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Cannabis Legalization Is on The Rise, Are Cannabis-focused Funds Positioned to Roll or Go Up in Smoke?

A growing number of asset managers are launching cannabis-focused funds. But what are the challenges with this industry?
Chloe Schwartzapfel
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While still incredibly niche, a growing number of asset managers are increasingly launching cannabis-focused funds. Although the appetite for cannabis investments is growing, some challenges remain.

Several factors have accelerated interest in cannabis-focused funds. Firstly, it is a strong growth market. For example, the legal cannabis market was worth around $11 billion back in 2018 although analysis by the equity research arm at Jefferies anticipates this could rise to $50 billion by 2029. However, other market participants have said this estimate is too conservative, with some predicting the cannabis market could grow to over three times that projection. This bullishness comes amid increased demand for medicinal cannabis products, which have been used to help people suffering from a number of different medical conditions such as epilepsy and Parkinson’s. Furthermore, several US states have introduced legislative changes decriminalizing the smoking of cannabis by adults. Experts are also confident that the new administration will liberalize federal laws on cannabis. Again, this will likely spur further investment into the fast emerging cannabis industry.

While there is certainly growing institutional investment in cannabis-related products, challenges do remain. Performance by ETFs (exchange-traded funds) focused on the cannabis industry has been checkered with many nursing heavy losses. Despite the optimistic growth forecasts for the cannabis industry, the $344 billion illegal market still dwarfs the legal market, suggesting people are still reticent about buying their cannabis from legitimate sources. Others also point to the slow pace of US regulatory change on cannabis consumption and use, which has hampered the market’s development.

Another barrier which could hinder inflows into cannabis-focused funds is the growing investor focus on all things ESG (environment, social, governance). The issue of cannabis and ESG is riddled with complexities. It is clear that most investors who subscribe to ESG values will be reluctant to invest into a fund with exposure to companies involved in the recreational cannabis industry. However, there is certainly a compelling case that businesses involved in the production and distribution of medicinal cannabis are ESG-compliant. Several religious groups including the Church of England’s pension scheme appears to have adopted this position. In 2018 following the UK’s decision to legalize medicinal cannabis, the Church of England dropped cannabis from its list of excluded investments.

The cannabis market is nascent, but forward-looking managers are starting to build up exposures to it. Nonetheless, it is an industry where performance has been challenging of late. Despite this, many experts are confident that the cannabis industry is a sector that will enjoy sizeable growth over the coming years.  

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