The US has overtaken Canada as the place to be in the cannabis industry, according to a fund manager.
Nawan Butt, of Purpose Investments, manages the Purpose Marijuana Opportunities Fund (NEO:MJJ) and believes that while the Canadian market has the infrastructure for service, there remains a huge international market that’s underserviced.
With US MSOs coming to market in recent months, the actively managed ETF has switched its weighting to reflect what it views as the huge potential in the space south of the border. The portfolio now consists of about 46% US exposure, 40% Canadian and 3% international.
Butt said the move is another example of the rapid pace of change in the industry – 14 months ago the fund was 90-95% Canadian LPs.
He said: “We always knew what [the Canadian LPs] could do, with legalisation around the corner and it being a sell-on-the-news sort of thing. But the where the opportunity really lies is where the regulatory hurdles still hold. We wanted to try to get ahead of the curve.
“About Q3 [last year] we started switching the portfolio over and by Q1 we were at 40% allocation in US names. That’s where we see the industry for the next year, year and a half. We think the US is going to be the right play but we have also begun to aggressively pursue ancillary plays and additional geographies; Europe is top of mind for us.”
Butt said the speed of acceptance and legislation in the US has been eye-opening and that it’s hard to ignore the scalability potential in a country of 350 million.
And he believes his fund showed investors and industry peers the way into the US market after HMMJ, HMJR and SEED had focused primarily on Canada. Naturally, he backs Purpose’s fund despite Horizons and Evolve subsequently bringing out their own US-focused products
“We came in and showed people there was a way to invest in the US,” he said. “This year we have seen more funds open up but, again, they are geographically restrictive in that they can invest only in the US.
“What we gave investors was the ability to stay ahead of the curve. We can switch around from Canada to US to South America to Europe as the beta becomes more viable.”
Picking the companies for the portfolio requires an analysis of fundamentals, albeit via a different interpretation of what this means when there are no historical balance sheets.
Up until eight months ago, Butt said, everybody thought every company was going to be a winner but picking the stars of tomorrow comes down to assessing management, whether they are up to the job, have the right assets and strategy in place, and whether they have the foresight and regulatory clout to “define the future of the industry”.
He added: “That’s very important and what I see as the fundamentals rather than balance sheets or what the EBIDA strength is. That’s really less important right now.
“When we look at the past, it’s no indication of what could come in the future. It is more or less creating a hypothesis, an estimated guess of where you are going to end up. And if you have that estimated guess, you want to put it in the best hands possible, so you have to give [the company] the best managerial team to achieve the operational goals.”
Two names that feature in the fund are Cresco Labs and Harvest. The former is held up by Butt as an example of the managerial excellence that is required to be a long-term success, with the team having also started a mortgage broker from scratch and built it into a large company over a 10-year period.
Purpose and Cresco have had multiple face-to-face meetings and Butt said it’s a company that makes smart deals, not necessarily the biggest deals.
He said: “Cresco has probably had a smaller footprint on a state-wide basis than many of the larger players like Acreage, Columbia, CuraLeaf and Harvest. But what they have been able to do, which is smart, is they could see into the future and saw that branding was going to be very important, and that the penetration brands already had in California were the brands that were going to dominate the country.
“So they went out and acquired Origin House, which controlled a bunch of brands – that gave them a huge platform and market share in terms of brand recommendation.”
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