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This top LIC is high on my watchlist

There are few LICs that I don’t own higher on my watchlist higher than Naos Emerging Opportunities Company Ltd (ASX: NCC).

The LIC is run by Naos Asset Management. I like the long-term, high-conviction share choices that the investment team makes and that leadership want to pay a steadily-growing sustainable dividend.

It revealed the monthly performance net tangible asset (NTA) per share update today showing the investment portfolio returned 2.88% in September 2018 after expenses but before fees.

Since inception in February 2013 its portfolio has returned an average of 16.2% per annum before fees but after expenses.

High-conviction portfolios will be quite volatile year to year as the total performance is dependent on a few key shares, but it’s the long-term performance which matters.

One of the main reasons why I like this LIC so much is that it invests in microcap industrial companies with market capitalisations of less than $250 million. The smaller you go down in market cap the bigger the opportunity – a $200 million business could grow in value by ten times and only be a $2 billion company.

Many fund managers, analysts and normal investors do not scour the small end of the ASX for opportunities, so they’re usually valued on a lower multiple too.

Another attractive feature of this LIC is the large grossed-up dividend yield of 8.2%.

Foolish takeaway

According to the figures released by Naos, it was trading at a slight discount to the NTA. Ideally you’d like to buy LICs at a discount of more than 10%, but I’d be willing to buy a parcel of shares at today’s price and buy more if the small cap space were hit due to volatility.

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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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