The small-cap conundrum

"(...) Felix Goltz, research director at Scientific Beta, explains: “Size does not seem to deliver superior performance on a standalone basis. It offers a lower premium compared with other common factors, including momentum, value and low volatility. However, if you add the size factor to a set of exposures to different factors, returns may be improved. The size factor carries information about returns that is not captured by the other factors. Our studies have concluded that it is costly not to include the size factor in multi-factor portfolios.” Goltz points out that the size factor generally behaves differently from other factors. It has low sensitivity to interest rate shocks and has low correlation to other factors. “That is why it is important to look beyond the standalone premium and focus on the diversification element of the size factor,” he says. (...)"