Why I just bought this ASX share for the long-term

I recently bought an ASX share for my portfolio.

It’s something that I’ve regularly written about and offers exposure to something quite different to many other ASX investments.

I’m talking about WAM Microcap Limited (ASX: WMI).

Almost every investor knows what’s going on with shares like National Australia Bank Ltd (ASX: NAB), Afterpay Ltd (ASX: APT) and Telstra Corporation Ltd (ASX: TLS).

It’s when you start going down the market capitalisation list that you start finding those unknown opportunities. Not many people are looking at shares with market caps under $300 million. That’s exactly the shares that listed investment company (LIC) WAM Microcap looks at.

Regular investors can’t be expected to know about every small cap ASX share. I believe it can be a smart idea to delegate some of that share picking to one of the best small cap investment teams in Australia, Wilson Asset Management.

How has WAM Microcap performed?

At the end of April 2020, WAM Microcap’s gross investment portfolio performance was 11.1% per annum since inception in June 2017. But of course, that includes the 21.4% drop over the previous three months from the coronavirus sell-off. But WAM Microcap outperformed its benchmark by 7.7% per annum in that time.

At the end of January 2020 its gross investment performance was 22.8% per annum since inception.

So why did I buy this ASX share?

The ASX share holds dozens of positions, so it doesn’t have too much risk from any one position. Indeed, it actually offers a lot of diversification.

The main thing to worry about, apart from potentially poor returns, is that small cap values can get smashed during times like this when market liquidity disappears. Which is exactly what happened.

But it’s this market selloff that presents the best times to buy. We’ve already seen huge share price recoveries from shares like EML Payments Ltd (ASX: EML) and City Chic Collective Ltd (ASX: CCX).

It’s not exactly a cyclical share, but there are going to be moments where it makes a lot more sense to buy this ASX share small cap LIC compared other times. Despite the huge recovery of the WAM Microcap share price from 23 March 2020, it’s still materially under the pre-crash high of $1.58 (though it has paid a dividend since then).

The dividend

The dividend of WAM Microcap is one of the best features. It has been increasing its ordinary dividend over the past few years, whilst also paying special dividends. Using an annualised dividend of 6 cents per share, it has a grossed-up dividend yield of 6.6%. A very good yield in today’s low interest era.

Foolish takeaway

I think WAM Microcap is at a fair price right now. It’s probably trading close to its net tangible asset (NTA) price, but its actual share holdings have rallied hard and aren’t as good value. There could be another market dip. I’d be very willing to buy a parcel of the ASX share and buy more the next time the market falls – whenever that is.

More reading

• ASX shares can help millennials retire before their parents
• ASX shares I’d invest $10,000 into today
• Why high yield dividend shares can be detrimental to your wealth
• Is it time to buy ASX small caps for your portfolio?

Tristan Harrison owns shares of WAM MICRO FPO. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Emerchants Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Emerchants 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.

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