I recently decided to buy more of ASX share WAM Microcap Limited (ASX: WMI) for my portfolio.
A quick overview of WAM Microcap
WAM Microcap is a listed investment company (LIC). The job of a LIC is to invest in other ASX shares with market capitalisations under $300 million at the time of acquisition.
The LIC is run by the investment team at Wilson Asset Management (WAM), a high-performing investment outfit.
What has happened recently?
WAM Microcap has had a very strong recovery from the COVID-19 crash.
The WAM Microcap portfolio returned 23.6% over the three months to 31 July 2020 before expenses, fees and taxes. That gross return was 13.7% better than the S&P/ASX Small Ordinaries Accumulation Index's return of 9.9%.
In July 2020 alone WAM Microcap's gross portfolio return was 6.7%, which was 5.3% better than its benchmark.
The LIC recently reported its FY20 result. Over the 2020 financial year, WAM Microcap's portfolio outperformed the benchmark by 17.5% with an increase of 11.8%.
In that result the ASX share's board decided to declare a fully franked final dividend of 3 cents per share, bringing the full year ordinary dividend to 6 cents per share – an increase of 33%.
WAM Microcap also declared a fully franked special dividend of 3 cents per share due to the strong performance of the LIC since inception. Indeed, at 31 July 2020 WAM Microcap's gross portfolio return since June 2017 has been an average of 17.8% per annum.
Why I decided to buy shares
WAM Microcap recently decided to do a capital raising. Aside from scale benefits, a major benefit from the capital raising is that it will gain additional access and exposure to market opportunities such as capital raisings and pre-IPO investments.
I took part in that capital raising. It was priced at $1.379 per new share, which was the net tangible assets (NTA) value at the end of July 2020. A clear immediate benefit by taking part was the discount between the raising price and the traded share price. Using the current share price of $1.46, I'm already up about 6% if I were to sell today.
But I don't have plans to sell any time soon. Indeed, I want to hold WAM Microcap shares for at least the next decade.
I'm not a big fan of ASX blue chip shares like Westpac Banking Corp (ASX: WBC) or Telstra Corporation Ltd (ASX: TLS) because I don't think they offer much long-term growth potential.
However, smaller ASX shares have much more growth potential. WAM Microcap has proven to be one of the best investment teams at identifying those opportunities over the past few years. It is (or was) invested in high growth ASX shares like City Chic Collective Ltd (ASX: CCX), Redbubble Ltd (ASX: RBL) and Temple & Webster Group Ltd (ASX: TPW).
WAM Microcap offers investors high returns but it's also diversified. At 30 June 2020 it was invested in 66 different companies. During FY20 it was invested in 221 individual companies.
Dividends
I like that WAM Microcap is committed to paying a high level of dividends to shareholders each year. It's nice to benefit from the strong returns with cash payments. Those dividends can be used to buy more WAM Microcap shares, buy other (ASX) shares, sit in cash for a while or just paying for life expenses.
At the current WAM Microcap share price it offers an (ordinary) grossed-up dividend yield of 5.8%. That's not as high as it was a few months ago, but it's still solid in this era where the RBA official rate is just 0.25%.
Is the ASX share a buy today?
We'll have to see what the WAM Microcap's NTA per share at the end of August 2020 was, but I'd guess it's now trading at a premium to the NTA. I only like buying LICs at their NTA, or preferably at a discount. WAM Microcap fell heavily during the COVID-19 crash because small caps usually fall more, so the next large market drop could be the best time to buy more of this ASX share.
Whilst I've bought enough WAM Microcap shares for my portfolio for now, if I didn't own any I'd be happy to buy a small parcel today and buy more on weakness.
