There are a wide variety of listed investment companies (LICs) on the ASX. The purpose of a LIC is to invest into other shares for shareholders.
Some LICs invest at the large end of the ASX, such as Australian Foundation Investment Co. Ltd. (ASX: AFI). Some invest in mid-caps like NAOS Absolute Opportunities Co Ltd (ASX: NAC). Some invest at the small end of the share market like WAM Microcap Limited (ASX: WMI).
WAM Microcap is run by Wilson Asset Management, one of the highest-performing listed investment teams in Australia.
WAM’s original LIC, WAM Capital Limited (ASX: WAM), has been a strong performer since inception in 1999. Its portfolio has delivered a 17.5% return per annum before fees. However, its market cap is now around $1.5 billion and that makes it a little harder to generate strong returns.
WAM Microcap’s strategy goes back to the early days of WAM Capital of focusing on small caps, it’s looking at undervalued growth companies with a market capitalisation of under $300 million at the time of acquisition.
It’s been a stellar start to listed life for WAM Microcap, with the portfolio going up by 23.6% before fees over the past year. I wouldn’t expect every year to be as good as this, but it shows that microcaps can be a fertile ground for strong returns.
A lot of high-performing fund managers usually have most of their money deployed, with very little cash. I like that WAM keeps a higher amount of cash in reserve, for both protection and opportunities. At the end of April 2018, WAM Microcap had 18.7% of its assets as cash.
Over the long-term it’s quite possible that WAM Microcap will outperform all the other WAM LICs. However, there will be some years where small caps are hurt significantly more than blue chips, so underperformance may occur during those times.
The WAM Microcap team will pick a lot of winners like Integral Diagnostics Ltd (ASX: IDX) and 360 Capital Total Return Fund (ASX: TOT), however there could also be a few disappointments like Smart Parking Ltd (ASX: SPZ). That’s part of what investing in individual shares is about. Hopefully there are more winners than losers.
WAM Microcap has started to pay a dividend, it currently has a projected grossed-up dividend yield of 4.1%. I think it’s well worth being in a passive investor’s or dividend investor’s portfolio. Over the next decade I wouldn’t be surprised if WAM Microcap’s total shareholder return was the best or among the best of all the LICs on the market, although there could some bumpy years along the way.
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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.