“Does the size effect still exist?” asks Jim Harrington (Duff & Phelps), in a new article written especially for subscribers to the Duff & Phelps Risk Premium Report & Calculator. “In the last 40 years, many researchers have investigated the size effect and reached a variety of conclusions,” including Fama-French’s study of “small-minus-big” (SMB) returns over five different periods, which suggested the evidence for a size effect is “weak.”
However, Duff & Phelps believes that “examining average monthly returns may not be the proper measure to use and that examining ‘performance over period’ may be a better gauge of relative return,” Harrington says. “After all, the performance of an investment over a period is what is important to an investor, since it tells the investor how much money is in his (or her) pocket.” Accordingly, the D&P researchers evaluated the SMB series over several periods, looking at “actual performance over every possible combination of start dates and … end dates.”
Their conclusion: The empirical evidence suggests that the size effect is persistent over longer periods. “The 1980s were not good for small stocks, but small stocks may have recovered their footing in more recent periods,” Harrington writes. “We do not dispute that the size premium ‘waxes and wanes’ and may even be negative when measured over some time periods. However, the evidence suggests that over longer periods of time small stocks do outperform large stocks, and that an adjustment for size is appropriate.”
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