Product pipeline heats up for marijuana funds

Redwood launches actively managed strategy.

Rudy Luukko 1 February, 2018 | 6:00PM

Competition among fund managers in the currently booming but highly volatile niche of marijuana stocks is heating up.

Marijuana Opportunities, sponsored by Redwood Asset Management Inc., today became the first actively managed fund available to retail investors seeking diversified exposure to the marijuana industry in Canada. The strategy opened for trading as an exchange-traded fund listed on the NEO Exchange (symbol: MJJ), and is also available as a mutual fund.

The portfolio manager is Redwood's Greg Taylor, who at the outset will invest exclusively in a concentrated portfolio of Canadian companies. The initial portfolio will consist of up to 15 stocks, all of which are listed on either the Toronto Stock Exchange or the TSX Venture Exchange.

Taylor plans to diversify into other countries, but the timing and extent to which he does so will depend on his assessment of the legal and regulatory hurdles. Here in Canada, the launch of the Redwood fund comes five months to the day from the federal Liberal government's target date of July 1 to legalize recreational marijuana.

According to the prospectus, the Redwood fund will not invest in recreational marijuana providers until these products can be legally sold in Canada. Likewise, it will invest outside Canada only in companies whose products are legal in the countries in which they do business.

The management fee for Marijuana Opportunities, not including operating expenses, is 0.75% for the ETF units and for the Class F shares for fee-based accounts, and 1.75% for the Class A shares distributed by commissioned brokers and dealers. Class A fees are higher because these shares pay trailer commissions totalling 1% a year.

While noting that marijuana has recently been one of the hottest industries in Canada, Redwood acknowledges that there are concerns over stock valuations, volatility and industry regulation. For that reason, and in setting itself apart from a rival index-style ETF, Redwood argues that active management is preferable to passive indexing when investing in the marijuana industry.

Taylor's investment process is primarily bottom-up stock selection based on growth and value fundamentals. Top-down industry analysis also plays a role, with Taylor seeking to avoid investing in countries or regions that are likely to face regulatory hurdles. A third active element is technical analysis to aid in buy and sell decisions.

Redwood, a wholly owned subsidiary of Toronto-based Purpose Investments Inc., has as its main competitor the first marijuana fund out of the gate, Horizons Marijuana Life Sciences Index (HMMJ). This ETF has soared, not without some turbulence, to about $800 million in assets since its inception on April 4, 2017.

One of the fastest growing Canadian-listed ETFs launched in 2017, the Horizons ETF was issued at $10. It has doubled in price, closing on Jan. 31 at $20.19. Its benchmark is the North American Marijuana Index maintained by index provider Solactive, which is based in Frankfurt, Germany.

At least two more marijuana ETFs are in the product pipeline in Canada, with preliminary prospectuses having been filed in January. One filing, from Horizons ETFs Management (Canada) Inc., is for Horizons Junior Marijuana Growers Index, specializing in junior companies.

The other preliminary filing, from Toronto-based Evolve Funds Group Inc., is for "The Marijuana ETF." Its mandate will be to invest actively in both Canadian and non-Canadian stocks. When launched, it will trade under the symbol SEED.

About Author

Rudy Luukko

Rudy Luukko  Rudy Luukko is a freelance writer who contributes to Morningstar.ca on topics involving fund industry trends and regulatory issues. He retired in May 2018 from his position as editor, investment and personal finance, at Morningstar Canada, where he had worked since 2004. He has also worked as an editor and writer for various general, specialty and institutional media, and he has co-authored courses for the Canadian Securities Institute. Follow Rudy on Twitter: @RudyLuukko.