There have been numerous attempts to overturn the finding that small stocks have positive risk-adjusted returns. The most direct challenge for investment professionals is the claim that the returns of theoretical small-stock portfolios are unachievable in practice. Discussions about excess small-company returns are moot if actual portfolios are unable to deliver the returns of the small-company universe.

An examination of actual, small-company passive portfolios sheds some light on this issue. These small-stock portfolios deliver the returns of their targets, within statistically acceptable bounds. There are, however, significant differences across their returns, and these differences appear to be related to management style.

“Pure indexers” try to maintain perfect index-like portfolio compositions. Minimizing trading cost is of secondary importance to them. These portfolios have the lowest returns. At the other extreme, some portfolios emphasize minimizing trading costs at the expense of perfect portfolio composition. These portfolios have the highest returns.