“Size Matters, if You Control Your Junk" - Cliff Asness and his team at US fund management firm AQR Capital came up with an inspired title for their latest research paper.
Following their 2013 work on how Quality Minus Junk is a driver of stock market returns, they've now applied the same theory to small stocks and reinvigorated the argument that small beats big over the long run…
...although smaller stocks had an 'off year' last year. GMO, another US fund firm, reckons that between 80% and 90% of active US equity managers underperformed their benchmark in 2014 partly because large caps trounced small caps. Read the GMO paper - Is Skill Dead? - here. And you can read the FT's take on AQR's Size Matters research here.
Clarifying the small cap debate with the StockRanks
We launched a new StockRanks portal this week on the site - you can find the new tab in the top navigation. One of the features is a great StockRanks performance page which really helps clarify the debate about the 'size' effect. We too find that there are a huge number of low quality small caps… but the very best small caps have dramatically outperformed.
Here's a chart of £1m to £100m market cap 'penny stocks' in the UK market - a 56% return in less than 2 years for the top 10% ranked stocks - while the bottom 30% 'junk' fell on average 15-20%. With this research and our tools it's never been so blindingly obvious the kinds of stocks that private investors should be avoiding !
There is an introduction to all new services here, while the webinar that Ed did to explain how to get the most out of these new tools can be found here.
Around the web
Seven years ago Ted Seides of hedge fund Protege Partners made a bet with Warren Buffett that a fund of hedge funds could outperform the S&P 500 over a ten year period. Currently, Seides is losing that bet - and a major part of the reason appears to be down to fund fees. You can read his analysis of where things have gone wrong for him (and right for Buffett) here.
Elsewhere around…
