The high around cannabis stocks appears to have faded, with funds in the global sector reporting a sharp drop in inflows and woeful performance.
Figures provided to Financial News by Morningstar show that assets managed by cannabis funds shrunk by 45% to $ 2.6bn in the 12 months to March, down from $ 4.6bn at the same period last year.
The drop in assets came amid major share price falls for pot stocks following failed attempts to pass federal legislation in the US.
Performance for funds focused on the cannabis market has also nosedived, with the Morningstar data provided for 23 products showing losses of between 44.2% and 72% over a 12-month period to the end of April.
Inflows have also dried up, with investors channelling just $ 95.6m into cannabis funds during the first three months of 2022, compared to $ 1.7bn during the same quarter last year.
READ London set for flurry of cannabis IPOs after UK watchdog green light
A flurry of IPO activity last year got many investors interested in new opportunities in the sector.
London’s listed cannabis market doubled in size during the first five months of 2021, with Kanabo Group, Oxford Cannabinoid Technologies and MGC Pharmaceuticals among the four new listings on the London Stock Exchange last year.
However, following a positive start, shares in these groups have fallen by between 60% and 80% over the past 12 months. Performance for North America-listed stocks is little better, with share prices for Aurora Cannabis, Canopy Growth and Tilray down 57 %, 74% and 68% respectively over the same period.
Alec Lucas, research analyst at Global X ETFs, said flows and performance for cannabis funds picked up towards the end of 2020 when Joe Biden was elected US president, on the expectation that Democrats would be able to pass legislation making it easier for cannabis companies in the US to access funding from banks.
“When this did not occur, sentiments fell toward the space, and several factors have since dispelled enthusiasm,” said Lucas.
Global X’s Cannabis ETF is the worst performing fund in the set, according to the Morningstar data.
Lucas added that rising inflation has also had an impact on the cannabis market.
“Rising prices motivated consumers to pursue cheaper cannabis options sourced from illicit markets, which has in turn contributed to slowing sales in markets such as Colorado, Illinois, Massachusetts, and Pennsylvania,” he said.
READ Q & A: Inside the latest cannabis company listing
“Canadian companies have been unable to lift prices so as to remain competitive with illicit markets, leading to disappointing earnings.”
Supply chain disruption caused by the ongoing war in Ukraine has also had an impact.
“Notably, the conflict has pushed up prices for ethanol, which is often used as a solvent for cannabis derivative products,” said Lucas. Ethanol prices are up about 35% since February, he said.
“Higher gas prices also strain already tight margins for cannabis delivery services.”
Nawan Butt, manager of the Medical Cannabis and Wellness ETF — which posted a -44.9% return over the 12 months to the end of April — said cannabis stock performance had been hit due to regulatory challenges around investor access.
Companies in the sector, he added, “continue to improve their top-line sales and achieve bottom-line success” as markets for medical cannabis are on the rise.
The European cannabis market is expected to be worth around € 3.2bn by 2025, up from € 404m at the end of last year, according to Prohibition Partners — a firm that tracks the cannabis market.
Germany is forecast to represent more than half of the European market until 2024, with France and the UK also expected to represent a significant share. Medical cannabis usage was legalized in the UK in 2018.
“It is investor enthusiasm centerd around the slow speed of regulatory reform that plagues the sector and investors,” said Butt. “Under the current regulatory regime many investors are barred from investing in cannabis with a shortening list of brokers and custodians that provide access. This has led to many liquidations in the sector over the past year as Canadian retail investors and a handful of family offices and hedge funds provide the only liquidity to the sector. ”
In the UK, the Financial Conduct Authority published guidance on its rules for weed listings last year. The regulator will not admit the securities of a company with any opportunityal cannabis business to list — even if the procedures were generated from a firm operating in a country where engagemental weed was legal — since anyone raising any funds from such a listing would be breaching the Proceeds of Crime Act 2002.
However, if a medicinal cannabis or cannabidiol firm can show the FCA that it could steer clear of such money laundering offences, and met the rest of its listing rules, they can be admitted to IPO.
A number of cannabis firms have taken that opportunity to list on mid-market exchange Aquis. Four took to the exchange last year, data provided to FN shows — Apollon Formularies, Pharma C Investments,, Voyager Life, and Yooma Wellness.
To contact the author of this story with feedback or news, email David Ricketts