PSDN: 1st Quarter 2023 Portfolio Review
Performance
Since the launch in November 2021, AdvisorShares Poseidon Dynamic Cannabis ETF (ticker: PSDN) has endured an incredibly difficult trading environment for risk assets, including the global cannabis sector. PSDN’s NAV declined 20.04% in 1Q 2023. Rising interest rates and scant potential for any Federal legislation in the near-term have clouded cannabis focused investors regardless of companies that are showing good long term prospects. The S&P 500 gained 7.50% and the Russell 2000 gained 2.74% during the quarter.
Holdings
Our portfolio composition remains focused on companies we believe exhibit fundamental quality attributes, such as scale, balance sheet, leadership, capital allocation. Due to our selection based on these qualities, the PSDN portfolio remains mainly focused on U.S. operators with close to 90% exposure, and strategically allocating to international opportunities that meet our portfolio focus. Our top holdings and weightings are noted below.
We intentionally kept leverage in the portfolio low throughout 1Q 2023. We started the quarter with a weekly average of 0.96x and maintained a conservative exposure, ending with an average of 0.93x by the last week of the quarter. Maintaining a below 1x leverage turned out to be the right move as the sector continued its bear market decline in 1Q 2023.
PSDN is able to dynamically employ leverage to its portfolio of up to 1.5x net assets. Our previously stated goal was to maintain leverage in the 1.15x – 1.25x range. We have revised this approach to utilize more of our leverage range as we believe the sector is still clearing the headwinds of investors over indexing to federal progress, which we do not see as likely, and while fundamentals of sector leading companies transition back into a healthier growth trajectory.
Top Holdings
| Ticker | Security Description | Portfolio Weight % |
| GTBIF | GREEN THUMB INDUSTRIES SWAP REC | 32.46% |
| AAWH | ASCEND WELLNESS HOLDINGS SWAP REC | 16.45% |
| CURLF | CURALEAF HOLDINGS INC SWAP REC | 16.36% |
| TCNNF | TRULIEVE CANNABIS SWAP REC | 8.54% |
| VRNOF | VERANO HOLDINGS CORP SWAP REC | 6.11% |
| CRLBF | CRESCO LABS INC SWAP REC | 4.11% |
| SNDL | SNDL INC | 3.73% |
| TRSSF | TERRASCEND CORP SWAP REC | 2.24% |
| INCR | INTERCURE LTD | 0.84% |
| OGI | ORGANIGRAM HOLDINGS INC | 0.82% |
As of 03.31.2023. Cash is not included. Subject to change.
Cannabis Sector Review
The cannabis industry ended the quarter with a continued crisis of confidence. Pricing pressure moderated in select US markets, while continued declines in others including Canada. Missouri has been a bright spot with adult use sales beginning in the quarter and quickly performing above expectations. The industry saw continued declines in earnings estimates post the annual reports were released by most public companies in the sector. It is important to note that expectations were the closest to actuals we have seen in several quarters now. We may finally have cleared this long process of estimates declining as companies also seem to be focused on guiding more conservatively. Companies are finally making the hard choices of managing their spend, as they are realizing that capital markets are not likely returning for the foreseeable future. Other companies, such as key holdings in PSDN have been ahead of many others with a focus on managing their costs, capex plans, addressing their balance sheets, and preparing for an environment that largely does not include capital markets. We believe that is the preferred approach given the lack of federal reform in cannabis, continuing macro headwinds of declining economic indicators, and ongoing elevated interest rates by the US and other Central Banks.
Outlook
Rationale for an investment in PSDN
Despite the returns in 1Q 2023, we remain steadfast in our belief that cannabis has very attractive long term investment prospects. We have seen several equities retrace or go below their initial public offering prices while their businesses have grown significantly and are on a path to generating positive cash flows.
Valuations of select companies focused on the U.S. cannabis market are at a material discount to their intrinsic value. The inability for the US operators to list on major U.S. exchanges is a deterrent to institutional investment. We were reminded of this in 1Q 2023 when Cowen was forced to exit its trading and custody of cannabis stocks. This led to another round of selling pressure as it seemed that some institutions chose to sell their positions rather than trying to find an alternative. Losing another brokerage is continuing to create a lack of liquidity in these stocks. Unfair Federal taxation, and a lack of clear banking regulations add to the justification of discounted valuations to other industries, but we see valuations trading below those levels.
We believe that the upside in the U.S. cannabis sector will not be as correlated as the downside has been throughout this bear market. This year, 2023, could be the year this correlation breaks into the haves and have nots, those that are building good businesses should see their stock prices outperform the latter. Alpha should get rewarded as the bear market ends as it should be beneficial to not own the challenged businesses and focus on those that are poised to grow for years to come. Our dynamic leverage is also a potential alpha generator but we are remaining patient with a less than 1x leverage to start 2Q.
Respectfully,
Emily Paxhia
Poseidon Investment Management
AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN) Portfolio Manager
Morgan Paxhia
Poseidon Investment Management
AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN) Portfolio Manager
Tyler Greif
Poseidon Investment Management
AdvisorShares Poseidon Dynamic Cannabis ETF (PSDN) Portfolio Manager
Past Manager Commentary
Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark is a fund’s alpha.
Beta measures the sensitivity of an investment to the movement of its benchmark. A beta higher than 1.0 indicates the investment has been more volatile than the benchmark and a beta of less than 1.0 indicates that the investment has been less volatile than the benchmark.
MSOs (multi-state operators) are vertically integrated cannabis companies operating in the United States with cultivation and storefront retail operations across more than one U.S. State.
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Before investing you should carefully consider the Fund’s investment objectives, risks, charges and expenses. This and other information is in the prospectus, a copy of which may be obtained by visiting www.advisorshares.com. Please read the prospectus carefully before you invest. Foreside Fund Services, LLC, distributor.
Cannabis-Related Company Risk – Cannabis-related related companies are subject to various laws and regulations that may differ at the state/local and federal level. These laws and regulations may (i) significantly affect a cannabis-related company’s ability to secure financing, (ii) impact the market for marijuana industry sales and services, and (iii) set limitations on marijuana use, production, transportation, and storage. Cannabis-related companies may also be required to secure permits and authorizations from government agencies to cultivate or research marijuana. In addition, cannabis-related companies are subject to the risks associated with the greater agricultural industry, including changes to or trends that affect commodity prices, labor costs, weather conditions, and laws and regulations related to environmental protection, health and safety. Cannabis-related companies may also be subject to risks associated with the health care sector and the biotechnology and pharmaceutical industries. These risks include increased government regulation, the use and enforcement of intellectual property rights and patents, technological change and obsolescence, product liability lawsuits, and the risk that research and development may not necessarily lead to commercially successful products. In addition, rising costs of medical products and services, pricing pressure (including price discounting), limited product lines, and an increased emphasis on the delivery of health care through outpatient services may affect the healthcare sector
Leverage Risk – Leverage is investment exposure that exceeds the initial amount invested. The loss on a leveraged investment may far exceed the Fund’s principal amount invested. Leverage may magnify the Fund’s gains and losses and, therefore, increase volatility. The use of leverage may result in the Fund having to liquidate holdings when it may not be advantageous to do so.
IPO Risk – The Fund may invest in securities offered in IPOs or in companies that have recently completed an IPO. The market value of IPO shares can have significant volatility due to factors such as the absence of a prior public market, unseasoned trading, a small number of shares available for trading and limited information about the issuer.
Shares are bought and sold at market price not net asset value (NAV) and are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined) and do not represent the return you would receive if you traded at other times.
The views in this commentary are those of the portfolio manager and may not reflect his views on the date this material is distributed or any time thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.