Canadian Pot Fund Cuts Exposure to Pot, Buys Medical Names

(Bloomberg) -- Canada's first cannabis mutual fund is cutting back on pot stocks.

The UIT Alternative Health Fund has pared its holdings in marijuana companies to 33 percent, from 44 percent 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 fund lost 4 percent in the first quarter compared with a 25 percent drop for the BI Canada Cannabis Competitive Peers index, which almost tripled 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 C$700 million ($550 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 C$5.5 billion on 2017 sales of about C$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.

“The sector 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.

Canopy was upgraded to buy at Beacon Securities Friday on its potential to dominate recreational sales in Canada once marijuana is legalized later this year. Analyst Vahan Ajamian said the company is "best positioned to swarm the shelves of the legal market in all regions," and the recent stock pullback is a good buying opportunity. He raised his price target on the stock to C$37 from C$24.50.

Pot stocks have retreated four of the last five trading days amid broader market volatility. 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.

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, David Scanlan, Jacqueline Thorpe

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