The 2016 SBBI Yearbook: Stocks, Bonds, Bills, and Inflation: U.S. Capital Markets Performance by Asset Class 1926-2015 by Roger G. Ibbotson and contributors from Duff & Phelps (Wiley, 2016) is an imposing book. Printed on high quality, heavy stock and measuring 8 1/2” x 11,” it offers 368 pages of beautifully presented returns data along with careful analysis. It is divided into 12 chapters: results of U.S. capital markets in 2015 and in the past decade, the long-run perspective, description of the basic series, description of the derived series, annual returns and indexes, statistical analysis of returns, company size and return, growth and value investing, liquidity investing, using historical data in wealth forecasting and portfolio optimization, stock market returns from 1815-2015, and international equity investing.
Here I’ve decided to focus on a single short chapter: liquidity investing, written by Roger Ibbotson and Daniel Kim, because some of its findings are surprising. First, risk, as measured by standard deviation, increases with liquidity. The authors analyzed the annualized returns (%) between 1972 and 2015 of liquidity quartiles of stocks traded on the NYSE, NYSE MKT, or NASDAQ. The geometric means of the returns of the quartiles, from least liquid to most liquid, were 14.93, 14.04, 12.20, and 7.32. Their arithmetic means were 16.74, 16.06, 14.56, and 10.94. And their standard deviations were 20.01, 21.29, 22.72, and 27.79. One dollar invested in the least-liquid quartile of stocks at the end of 1971 (an equally weighted portfolio with all dividends reinvested) grew to $456.72 by the end of 2015. One dollar invested in the most-liquid quartile grew to only $22.43 over this period.
Liquidity, the authors found, is a much better predictor of returns than size. Although small stocks tend to outperform large stocks in general, this pattern is reversed for the most-liquid stocks. The best performing category is made up of small, relatively less liquid stocks; the worst performing are the small, highly liquid stocks.
The Bedford Park Opportunities Fund returned 13.5% net of all fees and expenses in the second quarter of 2021, bringing its year-to-date return to 27.6%. Q2 2021 hedge fund letters, conferences and more In the fund's second-quarter investor letter, which ValueWalk has been able to review, Jordan Zinberg, the President and CEO of Bedford Read More
Analyzing the performance of value and growth stocks in terms of liquidity, the authors show that high-value, low-liquidity stocks perform the best and high-growth, high-liquidity stocks the worst. The geometric mean of the compound annual returns of the former was 18.85%; of the latter, 2.46%.
In brief, liquidity is a viable investing style and can be mixed and matched with other styles to add to performance.
The SBBI Yearbook has been published for over 30 years. Even in an era of digital data, it remains a wonderful publication. I wish it another 30 years of prosperity.