Why WAM Microcap Limited (ASX:WMI) could be the best LIC to own

WAM Microcap Limited (ASX: WMI) could be the best listed investment company (LIC) to own on the ASX in my opinion.

It’s one of the many LICs in the market-beating Wilson Asset Management stable such as WAM Capital Limited (ASX: WAM), WAM Leaders Ltd (ASX: WLE), WAM Research Limited (ASX: WAX) and WAM Global Limited (ASX: WGB).

The key difference with WAM Microcap is that it invests in the smallest shares on the ASX, typically ones with market capitalisations under $300 million.

This gets back to the early roots of WAM success. The strategy has already been very successful for WAM Microcap. Since inception in June 2017 its portfolio has delivered an average return per annum of 20.1% before fees and expenses.

Its current portfolio seems to be a good list of shares. In last month’s volatility the WAM Microcap portfolio declined by 7.5% whilst the S&P/ASX Small Ordinaries Accumulation Index fell by 9.6%. It’s quite handy to generate outperformance of 2.1% in a single month.

The WAM Microcap team led by Lead Portfolio Managers Oscar Oberg and Martin Hickson has increased the cash position to 35.6% at the end of October 2018 compared to the 21.3% level of cash at the end of September. It’s in a much more defensive position to ride the volatility and also take advantage of opportunities.

There is a good chance that WAM Microcap could generate some of the biggest returns in the LIC industry over the next 10 years because of how much growth potential small businesses have. It’s much easier to grow profit from $20 million to $200 million than it is to go from $200 million to $2 billion.

It also helps that WAM Microcap hunts in a region that few other managers do, leading to (usually) much lower valuations.

However, as last month proved, small caps can be much more volatile due to lower liquidity.

Foolish takeaway

WAM Microcap is currently trading with an ordinary grossed-up dividend yield of 4.3%. The share price of $1.32 is a 4.8% premium to the declared October net tangible assets (NTA) per share. I’d be willing to pay for this small premium considering the quality of the investment team and the hunting ground.

There will likely be some very painful months over the next year or two, but that could be the best time to buy shares of WAM Microcap.

If WAM Microcap is too volatile for you then you might like this defensive share which is a leader in the auto industry – a sector few investors have exposure to.

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Motley Fool contributor Tristan Harrison owns shares of WAM MICRO FPO and WAMGLOBAL 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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