One of the best ways to beat the market over the longer-term could be to go for small caps.
I think it’s important to recognise that the market is currently focusing on the blue chip end of the ASX. Special dividends, big buy-backs and a flight to ‘safety’ have all seen investors shift to big businesses.
Small caps also haven’t been feeling the love with most exchange traded funds (ETFs) focused on the ASX 200 or the ASX 300. But small caps could be the ones to generate the best returns over the longer-term because they’re coming from a smaller starting point and are less researched by investors.
So that’s why I think that the two listed investment companies (LICs) I’m going to write about could be good ways to get exposure to small caps whilst also receiving a good and growing dividend.
WAM Microcap Limited (ASX: WMI)
WAM Microcap is managed by Wilson Asset Management, a high-quality investment team that like to find undervalued smaller growth businesses where a catalyst has been identified that could increase the share price.
The hunting ground is shares generally with market capitalisations under $300 million.
It’s done very well since inception in June 2017, its portfolio has grown by 21.1% per annum before fees, expenses and taxes, allowing it to grow its dividend each year since it started paying a dividend.
Excluding the special dividend, it has an ordinary grossed-up dividend yield of 4.7%.
Naos Emerging Opportunities Company Ltd (ASX: NCC)
This LIC is managed by Naos Asset Management, a long-term focused manager which focuses on largely industrial businesses which could produce solid long-term returns.
Its target market is even smaller, with shares that have market capitalisations under $250 million.
Naos takes a very concentrated approach, it has nine holdings right now, which can lead to underperformance in any given year (like FY19) but hopefully leads to stronger returns over the longer-term. Two of its shares that have performed well in the first couple of months in FY20 are BSA Limited (ASX: BSA) and Enero Group Ltd (ASX: EGG).
Naos Emerging Opportunities has returned an average of 12.3% per annum after expenses but before fees since inception in February 2013.
It has a grossed-up dividend yield of 10%.
Both LICs have pleasing dividend yields and are trading at a discount to their respective net tangible assets (NTAs) per share. For dividends it’s obvious that the Naos yield is more attractive, although WAM Microcap may be able to deliver better longer-term returns. I think both could be worth a place in an income-focused portfolio.
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Motley Fool contributor Tristan Harrison owns shares of WAM MICRO FPO. The Motley Fool Australia has recommended Data#3 Ltd. 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.