The Bengal Bite 

- quick thoughts-

Institutional Investors: Where Art Thou? 

We have heard ad nauseum that cannabis does not have “institutional investors” because of its status on the federal level as a controlled substance. But what exactly does that mean and why is it important?  

What is an “institutional investor”? There are many definitions but in the broadest sense these are paid professionals who allocate money for investors. Their investors can be individuals or large groups like mutual funds or ETFs, pension funds, insurance companies or endowments.  The key point to make however is that there exists an army of people who wake up every morning and are incentivized to do one thing and one thing only - allocate MASSIVE pools of capital to wherever they think there is a return. As you can see from the chart below this isn’t some trivial number either. The majority of all equity ownership in the US is in the hands of institutional investors

https://www.pionline.com/article/20170425/INTERACTIVE/170429926/80-of-equity-market-cap-held-by-institutions

This may seem fairly obvious but another point to add is that many of these institutions are constantly seeing inflows of capital from their investors (maybe less so recently). Pension funds invest tax dollars and contributions, insurance companies re-invest premiums, etc etc. The spigot of money that gets turned on and is continually added to these positions is substantial and provides the liquidity and depth of market that is essential for large players to trade in and out of their holdings. Liquidity begets liquidity and fresh dollars are added to positions over time which creates solid bases for many large stocks.  

So what “happens” when the day arrives where institutions can invest in US cannabis? In the quieter circles of the investor community we all hope and dream of an instant rerating of these downtrodden stocks where they trade in line with other growth industries. An even deeper confession is that every investor in cannabis stocks has had daydreams of what would happen if the Wall Street Bets retail crowd decided to “stick it to the man” and get all in on cannabis stocks before the big boys could.    

The bigger question is are these realistic thoughts or are we just telling ourselves what we want to hear? There is absolutely truth to the fact that increased liquidity and access on US exchanges will broaden the universe of potential investors. But if one looks at the institutional ownership percentages for ACB and TLRY (US listed NASDAQ companies) it’s not exactly as if institutions are lining up to own these stocks (yes, if you look at previous Bengal materials, you’ll note we’re well aware of the poor fundamentals). Yahoo Finance says institutional holders make up ~16% for both TLRY and ACB). It should be noted that many of the institutional names on these lists are market making and trading firms - not long duration investors like pensions and the like. Is it because institutions don’t like the stories or fundamentals of these stocks? Is it because they are too volatile and early stage? Is it a mixture of both?   

Only time will answer these questions but if there is one thing we’ve learned over time it’s that Mister Market doesn't usually make things so easy.