NAOS Emerging Opportunities (NCC) LIC Could Bounce Back After A Tough 2018

Naos Emerging Opportunities Company Ltd (ASX: NCC) is an ASX listed investment company or LIC.

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 A Good 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.

What Have The Naos Returns Been Like?

According to the company, 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 ASX Small Ords Accumulation Index by an average of around 7% per year.

Is The Naos Team Aligned With Its Investors?

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.

After A Tough 2018, Does It Set The Scene For 2019?

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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