The Liquidity Style of Mutual Funds

Abstract

Recent literature indicates that a liquidity investment style—the process of investing in less liquid stocks—has led to excess returns relative to size and value. The authors examined whether this style, previously documented at the security level, can be uncovered at the mutual fund level. Across a wide range of mutual fund categories, they found that, on average, mutual funds that held less liquid stocks significantly outperformed those that held more liquid stocks.