Maybe we should just call this the yawn trading strategy?
Pretty much all of the outperformance for small and microcaps comes in January. Here is a link to an earlier post from CrossingWallStreet on this effect. (Also known as the January Effect.)
I played around with the French Fama data for awhile, and came up with the following statistics. From 1927 – 2007:
The average return in January for the smallest decile(average market cap today is $134 million) was 11%. Add on ~ 4% for bond yields over that time period for sitting in cash the other 11 months, and that is a pretty nice return average return of 15%. The worst month was a paltry -4.27% and there were only 7 down years (only 3 down years if you include cash returns).
Before you cry foul and exclaim this is only an exercise in data mining, the returns have been consistent over the past decade. The strategy would have sailed through the recent bear market with positive returns of 19%, 35%, and 7% for 2000, 2001, and 2002 (including cash returns).
Even the lowest 20% of stocks (average market cap of $212 million today) had an average Jan return of 9.74%. The second quintile still had Jan returns of over 5%($1 billion average market cap). Here are the returns (without cash yields) and charts (with cash yields, log and non-log). Sample small and microcap funds are PZI, IWM, IWC, PZJ, BRSIX, and SAA/UWM (leveraged).