Why aren’t large funds playing cannabis stocks?

In a sign that marijuana has truly hit the big time, Smiths Falls, Ontario’s Canopy Growth Corp. (TSE:WEED) turned a lot of heads yesterday by announcing a partnership with beer and liquor giant Constellation Brands. The move gives the US-based Constellation a ten per cent stake in Canopy and effectively signals to other producers in the burgeoning cannabis trade that the corporate world is finally warming up to the pot business.

Then why are fund managers still so cagey about marijuana?

It’s not about optics, for sure, the big players in Canada’s pot scene are run by folks who are pretty far from being hippy potheads in dreadlocks. By now, they’re all C-Suite execs with plenty of corporate experience: Bruce Linton is head of Canopy, Vic Neufeld is at Aphria, Barry Fishman is at ABcann —the list goes on.

And, surely, it’s not still a moral squeamishness connected to the pot business that’s holding back the money managers, since they know as well as we do that no one cares anymore who smokes weed or, for that matter, whose investment portfolio might have a funky green haze about it.

In the end, of course, it’s the big pile of known unknowns that’s keeping the big investment companies at arm’s length. And the pending issues are significant: people want to know when the drug will become legalized, how each province is going to regulate the sale of cannabis and, perhaps the biggest question mark, how big will the industry get?

But we won’t have to wait much longer for the institutional money to come knocking, says Myles Zyblock, Chief Investment Strategist at Dynamic Funds, since as soon as the industry in Canada gets up and stabilized, the fund managers will be ready to dive in.

“It’s not just the legality, there’s still a lot of uncertainty around the industry,” says Zyblock, in conversation with BNN. “It’s still hard to gauge. When you’re trying to put capital to work, you have to be comfortable with what you know and what you don’t know.”

Zyblock says the caginess is nothing new but that it stems from past experience. “Historically, when you have these new industries that appear out of nowhere —  take the dot-com industry, for example, it was like a gold rush, with blue-sky stories feeding people’s enthusiasm,” says Zyblock. “Ultimately, reality kicks in where regulations come into play, financial oversight. Then you have a reset of expectations, a cooling off period, and then you have something real.”

Zyblock says that at the moment, the industry is too story-driven, with every new news item causing investors to either pile on or pull out, making for a much too rocky road for most major firms. That doesn’t mean they’re not paying attention, however.

“We have teams of portfolio managers and analysts poring over the industry. We have to be prepared,” says Zyblock. “I think this industry will be around in ten years, it’s not going away like tobacco did. It’s a real industry and Constellation’s participation is validation of that.”