Nicola Wealth backs its real-estate heavy, institutional approach with fixed income struggling and equities expensive
Nicola Wealth revels in the “steady and consistent” returns its strategy produces and believes that, given the current financial environment, it’s moving into its element.
Nicola Wealth, which held its annual strategic outlook in Toronto on Thursday night, has a planning-first mantra and an institutional-style investment philosophy that leans heavily on real estate and alternative approaches.
President David Sung sat down with WP before last week’s event to explain why his firm’s approach appeals to investors. With market volatility now part of the conversation, he said that the longest bull run in history – with everyone buoyed by equity returns – makes it harder to illustrate the value of assets like real estate.
However, the tide is turning and Sung believes Nicola’s philosophy will stand the test of a recession and post-recession.
He said: “Our approach is steady and consistent returns, and I find that in ever-running bull markets, during a euphoric period, that’s probably the most challenging period for us.
“This time, towards the end of a great cycle and what’s on the other side, is a really great environment for us to be in because that’s when our approach demonstrates itself best.
“When a recession eventually hits and when values of assets are being changed based on public emotion. That’s when we become a very comfortable place and it highlights exactly what we do for people.”
Nicola’s stance right now is that there is “no low hanging fruit” – all assets are expensive, begging the question how investors can generate the returns they need in today’s environment.
The classic 60-40 mix, according to Sung, presents problems: fixed income is giving you very little and equities are not cheap. This is where Nicola’s real estate emphasis bears some of that sought-after fruit. But to do that most effectively, Sung said his team have to start “from the dirt”.
He explained: “We invest in physical, hard asset real estate for our clients. But if we go out and buy an apartment relative to the income and rents we are going to earn in real estate, we refer to that as a cap rate – and that is really low right now.
“But can we go out, starting with the dirt and build that asset at a lower cost than it would cost us to go and buy an existing apartment building that’s 40-50 years old. We can build a brand new one that has less capital expenditure on a go-forth basis and we’ve built it for less than the cost of buying.”
What about convincing an old-school stocks and bonds investor that this is the way forward? One could expect a degree of pushback? Not so, said Sung, particularly in early January in the aftermath of a 10% drop in equities.
Unsurprisingly, they are receptive to a potentially less volatile option but Nicola positions its appeal to business owners and entrepreneurs who might already own a private equity asset.
He said: “They’ve owned and invested in private business for many years, of which that investment has been the best investment they have ever had bar none, better than they have ever achieved.
“Usually, the most successful business owners have earned a rate of return far in excess of what they could get investing passively. So when that type of individual is taking chips off the table or even having a complete liquidity event, it resonates very well with them that they would put their capital back into multiple other private businesses because they know and understand that quite well.
“Plus, many of these entrepreneurs and business owners have sometimes owned the building their business has operated out of, so they feel comfortable owning some physical dirt.
“We find, by and large, it’s a very easy conversation to have. In fact, it’s welcomed and investors find it a refreshing way to do what they had on their mind all along.”
The risk, of course, is less liquidity but Sung argued that it's Nicola’s job to educate and make sure the investment is suitable. Besides, having that money in liquid public equity markets is not necessarily the answer.
“If they did need that access that quickly, even though the markets trade daily, that’s probably not the place they should have been anyways. If they are going to crystalize that loss, they haven’t given it the time they should have.”