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In this article, we explore the small-firm effect using MSCI style indexes for both developed and emerging markets for the period since 1995 and show how overlaying relative momentum and trend following strategies can substantially enhance both absolute and risk-adjusted returns. For over 30 years, the size effect has been well documented in the finance literature, starting with Banz [1981] and Keim [1983]; the outperformance of small stocks relative to their large counterparts has been an accepted “anomaly” in asset pricing. Indeed the “small minus big” factor is a key component of the Fama and French [1992] three-factor model. Arguments can be made, in much the same way as the value–growth debate, that small firms have higher returns to compensate their owners for bearing additional risk compared with large firms. This might take the form of lower liquidity or less balance sheet strength for example. Alternatively, one can argue that the small f irm effect is an anomaly that is mispriced by the market. A key finding in our study is that a mid-cap effect dominates in emerging markets. Another anomaly within stock markets, and indeed asset classes generally, is that of momentum. The classic equity strategy highlighted by Jegadeesh and Titman [1993] involves buying the “winners” over the past 6–12 months and selling the “losers” over the same period. This is frequently referred to as cross-sectional momentum or relative momentum by Antonacci [2012]. Studies by Erb and Harvey [2006] and Miffre and Rallis [2007] demonstrate the effectiveness of this approach within commodity markets. An alternative type of momentum investing is where one is interested only in the direction of prices or returns rather than how they fare against their peer group. This type of activity is known as trend following (other names include time-series momentum and absolute momentum) and is frequently used by commodity trading advisors (CTAs) (see Szakmary, Shen, and Sharma [2010]). As examples, trend following rules may use the current price relative to a moving average (Faber [2007]) or the length of time that excess returns have been positive over a range of timeframes (Hurst, Ooi, and Pedersen [2012]). Indeed, Hurst, Ooi, and Pedersen [2012, p. 2] made the following distinction:

Size Matters: Tail Risk, Momentum and Trend Following in International Equity Portfolios