Returns for the Nicola Core Portfolio Fund were +0.7% for the month of July. The Nicola Core Portfolio is managed using similar weights as our model portfolio and is comprised entirely of Nicola Wealth pooled funds and limited partnerships. Actual client returns will vary depending on specific client situations and asset mixes.
The Nicola Bond Fund returned +0.1% in July. Both credit trading strategies, East Coast Investment Grade, and Algonquin Debt Strategies 2.0, made positive contributions by returning +1.3% and +0.5%, respectively. The Nicola Bond Fund's relatively lower duration also played a role in its return, particularly as Canadian government bond yields increased during July. For instance, the Canadian 10-year government bond experienced a rise of 0.2%, moving from 3.3% to 3.5%. Additionally, Canadian investment grade spreads tightened by 0.08%, concluding the month at 1.43%, driven by a widespread spread rally led by banking, insurance, and automotive sectors.
The Nicola Global Bond Fund (CAD) returned +1.2% in July.
The Nicola Global Bond Fund (USD) returned +1.6% in July.
Significant contributors to these returns were Templeton Global Bond and Blackrock Securitized Investors LP. The appreciation of various Asian currencies, such as the Japanese Yen, South Korean Won, and Indian Rupee, had a positive influence on the fund's performance. In terms of geographical impact, the Eurozone and UK observed a bond yield rally due to indications of inflation slowing down. Conversely, subdued economic activity indicators in Brazil and Mexico were counterbalanced by local currency strength, resulting in a month of flat returns in these regions.
The Nicola High Yield Bond Fund (CAD) returned +1.2% in July.
The Nicola High Yield Bond Fund (USD) returned +1.7% in July.
Throughout the month, credit and risk markets experienced a rally, propelled by solid High Yield earnings and GDP growth that exceeded expectations. Our focus on higher-quality high yield investments hindered returns for this period, as lower-quality credit, such as CCCs, generated a return of +2.9%, in contrast to higher-quality credit's return of +1.1%.
The Federal Reserve now anticipates a "noticeable slowdown," although they have retracted their recession prediction. This shift led to further tightening of spreads and an increase in demand for risk assets. Notably, high yield spreads concluded at 367 basis points, marking their narrowest level since March 2022. In strategies that exhibit less correlation with the market, our investment in PIMCO California Carbon Access returned +9.4% when measured in Canadian dollars. This gain reflects positive advancements in California, where regulators are actively exploring additional reductions in carbon emissions by the year 2030.
The Nicola Preferred Share Fund returned +1.4% in July. The preferred share market experienced a rally primarily propelled by rate-resets, which gained from both increasing rates and a robust credit environment. In contrast, straight preferred shares, characterized by fixed coupons, underperformed both rate-resets and floating preferred shares.
During the month, the Nicola Preferred Share Fund continued to enhance its liquidity due to the potential uncertainty arising from the 2023 Budget's impact on the Canadian preferred share market. The heightened taxation affecting a broader preferred share investor base, particularly financial institutions, might pose a challenge for the preferred share market in the coming times.
The Nicola Primary Mortgage Fund returned +0.5% in July.
New investment activity will be curtailed in anticipation of the fund's termination and the subsequent asset transfer to the Nicola Balanced Mortgage Fund, expected to take place on or around October 31, 2023. As of the end of the month, the Nicola Balanced Mortgage Fund maintained 10.3% in cash and cash equivalents. Furthermore, 96% of the direct loan portfolio was backed by senior-ranking mortgages.
The Nicola Balanced Mortgage Fund returned +0.65% in July, with a trailing 12-month return of +7.8%. New investment activity has been light as the Fund continues to be nearly fully invested. The Nicola Balanced Mortgage Fund held 1.4% in cash and cash equivalents, while 47% of the direct loan portfolio was backed by senior-ranking mortgages.
The Nicola U.S. Mortgage Fund (CAD) returned +0.2% in July.
The Nicola U.S. Mortgage Fund (USD) returned +0.6% in July.
New investment activity continues to be limited due to a slowdown in loan origination volume within the U.S. commercial mortgage market. However, potential new opportunities are under consideration, and new loan fundings are planned for both August and September. As of the end of the month, the Nicola U.S. Mortgage Fund held 18.2% in cash and cash equivalents. Additionally, the entire direct loan portfolio was backed by senior-ranking mortgages.
The Nicola Private Debt Fund (CAD) returned +0.8% in July.
The Nicola Private Debt Fund (USD) returned +0.9% in July.
The main source of returns for the month was the contractual interest income derived from the Nicola Private Debt Fund's diverse portfolio of direct investments. In July, the Nicola Private Debt Fund successfully concluded its 2021 investment in a senior term loan to PharmaSmart International, resulting in a realized net Internal Rate of Return (IRR) of 21.7% and a Multiple on Invested Capital (MOIC) of 1.44x over the two-year investment duration.
The Nicola Canadian Equity Income Fund returned +1.3% in July. The Canadian equity market's performance slightly trailed that of global peers in July, but still managed to deliver a healthy return. The Bank of Canada increased its policy rate by another 25 basis points, raising the overnight rate to 5.0%, as part of an ongoing effort to address inflation.
Central bankers haven't signaled an end to rate hikes, yet the "risk-on" sentiment within equities suggests that certain market participants believe the tightening process may have reached its peak. Consequently, the cyclical sectors of the S&P/TSX Composite Index contributed to overall performance (Top 3: Financials, Materials, Energy), while defensive sectors detracted (Bottom 3: Communication Services, Consumer Staples, Utilities).
Within the Nicola Canadian Equity Income Fund, the highest-performing sectors were Materials (+9.5%), Utilities (+9.4%), and Financials (+4.1%). Conversely, the sectors that showed the lowest performance were Communication Services (-8.9%), Consumer Discretionary (-4.3%), and Consumer Staples (-2.6%).
In terms of attribution, security selection emerged as the major factor detracting from relative performance during the month. The negative price movements of the bottom three performers offset solid returns from the rest of the portfolio. In July, the Nicola Canadian Equity Income Fund’s top-performing holdings were First Quantum Minerals, Lumine Group, and Nuvei Corp. The bottom performers included TELUS International, Aritzia, and TC Energy.
Two new positions were initiated: Teck Resources – a diversified miner with high-quality copper and zinc assets, and CGI Group – an IT consulting business known for strong cash flow generation. Additionally, call options were written on Lundin Mining. No positions were exited during the month.
We remain convinced that Canadian equities still present appealing relative value, with a market P/E ratio of 13.5x in contrast to a long-term average of 14.0x. Opportunities for volatility have enabled us to identify strong businesses at reasonable prices, and we uphold our disciplined approach in enhancing the fund's profitability and maintaining a balanced sheet.
The Nicola U.S. Equity Income Fund (CAD) returned +2.4% in July.
The Nicola U.S. Equity Income Fund (USD) returned +2.9% in July.
Market performance in July was primarily driven by the sustained strength of the Magnificent 7, and to a lesser extent, by the Energy sector (which saw a 14% rally in Brent crude due to extended output cuts and decreasing levels of the Strategic Petroleum Reserve), as well as the Financials sector, where megabanks reported solid Q2 results. Despite notable cooling in inflation, the Federal Reserve raised rates by +25 basis points as expected, owing to the tight labor market. With encouraging economic indicators like GDP growth, resilient consumer spending, and rising consumer sentiment, the Fed no longer predicts a recession as the base case, leading to the observation of traditionally cyclical sectors performing strongly in July.
In the past month, the Nicola U.S. Equity Income Fund (USD) underperformed the S&P 500 by 0.3%, primarily due to negative stock selection within the Financials sector (due to the absence of various large-cap banks in the portfolio) and the Communication Services sector (with AT&T experiencing a sell-off due to reports of lead-sheathed cables). This was offset by positive stock selection within the Materials sector. The top contributors to the fund's performance were Alphabet, Union Pacific, and Hyatt. Conversely, the top detractors were AT&T, Boston Scientific, and CubeSmart (a self-storage REIT).
Regarding portfolio adjustments, the Nicola U.S. Equity Income Fund reduced exposure to Electronic Arts and various Materials names (such as Crown Holdings and Freeport), reallocating to undervalued and higher-dividend-paying stocks like AT&T (with a fully covered 8% dividend yield) and Carlisle (a new addition). Carlisle is a manufacturer of roofing products, primarily catering to commercial customers. The company's business model is underscored by substantial barriers to entry (reputation and product quality being key factors), considerable supplier power (resin suppliers lack pricing power), and a low risk of substitute products.
The Nicola U.S. Equity Income Fund is composed of entities we feel have robust balance sheets, strong free cash flows, and appealing blended forward 1-year Return on Equity (ROE) figures (23% compared to the S&P 500's 18%). At the conclusion of the month, the fund's delta-adjusted equity exposure stood at 84% due to option positioning (with 7% of long positions covered and 11% notional put options).
The Nicola International Leaders Fund returned +1.9% in July. In Europe, the European Central Bank (ECB) raised rates by 25 basis points (bps), aligning with expectations. However, weaker economic activity, decreasing Eurozone inflation, and the absence of a definite timeline for future rate hikes fostered optimism that the ECB might be approaching the conclusion of its tightening cycle. In Emerging Markets, China's market experienced a robust rally as the Politburo committed to implementing additional measures to bolster the economy.
The primary contributors to relative performance throughout the month were our holdings in the Health Care sector and Japan. Notably, our significant contributors included our holdings in Japanese banks such as MUFG (the largest bank in Japan) and SMFG (the second-largest bank in Japan). In July, MUFG and SMFG rallied as the Bank of Japan eased its yield curve control measures.
On the other hand, the main detractors from relative performance during the month were our holdings in the Consumer Discretionary sector and South Korea. One of the most notable detractors was LVMH (a leading global luxury conglomerate). Despite reporting robust Q2/23 sales growth (+17%), LVMH shares experienced a sell-off due to concerns about slowing growth in the US and uncertainties surrounding its spirits division.
The Nicola Global Small-Cap Equity Fund (CAD) returned +3.5% in July.
The Nicola Global Small-Cap Equity Fund (USD) returned +4.0% in July.
In the U.S., the markets gained support from optimism surrounding a soft landing, as evidenced by sustained disinflation trends and a resilient Q2 GDP figure. In Europe, falling inflation rates and weaker economic data prompted speculation that the European Central Bank (ECB) might be nearing the end of its hiking cycle. Meanwhile, in Emerging Markets, a stimulus announcement aimed at bolstering the economy led to a robust rally in China’s market.
The primary contributors to relative performance during the month were our holdings in the Consumer Discretionary sector and Germany. A notable contributor was Ceconomy, one of Europe’s largest electronics retailers, which experienced an increase in stock price due to a broker upgrade, driven by expectations for sustained recovery in the business.
On the other hand, the main detractors from relative performance during the month were our holdings in the Financials sector and our underweight position in the U.S. market. One of the significant detractors was Silgan, a leading provider of packaging products primarily for the food and beverage industry. Silgan experienced a de-rating during the month, as the company lowered its guidance due to weaker demand and customer de-stocking, particularly in Europe.
The Nicola Sustainable Innovation Fund (CAD) returned +1.4% in July.
The Nicola Sustainable Innovation Fund (USD) returned +1.9% in July.
The Nicola Sustainable Innovation Fund saw its top performers during the month as Plug Power, Stem Inc, and Ameresco, while TPI Composites, Array Technologies, and Enphase Energy experienced the most significant lag. In general, equity markets continued their upward trend in July, with resilient economic data indicating a decrease in headline inflation and growing optimism that the Fed's cycle of rate hikes might be concluding. Hydrogen-related companies benefited from the announcement of additional stimulus of $1 billion by the US Department of Energy to support clean hydrogen demand. Carbon credits also increased in July, primarily driven by positive sentiment surrounding the future of the California Cap and Trade program. Although no formal changes have occurred in the program, communication regarding the eventual tightening of the program has been favorable for California Carbon Allowances (CCAs).
In late July, the Nicola Sustainable Innovation Fund initiated a starter position in Mobileye Global Inc, a market-leading pure-play in the development and deployment of advanced driver-assistance systems (ADAS) and autonomous driving technologies for automobiles. Headquartered in Israel, Mobileye's solutions cover the entire spectrum of autonomous driving, from basic driver assistance to self-driving technologies. With over two decades of experience in computer vision technology and a 70% market share in the ADAS market, the company's chipsets have been integrated into over 800 vehicle models across more than 50 OEMs worldwide. Additionally, the Nicola Sustainable Innovation Fund received an additional capital call notice for our investment in Ares Climate Infrastructure Partners LP, raising our position to 6.7% of the portfolio and utilizing 83% of our $10 million USD committed investment. These funds are being allocated to a utility-scale wind and solar developer, a full-service developer, owner, and operator of clean energy projects, as well as various other climate infrastructure investments. Throughout the month, we capitalized on gains from positions in companies like Sunrun, Fluence Energy, Ameresco, and Stem Inc, reallocating funds to Aker Carbon Capture, Boralex, Brookfield Renewable Partners, and our new holding, Mobileye Global Inc.
The Nicola Infrastructure and Renewable Resources Limited Partnership (CAD) returned -0.1% for the month of July.
The Nicola Infrastructure and Renewable Resources Limited Partnership (USD) returned +0.4% for the month of July.
The strengthening of the CAD against the USD negatively affected the CAD sleeve, while the EUR's weakening against both the USD and CAD had corresponding negative impacts on their respective sleeves. Excluding currency effects, our assets yielded a return of +0.6% over the month. This performance was driven by the Q2 2023 results meeting expectations in our co-investment with a US energy-as-a-service platform and our North American integrated energy platform fund. Additionally, the Q1 2023 performance aligned with expectations in our global core and core-plus infrastructure fund.
The Nicola Global Real Estate Fund returned-0.6% in July. Concerns persist regarding the potential impact of an anticipated economic slowdown, volatility in interest rates, and uncertainties surrounding credit availability, especially in light of recent stress experienced by banking systems in US regionals and certain parts of Europe. This year has seen relatively volatile returns in the REIT sector. However, fundamentals are showing signs of recovery across most property types, and organic growth is rebounding positively. Valuations appear reasonable, and the costs of replacement remain notably high. Stabilization in interest rates is expected to bolster sentiment, and the potential for lower long bond yields could enhance earnings growth and alleviate concerns about cap rate expansion. Additionally, mergers and acquisitions (M&A) might act as a catalyst for the sector's growth. Any substantial downward pressure could potentially offer attractive opportunities to invest in REITs, particularly for income-oriented investors.
Presently, our global REIT manager holds a favourable view on data centers. This segment is experiencing a unique situation, with data center rents increasing for the first time in over a decade. Demand for space is robust, while the supply of new projects is diminishing, further enhancing the value of existing space. Escalating costs to construct data centers are being driven by rising expenses in land, construction, and labour. We anticipate that rents will continue to rise, especially with the increasing demand for space driven by AI-related requirements over the next 12 months.
We continue to favour the multi-family sector, which is enjoying robust demand for affordable housing. Another strong trend is observed in the senior housing sector, where there is a high demand due to the aging baby-boomer demographic requiring more extensive daily care. In our portfolio, we have purposefully underweighted sectors that are more susceptible to economic cyclicality, such as office spaces, lodging, and regional malls.
The Nicola Canadian Real Estate Limited Partnership NAV per unit has decreased to $157.1178 (previously $157.1930), effective July 31, 2023. This represents a decrease of 0.05% and a positive return for June of +0.3%. YTD return as at June 30, 2023 is +3.3%. The positive return was primarily due to increased appraised values of Grace Road, The James at Harbour Towers, and Advanced - Riverside.
The Nicola U.S. Real Estate Limited Partnership NAV per unit has increased to US$201.9921 (previously US$201.2998), effective July 31, 2023. This represents an increase of 0.3% and a positive return for June of +0.7%. YTD return as at June 30, 2023 is +4.3%. Portfolio Leverage is 48.5%. The positive return was primarily due to increased appraised values of Clearwater, Stonecreek Ranch, and Fairways at South Shore.
The Nicola Value Add Real Estate Limited Partnership NAV per unit has increased to $242.7048 (previously $241.8943), effective July 31, 2023. This represents an increase of 0.3% and a positive return for June of +0.3%. YTD return as at June 30, 2023 is +3.2%. In June, we funded $9.7M for one new project that closed (1463 Mustang Place) and $5.6M for existing projects.
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 Management Ltd. (Nicola Wealth) is registered as a Portfolio Manager, Exempt Market Dealer, and Investment Fund Manager with the required 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. ETF’s are pooled funds that track a specific investment universe that is expressed by a market index or a basket and that is listed on an exchange. Unlike a market index, an ETF incurs trading costs and other charges, including taxes. Because of these incurred costs, an ETF may underperform the market index that it tracks. ETF returns stated in this material are based on NAVs and are stated net of fees and other costs, including transaction costs. For a complete listing of Nicola Wealth Real Estate portfolios, please visit https://realestate.nicolawealth.com. All values sourced through Bloomberg. 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.
