[Most Graham and Dodd value investors tend to search for potential catalysts in depressed stocks that the rest of the market may not be focused on and hope that a catalyst will be recognized, triggered and come to fruition to propel the company’s share price higher. If the stock investment premise does not get realized—usually due to management’s inability to execute needed internal firm change or respond quickly to market challenges—managers often acknowledge the investment loss as a value trap mistake, sell their position and move on. For a relative few value managers, taking a stock position is just the beginning. These managers take an activist stance to support management and strengthen the firm’s efforts to solve their business challenges and enable their potential catalysts.

There are a range of activities under the banner of shareholder activism that are intended to result in some change in the corporation. These activities fall along a broad spectrum based on the significance of the desired change and the assertiveness of the shareholders’ activities including, private negotiations with management or board members, publicity campaigns or movements, proposing shareholder resolutions, proxy battles, litigation and more. On one end of the spectrum are one-on-one engagements between major shareholders and corporate management. The more aggressive end of the spectrum seeks a significant change to the company’s strategy, financial structure, management or board.

To explore this activist investment arena further, we went to new Institute members Kevin Rendino, CEO and portfolio manager, and Daniel Wolfe, president and portfolio manager of 180 Degree Capital Corp.—a publicly traded closed-end fund and registered investment adviser (NASDAQ: TURN) that manages its own capital alongside separately managed accounts. 180 Degree focuses on positively impacting the business and valuation of microcap companies through a process they call “constructive activism.” Their goal is to invest in and provide value-added assistance to substantially undervalued small, publicly traded companies that have potential for significant turnarounds, and that these efforts lead to a reversal in direction for the share price of these investee companies, in other words, a “180-degree turn.”]

Bill Hortz: With an investment philosophy firmly grounded in Graham and Dodd value management, how did your firm develop your investment methodology/strategy focused on constructive activism? What research or experiences led you down this path?
Kevin Rendino:
Starting with working at Merrill Lynch Asset Management in 1990, then BlackRock when we merged, I had one job with a Graham and Dodd Value focus for 24 years. I was either an analyst or, for the last 19 of those years, a portfolio manager of the Basic Value family of funds. It is the only way I have ever managed money, and the only way I ever want to manage shareholder assets, especially as a fiduciary of their investment capital.

And while I loved my time there, I left BlackRock in 2012 because I saw the advent of passive investing styles and had a desire to find an asset class that had less market efficiencies than my previous world of investing in Large Cap companies.  Blackrock just bought iShares and it was apparent the large cap universe was becoming an increasing universe of ETF’s and index funds. I wanted to focus my attention on areas of the market that may not have been as ripe for ETF and index fund investing; a group of companies that were unloved, orphaned, not really covered by wall street. That was the microcap world.

I started a friends and family fund called RGJ Capital and focused on investing in microcap companies. What I learned was many of these companies had real businesses and management teams that needed help… a great deal of and variety of help. Perhaps it was in investing relations help, balance sheet help, a new CFO, a new CEO, better capital allocation decisions, etc. So, I decided to call myself and act as a constructive activist, all the time employing the core principles of Graham and Dodd’s discipline about the valuations of businesses coupled with the prescriptions for good corporate management and responsible stewardship for the company.  It worked well right from the beginning. I found a number of holdings that were not only cheap, but also management teams receptive to hearing the views of an experienced Wall Street investor who had been in the business for 25 years at the one of the world’s biggest asset management companies. RGJ Capital had initial investment success including an activist campaign designed to replace the management of a company called Xplore Technology. Ultimately the company was sold for a large premium to our cost.

It was then in 2016 that I was nominated to the Board by an activist investor to 180 Degree’s predecessor company Harris & Harris Group, which was a broken Business Development Company (BDC) focused on venture capital investing.  Subsequent to my arrival on the Board, Daniel and I worked on a new path forward for the business and presented the board a strategy for how to fix the company. It centered on a Graham and Dodd investment strategy that had worked for me for years and I married that with the microcap activism I was doing since 2013. Essentially, we presented the business plan for RGJ Capital.

Daniel Wolfe: That is a good timeline on how the firm and its leadership came to its present mission and focus for investors. But I would also point to a fabulous article that always impressed me. The article suggests that investment activism’s birth can be drawn back to one of the two people we model our investment style on—Benjamin Graham.

I would also note that our structure as a close-end fund lends itself well to constructive activism and value investing.  The capital within 180 Degree is permanent, meaning it is not subject to redemptions by limited partners.  This permanency allows us to take advantage of market dislocations and other events that may lead to companies being deeply undervalued, in addition to ones that may be mismanaged.  We can also focus on being investors with a longer cycle than one quarter or one year if the investment thesis supports such an opportunity.  We also have the flexibility to manage outside capital alongside 180 Degree’s permanent capital and currently do so for a portion of a publicly traded company’s pension fund.

Hortz: Why are you strictly focused on microcap stocks? What makes them an attractive asset class for you?
Rendino:
The sole motivation for 180 Degree Capital is to create wealth for our shareholders and Limited Partners.  We have chosen the microcap world because the risk/reward of this investment universe is asymmetric and provides a low correlation to everything else in the market that is ETF’d and indexed. The world doesn't need another Large Cap Growth Fund focused on Apple and Google. But portfolios can be enhanced by using a differentiated product like ours.

We have chosen this asset class because there are limited participants and if our fundamental research proves correct, the upside is greater than most other areas of the market. Plus, many of these companies need help with our now 52 years of our combined experience in the financial markets. Sometimes they need our capital, sometimes they need our thought leadership on the Board, sometimes they simply need our advice on what Wall Street wants to see from the investee company.

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