I am more excited about shares of WAM Microcap Limited (ASX: WMI) from today. I'm going to tell you why in this article.
A quick overview of WAM Microcap
WAM Microcap is a listed investment company (LIC) which invests in the smallest businesses on the ASX. It targets ones with market capitalisations under $300 million at the time of acquisition. It's operated by the high-performing team at Wilson Asset Management.
Why I'm usually excited about WAM Microcap
I think WAM Microcap could be one of the best LIC investment teams at the moment. It has proven to be a very strong performer.
At 31 August 2020, the LIC reported that over the prior three months its gross portfolio performance was 26.9%, which was 20.3% better than its benchmark. Over the prior year (including the COVID-19 crash) it produced a gross return of 25.4%, which was 23.3% better than its benchmark. Since inception in June 2017, its gross return has been 21.7% per annum, 13.3% per annum better than the benchmark.
I don't think it's always going to produce returns of 20% per annum, but I do believe that picking small caps and the WAM investment strategy can lead to continued outperformance of the S&P/ASX 200 Index (ASX: XJO) over the long-term.
WAM Microcap can turn this strong investment return into pleasing dividends for shareholders. It has paid a special dividend, as well as growing ordinary dividends, each year since FY17 when it started paying dividends.
At the current WAM Microcap share price it offers an ordinary grossed-up dividend yield of 5.7%.
The reason I'm more bullish from today
There was a piece today in the Australian Financial Review that caught my eye. WAM Microcap recently carried out a capital raising, with some of that money planned for pre-IPO investments.
The AFR reported that WAM Microcap has invested $2.5 million into AUCloud, which is described as a sovereign cloud services provider.
The COVIDSafe app and the shift to working from home highlighted the importance of having a safe, secure service that could be trusted for government officials to use. According to the AFR, the government is thinking about restricting access to government data to local players. This could be good news for companies like AUCloud which focuses on government and important national infrastructure clients. It was referred to as an 'infrastructure as a service' provider.
AUCloud is supposedly going to list onto the ASX later in 2020, it's aiming to be profitable in this financial year.
WAM lead portfolio manager Oscar Oberg said: "With all the negative press around the COVIDSAFE app – we think the issue around sovereignty is going to increase. It will be a bullish time for software providers. As a pure play company in this space – the demand for cloud providers that are Australian owned as opposed to the global behemoths like Azure or AWS, will increase. Particularity with their exposure to government departments such as defence and key industries like financial services.
"AUCloud offers the security, the compliance and they have an increased level of efficiency and productivity to their clients. They also have a successful partner channel with some of the largest software companies in the world."
If these are the types of investments that the LIC is going to invest in, then it's an exciting proposition. I like WAM Microcap even more than before.
Foolish takeaway
WAM Microcap does a great job of identifying opportunities that are going to produce strong returns over the medium-term. Expanding its horizon to new investment ideas is exciting and could lead to more strong returns if the IPOs go quite well.
These pre-IPO ideas are not accessible to regular investors, so WAM Microcap could be a nice way to indirectly benefit from that as well as with other opportunities like institutional capital raisings. Sure, its management fees are higher than a cheap exchange-traded fund (ETF), but the net returns from WAM Microcap have been stronger than most ETFs – which make the fees more than acceptable.
I'd be happy to buy at this WAM Microcap share price because it's probably trading close to its pre-tax net tangible assets (NTA), which is a fair price.
