nicola Alternative Strategies Fund returned +2.1% in June. Currency was a tailwind contributing 1.7% for the month. Quarter to date the Nicola Alternative Strategies Fund returned +0.6%, while year to date the fund returned +3.9%. For the month of June, in local currency terms since the funds were last priced, Millennium returned +1.3%, Renaissance Institutional Diversified Global Equities Fund -5.1%, Bridgewater Pure Alpha Major Markets -1.6%, Verition International Multi-Strategy Fund Ltd +0.4%, and Polar Multi-Strategy Fund +0.8%.

Renaissance returns reversed the trend during the month, mirroring the switch of value and growth factors as growth materially outperformed value. The multi-strategy funds enjoyed stable returns for the month. Historically, high yield credit spreads are correlated to arbitrage spreads and can be used as a proxy which was reflected in June as both high yield and arbitrage strategies such as merger arbitrage and SPAC trading (special purpose acquisition company) had a strong month.

The Nicola Precious Metals Fund returned -6.7% for the month while underlying gold stocks in the S&P/TSX Composite index returned -8.7% and gold bullion was down -4.6% in Canadian dollar terms. Quarter to date the Nicola Precious Metals Fund returned +6.7% while year to date the fund returned -8.9%. The weakness in June came as the Federal Reserve talked down inflation concerns, citing their belief the uptick in inflation was transitory. The FOMC (Federal Open Market Committee) had a meeting in mid-June and surprised the market with more hawkish dialogue on tapering with a dot-plot (each individual policy committee member’s views on the Fed Funds Rate level in the future) indicating 2 rate hikes in 2023.

The market reacted as real yields moved higher leading to a rally in the US dollar and a weakening in gold and other commodities. We were not as surprised as the general market. Long-term forecasts are notoriously difficult to make and the change in dot plots is within a band of error for a forecast two and half years out additionally, we believe that the move was prudent given improvements in economic data have led to a more optimistic long-run outlook for economic activity.

Nicola Private Equity Limited Partnership returned +9.0% during Q2 and is +13.1% YTD.  Performance was driven by both co-investments including MDA, Mara Renewables, and Micross (formerly known as Corfin), as well as new secondary investments –mature, diversified high-quality portfolios that we acquired at favourable prices.  Our investments in pools including Harbourvest Partners Fund IV, Redbird Series 2019 as well as Headwater Equity Partner II also contributed to performance.

In Q2 the Nicola Private Debt Fund returned +3.4% bringing 2021 year-to-date returns to 6.1%. The main driver of the strong Q2 performance was the Nicola Private Debt Fund’s investment in the Morgan Stanley Alternative Lending Fund which contributed approx. 1.7% to returns for the quarter. The Morgan Stanley Alternative Lending Fund invests in prime and near-prime consumer loans originated by leading US marketplace lenders. The Nicola Private Debt Fund’s FX hedging strategy also contributed 53bps to the quarterly return despite the US dollar depreciating by 1.4% during the quarter.

Consistent with prior quarters, Project Strength, Project Karma and Project Access all continued to provide strong contributions to performance from contractual cash interest income. The Nicola Private Debt Fund continues to experience significant early principal repayments on direct loans and co-investments despite the COVID pandemic. Year to date the Nicola Private Debt Fund’s investments in Project Steen, Project Karma, Project Jackson, and Project Orion were all fully realized, representing approx. $75mm of cash inflows from loan principal repayments.

During Q2 the Nicola Private Debt Fund made a new direct investment in the senior term loan of Divisions Maintenance Group, a leading technology-enabled facilities maintenance service provider to multi-location commercial customers across the United States. In addition, the Nicola Private Debt Fund also made a direct investment in a senior term loan to PharmaSmart International, a leading North American manufacturer of blood pressure kiosks leased by large multi-location pharmacy chains.

The Nicola Infrastructure and Renewable Resources LP returned +2.0% for the 2nd quarter of 2021 in USD terms. Year to date the Nicola Infrastructure and Renewable Resources LP  is up 3.7% in USD terms. We deployed $25 million during the quarter bringing cash levels down to 17%. During the quarter, we invested in the Franklin Global Real Assets fund which is a diversified fund of fund portfolio of infrastructure, timber, agriculture, and real estate.

The Nicola Infrastructure and Renewable Resources LP is an evergreen structure and allows us to deploy capital quickly while also providing liquidity for rebalancing the portfolio. We also initiated a position in hyper-scale data centers.  We believe there are strong secular tailwinds supporting datacenters with the increasing adoption of digital technologies. Hyper-scale data centers are business-critical facilities and support services such as cloud computers, online shopping and banking.

 

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. An investment in Nicola Infrastructure and Renewable Resources Limited Partnership is an investment in alternative asset classes. Investments in alternative funds are highly illiquid and carry a related degree of risk of financial loss. Investors should consult the relevant disclosure and subscription documents for a full listing of risks associated with an investment in alternative assets and consult their Nicola Wealth advisor and relevant professionals regarding any tax, accounting, legal or financial considerations. Effective September 19, 2018, the fund adopted a new mandate and changed its name from the NWM Farmland Limited Partnership.