Model inception dates of JPE4 and USSLOW are Dec. 26, 2021, based on MSCI’s Barra Japan Equity Model (JPE4) and Barra US Total Market Equity Model for Long-Term Investors (USSLOW). The size of the premium, however, trended smaller in the more recent periods.Īnnualized Cumulative Low-Size-Factor Return (%) in Japan and the USĭata as of Feb. How much exposure to the low-size factor would the index have lost if microcap stocks were excluded, and how would that have affected low-size-factor return contribution?įor starters, low-size-factor returns in these markets were mainly positive over the past 20-plus years, based on MSCI equity models for Japan and the U.S. We inferred this as the MSCI Japan IMI, which takes into account a stock’s traded value per market capitalization for liquidity screening, had a better liquidity and tradability profile than hypothetical indexes with the same number of constituents selected solely on size. We found the trade-off between the low-size premium and liquidity was more significant in Japan, but it was interesting to see that considering liquidity and size together actually improved investability. 3 We used the MSCI Investable Market Index (IMI) and the MSCI All Cap Index as proxies for the investable universe and total-market universe, respectively. In this study, we examined these trade-offs in terms of including microcaps in investable equity universes in Japan and the U.S., two of the major sources of these stocks. While microcap stocks tend to have low liquidity and investment capacity - and excluding them may improve portfolio investability - investors could lose opportunities to capture the low-size premium if these stocks are excluded. 1Įxhaustive market coverage may mean including stocks with the smallest market capitalization, i.e., microcap stocks. Institutional investors often face the challenge of seeking to balance comprehensive market coverage and investability when selecting an equity benchmark. A comprehensive analysis of the trade-off between market representation and exposure to the size and liquidity factors may help investors seeking to strike a balance.On the other hand, when microcap stocks were added to a broader hypothetical benchmark, investability of a total-market index would have deteriorated.Investment products based on indexes that exclude microcap stocks would have sacrificed some of the low-size return premium witnessed in Japan and the U.S.
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