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Why this small-cap focused LIC could be a good option

One of the main things that I try to remain focused on as an investor is to stay within my ‘circle of competence’. That simply means sticking to shares that I understand, that I can judge if they’re good value and that I can decide if they’re market-beating opportunities.

This can be both in terms of industry and market cap size. There are some industries that I don’t have any edge in evaluating.

The smaller market cap you look at the more important factors like management become. It’s very hard to judge small cap management as a small retail investor – that’s one of the ways how investment managers who can meet or talk with management get an advantage.

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

Whilst I do own a few businesses in my portfolio that have small market capitalisations, most of them are larger than the $250 million hurdle. I’m happy to delegate the small cap investing to an investment team that know what they’re doing.

The Naos LIC released its monthly NTA update today, showing that its portfolio grew by 3.94% before fees but after expenses in August 2018. Naos’ longer-term investment horizon has led to good returns over the past three years – its portfolio grew by an average of 16.5% per annum before fees.

Naos also has an attractive dividend policy of trying to pay a sustainable growing stream of fully franked dividends. This LIC has grown its dividend each year since the second half of FY13 and currently offers a grossed-up dividend yield of 8%.

Foolish takeaway

Small caps can be volatile but profitable if you invest in the right shares. If you like a majority of your returns paid as dividends then this Naos LIC could certainly play its part in your portfolio at the current price, although it’s trading at a slight premium to the reported NTA.

Another share delivering quality dividends for shareholders is this exciting growth stock.

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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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