Denali working to stop asset drain, boost returns

Quant value equity manager adds staff to refine its model

Denali Advisors LLC is at a critical juncture.

Assets under management have declined by about half since the first quarter of 2011, to $558.8 million as of Sept. 30, because of client terminations and market depreciation.

Denali managed $1.4 billion at its peak on March 31, 2010.

Despite the drop, Denali is still profitable, said Robert Snigaroff, founder, president and chief investment officer of the La Jolla, Calif., firm. He said Denali executives are making enhancements to the quantitative investment process that will help produce better returns for its large-cap and midcap value equity strategies.

“We are making a conscious effort to continuously improve,” said Mr. Snigaroff, an Alaskan Native of the Aleut Tribe who founded Denali in 2001. Prior to that, he was CIO of the $8.6 billion San Diego County Employees' Retirement Association.

Mr. Snigaroff faces double trouble as he attempts to rebuild performance: His firm is a value-oriented quantitative equity manager.

Both styles have suffered since the financial crisis, but even among value managers, Denali's performance has been poor. Its large-cap value strategy, with around 60% of the firm's assets under management, ranked in the 88th percentile of the 406 managers tracked by eVestment Alliance, Marietta, Ga., for the year ended Sept. 30.

For the three-year period, Denali was in the bottom 80th percentile; for the five-year period, the firm was in the bottom 86th percentile.

The firm's midcap strategy also has done poorly compared to its peers, ranking it in the 87th percentile for the year ended Sept. 30; 68th percentile for the three years; and the 83rd percentile for five years.

Denali could be particularly vulnerable if its largest remaining clients were to terminate the firm. More than 65% of its assets come from three sources.

The $36 billion New York City Employees' Retirement System has $115.7 million in Denali's large-cap value strategy, and the $146.5 billion New York State Common Retirement Fund, Albany, has $126.2 million in the large-cap value and $57 million in the midcap value strategies. Denali also manages more than $100 million in an emerging manager-of-managers program run by Progress Investment Management Co., San Francisco.

Denali has underperformed both New York pension funds' benchmarks over one- and three-year periods. According to data from the New York City fund, Denali returned 9.94% for the year ended Aug. 31, compared with 17.3% for the Russell 1000 Value index. On a three-year basis ended Aug. 31, Denali returned an annualized 10.24%, vs. 12.08% for the benchmark.

For the state pension fund, its data show Denali's midcap value strategy fared better, although still underperforming its index, returning 3.23% in 2011 against the Russell Midcap index's 3.31%. For the three years ended Dec. 31, 2011, the portfolio returned an annualized28.2% while the index returned 29.13%.

Spokesmen for both funds wouldn't say whether Denali was on their watchlists.

But Thurman V. White Jr., founder and CIO of Progress, said, “We are concerned about their performance.” Mr. White added he's hopeful Mr. Snigaroff will be able to improve performance.

Significant impact

“The departure of any of the clients would clearly significantly impact profitability of the firm, and accelerate the need to rebuild assets and revenues, either in the same or other products,”said Janie Kass, managing director of Margolis Advisory Group Inc., San Francisco, a consultant to money managers.

Ms. Kass said while it is difficult to know the profitability of a firm without a solid understanding of its cost structure, a long-only traditional equity firm with assets similar to Denali's “is clearly not extraordinarily profitable. In many cases it is near break-even at best, if current costs are low. Either a firm needs to grow assets or diversify into alternatives.”

Denali's biggest client, the $36 billion Teachers' Retirement System of the State of Illinois, Springfield, announced in October that it had terminated the money manager, which ran $140 million in its large-cap value strategy. Denali, which had graduated from Illinois Teachers' emerging managers program in February 2010, was terminated because its assets had dropped to the point that TRS accounted for 20% of the AUM, a level too high for investment staff's comfort, an official said.

Further compounding Denali's problems, Martin Curiel, partner and director of marketing and client services, left earlier this year to become vice president of client services at Matthews International Capital Management LLC, San Francisco. He was Denali's only salesman, according to multiple sources. The Matthews website says Mr. Curiel was a partner in Denali; it is not clear if he sold his interest. Mr. Curiel did not return repeated phone calls and Mr. Snigaroff would not comment on the departure, saying only that he's looking for a new salesman.

Mr. Snigaroff said he has talked with all of the firm's clients and they are “supportive.” He said he recently added a research analyst to the firm's investment staff, who has helped refine the firm's investment model.

“We are improving our investment process to make a material positive effort on our portfolio,” he said. “Quantitative models that rely on the usual factors are performing poorly. We identified a way to improve our performance by adding new factors.” Mr. Snigaroff also said he is intent on keeping existing clients and adding new ones to the firm's roster.

Encouraging signs

Mr. Snigaroff said he is encouraged by his firm's results during the past two months.

He said the firm's large-cap value strategy returned 0.78% in October and 0.36% in November; the Russell index returned -0.49% in October and -0.04% in November, he said.

Mr. Snigaroff said Denali's midcap value strategy returned 1.1% in October, compared with 0.11% for its Russell benchmark, and 1.96% in November, vs. 1.14% for the benchmark.

Terminations can make it hard for money management firms to bounce back and attract new clients, regardless of whether the firm is an emerging manager or a large one, said Kristin Finney-Cooke, a senior consultant at NEPC in Cambridge, Mass.

“Often emerging managers are put on a shorter leash,” she said. “They may not be given as much time to have poor performance as their larger bulge-bracket brethren.”

Ms. Finney-Cooke would not comment specifically on Denali.

Progress' Mr. White said most emerging managers have been able to survive hard times by taking action such as suspending or reducing salaries to partner-owners. “They can have more flexibility than a bigger firm,” he said. n

This article originally appeared in the December 10, 2012 print issue as, "Denali working to stop asset drain, boost returns".