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Why this could be the best LIC on the ASX

NAOS Small Cap Opportunities Company Ltd (ASX: NSC) is, perhaps, the flagship listed investment company (LIC) operated by Naos.

NAOS Small Cap Opportunities looks to invested in listed small cap companies that have market capitalisations between $100 million to $1 billion with an industrial focus. These target businesses have a good growth runway and are able to re-invest into themselves for further growth.

The LIC invests for the long-term and maintains a high-conviction portfolio of a maximum of 30 shares. At the end of July 2018 it had only 11 positions.

It reported its FY18 result earlier on Thursday. The headline figure showed that net profit after tax (NPAT) had increased by 134% to $4.7 million. However, the important part thing to consider with LICs is the investment returns.

Naos has been managing this LIC for seven months and its portfolio produced a return of negative 3.44% post operating expenses, but before fees, in this time.

A LIC’s performance is driven by the underlying holdings, so it’s perhaps not surprising that a concentrated portfolio doesn’t immediately perform. However, with core holding MNF Group Ltd’s (ASX: MNF) share price performing strongly since the end of FY18, the current financial year could yield better returns.

Talking of the yield, Naos increased the final dividend to 3 cents per share compared to the half-year dividend of 2.5 cents. Naos want to grow the dividend every year, so based on the trailing yield it is likely trading with a forward grossed-up yield of at least 9.2%, paid quarterly.

Independent Chairman Trevor Carroll said “Pleasingly this is the first full year period that dividends have been fully franked since the 2011 financial year, and this represents the Company’s renewed focus on protecting investor capital whilst providing a stream of fully franked dividends and long-term capital growth.”

Naos CIO and Managing Director Sebastian Evans said “In our view, we have in the portfolio a select group of industrial small cap businesses that are undervalued on a long-term investment horizon.”

I’d be interested in buying some shares at today’s price considering how attractive the dividend is and the long-term growth focus.

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Motley Fool contributor Tristan Harrison owns shares of NAO SMLCAP FPO. The Motley Fool Australia owns shares of and has recommended MNF Group Limited. 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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