Migration refers to the movement of stocks across size and value portfolio boundaries from one rebalancing period to the next. Fama and French (2007) show that migration is a primary mechanism through which the size and value premia are generated.
Framework
At the end of each June (1926-2005), stocks are sorted into six value-weighted portfolios based on size (small/big, using NYSE median market cap) and price-to-book (growth/neutral/value, using NYSE 30/40/30 breakpoints). Each portfolio’s stocks are then classified into four groups based on where they appear at the next June rebalance:
- Same: stocks remaining in the same portfolio
- dSize: stocks crossing the size boundary (small to big or big to small)
- Plus: stocks improving in type (moving toward growth or being acquired)
- Minus: stocks deteriorating in type (moving toward value, delisted for cause, or book equity turning negative)
A migration group’s contribution to a portfolio’s excess return depends on both the group’s return and its weight in the portfolio.
Size premium and migration
The size premium traces almost entirely to small stocks that become big. Key findings (1927-2006):
- The 8-12% of small-cap market capitalization that migrates to big-cap status each year earns average excess returns exceeding 60% per year.
- Big stocks that become small have strongly negative excess returns, but contribute little to the size premium because they represent tiny fractions of big-cap market capitalization.
- Stocks that stay in the same portfolio or deteriorate in type actually lean against the size premium, contributing more to big-cap returns.
- The size premium is essentially a lottery-ticket effect: most small stocks underperform, but a few spectacular winners more than compensate.
Value premium and migration
Three of four migration groups contribute to the value premium:
- Plus transitions contribute roughly 3.5 percentage points more per year to value portfolio returns than to growth portfolios. Value stocks that improve (acquired or migrate to neutral/growth) have high returns. Plus transitions are common for value stocks but rare for growth stocks.
- Minus transitions are a bigger drag on growth portfolios. Minus transitions contribute 5.1 pp/yr to the small-cap value premium and 1.2 pp/yr for large caps. Minus transitions are common for growth stocks (deterioration) but rare for value stocks.
- Same (non-migrators) contribute modestly: value stocks that remain value earn slightly higher returns than growth stocks that remain growth (1.0 pp/yr for small caps, 1.7 pp/yr for large caps).
One offset: small growth stocks migrate to big-cap status more frequently than small value stocks (11.8% vs. 8.5% of market cap), working against the value premium by 2.9 pp/yr.
Transition frequencies
Most stocks stay in the same portfolio year to year. Big growth stocks are most persistent: 77.5% of companies (86.8% of market cap) remain in the same portfolio. Small growth and small neutral are least sticky, with persistence rates near 60%. When stocks do migrate, they are more likely to change value type (crossing a P/B boundary) than size group.
Declining migration rates
BCA Research (2024) documents that migration rates from small to large caps have declined to roughly half their peak level since 2000. Contributing factors include the growth of venture capital (best small companies stay private), big tech acquisitions (successful small companies acquired before growing into large caps), and declining IPO activity (US public company count roughly halved since 2000). This structural decline in migration undermines the primary mechanism through which the size premium was historically generated. See size-effect-debate.
Migration in the value context
Arnott, Harvey, Kalesnik, and Linnainmaa (2021) confirm that migration remains a structural driver of the value premium. Comparing pre-2007 and post-2007 data, they find no meaningful change in the performance attributable to migration or income yield. Value’s post-2007 underperformance is driven entirely by revaluation (widening of the value-growth spread), not by a breakdown in the migration mechanism.
Implications
The migration framework reveals that factor premia are not earned uniformly by all stocks in a portfolio. They are concentrated in the tails: the stocks that transition between categories. This has practical implications for factor portfolio construction and rebalancing frequency.