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WAM Microcap Limited (ASX:WMI) is winning with small cap investing

Tristan Harrison
Small defeats big

There are few listed investment companies (LICs) on the ASX that have performed as well as WAM Microcap Limited (ASX: WMI) over the past year.

WAM Microcap is the LIC run by Wilson Asset Management that focuses on the smallest shares on the ASX, typically industrial businesses with market capitalisations under $300 million at the time of acquisition.

In August 2018 its portfolio grew by 5.4% before fees and expenses, outperforming the S&P/ASX Small Ordinaries Accumulation Index by 2.9%. Over the past year its portfolio has returned 30.1% before fees and expenses, outperforming its benchmark by 7.8%. This is a solid result.

Small caps potentially offer the biggest returns because they are often under-researched by the market, leading to lower valuations, and the small size means they can grow many times bigger before they hit a growth ceiling.

WAM Microcap has achieved these strong results whilst also keeping a double-digit level of cash on hand for protection and opportunities. At the end of August 2018 it had 13.7% of the portfolio as cash.

The investment team attributed some of August’s strong performance to Specialty Fashion Group Ltd (ASX: SFH), a company which is selling all of its retail chains except City Chic. Pleasingly, City Chic delivered comparable same store sales growth of 13% – quite the performance for a retailer. Some of its other top holdings currently include Adairs Ltd (ASX: ADH) and Baby Bunting Group Ltd (ASX: BBN).

Foolish takeaway

WAM Microcap is a good way to get diverse exposure to small caps if you’re not sure about doing it yourself. I think over a 10+ year timeframe it will deliver very pleasing results.

It currently offers a (regular) grossed-up dividend yield of 3.9%, plus the special 2 cents per share dividend. It’s trading at a decent premium to the NTA, but not as high as some of the other WAM LICs. I’d be happy to buy a parcel today, although I hope it trades at NTA at some point in the future so I can buy at a more attractive price.

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Motley Fool contributor Tristan Harrison owns shares of WAM MICRO 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.