Is this a good sign? The first marijuana mutual fund is cutting back on pot stocks
Canada’s first cannabis mutual fund is cutting back on pot stocks.
The UIT Alternative Health Fund has pared its holdings in recreational marijuana companies to 33 per cent, from 44 per cent at the end of 2017, while raising cash and shifting to health-care stocks like Jamieson Wellness Inc. and Pinnacle Foods Inc.
The UIT fund, run by Toronto-based Faircourt Asset Management Inc., is cutting its exposure to pot as the sector pares gains following a surge at the end of last year. The BI Canada Cannabis Competitive Peers index has dropped 30 per cent this year, after almost tripling in 2017.
“The last six months those cannabis names were on fire, so some people just figured, you know what? Until the dust settles from a macro perspective, we’re going to take some profits,” said Charles Taerk, chief executive officer at Faircourt, which has more than $700 million in assets.
Investors are fleeing risky assets amid growing fears of a global trade war, raising concerns about the valuations on some of the pot stocks, many of which have little or no revenue. Canopy Growth Corp. has a market value of $5.5 billion on 2017 sales of about $70 million.
“This whole trade war has ripple-effect ramifications because if you’re investing in equities, now you take a look and say, ‘What’s safe and what isn’t?”‘ said Taerk. “These are higher beta names and people usually pull back from those, so we’re seeing a retrenchment out of the cannabis names.”
Doug Waterson, who manages the fund, said it has recently added to its positions in CannTrust Holdings Inc. and MedReleaf Corp. because of their exposure to the global medical marijuana market, which generates higher margins than recreational products.
Cannabis stocks tend to move in tandem, but Taerk said higher quality names with larger institutional followings like Canopy Growth — the fund’s second biggest holding — are less volatile than companies with mostly individual investors like Aphria Inc. and Aurora Cannabis Inc. Canopy’s biggest investors include Constellation Brands Inc., the seller of Corona beer, along with Horizons Investment Management Inc.
“It is still retail driven, so the swings and the volatility in it are perhaps greater than in other sectors just because there is definitely a bit of a herd mentality both on the way in and on the way out,” Taerk said.
Pot stocks tumbled more than 11 per cent in the first three trading days of the week amid broader market volatility, before rebounding Thursday. Eight Capital analyst Daniel Pearlstein said now is the time to buy into larger Canadian companies with international initiatives.
“We believe these will appeal to the broader institutional investor community as the next wave of capital continues to enter the space,” he wrote in a note published Wednesday.