Returns for the Nicola Core Portfolio Fund were +1.7% for 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 was up for the month, returning 1.2% in November, while the iShares Core Canadian Universe Bond Index ETF returned +2.8% for the month. Interest rates were the largest driver of returns for the month as 10-year Bank of Canada bond yields moved from 3.25% to 2.94%. Our exposure to real returns bonds and our East Coast strategy helped drive returns higher. In addition to interest rates, returns were also supported by credit spreads which tightened materially during the month as spreads on Canadian corporate bonds moved from 1.87% to 1.76%, with communication, energy, financials, and real estate sectors all tightening significantly.
The combination of both rates and credit spreads supporting returns leads to one of the strongest returning months in investment grade bonds over the past ten years. The strong returns for the month have narrowed the relative attractiveness of investment grade bonds versus high yield; however, we continue to see pockets of opportunities.
The Nicola Global Bond Fund was up for the month, returning 2.8%. The Nicola Global Bond Fund was supported by strong returns from Templeton Global Bond fund, which was up 4.8%. The IMF revised down global growth projections from 2.9% to 2.7% for 2023, one of the weakest growth profiles since 2001, while more emerging market central banks signaled that they were likely to pause interest rate hikes. Currency was a strong contributor for the month as the U.S. dollar weakened versus most currencies. Many Asian currencies provided a tailwind to returns, including the South Korean Won, Japanese Yen, Malaysian Ringgit, Thai Baht, and Chinese Yuan.
The Nicola High Yield Bond Fund returned -0.8% in November, while the iShares U.S. High Yield Bond Index ETF (CAD-Hedged) returned +2.9%. Year to date, the iShares U.S. High Yield Bond Index ETF (CAD-Hedged) has returned -9.8%, while the Nicola High Yield Bond Fund has returned -1.9%. We continue to believe that credit spreads remain slightly expensive at around 5%, and default rates currently at 1.4% may move higher and reach levels closer to 4% with a deteriorating economic backdrop in the coming year. Shorter term, the market has some support from technical factors as December is historically a slow month for new issuance, while ETF demand for high yield has been strong for the past couple of months.
The Nicola Preferred Share Fund returned +0.1% for the month while the BMO Laddered Preferred Share Index ETF returned -0.2%. The flat returns for the month were not reflective of the underlying volatility as preferred shares sold off more than -3% during the first three weeks before a strong recovery during the last week of the month. Despite the ongoing volatility, we maintained our focus on institutional preferred shares, particularly in BMO, where we increased our position during the month. Our exposure in Bolton also helped to support returns during the month, as the strategy was up 1.0%. Despite the flat returns for the month, the backdrop of the relative attractiveness of preferred shares decreased. Preferred share coupons increased with higher five-year Government of Canada bonds, and yields decreased from 3.41% to 3.16%.
Returns for the Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund were +0.5% and +0.7%, respectively, for the month of November. The Nicola Primary Mortgage Fund and the Nicola Balanced Mortgage Fund benefited from slight increases in loan valuations. Cash in the funds at month end was -1% in the Nicola Primary Mortgage Fund (as the fund drew on its credit line) and 10% in the Nicola Balanced Mortgage Fund.
Current annualized 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 5.1% for the Nicola Primary Mortgage Fund and 6.9% for the Nicola Balanced Mortgage Fund. The Nicola U.S. Mortgage Fund continues to hold a 3rd party fund comprised of U.S. commercial mortgage loans as an individual loan program nears finalization.
For the month of November, the Nicola Private Debt Fund returned +0.6%, bringing the YTD NAV return to +4.9%. The Nicola Private Debt Fund’s YTD cash distribution to investors reached +7.4% at month’s end and continues to distribute 100% of its income monthly. The difference between the NAV return and distribution relates to unrealized fair value adjustments to reflect widening credit spreads across credit markets. The Credit Suisse Leveraged Loan Index returned +1.1% in November as credit investors gained some optimism that the pace of Fed rate hikes may begin to slow.
The primary return driver for the Nicola Private Debt Fund during the month was contractual interest income from the Nicola Private Debt Fund’s portfolio of direct investments. The Nicola Private Debt Fund continues to benefit from rising interest rates, with 83% of the portfolio invested in floating-rate debt. We expect the Fed and Bank of Canada’s aggressive rate hikes over the last 6 months should continue providing a tailwind for returns into 2023 given the Nicola Private Debt Fund’s positioning toward senior secured floating rate debt.
Nicola Canadian Equity Income Fund performance vs S&P/TSX in October was +4.2% vs +5.5%. Peaking inflation and hopes of a slower pace of rate hikes by the Fed and other central banks boosted risk appetite in November. Global equity markets surged. In Canada, the TSX gained +5.5% despite weakness in energy. Growing worries over weakening demand weighed on Crude oil prices (WTI -6.9%, Brent -9.9%). In precious metals, the USD’s recent slide lifted Gold (+8.3%). Nine out of eleven TSX sectors scored gains in November as Materials (+10.8%) and Technology (+9.5%) were the best performing sectors, while Utilities (-1.2%) and Health Care (-0.3%) posted declines.
The Nicola Canadian Equity Income Fund underperformed as a positive contribution from Materials, and Consumer Staples was more than offset by relative underperformance in Financials and Technology. With macro conditions likely to worsen before they improve, we positioned the Nicola Canadian Equity Income Fund defensively and large underweight in Financials. Opportunities should arise in the first half of 2023, providing entry points that offer attractive upside potential for the long run. In the month of November, the Nicola Canadian Equity Income Fund’s top-performing holdings were First Quantum Minerals, Labrador Iron Ore Royalty, and Shopify. The bottom performers were Telus International, Suncor Energy, and Aritzia Inc. We exited our positions in Empire Co Ltd. There were no new additions.
The Nicola U.S. Equity Income Fund returned +7.3% vs +5.6% for the S&P 500 (total return in U.S. dollar terms). November is the second month in a row where all S&P 500 sectors showed positive returns, and it is the second strongest November since 2009. In addition, the mid-term election results (split congress), soft CPI report on November 10, and Jerome Powell’s commentary about “moderating the pace of future rate increases” on November 30 boosted market sentiment last month.
The Nicola U.S. Equity Income Fund’s relative outperformance came from being overweight the Materials and underweight the Consumer Discretionary sectors as well as positive stock selection within Consumer Discretionary (Ross Stores & Lowes), Materials (Crown Holdings, Air Products & Freeport McMoRan) and Information Technology (Cadence Design & NXPI Semiconductors). Transactions during the month include selling our Medtronic position and buying a new name, Edwards LifeSciences. Edwards LifeSciences is a high-quality medical device company specializing in specific segments of structural heart disease that are in secular growth (i.e., TAVR market).
The Nicola U.S. Equity Income Fund also selectively wrote nine puts and five covered call options, which generated attractive premiums and enhanced the estimated annual distribution yield. The Nicola U.S. Equity Income Fund ended the month with a delta-adjusted equity exposure of 93% (11% in covered calls) and consists of high-quality names with healthy balance sheets, strong free cash flows and attractive consensus forward 12-month ROEs (40% vs 22% for S&P 500).
For November 2022, the Nicola International Leaders Fund was +10.4%, vs the MSCI ACWI ex-USA Index +11%. For the month, Emerging Markets (+14%) outperformed and International Markets (+10.4%) underperformed. China (+28.7%) was the main contributor in emerging markets as the relaxation of certain Covid restrictions and support for the housing sector drove a rebound in the market. In Europe (+10.7%), the region rallied on signs of decelerating inflation and warmer autumn temperatures continuing to support the energy shortage.
This month, the Nicola International Leaders Fund benefited from its exposure to consumer discretionary, industrial, and information technology stocks. One of the best performers for the month was TSMC (+34%), the world’s largest manufacturer (fabricator) of advanced semiconductor chips. TSMC has a strong competitive advantage, good cash flows, and has managed to maintain a solid balance sheet despite spending $30 billion per year on CapEx. Performance was hindered during the month by an underweight position in emerging markets and certain individual stocks. One of the laggards was Australia & New Zealand Banking Group (4th largest Australian bank by market cap), which despite reporting strong 2H/22 results showing the benefits of rising interest rates, disappointed the market with higher-than-expected expense growth in FY23.
The Nicola Sustainable Innovation Fund returned +7.4% (USD) / +6.3% (CAD) in November and -12.1% (USD) / -6.4% (CAD) year-to-date. Top performers during the month were E.V. charging company Beam Global, Sunrun, and our Ares Climate Infrastructure Partners L.P. investment, while ChargePoint, PIMCO California Carbon Access L.P., and Stem were the biggest laggards. The broader equity markets were largely positive in November, buoyed by a more positive inflation outlook from Fed Chairman Powell towards the end of the month.
During the month, we received another capital call notice for our Ares Climate Infrastructure Partners L.P. investment, taking our position to roughly 3.4% in the portfolio and ~54% drawn. The portfolio investments within the Ares LP have, in our opinion, performed well so far, and the most recent capital call proceeds are being allocated towards a distributed solar company, a market-leading wind service company and several other aligned investments. We were active trading throughout the month, taking some profits in names that had performed well, like Beam Global, Array Technologies, and Xylem, rebalancing into TPI Composites, and some of the Canadian Renewable companies, including Brookfield Renewable, Boralex, Northland Power and Innergex.
The Nicola Alternative Strategies Fund returned -1.1% in November. The primary factor was currency, as the Canadian dollar strengthened during the month versus the U.S. dollar. We made our second distribution to clients at the end of November and look to make a third and final distribution early in 2023 as we finalize the wind-up of our fund. According to Eurekahedge, overall hedge funds returned 1.4% for the month, while the Eurekahedge Arbitrage Hedge Fund Index returned 0.6%, and the Relative Valued Hedge Fund Index returned 2.2%.
The Nicola Precious Metals Fund returned +12.4% for the month of November. Underlying gold stocks in the S&P/TSX Composite index returned +14.5%, and gold bullion was up 6.6% in Canadian dollar terms. The rebound in the precious metals fund was a function of a global reversal of beaten-down assets for the year magnified by U.S. dollar weakness and covering of net short positions in Gold, which helped amplify the rebound for precious metals.
The Nicola Infrastructure and Renewable Resources LP returned 0.5% for the month of November in Canadian dollar terms. Overall currencies had a negative impact over the period with CAD strengthening against USD more than offsetting the CAD weakening against GBP; agnostic to currencies, our assets returned 1.2%. This was primarily driven by Q3 2022 fund and co-investment performance in line with expectations, including the first markup of our US district heating and cooling platform co-investment from cost. During the month, the fund funded a $2 million existing commitment to Macquarie’s global infrastructure fund. The proceeds were used to fund new and follow-on investments in eight underlying portfolio companies. The fund is at $188 million of AUM with a waitlist of $31 million that is expected to be fully drawn by Q1 2023 from a combination of existing fund commitments and co-investment.
The Nicola Global Real Estate Fund performance vs iShares S&P/TSX Capped REIT Index (XRE) was +3.5% vs +8.2%. Publicly traded REITs rebounded in November and were the main driver for the positive performance of the Nicola Global Real Estate Fund. Q3 earnings results were positive, and forecasts reflect a healthy earnings outlook for the year ahead. Multi-family and industrial remain firmly in the lead on organic growth with the former accelerating.
The senior housing sector had the largest negative revisions as the ongoing pandemic and elevated operating costs will likely prolong the recovery period. Set against a backdrop of higher rates and an economy shifting into a lower gear, investors have worried about the potential for asset write-downs, but once again, portfolio fair value charges were not much of a story in Q3. Despite the material YTD jump in debt costs, IFRS cap rates were flat, with most citing a lack of transaction data to support material revisions. \
Our global REIT manager Hazelview has been increasing exposure to the U.S. while reducing exposure to the U.K. and Hong Kong. From a sector exposure, exposure to triple net lease REITs and regional malls increased while exposure to diversified REITs decreased. Near-term volatility will likely persist until visibility on rates and inflation improves. However, for investors taking a long-term view, current valuation levels are a reasonable entry point, particularly for the multi-family and industrial subsectors. We view these two property types as best positioned to mitigate value erosion through NOI growth.
The Nicola Canadian Real Estate LP NAV per unit has increased to $157.0549 (previously $156.7538), effective November 30, 2022. This represents an increase of 0.2% and a positive return for October of 0.6%. YTD return as of October 31, 2022, is 13.7%. Portfolio Leverage is 42.32%. The positive return was primarily a result of increased appraised values of the GTA West Portfolio, Dover Pointe, and 55th Ave.
The Nicola U.S. Real Estate LP NAV per unit has increased to US$198.1228 (previously US$197.0567), effective November 30, 2022. This represents an increase of 0.5% and a positive return for October of 1.0%. YTD return as of October 31, 2022, is 21.8%. Portfolio leverage is 45.95%. The positive return was primarily a result of increased appraised values of Apex West Midtown, Northgate Executive Center, and Anatole at Norman.
The Nicola Value Add Real Estate LP NAV per unit has increased to $234.1119 (previously $231.9523), effective November 30, 2022. This represents an increase of 0.9% and a positive return for October of 0.9%. YTD return as of October 31, 2022, is 19.0%. In October, we funded a total of $3.4M 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 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. 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.
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