The small-firms effect is the theory that firms with a smaller capitalisation will outperform those firms with a larger market capitalisation. This effect was one of the three factors use in Eugene Fama and Kenneth French’s Three-Factor Model that was made in 1993.

To test this theory, we ran a backtest using the Bloomberg back-testing tool on the Singapore markets. In this test, we compared the performance of an equally-weighted portfolio of stocks against half the number of stocks with a different market capitalization.

Back-tests were done over the following:

• 10 years – Corresponding to the decade after the Great Recession. This is, generally speaking, a bullish period.
• 5 years – Corresponding approximately to the period where markets experienced the taper tantrum. This is a marginally bearish or sideways market.
• 3-years – Corresponding to the ...

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