Stock Selection
Of the 700-stock universe of publicly traded banking and financial services firms, RASARA screens out micro-caps and concentrates on stocks with market capitalizations between $500 million and $20 billion: roughly 200 banking companies.

We conduct research to determine which geographic sectors of the U.S. banking industry hold particular investment promise and identify which investment themes may impact the market value of banking and financial service sector securities. Fundamental and comparative performance analysis is utilized to identify companies exhibiting superior earnings potential. Our primary interest is in institutions characterized by strong financial condition, proven management ability, attractive location (a growing community), and a business niche or proprietary skills. This analysis results in a list of around 50 prospective Buy candidates for the portfolio.

From this stock group we construct a portfolio comprising the best 20 to 40 undervalued stocks that offer superior price appreciation potential. Technical analysis is used to help identify when a stock’s undervaluation reaches the desired Buy or “entry” point. Each resulting position represents less than 5% of the aggregate portfolio. 

Portfolio Construction & Risk Management
RASARA builds its portfolios so that there is diversification on multiple levels.

By sources of revenue generation:

• Net interest revenues

• Non-interest revenues

By geographic focus of the business:

• Local

• Regional

• National

By stock cap size: 

• Small and mid-cap bank stocks comprise approximately 80% of the portfolio, with large cap financial services stocks accounting for the other 20%.

While not a primary investment objective, RASARA may have exposure to large cap stocks in its portfolio. These positions generally develop as a result of smaller companies in the portfolio being acquired by larger banking institutions. These positions are held as long as the firm believes it is worth maintaining a position in the acquirer. 

Although typically a minority portion of the portfolio, these large cap holdings also provide an additional layer of liquidity.

Managing Investment Risk
RASARA manages geographic risk through investment diversification among different companies in different regions of the country. 

The greatest company-specific risks pertaining to bank earnings are interest rate risk and asset quality risk. Interest rate risk is controlled through a bank’s ability to maintain a balanced asset/liability policy. A neutral asset/liability posture shields a bank’s net income margin from large fluctuations due to changes in interest rates, thereby minimizing the impact of those changes on profitability. The ability of banks to manage interest rate risk has increased dramatically over the past 15 years, a development that remains largely under appreciated by the investment community.

Asset quality risk is mitigated through conservative underwriting standards. 

In conducting its analysis, RASARA looks to identify banks that have strong capital reserves, superior asset quality and neutral asset/liability policies.