Faircourt Asset Management Inc CEO Charles Taerk talks about how the company launched the first Cannabis-focused mutual fund – the UIT Funds which invest in cannabis companies among other things. Charles shares his thoughts on what makes a good marijuana company as well as shares some of the company’s that they are particularly interested in and why, like CannTrust Holdings Inc (TSE:TRST) (OTCMKTS:CNTTF) (FRA:C9S) and MedReleaf Corp (TSE:LEAF) (OTCMKTS:MEDFF) (FRA:MEW)

TRANSCRIPT:

James West: Charles, thanks for joining me today.

Charles Taerk: Thanks for having me on, James.

James West: Charles, I heard that you were the first mutual fund in the cannabis space in Canada, but I’ve heard also others laying claim to that same sort of idea.

Charles Taerk: Sure. We launched the first cannabis-focused mutual fund in the country – March 17, 2017 was our opening day. And originally, yeah, almost three weeks, four weeks ahead of the second entrant, which was the Horizons Passive ETF.

James West: Okay. So how much capital under management?

Charles Taerk: Right now, a little over $11 million, and holding steady. We’ve been doing really well with the advisor channel.

James West: Sure, okay. So this is a actively managed mutual fund, open-ended, versus a (unintelligible)

Charles Taerk: Well, there’s a couple of things. Some people look at the, there’s private equity funds, there’s many private equity funds that are focused at looking at the really early-stage, higher-risk private companies. Then there’s passive strategies, which, I think ETFs with passive strategies have a place in everybody’s portfolio; except, you need a passive strategy when you’re in a sector or in a market that’s very liquid, there’s a lot of research and a lot of coverage, well-known names, well-known industry and a lot of liquidity.

That’s not the case in the cannabis sector. When you look at the last year, I think case in point has been made: there’s a lot of volatility, there’s not a lot of research on the companies, and there’s a lot of volatility in the sector.

James West: Yeah.

Charles Taerk: So that’s where we believe you need active management. We are constantly meeting management teams, we’re touring the facilities, we’re getting to understand where their cost advantages are, and seeing what their growth plans are. and really, I think that’s where we have an advantage, because we can avoid some of the messes that we see potentially happening down the road. Whereas if you’re in a passive strategy, it only gets rebalanced every quarter, then you’re in for the ride.

James West: Ideal cannabis company look like in terms of growing style, location, strategy? What does that look like?

Charles Taerk: Well, there’s, you know, all sizes, many different stories. To me, I think the biggest differentiator are the management teams.

James West: Oh?

Charles Taerk: Putting aside the structure of the building, because in Canada, let’s face it, we don’t have the best weather, so you need to have good structure, we see certain companies building greenhouses, and there’s great history with using greenhouses in the fruit and vegetable business in this country, so that has a place. We also see very solid production in indoor. But it’s the management teams that are going to make those operations work, make them profitable, make them efficient.

James West: So Charles, you must have some favourites in the cannabis sector. What are some of your favourites that you hold in the fund?

Charles Taerk: Sure. For different reasons, we really like CannTrust. We have a strong position in Med Releaf. We also, at the other end of the spectrum – those two are, you know, fairly large players – at the smaller end, we like Hydropothecary, although not that small anymore. We like ICC. So our portfolio is mixed between the larger players, the incumbents, so to speak, and some of the newer entrants.

James West: Sure. What is it about CannTrust that attracts you?

Charles Taerk: A number of factors. Number one, great management team; between Brad Rogers and his team you’ve got a great combination of consumer packaging, consumer products people, as well as pharmacists and people that have been in the pharmaceutical industry. They’ve got a great Board of Directors with a lot of experience in the pharma business, and then, added to all that, you’ve got a joint venture with Apotex, Canada’s largest generic drug manufacturer.

James West: Right.

Charles Taerk: So what that is going to allow them to do is take all their medications, help them both develop more IP, and distribute to the over 100 countries where Apotex already has sales offices.

James West: Wow.

Charles Taerk: So that’s a big factor for us.

James West: Sure. Lots of distribution.

Charles Taerk: Yep.

James West: Okay, so what are some of the smaller opportunities you see, like, what are you attracted to in terms of an earlier stage company?

Charles Taerk: Right now, the sector has really gone through a big change, even over the last year, where initially it was all about building capacity. All the licensed producers are either adding additional locations or building out their current projects.

But now it’s looking more towards technology: how can we improve efficiencies? So it’s new applications to help with the grow process, it’s companies that are reducing the time that it takes to get plants from growth stage into extraction; so where companies are going to be able to differentiate and reduce costs is, how are they able to drive a plant out to get it ready for production? If you can reduce the time, you’re reducing costs, you’ve got an advantage.

James West: Right. Huh, interesting. So it would seem to me that you’re less attracted to just ACMPR growers and more focused on what they’ve got in addition to being a grower down the road?

Charles Taerk: Yes. Those are going to be the competitive factors, the differentiators, down the road. It’s not just having a million square feet, it’s how are you reducing costs, adding distribution, getting to global markets. Those are going to be some of the next critical steps for these companies.

James West: Okay. Charles, this time let’s drill down a bit on the difference for investors in terms of risk and opportunity from companies that are Canadian-listed operating Canadian assets, versus Canadian companies offering a) US assets or b), assets elsewhere in the world that are fraught with their own different sets of risk and opportunity sort of ratios. What’s your overview on that?

Charles Taerk: Sure. I think there’s a big opportunity to look at the operations globally. There’s always going to be risks, so one of the things that we do as active managers is, we look at each company, we look at the regulations and the regulatory framework that they operate in. we want to make sure that, a) they have the right licenses, that there aren’t additional requirements that we didn’t know about, and they’re operating within the general framework.

I think the US government right now adds a lot of dysfunction to the cannabis space –

James West: To every space.

Charles Taerk: But when you look at this, there’s a lot of opportunity for the Canadians to take advantage and continue our leadership, while at the Federal level, there really is no desire to move it forward, but you have this patchwork group of States that are increasingly legalizing for medical at least, if not for rec.

James West: Right.

Charles Taerk: So, Canadian companies have a great opportunity in the United States. It’s a little tricky, but as we’ve seen with certain companies, as long as you’re operating within the law, there are ways to take advantage.

James West: Sure. So give me an example of a company operating successfully in the US as a Canadian-listed company.

Charles Taerk: We would tell people to look at CannaRoyalty. It’s a Canadian-listed licensed producer that has extensive business in California, and what’s great about CannaRoyalty is that it appears to be what the Canadian market will be down the road. What I mean by that is, CannaRoyalty4 doesn’t have an extensive amount of production, meaning, farming; but they are in all the value-added aspects of the cannabis business. They’re in extraction, they’re in distribution, they’re in marketing, and that’s where we see the future of this industry, not just domestically, but around the world, that you can’t have plants being grown in 47 different countries, because not all places have the right geography or climate.

But where you can take your know-how into other countries and property distribute your product, properly market, work with pharmacies, then you’ve got a whole different opportunity. And that’s where I think CannaRoyalty shows Canadian investors, and actually may be why it’s not getting some of the attention that the larger players in Canada get, is that Canadian investors have been taught over the last year, well, I’s all about the number of square feet you have under growth. But actually, it’s not.

James West: Not anymore.

Charles Taerk: Because that’s an agricultural business.

James West: Right.

Charles Taerk: With what some people would look at as a very low-margin business.

James West: Sure.

Charles Taerk: It’s what are you going to do with the plant once it’s grown? You’re going to extract it for oil, you’re going to make medicines, you’re going to make other value-added product. And by value-added I mean higher margins. So that’s also one of the critical factors we look to in some of these companies.

James West: Do you think that the licensing that’s going on in states that have become pro-marijuana, do you think that there’s a risk of over-supply in the US market and in the Canadian market, separately?

Charles Taerk: Well it’s different, because with a patchwork in the US, the states that have legal frameworks, product can’t be shipped outside those states.

James West: Ah, so they’re captive markets.

Charles Taerk: So it’s from a Federal perspective, you’re trapped. There will be production growth, and there is more production in the US, especially in those states where the climate is more conducive for growing.

James West: Sure, like California.

Charles Taerk: California, Arizona, Nevada, and so that’s going to come over time. But we do see that sort of phenomenon taking place in Canada over the next four or five years, where if all the production gets ramped up to the funded capacity that we’re talking about now, there will be a time where the licensed producers have generated or grown enough to satiate the domestic market. And that’s where the global market still will be the added cream in the coffee. That’s where Canadians are going to do really well, because we’ve got export markets to be distributed.

James West: Sure. And in Europe, for example, is the movement to sort of decriminalize and de-prohibit cannabis for medical purposes along the same lines and pace of Canada?

Charles Taerk: Everybody is watching Canada. We’re the first G7 country to legalize both for rec and medical; most people don’t realize medical has been legal here since, really, 2001, and in a big way over the last five years. But Europe is going to take a step-by-step process. Germany was the first big market to legalize for medicinal purposes, and that’s a huge opportunity, because everyone knows, Germany really is the centre of Europe from a business opportunity/innovation standpoint, and their medical coverage is very extensive when it comes to the cannabis medicinal properties.

Many pharmacies, 90 million people, and so there’s been a bit of a rush on the part of those Canadian producers to get into Germany. As long as you have, again, the right regulatory framework, many of the Canadian companies now have GMP certification to sell into Europe, and Germany is going to be their first base. That’s going very, very well for companies like Kronos, for MariCann, for a couple of the others that are starting to get into Germany.

James West: Right. So from your perspective as a manager, as an active manager of a mutual fund, do you have a sort of hesitation to investing in companies operating in the United States because of the federal prohibition, or do you think that issue is largely more or less stable because of the détente that exists between states and Federals?

Charles Taerk: I think that we take a one by one step process.

James West: State by state, then?

Charles Taerk: Yeah, state by state, and even enterprise by enterprise.

James West: Oh, okay.

Charles Taerk: We want to see each state, different population, different sort of licensing, what medical coverage are they allotting for cannabis, because each state is a little bit different in terms of the ailments that medical cannabis is being offered for. So we’ve got to be really careful that although we think that it would be great to have access to a state with a large population, if they’re only legalizing medicinal cannabis for one or two ailments that aren’t really going to generate a lot of revenue, then again it’s more of an investment risk; why be there?

James West: Right, right. Well, we’ll leave it there for now, Charles. Fascinating as usual. Thanks for your time today.

Charles Taerk: Great.