I have been investing in ASX shares during the coronavirus share market selloff.
This investing environment is unlike anything else that investors will have experienced. The GFC was horrific economically, but it didn’t have the physical shutdown and healthcare side of things that we’re seeing now.
It’s very hard to gauge how shares like Qantas Airways Limited (ASX: QAN) and Crown Resorts Ltd (ASX: CWN) will do or when they’ll recover because we don’t know how long the situation will require controlling here and abroad.
But with share prices so much lower than a couple of months ago, I think we really need to be putting some money to work.
So how are you supposed to invest? Well, that’s for you to ultimately decide. But I’ve been investing some cash into this ASX share:
WAM Microcap Limited (ASX: WMI)
This is a listed investment company (LIC) which usually invests in businesses with market capitalisations under $300 million. It’s this end of the market where you can find some of the best opportunities, in normal economic conditions.
Few fund managers look at shares that small because of liquidity reasons. And not many regular investors go that small either. It means valuations are cheaper, helping returns for small cap managers like WAM Microcap, which is operated by Wilson Asset Management.
In times like this we see small caps punished the most because investors want to go for relative safety of large caps. But I think it depends on each business. It’s their industry rather than the size which will dictate how they can perform during these times.
After this is over, I think small caps could be the best-performing area of the share market because of how low share prices have gone (and could go even lower).
But you shouldn’t think of WAM Microcap’s portfolio – which offers diversification – as being 100% invested in small shares where the value will fall as much as the small end of the market does. At the latest disclosure WAM Microcap said around a third of its portfolio was cash. That means that if there are more falls, WAM Microcap will only see two thirds of the fall.
Another benefit to the LIC structure is that it’s not a forced seller of shares like exchange-traded funds (ETFs) are. It also means it can turn capital gains and dividends received into a growing dividend for its shareholders, assuming the dividend is sustainable.
Is WAM Microcap a buy?
It’s currently trading closely to its underlying net asset value, so I wouldn’t describe it as extremely cheap. But the share price has fallen by around a third since the declines started. That’s a large, quick decline.
There may be more falls to come, but I think WAM Microcap will be a very strong performer over the next five years from this share price. It currently offers an annualised grossed-up dividend yield of 7.9% – but who knows what’s going to happen with the dividend?
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Motley Fool contributor Tristan Harrison owns shares of WAM MICRO FPO. The Motley Fool Australia owns shares of and has recommended Crown Resorts Limited. 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.