Liquidity Style of Mutual Funds

18 Pages Posted: 28 Mar 2011 Last revised: 17 Feb 2012

See all articles by Thomas M. Idzorek

Thomas M. Idzorek

Morningstar Investment Management; Ibbotson Associates - A Morningstar Company

James X. Xiong

Ibbotson Associates

Roger G. Ibbotson

Yale School of Management; Zebra Capital Management, LLC

Date Written: 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.

Keywords: Liquidity, Stocks, Portfolio Management, Mutual Funds

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

Suggested Citation

Idzorek, Thomas and Xiong, James X. and Ibbotson, Roger G., Liquidity Style of Mutual Funds (February 10, 2012). Available at SSRN: or

Thomas Idzorek

Morningstar Investment Management ( email )

22 W Washington Street
Chicago, IL 60602
United States

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)


James X. Xiong

Ibbotson Associates ( email )

United States

Roger G. Ibbotson (Contact Author)

Yale School of Management ( email )

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6021 (Phone)
203-432-6970 (Fax)

Zebra Capital Management, LLC ( email )

2187 Atlantic Street
Stamford, CT 06902
United States
203 701 5900 (Phone)

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