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.