Are small caps the key to returns in the Japanese market?

Regardless of market conditions, active management in the Japanese small-cap market is still able to provide a better return with less volatility when compared to Japanese equity market as a whole.

There are three main reasons for this. Firstly, the lack of volatility is primarily because the small-cap market in Japan contains domestic-focused stocks and very few foreign investors. These stocks are thus less sensitive to non-domestic events, while the lack of active foreign investors provides further protection from the more extreme swings seen lately in the Topix and Topix 100 - hence the potential for better risk-adjusted returns from the small cap market. Secondly, there is a dearth of sell-side research on Japanese small-cap firms as, while they make up 86% of all listed sto...