2 buy-rated small cap ASX shares that this fund manager likes

Reject Shop is one of the ASX shares in the WAM Microcap portfolio.

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Key points

  • WAM has picked out two small-cap ASX shares in its latest monthly update
  • Generation Development Group was one of the picks with the fund liking the company's growing market share
  • Discount retailer Reject Shop was the other stock pick

Fund manager Wilson Asset Management (WAM) has identified two top small-cap ASX shares in one of the portfolios it manages that could be investment ideas.

WAM operates several listed investment companies (LICs). Some focus on larger companies like WAM Leaders Ltd (ASX: WLE) and WAM Capital Limited (ASX: WAM).

There's also one called WAM Microcap Limited (ASX: WMI) which focuses on small-cap ASX shares with a market capitalisation under $300 million at acquisition.

WAM says WAM Microcap targets "the most exciting undervalued growth opportunities in the Australian microcap market".

These are the two small-cap ASX shares the fund manager outlined in its most recent monthly update:

Generation Development Group Ltd (ASX: GDG)

WAM says that Generation Development operates as a registered pooled development fund (PDF) specialising in providing development capital to financial sector businesses.

In April, the business revealed a stronger-than-expected quarter for the three months to March 2022. It reported a 33% increase in inflows into investment bonds. This made its FY22 year-to-date result the highest annual recorded sales result since the start of the business.

The small cap ASX share also revealed a 36% increase in total funds under management (FUM) year on year. This growth was supported by "significant" investment bond sale inflows.

Why does WAM like this business? The investment team believes that the company's suite of new and existing products are continuing to gain market share in the adviser community. WAM pointed to the 56% market share of quarterly inflows into investment bonds in the three months to December 2021.

The fund manager also said that the growth underpins its view that the business has a long growth runway which is why it's still positive on the outlook for the company.

Reject Shop Ltd (ASX: TRS)

Reject Shop is the other small-cap ASX share. The discount retailer has been around for more than 40 years. Some of the categories of products that it sells include homewares, kitchenware, hardware, petcare, household cleaning products, toiletries, and cosmetics.

WAM noted that in April, the resignation announcement of CEO Andre Reich, after two years in the role, saw the Reject Shop share price fall 24% on the day.

However, the fund manager thinks the business can keep up its momentum, maintain profitability with a lower cost base, keep its strong balance sheet and expand its store network.

The company continues to trade in line with its earnings guidance outlined in the company's FY22 first half, according to WAM. The fund manager is also positive on the company's next growth phase.

Motley Fool contributor Tristan Harrison has positions in WAM MICRO FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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