Why I want to buy shares of this ASX small cap LIC

I think that Naos Emerging Opportunities Company Ltd (ASX: NCC) is one of the best ASX small cap listed investment companies (LICs) on the ASX.

It focuses on very small ASX shares with market capitalisations under $250 million. These businesses could provide the best investment opportunities because they have much bigger growth runways. They are also under-researched, so the valuations are usually lower.

I’m attracted to the Naos way of investing because the investment team focuses on value with long-term growth, ignoring the index and holding a small number of high-conviction ideas.

I also like that Naos invests with environmental, social and governance (ESG) criteria. Plus, the Naos staff are shareholders themselves, with the LIC’s directors holding four million shares.

So, the setup is good, but it’s the returns that are the most important thing. Over the past month for October 2018 the LIC’s portfolio outperformed the S&P/ASX Small Ordinaries Accumulation Index by 3.51% because it only fell by 6.09% compared to the index’s fall of 9.6%.

Since inception in February 2013 the LIC’s portfolio has outperformed the index by 9.75% per annum by generating an average return of 14.66% per year before fees but after expenses.

Another good reason to like this LIC is that it aims to pay a sustainable, growing fully franked dividend. It has been successful with this – its dividend has grown each year since FY13. It currently has a grossed-up dividend yield of 8.7%.

However, one thing to be wary with small caps is that they can be far more volatile than larger caps. There is also a chance that Naos will underperform the index in the short-term or long-term due to its investment choices or fees.

Foolish takeaway

This Naos LIC is one of my favourite LIC ideas, but I haven’t been able to push the buy button in recent months because it hasn’t traded at an attractive enough discount.

Based on its just-released NTA update, it’s trading at around its underlying portfolio value. Therefore, it’s a fair price to buy it today, however I’d like to buy it at a decent discount, if that ever occurs in the future.

So whilst I wait for the Naos to trade at better value I’d rather invest in one of these top shares for my portfolio.

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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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