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3 LICs for a strong and passive portfolio

Knowing what to buy, when to buy and then when to sell can be a stressful and/or time consuming process. Most people might just be better off investing in a listed investment company (LIC) and letting the manager make the investing decisions for them.

The only job of a LIC is to invest in other shares for the benefit of shareholders. Not every LIC will generate strong returns. Investors wishing to beat the ASX index shouldn’t invest in the LICs that invest in a similar fashion to the ASX Index.

However, these three LICs could be good options:

WAM Microcap Limited (ASX: WMI)

WAM Microcap is the WAM LIC that focuses on the smallest end of the share market. It looks for undervalued growth companies with a market capitalisation of under $300 million at the time of acquisition.

The small cap area of the market is the least-covered area by investors and analysts, meaning that there could be the most opportunities. In the financial year to date the WAM Microcap portfolio has grown by 21.4% before fees, outperforming its benchmark.

If it pays another 2 cent per share dividend at the full-year result it’s trading with a grossed-up dividend yield of 4.1%.

NAOS Absolute Opportunities Co Ltd (ASX: NAC)

This is a LIC that focuses on shares with an industrial bias and have market capitalisations of between $400 million to $1 billion.

The Naos investment team invest in shares with at least a three-year investment horizon in mind. That’s why its portfolio has returned an average of 16.26% per annum over the past three years before fees.

I like that the Naos portfolios are quite concentrated, meaning the team only invests in shares that it believes will deliver good returns.

If the LIC pays another 2.75 cent dividend at the full-year result it is currently trading with a grossed-up dividend of 7.8%.

L1 Long Short Fund Ltd (ASX: LSF)

This is a new LIC to the market. It boasted of generating strong returns in the unlisted fund, indeed over the past three years its average net performance after all fees per annum was 39.42%.

The LIC could continue to perform well because it has the ability to invest in Australian shares and international shares. As the name suggests, it can also short stocks if it wants to.

I think investment managers that invest into global stocks will be the ones to outperform over the next few years.

Foolish takeaway

I would happy to buy WAM Microcap shares at today’s price, as I believe in the WAM investment process. The Naos one is interesting, but it has comparatively high fees and an odd benchmark. The L1 Long Short LIC could do very well, but I’d like to see what it is investing in before I commit any money.

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Motley Fool contributor Tristan Harrison owns shares of WAM MICRO FPO. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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