WAM Microcap Limited

WAM Microcap Limited is an Australian Listed Investment Company (LIC) listed on the Australian Stock Exchange under the ticker code WMI. WMI specialises in investments in Australian equities with a focus on micro-cap growth companies, typically characterized by a market capitalisation of less than $300 million at the time of purchase. WMI has been listed since June 28, 2017, and has been operating for 6 years.

WMI's primary investment objective is to provide investors with exposure to a diversified portfolio of micro-cap growth companies while also offering opportunities in relative value arbitrage and market mispricing. Its investment goals include delivering a stream of fully franked dividends, achieving capital growth over the medium-to-long term, and preserving capital. WMI is externally managed by MAM Pty Limited, which is part of the Wilson Asset Management Group.

WMI's primary investment focus is on Australian equities with a portfolio bias towards small-cap companies, specifically those with a market capitalisation of less than $300 million at the time of purchase. To assess its performance, WMI uses the S&P/ASX Small Ordinaries Accumulation Index as its benchmark. This benchmark reflects the segment of the Australian equities market that WMI aims to navigate and potentially outperform.

When evaluating WAM Microcap Limited (WMI) as an investment option, several essential metrics should be considered:

• Growth and Risk Asset: recognise that WMI primarily invests in Australian equities, with a particular focus on micro-cap growth companies. As such, it should be viewed as a growth/risk asset within your overall investment portfolio. While micro-cap stocks can offer growth potential, they also carry higher inherent risks, which should be assessed within your investment strategy.
• Long Term Performance: Assess WMI's long-term performance by evaluating whether it has delivered consistent after-fee returns over an extended period, typically exceeding five years. This analysis helps gauge WMI's ability to achieve capital growth over extended investment horizons.
• Dividend Reliability: Investigate WMI's historical track record of maintaining or increasing dividend payments to shareholders. Dividend stability is crucial for investors seeking income along with capital growth.
• Underlying Holdings: Gain insights into WMI's underlying portfolio holdings, which comprise a diversified selection of micro-cap growth companies. Understanding the composition of these investments, including industries and individual holdings, is vital to ensure alignment with your investment goals and risk tolerance.
• Fees: Consider the cost of investing in WMI by evaluating its Management Expense Ratio (MER). WMI's MER, which includes the management fee and other expenses, was calculated at 1.43% in the most recent financial year. Understanding the MER provides insight into the impact of fees on your investment returns.

A Listed Investment Company (LIC) is one type of investment fund structure (i.e. shareholder funds pooled together and invested together, either actively by a manager, or passively). Other types of investment funds include Exchange Traded Funds (ETFs) (which can be both actively managed or passive), Listed Investment Trusts, or Managed Funds.

The different structures have their own positives and negatives, which are dependent on the goals of the investor and their own individual investment structure.

Some of the benefits of the LIC structure (the structure of WMI) include:

• It's a closed-end investment vehicle: Meaning the manager has a fixed pool of capital to invest with a long-term mindset, and doesn't have the risk of fast redemptions by investors in a time of market panic.
• They can smoothen out income to the investors: Which can be beneficial for both tax efficiency and emotional mindset, due to being able to retain profits over time (as compared to the trust structure, which must distribute income and crystallized capital gains to the investor in that financial year).
• The income will most likely be in the form of fully franked dividends: Which is an attractive form for Australian retirees due to the franking system in Australia. Since LICs are companies themselves and pay tax in Australia on profits, they receive franking credits paid on the tax they pay, in addition to the franking credits they receive from their investment portfolio. Well-managed LICs ensure their franking credit reserves are sufficient to pay future fully franked dividends (see 'franking reserves' chart above).