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Investment fund bets on companies in burgeoning legal marijuana sector

by Chris Bahn | November 13, 2016 at 5:45 a.m.

Tim Taggart is, ahem, high on marijuana as a sound financial investment.

Taggart lives in Denver and is CEO of American Growth Fund Series Two (AMREX), a mutual fund billed as "the country's only Cannabis Mutual Fund." Investors in the 5-year-old fund -- Taggart said there are about 50 of them -- agreed to shift their focus to marijuana-related companies three months ago.

Eventually, the aim is to invest at least 80 percent of the fund in a range of small-, mid- and large-cap stocks of companies involved in cannabis-related industries. Prospects range from pharmaceutical, agriculture and tobacco giants to smaller businesses specializing in safety and software.

Taggart reached out last week after Arkansas voters became the first in the Bible Belt to approve legalization of medical marijuana. California joined Alaska, Colorado, Maine, Massachusetts, Nevada, Oregon, Washington and Washington, D.C., in approving recreational marijuana.

Medical marijuana is now legal in 28 states with another 16 states allowing limited medical use.

ArcView Market Research estimates the legal market for marijuana will eclipse $22 billion by 2020. Legal cannabis sales reached $5.7 billion in 2015 and are projected to hit $7.1 billion for this year.

"It's a growth industry," Taggart said. "My big inspiration in focusing the fund on cannabis was to make money. We'll see some of the large tobacco companies get into it. Some of the companies starting up now are going to fail. Some are going to be the next Microsoft or Apple. It's an easy sell. It's not like marijuana doesn't exist in the population. It does. Now we make it into a business and make money off of it. I'm not a pot user myself, but there are a lot of them out there."

AMREX has net assets of about $898,000 with a return of 8.39 percent and expense ratio of about 8.94 percent, according to Yahoo Finance. How successful this particular investment is over the long run remains to be seen, but based on the number of states making marijuana legal in one form or another, there certainly seems to be future business opportunity there for the right people.

Even as states relax their prohibitions on marijuana usage, mainstream acceptance of a fund like this -- and other cannabis-related business ventures -- will take some time.

A number of factors make it a risky proposition, not the least of which is marijuana's classification as a Schedule 1 drug. Because of that distinction banks are fearful of violating federal laws against money laundering and are unwilling to facilitate credit- or debit-card transactions. Research also is restricted because of the Schedule 1 classification.

Earlier this year the Food and Drug Administration elected to continue its stance that marijuana has no known medical benefit and is a Schedule 1 narcotic. Even in states like Arkansas, where legalization has been approved in some form, businesses involved in the cannabis trade are technically in violation of federal law.

Investors were warned of the potential trouble with marijuana-related companies in a 2014 note from the Securities Exchange Commission. Included in the SEC's investor note was a section explaining, "if you are considering investing in a company that is connected to the marijuana industry, be aware that marijuana-related companies may be at risk of federal, and perhaps state, criminal prosecution."

Taggart said when -- not if -- the FDA changes its classification of marijuana, the investment opportunities will be substantial. Even with the uncertainty today, Taggart finds the willingness of others to invest in the industry is growing.

"There is a lot of interest in this, even in typical states where you wouldn't expect interest," Taggart said. "When it comes to investing, if people think they can make money, then the moral side of it is re-adjusted."

SundayMonday Business on 11/13/2016

Print Headline: Investment fund bets on companies in burgeoning legal 'pot' sector


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