Adam Hennick, an investment advisor at Mackie Research Capital Corp. in Toronto, has been fielding many questions from clients lately about Canadian holdings in their portfolio. But their inquiries haven’t been about the stumbling energy sector or whether the big banks are still good investments. Rather, they’re asking about cannabis.
“A lot of clients are calling about [cannabis],” he says. “It’s really driven by the fear of missing out because they all seem to know someone who has presumably made a heck of a lot of money investing in cannabis.”
Indeed, Canada’s nascent cannabis industry has been having its moment in the sun, basking in the love of not just Canadian investors, but those from the United States and elsewhere – especially as Canada moved to legalize recreational use of the drug on Oct. 17.
Yet, cannabis companies’ soaring stock prices have presented a conundrum for advisors. What was once a highly speculative industry has paid early investors handsomely. Its growth has even led the big banks’ analysts to start giving the industry attention, as well as providing financing for cannabis companies.
As well, a handful of exchange-traded funds (ETFs) covering cannabis has launched to great fanfare. And there are even some cannabis-focused mutual funds.
Still, many advisors remain wary of the risk their clients could lose money. At the same time, they also run a risk not helping clients invest in cannabis, in turn losing them to an advisor who will.
“When you say to clients as an advisor not to buy something … and it does well, they tend to really resent you,” Mr. Hennick says.
Advisors may have been able to push aside inquiries about cannabis even a year ago, but today, cannabis stocks are the elephant in their office that cannot go unaddressed.
Ignore the industry’s future growth prospects and risk more questions from clients about missing out on one of the best stock opportunities in a generation. That’s the warning from one of the earliest portfolio fund managers to dip into the budding cannabis market.
“My personal view is this will be one of the fastest-growing industries globally over the next decade. If anything, it will continue to accelerate as we see legislation across the world move more in favour of medical, recreational or both,” says Bruce Campbell, founder and portfolio manager at Kelowna, B.C.-based StoneCastle Investment Management Inc., which began investing in cannabis companies in 2013, when licensed producers began going public.
“We did it very quietly because we were concerned about reputational risk as people would view us as ‘potheads’ trying to manage money, but we felt there would be a significant paradigm shift,” Mr. Campbell adds.
StoneCastle’s early involvement in the industry, involving buying cannabis stocks for a Canadian equity fund the firm managed, exceeded expectations, Mr. Campbell says: “We thought there could be a revolution as cannabis moved closer to mainstream, but we had no idea it would happen as quickly as it has.”
Yet, even with the growth of the cannabis industry, many advisors remain skeptical because of its nascent nature and the persisting stigma surrounding marijuana use.
“It’s obviously changing, but we still see that,” says Mr. Campbell, who manages StoneCastle Cannabis Growth Fund, a mutual fund launched this past September, which currently has about $6-million in assets under management (AUM). “Now, even some of the big banks are up to speed letting their advisors participate.”
The cannabis industry also has been fertile soil for ETF providers as demand from investors has gravitated to these low-cost, diversified baskets of stocks, says Steve Hawkins, president and chief executive officer, Horizons ETFs Managment (Canada) Inc.
Although he says that most of the demand for cannabis ETFs comes from “mom-and-pop” type investors, advisors have been buying them as well.
Specifically, advisors who work at independent firms have been more active on this front as larger, more conservative organizations – such as bank-owned brokerages – have only recently permitted advisors to invest in cannabis for clients, Mr. Hawkins says.
The biggest demand from advisors comes from those whose clients demand exposure to the industry, he adds.
From a broader perspective, investing in cannabis is becoming almost unavoidable, says Hardev Bains, president and portfolio manager at Lionridge Capital Management Inc. in Winnipeg.
“Part of it’s driven by the fact that some of the larger [cannabis] stocks are now included in the [S&P/TSX Composite Index],” he says.
As such, firms using indexing strategies are already allocating money to a half dozen large-cap cannabis companies.
“In turn many portfolio managers likely feel compelled to be exposed to all parts of the index,” says Mr. Bains, who recently spoke to the Winnipeg chapter of the Chartered Financial Analysts Society on cannabis. “The other kind of portfolio manager that might be attracted are those running aggressive growth mandates, which is the opposite of us.”
Mr. Bains, a discretionary money manager, adds he has yet to invest in cannabis stocks for clients. Then again, none of his clients have asked because they know the highly volatile stocks do not fit his value-focused approach aimed at steady growth and wealth preservation.
The same holds true for Mr. Hennick, but he is increasingly being asked by clients to buy cannabis stocks for their portfolios.
“What I point to is our long-term return,” he says. “When clients ask about it, I say ‘What we’ve been doing has been working for us. Let’s keep doing that.’ ”
He adds the cannabis rush feels a lot like the dot-com bubble.
“That’s one of the things that scares me,” he says.
Of course, a handful of companies emerged from the dot-com bubble to become the largest companies in the world today. Arguably, a few firms in Canada’s cannabis sector could find similar success.
Although Mr. Campbell says the challenge is determining who the long-term winners will be, Mr. Hawkins suggest ETFs are a good option for advisors in this respect.
“You’re putting too many eggs in one basket buying two or three stocks,” he says.
Many investors feel the same way. Horizons Marijuana Life Science Index ETF (TSX: HMMJ), which tracks the North American Marijuana Index, grew to amass about $1-billion in AUM just a few months after launching in 2017.
There are other popular options, including an actively managed ETF, Evolve Marijuana Fund (TSX: SEED), which led all Canadian equity ETFs for the one-year performance ended Feb. 28 with a 48.5 per cent return.
Mr. Campbell advocates for diversified exposure to the industry to reduce risks, but argues that expertise in selecting stocks also is critical.
“Even from a value perspective, we’ve found companies that are trading at one times sales,” he says about the StoneCastle fund. “But you need to turn over a lot of stones to find those and then make sure the numbers are legit.”
This takes time and skills many advisors don’t have, he adds.
“You get your timing wrong with a couple of stocks, and you could be down 50 per cent off the start,” Mr. Campbell says, “and that’s hard for your clients to stomach.”