Does your portfolio have enough small cap exposure? This LIC could be the best bet

Naos Emerging Opportunities Company Ltd (ASX: NCC) is a listed investment company (LIC) that focuses on the smallest businesses on the ASX, with market capitalisations under $250 million.

The LIC generated a headline net profit after tax (NPAT) figure of $4.1 million, which was down 10% on the prior corresponding period. However, this doesn’t mean much for LICs which focus on investment returns year to year.

Its portfolio produced a return of 7.13% post operating expenses, but before fees, for FY18, sadly underperforming its benchmark by 17% – the small cap index had a great year. However, over the past five years its portfolio has returned an average of 14.92% per annum post operating expenses, but before fees.

A decrease of the LIC’s share price near the end of the year created a total shareholder return (TSR) of negative 0.5%, which doesn’t include franking credits.

The Board remains committed to limiting the size of the LIC to $125 million to $150 million to maintain the optimal size to produce strong returns with small caps. The Board also wish to continue paying a growing stream of dividends.

In FY18 the full year dividend was increased by 3.6% to 7.25 cents per share, meaning the dividend has increased each year since FY13.

Whilst FY18 wasn’t a strong year, Naos expect the current portfolio holdings will generate greater earnings growth in FY19 after several of them have invested in their businesses. All of them have been held for more than 12 months and are high-conviction ideas.

Foolish takeaway

Naos Emerging Opportunities currently offers a grossed-up dividend yield of 8.3%.

This is one of the few small cap focused LICs that I’d be comfortable buying for my portfolio. I like the investment philosophy and process, so I’d be happy to accumulate shares over time.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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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