Activist hedge fund Engaged Capital is having a good year. The hedge fund produced a return of 6.92% net for investors during the second quarter, taking the year-to-date returns to 7.04%. Average long exposure during the quarter was 85.26%, according to a letter to investors reviewed by ValueWwalk. Since inception (01/01/2014), the Engaged Capital’s Flagship Fund has produced a cumulative return of 58.71% net or 10.21% annualized compared to a return for the HFRI Event Driven Index of 5.79% per annum over the same period.
Engaged runs a small-mid cap focused concentrated investment strategy with 78.6% of assets invested in eight core activist positions. The second largest position, accounting for 14.4% of assets is Rent-A-Center, which is described by Wikipedia as "an American public furniture and electronics" where Engaged is currently pursuing a campaign to get the company to reduce its bloated cost base.
Engaged Capital Activist Takes On Hain
Earlier this week, Glenn Welling, founder and Chief Investment Officer of Engaged Capital sent a letter to Rent-A-Center's board criticising the company's "spendthrift culture that is coming straight from the top, starting with the new Chairman of the Board." Of particular concern is the company's ownership of a jet to ferry around senior management:
"Frankly, I believe it is unwarranted for a company of RCII’s size to own a jet aircraft, and I am sure the rest of the shareholder base would agree. Further, I am flabbergasted that the Chairman of the Board thinks it is appropriate to spend what we estimate was over $50,000 to fly from Mexico City to Newport Beach while a round trip ticket from Mexico City to LAX in standard class would have cost under $700 and a business class ticket likely would not have exceeded $3,000. How is it possible, in the face of the challenges facing the Company, that this exorbitant expense can be justified?"
Engaged is pushing for the sale of RCII, which according to the company's second quarter letter to investors trades at a discount to sector peers with "significant levers for value creation, including a sale of the entire company to a strategic or financial acquirer." At the 2017 annual meeting, the fund succeeded in getting three of its representatives on the company's board.
The hedge fund's letter to investors states:
RCII had a very eventful second quarter which culminated in our victory at the June 8 Annual Meeting of shareholders where all three Engaged nominees, Jeff Brown, Mitch Fadel, and our own Christopher Hetrick were elected to the Company’s seven-member board of directors. Naturally, we were quite pleased with this result and the overwhelming support we received from our fellow RCII shareholders. The win should send a message to the newly reconstituted board that a mandate for change has been delivered by the Company’s true owners and that the parallel sales process that Engaged campaigned for is what investors would like to see instituted as soon as possible.
Engaged's largest position is Hain Celestial. Not only is Hain the firm's largest holding, it is also the newest.
Hain is the largest publically traded company focused on natural, organic and non-GMO packaged food. With a 9.9% holding, Engaged is now the company's largest shareholder. The fund likes Hain because of the company's positioning in the health food market, and potential for growth as demand for these products increases.
What's more, Welling and team believe that the company has made some strategic missteps, which have depressed the valuation relative to peers. To address these issues, Engaged has nominated seven director candidates for the next annual meeting, with the goal of evaluating "all options to create shareholder value," which may include a sale of the company, asset sales or operational improvements.
Hedge fund's top holdings below.