How an investment firm’s diversified strategy is paying off – The Globe and Mail

When markets crash, Nicola Wealth Management Ltd.’s “beyond stocks and bonds” investment approach looks particularly appealing to many retail investors.

The Vancouver-based wealth-management firm, founded by chairman and chief executive officer John Nicola in 1994, is known for its pension-style investment strategy. Roughly 32 per cent of its core portfolio is in equities, about 25 per cent is in hard-asset real estate and the rest in bonds, mortgages, preferred shares, private equity and private debt and other alternative strategies.

That mix has helped shelter investors from the market rout in recent weeks. The firm reports that its average client portfolio was down about 1.5 per cent year-to-date as of April 24, with no impact on cash-flow generation for clients. The performance compares to a 14-per-cent drop in the S&P/TSX Composite Index and a 12-per-cent drop in the S&P 500 over the same period amid the economic fallout of the COVID-19 pandemic.

Nicola Wealth’s assets under management (AUM) are up by about 1.7 per cent so far this year, as of April 24, at about $6.9-billion, and the firm has attracted about $200-million in new deposits from new and existing clients in that time frame.

“This is the environment in which active management of every single asset really shines, where it really makes a difference,” Mr. Nicola says.

Nicola Wealth’s portfolio managers haven’t been sitting idle through the recent market mayhem. The team has been snapping up more preferred shares at discount prices and is reviewing all of its real estate holdings, including retail, office, industrial, self-storage and multi-family properties across Canada, for risks and opportunities.

The firm is also reviewing all of its mortgages to see if refinancing makes sense given the dramatic drop in interest rates in recent weeks, while also working with commercial tenants that need short-term rent relief to keep them in business.

“There’s nothing we’re not doing in terms of managing the underlying assets that we’re looking at for clients,” Mr. Nicola says. “Our objective is to manage the cash flow and, ultimately, to look at the opportunities that present themselves.”

He expects the firm’s real estate asset valuations to come under pressure in the coming months, but believes the diversified portfolio base will keep clients on track for the long term.

Nicola Wealth is also pumping out newsletters and communicating regularly with clients to assure them their portfolios – and the critical cash flow – are intact.

Mr. Nicola got his start in financial services in his early 20s, selling insurance after giving up his short-lived career playing bass in a 1970s bar band.

He then added retirement savings to his product mix, followed by mutual funds after moving to Rogers Group Financial Ltd. in 1984, at which he later became a partner and president.

A decade later, Mr. Nicola launched his namesake firm with eight employees and $80-million in AUM, including mostly mutual funds and term deposits.

In 2000, the firm registered as a portfolio manager, allowing its advisors to recommend securities as well as alternative assets such as investment-grade real estate. The company began investing in third-party products for its portfolios before starting its own investment pools in 2005. Today, Nicola Wealth has 18 investment pools across eight asset classes and about 200 employees at its offices in Vancouver, Kelowna, B.C., and Toronto.

“Our philosophy is very simply this: In order to have a diversified portfolio, you should invest in assets that are representative of global wealth,” Mr. Nicola says. “[The] industry tends to sell and recommend assets that can be traded in public markets daily. Our view is that’s a fraction of global wealth, and private assets are a greater share of that wealth. Real estate, private equity, private debt and mortgages are all part of the real-world assets. A large pension or family office would typically include all of these asset classes in their mix, but that’s a much more difficult task for individual investors.”

Mr. Nicola says those larger investors usually achieve superior returns with less volatility than a traditional portfolio with a 60-per-cent equities and 40-per-cent fixed-income asset mix. “Our objective is to bring that more diverse portfolio to individual investors.”

Nicola Wealth reports that its average portfolio has produced an annualized return of 6.6 per cent between Jan. 1, 2000 and March 31, 2020 (the latest data available), which includes the 2000 dot-com bust and the 2008-09 global financial crisis. According to the firm, the performance compares to annualized returns of 3.9 per cent for a typical balanced portfolio measured by Morningstar, 4.9 per cent for the S&P/TSX Composite Index and 3.8 per cent for the S&P 500 over that same period.

Mr. Nicola, who’s 69 years old, is still running his wealth-management business actively and has a succession plan in place. He forecasts stepping down as CEO in about three to five years and would stay on as executive chairman for the foreseeable future.

He says the COVID-19 crisis hasn’t dimmed his desire to remain engaged actively in the company and the industry.

“Our model of advanced financial planning and advising with a truly diversified investment strategy performs very well in a crisis such as this – as it did in 2000 and 2008,” he says. “It’s during these times that all that preparation and modelling pays off for clients and for us.”

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