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For many advisors, the latest year-in-review with clients may involve explaining why their portfolios were in the red in 2022, given the brutal year for both stocks and bonds. But the news won’t be bleak for clients of Vancouver-based Nicola Wealth Management Ltd., which reported a 7.5-per-cent rise in its Core Portfolio Fund for the year.

By comparison, Vanguard Growth ETF Portfolio VGRO-T, which includes a mix of roughly 80 per cent equities and 20 per cent fixed income, was down about 11 per cent in 2022, according to Morningstar Inc. All data are based on total returns.

“We’ve outperformed the traditional balanced portfolio by 2 or 3 per cent each year since 2000, but never by this much,” says John Nicola, founder, chairman and chief executive officer of Nicola Wealth, which has about $13-billion in assets.

He says the outperformance is thanks to the firm’s pension-style investment strategy, which is a rough one-third split between public and private equities, fixed income, and hard-asset, income-producing real estate.

The “beyond stocks and bonds” approach, including non-traditional asset classes like private real estate and private equity, provide greater diversification regardless of what’s happening in the markets.

Globe Advisor spoke recently with Mr. Nicola about his firm’s investment style and outlook for this year:

Where did you see the best performance in 2022?

Our real estate portfolio, which includes privately held multi-family and commercial-grade properties across North America, really outperformed. It was up about 20 per cent versus a REIT (real estate investment trust) market that was down by about 25 per cent.

Some commentators have said to me, ‘Well John, you’re dealing in private markets, and the public markets are marked-to-market.’ But I tell them the opposite is true. REITs are trading at 25 per cent below their net asset value, which means they are not the market. They are the public’s reaction to external events. They’ve been oversold. The actual market – what buildings are being bought and sold for – that’s the real market.

How did your bond investments perform?

As most investors know, bonds got clobbered last year. We didn’t get clobbered, but we lost money in bonds. We were always defensive by reducing our duration on bonds. The bond market dropped 9 per cent in Canada last year, while our bond fund was down 1 per cent.

Are you shifting your asset mix at all in 2023?

We’re not making dramatic changes, but we are tilting slightly more toward fixed income and away from equities.

We don’t see inflation coming down quickly, which means interest rates are likely to continue rising and remain high for a while longer. That could mean a recession, which means lower corporate earnings and higher unemployment. I would much rather be focused on fixed income in that environment as long as I’m careful about credit risk and default rates. With any new capital, we’ll continue to use cost averaging today to make sure that we maintain our asset mix – and we always rebalance.

What is your outlook for this year?

I don’t think 2023 will be spectacular. There won’t be a recovery like we saw coming out of the March 2020 downturn at the start of the pandemic.

It’s safe to say that higher interest rates will hurt most asset classes throughout the year. There will be no easy returns until we see interest rates hit a plateau, combined with some reasonable decline in inflation and, ultimately, that we’re at least halfway through any future recession that may be in the works.

All those things have to happen before you can start to say you’re in a generous market, whether it’s for equities or for real estate. We believe we’re well positioned because we have that one-third, one-third, one-third asset mix in place.

This interview has been edited and condensed.

- Brenda Bouw, Globe Advisor Reporter

Must-reads from Globe Advisor this week

Which of the Big Three telecoms are a good bet as a ‘recession-resistant’ defensive investment?

Canada’s Big Three telecommunications companies have plenty of appeal as investors look for safety in a challenging environment. Rogers Communication Inc. RCI-B-T, BCE Inc. BCE-T and Telus Corp. T-T are all recession-resistant, though not recession-proof, with high demand for their utility-like services. Canadians need cellphone plans, internet connections and access to streaming services in all seasons, experts say. Adam Mayers weighs the pros and cons of investing in the big players and what lies ahead for the sector.

How retirees can make up for an income shortfall if they’re unable to work

Pre-retirees often get a healthy dose of sticker shock when they first realize how much they need to save now to enjoy a comfortable standard of living later. When retirement planning projections show a client will come up short of their goal, there are a few ways to make it work. They can save more, earn more, wait to withdraw from their pensions or registered investment savings, or take less. Barbara Balfour speaks to advisors on what clients need to consider when it comes to generating income in retirement.

Is the tech sector ready to drive growth again?

It’s a trillion-dollar question: When will the technology sector rebound and lead market growth again? Many of the world’s largest companies – Apple Inc. APPL-Q, Microsoft Corp. MSFT-Q, Alphabet Inc. GOOGL-Q and Amazon Inc. AMZN-Q – that consist of trillions of dollars of market capitalization were down more than 30 per cent in 2022. Indeed, an opportunity is likely at hand for an overweight focus on technology – only with a hitch, say those who track the sector. It’s important to differentiate between growth tech and profitable tech. Joel Schlesinger reports on the valuations, dividends and stocks to watch out for.

Why financial literacy needs to be tied to kids’ real lives to sink in

With a deficiency of financial literacy education in schools, some advisors are taking matters into their own hands by teaching children directly about money matters. Either by volunteering through non-profit organizations to teach in classrooms or by offering courses to their clients’ children and the younger generation, advisors say children value the independence and objectivity of someone who is not their immediate family member. Deanne Gage looks at popular points of discussion with advisors and why this needs to start early.

Also see:

Why advisors should make plans well before they experience cognitive decline

Why this money manager is adding to positions in railways and other industrials

Why the choice between advisors and robo-advisors is more obvious in times of volatility

Companies rush to tap U.S. bond market as credit conditions ease

What if 2023 is not the reset investors are pining for?

What you and your clients need to know

Sun Life CEO sees deal opportunities in Asia as local companies sit on the sidelines

The head of Canada’s second-largest life insurer since 2021 says the current economic challenges facing some Asian countries – particularly mainland China, which is seeing a surge of COVID cases – opens the door for deal opportunities with less competition from local companies than before. Sun Life Financial Inc.’s chief executive officer Kevin Strain says in many deals, there are only two or three contenders, versus the typical 12 to 15 who would be looking to negotiate in the past. Clare O’Hara reports on Sun Life’s plans in Asia as it boosts its wealth and asset management business.

Seven global equity funds that are set to outperform

Investors are likely still feeling the effects of last year’s roller-coaster in equities. Although inflation continues to be a challenge in many markets, China’s reopening might draw the interest of institutional investors from abroad. No one has a crystal ball in terms of what to expect from global equities this year, but Morningstar Inc.’s analyst team has a fairly good idea of which fund managers will continue to produce excess returns on an after-fee basis. Ian Tam of Morningstar looks at the three main pillars to consider when assessing a fund’s potential to produce superior risk-adjusted returns in the future.

Defer a tax bill to the future to reduce the burden

If only paying less taxes was as easy as writing the Canada Revenue Agency a letter similar to the one written by the character Snoopy to the taxman: “Dear CRA, I am writing you to cancel my subscription. Please remove my name from your mailing list.” Chances are pretty good that the taxman is going to ignore the request. And so, we’re left to find other ways to reduce our tax burden. Pushing a tax liability to a future year is the same as putting money in your pocket because you’ll have use of those dollars until you have to pay the tax. Tim Cestnick looks at some strategies to consider about deferring taxes.

– Globe Advisor Staff

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