The case for investing in small caps in Japan

ACADEMIC studies have over the years pointed to the existence of a "size effect" in equity returns with small-cap stocks outperforming large caps (eg, Banz, 1981, on absolute and risk-adjusted performance in the US between 1936 and 1975).

Fama and French (1993) named "size" (market cap) as a factor in stock returns and although most of the research concerns US markets, recent performance suggests that small-cap outperformance persists in other regions as well.

So what about Japan? We have seen small-cap equities outperform large caps for 12 of the 16 calendar years since the start of this millennium. Small caps have also outperformed year-to-date (to the end of October).