Here’s why I want to buy a lot more WAM Microcap Limited (ASX:WMI) shares

There are a number of different ‘type’ of shares I like for my portfolio. I like some for the reliable income stream and long-term steady growth. I like some for the exposure to a certain thematic or tailwind. I also like the idea of some for the market-beating potential in an area I don’t have much expertise.

I believe that there are some investment managers that invest in overseas shares that can deliver market-beating returns (after fees), but I don’t have the expertise (or time!) to study every possible share idea listed overseas. That’s why I’m comfortable investing in shares like Magellan Global Trust (ASX: MGG).

I also don’t believe my ‘circle of competence’ extends to the microcap region of the ASX. Microcaps are generally seen as shares with market capitalisations of less than $300 million.

That’s why I’m a fan of WAM Microcap Limited (ASX: WMI), the listed investment company (LIC) run by Wilson Asset Management that focuses on small caps. The flagship LIC WAM Capital Limited (ASX: WAM) started out investing in small caps, but it’s now so large it can’t meaningfully invest in microcaps.

WAM Microcap is a return for the WAM team to the smallest end of town and already the results are impressive. Since inception in June 2017 the WAM Microcap portfolio has returned 27.5% before fees and expenses, which was achieved with a double-digit cash holding in the portfolio.

The reason why I’m so enthusiastic about WAM Microcap is because the smallest shares can create the biggest returns. Very few analysts, fund managers or retail investors invest in small businesses – meaning they generally trade on cheaper valuations.

Being the smallest also means they have the most room to grow, it is easier to grow a $100 million company into $200 million compared to a $10 billion company into $20 billion. The mathematics of size make it harder to grow meaningfully every year.

Foolish takeaway

I believe WAM Microcap’s approach will lead to impressive market-beating returns over the next decade, although some years could be rough as microcaps are more volatile than larger shares.

The only thing holding my back from buying at the moment is the 13% premium to the July 2018 post-tax NTA. Although the premium isn’t as high as some of the other WAM LICs I’m hoping I will be able to buy closer to the NTA value, or even a discount, at some point in the future.

Until WAM Microcap is trading at better value I will be looking to buy shares of these top stocks for my portfolio.

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Motley Fool contributor Tristan Harrison owns shares of MAGLOBTRST UNITS and 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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