Naos Emerging Opportunities Company Ltd (ASX: NCC) is a listed investment company (LIC). Is it the best one on the ASX?

Firstly, what does NCC do?

Naos Emerging Opportunities Company is operated by NAOS Asset Management, a specialist fund manager that provides high-conviction exposure to listed industrial Australian companies outside of the ASX-50. Across all of its LICs, NAOS aims to protect investor capital whilst providing a sustainable growing stream of fully franked dividends and long-term capital growth above the relative benchmark index.

Is Naos Emerging Opportunities Company The Best ASX LIC?

Of the three LICs that Naos operates, Naos Emerging Opportunities Company is the one that aims to provide investors with exposure to “undervalued micro-cap businesses with market capitalisations under $250 million with an industrial focus”.

How Does Naos Invest?

Naos invests for the long term and looks for value at the time of acquisition. The Naos strategy is to hold only high-conviction ideas in the portfolio and ignore the index.

According to Naos’ January 2019 monthly investment report, it only had nine investment positions with its cash sitting at 0.22%, this means each position on average represents more than 10% of the portfolio.

The focus on industrial businesses may mean returns are less cyclical and Naos can create fairly consistent returns.

Since inception, the five largest contributors to Naos Emerging Opportunities Company’s returns have been BSA Limited (ASX: BSA), Calliden Group Limited (ASX: CIX), Capitol Health Limited (ASX: CAJ), Consolidated Operations Group Limited (ASX: COG) and Careers Multilist Limited (ASX: CGR). Most ASX investors wouldn’t be familiar with those companies, so it shows the types of potential hidden gems that Naos is looking for.

What Have The Naos Returns Been Like?

Since inception in February 2013, the Naos Emerging Opportunities Company portfolio has generated returns of 12.18% per year (before fees, after expenses), outperforming the S&P/ASX Small Ordinaries Accumulation Index by an average of 7.35% per year.

Naos aims to deliver shareholders a sustainable growing stream of fully franked dividends, so it utilises the gains it has made to pay a dividend which has increased each year since FY13.

Are Naos Aligned With Shareholders?

It can point to a lack of alignment when an investment firm’s management team don’t have money invested alongside regular shareholders. Ideally, you’d like to see the investment manager do well or badly too, and not take risks they wouldn’t take with their own money.

Naos Emerging Opportunities Company directors own just over 4 million shares, which means they own more than 6.5% of the shares on issue.

Is Now A Good Time To Buy Naos Emerging Opportunities Company Shares?

Market declines over the past six months have been tough on the Naos portfolio, therefore there’s a chance the next year could see a positive reversal of fortunes.

At the end of January 2019, Naos’ pre-tax net tangible assets (NTA) was at the same value as its share price. It was about fair value. The current share price does translate to a fully franked dividend yield of 6.8%, which looks attractive in this environment of low-interest rates.

Bear in mind that the smallest businesses on the ASX are the most volatile, so the Naos share price could go down (and up) a lot in one year. It’s the long term returns that matter the most.

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).