The Case for Less Liquid Stocks
Yet while most investors are routinely steered to the most liquid investments and large, well-known stocks like Apple (AAPL: 266.61*, -2.39, -0.88%), Ibbotson's thesis is that investors pay a premium for liquidity, meaning that, over time, one actually makes more money buying less liquid stocks, which tend to be more out of favor than their more fashionable (and frequently traded) alternatives.
Over a 14-year-period ending Dec. 31, a global portfolio of Ibbotson's lower-liquidity stocks racked up 13% average annual returns, compared with a 7.9% return for the benchmark MSCI World Index. Longer-term results are even more impressive.
Lose the Liquidity
“Liquidity as an Investment Style” by Zhiwu Chen and Roger Ibbotson, 2008
Building off that research, Ibbotson’s firm Zebra Capital has launched two new mutual funds, American Beacon Zebra Large Cap Equity (AZLAX) and American Beacon Zebra Small Cap Equity (AZSAX). Both select stocks based on their liquidity metrics (such as trading volume) relative to their fundamentals. The strategy invests in stocks with strong fundamentals that are traded less often than stocks with comparable fundamentals. The expectation is that, over time, the liquidity discount of out-of-favor stocks narrows as the investment comes more into fashion. Stocks are sold when the fundamentals deteriorate or trading activity increases.
The funds, which have a $2,500 minimum investment, are billed as the first liquid investment strategy that specifically target liquidity as an investment strategy.
The Associated Press reported this week on the government’s stalled HAMP program to aid homeowners in modifying their mortgages. At $75 billion, HAMP has thus far failed to prevent widespread foreclosures among troubled homeowners.
More than a third of the borrowers who enrolled in the program have dropped out -- exceeding the number of borrowers the program has actually helped by a third, echoing our assertion that “The Plan to Stop Foreclosures Has Failed" made nearly six months ago.
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