Size Matters, Says Cliff Asness, But Watch Your Junk

In the early eighties, researchers noticed that small stocks had been outperforming large stocks – for no obvious reason – for a very long time. This size premium has attracted a lot of attention and a lot of criticism over the years, raising the possibility that it may have been an arbitrage opportunity that dried up when it became well known or even just a case of data mining. But AQR Capital Management managing principle Cliff Asness says that the effect still remains if you take quality into account.

“Small quality stocks outperform large quality stocks and small junk stocks outperform large junk stocks, but the standard size effect suffers from a size-quality composition effect,” he writes with his...