In 2015, Cliff Asness and his colleagues released a paper with the highly provocative title “Size Matters, if You Control Your Junk.”1
We agree that taking an additional layer of focus within small-cap stocks—for example, small caps plus quality, small caps plus value or small caps plus momentum—can be very helpful, to allow for the risk/return trade-offs to be potentially more attractive.
However, it is critical to think of small caps not only as stand-alone options but also in terms of how they might sit within portfolio allocations.
Quantifying a Quality Upgrade over the Long Term
Large Caps and Small Caps vs. Large Quality and Small Quality
Factor investing has generated significant attention of late:
Small Caps Offer Fertile Ground for Factor Tilts
While the five commonly discussed factor exposures are value, momentum, quality, size and low volatility, we’d encourage investors to not think of them as necessarily being mutually exclusive. For instance, the concept of small value has been prevalent for many years and would imply exposure to at least two factor premiums—small caps and value.