Scientific Beta

Benefits and Pensions Monitor: "Size factor improves model fit, delivers a significant positive premium in the presence of other factors, and contributes positively to the performance of multi-factor portfolios, says research from Scientific Beta. The size effect is well-established in the finance literature: stocks with smaller market capitalization outperform large stocks over the long term. However, a common recommendation in the asset management industry is to remove size from the factor menu, given its relatively weak post-publication performance."

Benefits and Pensions Monitor 23/07/2019

"(...) Size factor improves model fit, delivers a significant positive premium in the presence of other factors, and contributes positively to the performance of multi-factor portfolios, says research from Scientific Beta. The size effect is well-established in the finance literature: stocks with smaller market capitalization outperform large stocks over the long term. However, a common recommendation in the asset management industry is to remove size from the factor menu, given its relatively weak post-publication performance. Rather than asking which factor has the best stand-alone performance, ‘Does the Size Factor Still Have Its Place in Multi-Factor Portfolios?’ asks what the marginal impact of the size factor is when including it in the menu along with other factors. In short, omitting the size factor has substantial cost to investors, which often exceeds that of omitting other popular factors. Exclusion of the size factor from a multi-factor asset-pricing model leads to a 22 per cent increase in the proportion of unexplained returns of portfolios sorted by characteristics. This suggests that excluding size seriously deteriorates model fit. As well, the size premium is economically and statistically significant over the long-term U.S. history when accounting for the presence of other commonly used equity factors. Finally, size offers diversification benefits due to its low correlation with other factors. (...)"