Why Pension Funds Invest in Cannabis?

Pension funds are getting exposure to Canadian cannabis producers

In 2018, the AP7 Swedish fund bought the shares of Canopy Growth (WEED CN) and Aurora (ACB CN) for about 63 million Swedish crowns (~ $7 million). The main reason is that these stocks were included in the MSCI All Country World Index (ACWI). This does not happen only in Sweden. Last year cannabis producers were acquired by Canadian and US pension funds, in particular, Canada’s Public Sector Pension Investment Board (PSP) and the California Public Employees Retirement System (CalPERS).

It is quite gratifying to note that pension funds are diversifying their portfolios by the producers of “Herb”. I believe this suggests that more and more investment managers in the world (even conservative ones like pension funds) come to believe in the idea of “Cannabis”. I think that, apart from the inclusion in MSCI ACWI, the legalization of cannabis in Canada also played a significant role.

Many companies continue to expand into export markets, in particular, European markets. Canopy Growth recently announced that they had completed the purchase of Cafina, a certified Spanish manufacturer. In my opinion, this asset will allow the company to strengthen positions in the EU. After all, Canopy already has facilities in Denmark and Germany.

Key market players continue to increase their production capacity

In particular, Aurora recently announced that they had expanded the product growing areas from 1.3 million to 1.62 million square feet (+25%). Theoretically, this will increase the company’s annual productivity to 230 thousand kg, making Aurora one of the leaders of the industry along with Canopy Growth.

It has been reported recently that CannTrust (TRST CN) also had similar progress. The company made an announcement on the purchase of large areas for the cultivation of cannabis. The company has acquired 81 acres of land (about 33 hectares) and plans to purchase a total of about 200 acres (81 hectares), which would allow increasing the production capacities to 300 thousand kg per year.

The sector continues to grow and develop. An important factor is that most companies are already listed at the New York Stock Exchange. The recent pullback, in my opinion, has more to do with technical factors rather than fundamental ones.

Besides, the market’s expectations were probably over-inflated. This factor clearly illustrates the fall of CannTrust, which is explained by the fact that the Net loss was below the consensus. The company will report on the first quarter of 2019 on May 15. I am looking forward to it.

From early 2019 to about mid-March, single stocks showed quite impressive growth, in particular, CannTrust and Organigram doubled their market cap; Canopy Growth and Aurora grew by 70%, and Aleafa by 60%… It was followed by a completely natural correction. I have to repeat that the correction was more of a technical rather than fundamental nature.

Although it is impossible to predict everything, I believe that the downtrend will hardly last long. I still believe that this sector has great growth potential. CannTrust, Organigram, Canopy Growth, and Aurora are still my favorites. Small manufacturers like Aleafia and Wayland, which may be pulled up with the sector.

The article was written by Evgeny Kogan, Ph.D., investment banker, the author of the telegram-channel Bitkogan.