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Liquidity Style of Mutual Funds

Thomas Idzorek

Ibbotson Associates - A Morningstar Company

James X. Xiong

Ibbotson Associates

Roger G. Ibbotson

Yale School of Management; Zebra Capital Management, LLC

February 10, 2012

Recent literature indicates that a liquidity investment style – the process of investing in relatively less liquid stocks within the liquid universe of publicly traded stocks – has led to excess returns relative to size and value. While previously documented at the security level, we examine whether this style can be uncovered at the mutual fund level. In aggregate and across a wide range of mutual fund categories, we find that on average mutual funds that held less liquid stocks significantly outperformed mutual funds that held more liquid stocks. This demonstrates that the liquidity premium is sufficiently strong to show up in portfolios where the managers are most likely not directly focusing on liquidity. Surprisingly, the outperformance of the mutual funds that held less liquid stocks was primarily due to superior performance in down markets, especially market crashes.

Number of Pages in PDF File: 18

Keywords: Liquidity, Stocks, Portfolio Management, Mutual Funds

JEL Classification: D40, D46, G00, G10, G11, G12

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Date posted: March 28, 2011 ; Last revised: February 17, 2012

Suggested Citation

Idzorek, Thomas and Xiong, James X. and Ibbotson, Roger G., Liquidity Style of Mutual Funds (February 10, 2012). Available at SSRN: http://ssrn.com/abstract=1789906 or http://dx.doi.org/10.2139/ssrn.1789906

Contact Information

Thomas Idzorek
Ibbotson Associates - A Morningstar Company ( email )
225 North Michigan Avenue
Suite 700
Chicago, IL 60601
United States
312 696-6840 (Phone)
312 696-6701 (Fax)
HOME PAGE: http://www.ibbotson.com
James X. Xiong
Ibbotson Associates ( email )
United States
Roger G. Ibbotson (Contact Author)
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6021 (Phone)
203-432-6970 (Fax)
Zebra Capital Management, LLC ( email )
612 Wheelers Farms Road
Milford, CT 06461
United States
Feedback to SSRN

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