Nicola Wealth Portfolio Results – July 2021 - Nicola Wealth

Nicola Wealth Portfolio Results – July 2021


Returns for the Nicola Core Portfolio Fund were +0.9% in the month of July.  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 July while the iShares Core Canadian Universe Bond Index ETF returned +1.1% for the month. Credit spread changes were relatively muted in Canada and wider in the US, however, the overall market experienced strong returns thanks to a move lower in rates.

Bond yields have rallied for three months with 10 Year Government of Canada bonds ending July at 1.20%. Despite still being relatively attractive to international buyers, Asian demand for investment-grade bonds slowed in July while domestic demand from both active funds and ETFs continues to be very robust. There are technical factors that have influenced the yield curve such as the Fed is purchasing approximately $80 billion per month in treasuries, however, we are concerned the market may be overly complacent as recent data points to inflationary pressures that may not be as transitory. We worry rates may reverse, and given credit spreads are tight, we remain defensively positioned.

The Nicola High Yield Bond Fund returned 0.7% in July. Currency contributed 0.3% to returns as the US dollar strengthened versus the Canadian dollar. The largest contributors to returns in local currency terms were the Pimco Tactical Income Fund and the Pimco Tactical Income Opportunities Fund, which returned 2.9% and 3.6% respectively.

During the month we initiated a position in California carbon allowances (CCA). We believe CCA is a solution to addressing California’s climate initiatives. As opposed to a carbon tax, which sets the price of carbon emissions resulting in the market then reducing the quantity of emissions, the CCA is a Carbon cap and trade program. A cap-and-trade program sets the quantity of emissions and lets the market determine the price. By setting the quantity of emissions, companies that over emit carbon can purchase carbon allowances from companies which under emit. Furthermore, the supply of carbon allowances is restricted. Annually, there is an auction process for CCA’s with a floor price of inflation (CPI) + 5%. We believe this floor price creates an attractive opportunity for investors and that the reduction of carbon dioxide is key to a sustainable future.

The Nicola Global Bond Fund was up for the month returning +0.3%. Currency contributed 0.1% to returns as the Canadian dollar weakened versus the US dollar during the month. The strongest contributors to returns for the month were our exposure to Blackrock Securitized Investors and treasury inflation-protected securities (TIPS). In the Pimco Monthly Income Fund, duration exposure helped contribute to returns, along with select credit exposure particularly in asset-backed securities.

Returns for the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund were 0.4% and 0.6% respectively for the month. Cash levels at month-end were 8% in the Nicola Primary Mortgage Fund and 8% in the Nicola Balanced Mortgage Fund after waitlist drawdowns of $7.6 million in the Nicola Primary Mortgage Fund and $28.0 million in the Nicola Balanced Mortgage Fund. Higher cash balances as a result of larger waitlist drawdowns in both funds were in preparation for new investments funding in August. 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 5.6% 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 0+.7%. Rate resets in the mid reset range of 200-300 bps contributed to positive returns for the month while floaters were slightly negative. Brookfield Property Partner’s issued a $500 million perpetual preferred share during the month with a coupon of 6.25%, this is a first preferred share new issue since Emera launched a fixed reset in April.

The Brookfield preferred share sold off after listing over credit concerns as Brookfield Property Partners was downgraded at the end of July from BBB to BBB-. The Limited Recourse Capital Note (LRCN) market continues to grow as TD came to market with its first LRCN, a $1.75 billion note with 3.6% coupon. After 12 months the LRCN market is now almost $14 billion with the 6 largest Canadian banks participating. Great West Life also announced plans to launch a LRCN, however we believe that they will unlikely redeem preferred shares as they plan to use the proceeds for the acquisition of Prudential Financials’ retirement business.

The S&P/TSX performance was +0.8% in July while the Nicola Canadian Equity Income Fund was +0.6%. Positive earning beats and dovish remarks from the Federal Reserve generally helped power equities higher. Canadian 10-year yields continued to decline (-18.8 bps to 1.2%) in July despite strong inflation numbers. Defensive sectors led for the month with Staples (+7%) and Real Estate (+4.4%) being the strongest sectors in the S&P/TSX this month.

Five sectors underperformed including Health Care (-11.1%) and Energy (-5.1%). The Nicola Canadian Equity Income Fund slightly underperformed due to our overweight in Energy and poor relative performance in Consumer Staples from an underweight to the Food Retail sub-sector. Overall, the portfolio remains overweight Industrials, Financials, Real Estate and Energy.

The top positive individual contributors to the performance of the Nicola Canadian Equity Income Fund were transportation and logistics company TFI International, gold royalty corporation Franco Nevada, and gold miner Kirkland Lake Gold. The largest detractors were Suncor Energy, Doman Building Materials, and Canadian Natural Resources. There were no new positions added in the month. However, we added to our cyclical exposure by increasing our positions in Linamar, First Quantum Minerals, and Lundin Mining. We sold our position in Brookfield Asset Management Reinsurance Partners, which was spun out of our current holding, Brookfield Asset Management.

The S&P/TSX performance was +0.8% in July while the Nicola Canadian Tactical High Income Fund was +0.4%. Strong relative performance in Materials and Health Care were offset by our overweight in Energy and poor performance in Consumer Staples. The Nicola Canadian Tactical High Income Fund has a Delta-adjusted equity exposure of 99% and the projected cashflow yield on the portfolio is 3.5%. 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 TFI International, Kirkland Lake Gold, and Dream Industrial REIT. The largest detractors for the month were Suncor Energy, Canadian Natural Resources, and Doman Building Materials. There were no new additions in the month. We sold our position in Brookfield Asset Management Reinsurance Partners Ltd.

The Nicola U.S. Equity Income Fund’s performance vs S&P 500 in July was +2.3% vs +2.4% (USD$).  The Nicola U.S. Equity Income Fund’s relative underperformance in July was driven primarily by having underweights to the Communication Services, Real Estate and Information Technology sectors.  Overall, stock selection was positive for the Nicola U.S. Equity Income Fund particularly within the Utilities (Nextera Energy +6.3%), Information Technology (Accenture +8.1% & Apple +6.5%) and Consumer Staples (Costco +8.8% & Pepsi +5.9%) sectors, but stock selection was less favorable within the Communication Services (Activision Blizzard -12.8%) and Energy (Valero -14.2%) sectors.

We sold our Xylem Inc and added to our existing positions in Dollar Tree and Activision Blizzard during the month.

The Nicola U.S. Tactical High Income Fund’s performance vs S&P 500 was +1.5% vs +2.4%. (USD$).   The Nicola U.S. Tactical High Income Fund’s positive performance was primarily attributable to stock selection within Consumer Staples (Pepsi +5.9% & Costco +8.8%), Industrials (Waste Management +5.8% & Emerson Electric +4.8%) and Information technology (Accenture +8%, Apple +6.5%, Visa 5.4%, Microsoft +5.2% and Qualcomm +4.8%).

On a relative basis, the Nicola U.S. Tactical High Income Fund underperformed the broader market due to a low net equity weight (61% equity equivalent exposure) and by being underweight Information Technology (IT contributed 44% of the markets total return last month).

In terms of the option market, volatility in the market (as measured by the VIX Index) started and ended the month at the mid-teens level, but we did see a peak of 22.5% as economically sensitive stocks sold-off on July 19th due to worries about a delayed reopening from the rising Delta variant case count.  We were able to find opportunities to generate attractive option premiums and wrote 34 Put options and 13 Call options positions.

No new names were added this month.  We trimmed our position in FedEx and added to our Electronic Arts and Visa positions via Put options.

The Nicola Global Equity Income Fund returned +0.4% vs +1.3% for the MSCI ACWI Index (all in CDN$). The Portfolio’s relative underperformance was primarily driven by regional allocations, namely having an underweight to the U.S. and being overweight Emerging Asia.  Sector allocation also detracted from performance, as we were underweight Information Technology and Utilities while being overweight Consumer Staples.  Performance of our managers in descending order was Pier 21 Worldwide Equity +4%, Nicola EAFE +2.4%, Edgepoint Global Portfolio +1.5%, Lazard Global Small-cap +0.5%, Pier21 Global Value +0.1% and JP Morgan Global Emerging Markets -5.0%.

The Nicola Global Real Estate Fund return was +3.3 in July vs. the iShares S&P/TSX Capped REIT Index (XRE) +4.5%.  Listed real estate continued to deliver positive results in July, and the set up for balance of the year appears strong. The drivers for continued strong performance 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.

Private market transaction activity has highlighted further Canadian Industrial and Apartment cap rate compression in select markets, which further validates underlying NAV growth and higher valuations for companies focused in these 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 these sectors.

In July we added a position in the world’s largest owner and operator of logistics real estate Prologis Inc. We sold our positions in Artis REIT and H&R REIT.  Subsequent to the quarter we funded a capital call and increased our investment in the Invesco European Value Add Fund II.

The Nicola Canadian Real Estate LP per unit has increased to $139.0414 (previously $137.7791), effective July 31, 2021. This represents an increase of 0.9% and a positive return for June of 1.4%. YTD Return as of June 30, 2021 is 10.9%.  Portfolio Leverage is 40.39%.  The positive return was primarily a result of increased appraised values of The James at Harbour Towers, Aero Portfolio, and 40th Street Industrial (Dominion). YTD average rent collection as of June 30, 2021 is 97.75%.

The Nicola U.S. Real Estate LP NAV per unit has also increased to US$163.6202 (previously US$162.1141), effective July 31, 2021. This represents an increase of 0.9% and a positive return for June of 1.5%. YTD Return as of June 30, 2021 is 4.0%.  Portfolio Leverage is 46.57%.

The positive return was primarily a result of increased appraised values of The Park at Arville, Cabot Business Center, and Valley View Business Park. YTD average rent collection as of June 30, 2021 is 97.94%.

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 98.00%.  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.  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.

Additionally, the Nicola Value Add Real Estate LP NAV per unit has increased to $191.8647 (previously $189.9428), effective July 30, 2021, after a cash distribution of quarterly profits of $1.8353 per unit. This represents an increase of 1.0% and a positive return for June of 2.0%. YTD return as of June 30, 2021 is 5.6%. In June, we funded $6.3M for Highway 27, $4.3M for 205 West 5th, $3.2M for Treo, $1.3M for Northgate, $1.2M for Vernon, $0.7M for Garden Drive, $0.4M for Encore, $0.1M for King City and $0.1M for Railway.

The Nicola Sustainable Innovation Fund returned -3.7% (USD) / -3.2% (CAD) in July, and -9.4% (USD) / -11.4% (CAD) year-to-date. American Water Works, Ameresco, and NextEra Energy were the top contributors to performance while ChargePoint Holdings, Stem Inc., and Plug Power were the biggest laggards in the month.

We initiated a new fund position in the PIMCO California Carbon Access Offshore Fund, L.P. with our full allocation being drawn during the month. PIMCO launched the fund last month for investors to gain access to California’s carbon cap-and-trade program, one of the largest emissions trading systems in the world. Proceeds from the state’s cap-and-trade program are used to fund a variety of projects and programs including those directly aimed at improving the environmental, economic and public health of some of California’s most disadvantaged communities.  During the month we trimmed some of our positions in the iShares Global Green Bond ETF, Enviva Partners, Evoqua Water Technologies, BYD Co., and Ameresco as we made room for PIMCO. These positions had held up relatively well amongst the weakness we’ve seen in the clean technology and renewable energy sectors so far this year and we used this opportunity to take some profits and rebalance the portfolio.

The Nicola Alternative Strategies Fund returned 0.4% in July. Currency was a tailwind contributing 1.7% for the month. For the month of July, in local currency terms since the funds were last priced, Millennium returned +0.2%, Renaissance Institutional Diversified Global Equities Fund +4.0%, Bridgewater Pure Alpha Major Markets -2.9%, Verition International Multi-Strategy Fund Ltd +0.5%, and Polar Multi-Strategy Fund -0.4%. Renaissance recovered in July after having weaker returns during the previous month. The month marked larger dispersion in returns for various strategies, with positive returns from credit arbitrage offset by profit taking in strategies such as SPAC trading (special purpose acquisition company).

The Nicola Precious Metals Fund returned +2.6% for the month while underlying gold stocks in the S&P/TSX Composite index returned +6.2% and gold bullion was up 3.1% in Canadian dollar terms. Our Nicola Precious Metals Fund lagged the overall market as we were underweight larger gold companies such as Barrick, Franco Nevada, and Wheaton Precious Metals which all had strong months, up more than 5% each.

Overall positive returns for the gold market was supported by comments from the Fed and ECB. The ECB shifted its strategy recently to allow for an overshoot of its target inflation levels. The US Fed continues to believe that inflation will be transitory despite data points indicating higher inflation and have focused more on labor markets with Chairman Powell suggesting “substantial further process” is required for full employment.

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.