I believe that the ASX does have a few quality ASX shares, but as a whole the index is rather disappointing with too much of it focused on bank shares like Australia and New Zealand Banking Group (ASX: ANZ).
However, it's getting more difficult to consistently beat the market with so much coverage and information available to all investors.
But, if you invest in shares that offer a different earnings & risk profile to the ASX then you can do very well. That's why I'd consider the below shares with $10,000:
Vanguard FTSE Asia Ex Japan Shares Index ETF (ASX: VAE) – $3,500
It might be possible to beat the returns of the ASX index simply by looking at a different index. The Asian index has its own huge tech shares, banks and telcos, just like the US market.
However, the Asian market is trading much cheaper than the US market due to pessimism arising from the trade war. According to Vanguard this exchange-traded fund (ETF) has a price/earnings ratio of only 12x. It looks even cheaper with the index's earnings growth rate being 11.5%.
With nearly 850 holdings, this could be a very good, very diversified ETF to hold over the next few decades.
Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) – $2,500
Soul Patts could be my favourite business on the ASX. Its ultra-long-term history of operating for more than a century shows that it has excellent staying power.
The fact that it's an investment conglomerate allows it to shift its holdings as time goes on to where it thinks are good long-term opportunities. It has consistently managed to beat the ASX index over the long-term thanks to its unlisted and listed assets.
It has paid a dividend every year since inception in 1903 and it has increased its annual ordinary dividend each year since 2000. That is excellent reliability.
Soul Patts' share price has appreciated considerably over the past year, leaving its grossed-up dividend yield at only 2.8%.
WAM Microcap Limited (ASX: WMI) – $2,000
The best way to outperform the market may be to go for the smallest shares on the ASX because they are mostly undiscovered by institutional investors and they have the biggest growth runways because of their small size.
WAM Microcap looks for businesses with market caps under $300 million at the time of acquisition.
The Wilson Asset Management team are very effective at finding market-beating opportunities, the listed investment company (LIC) investment team is happy to sit in cash when it can't find a great idea.
Small caps can be very volatile, so I wouldn't recommend the average investor putting a huge amount of their portfolio into small caps, but a small cap-focused LIC could be a good way to do it.
WAM Microcap currently has an ordinary grossed-up dividend yield of 4.5%.
Naos Emerging Opportunities Company Ltd (ASX: NCC) – $2,000
This is another LIC that targets the smallest shares on the ASX, it looks at shares with market caps under $250 million.
However, Naos do things a bit differently. The LIC only holds a very small number of holdings, currently nine, meaning it has very high conviction in the shares that it invests in.
Naos announced today that it is going to maintain the dividend, which means based on the current share price it has a grossed-up dividend yield of 9.7%.
Foolish takeaway
Each of these shares have shown they can beat the ASX index and I think over the long-term all of them will create much better returns for investors than the All Ords. The Vanguard Asia index looks like the best value, which is why I allocated the most money to it, but I'd love to buy some more Soul Patts shares at a good price.
