In contrast, the equities that have produced the best returns over 37 years were illiquid small-cap concerns, which generated an astonishing 17.87% annual return over nearly four decades. In all likelihood, these companies represent small, overlooked companies that attract little interest or trading activity.

It should be noted that studies of the small-cap performance advantage-some of them based on Ibbotson's data-have found that most of that outperformance since 1926 can be traced to a nine-year period from 1974 to 1983. That era was characterized by gas station lines, stagflation and two nasty recessions, and yet small stocks levitated while blue-chip companies watched their shares founder.

While the trend persists among large-company stocks, the premium for illiquid big businesses is much narrower. The most liquid shares of large firms returned 9.46% while the least liquid among this group recorded a 12.29% annual gain over the 37-year period.
Taking a look at the liquidity of value and growth stocks, Ibbotson's research produces its most striking variances. While the findings support the French-Fama theory that unloved stocks offer a premium, the differentials are so wide they throw the whole efficient markets hypothesis into question.

Highly liquid growth stocks, the stocks everybody knows and many portfolio managers own, performed dismally, throwing off a meager return of 3.32% a year over almost four decades. In contrast, the least liquid value companies gave investors 20.63% annually during the same time frame.

Liquidity as a predictor of returns evens works when equities are sorted based on their momentum. However, Ibbotson offered several caveats in this area.

"Momentum has become far more erratic in recent years" as a return predictor, he explained. In the past, it used to exhibit more clairvoyance about where equities were headed.

The equities with the most liquidity and the least momentum performed poorly, producing an annual return of only 5.01% during the period. Those with the least liquidity and the most momentum performed best, generating a return of 17.87%.

While Ibbotson said his research into liquidity holds when it is extended to global investing, there have been periods when it didn't pan out. "This is not something that works every year, notably in 1999," when the tech bubble was approaching its zenith, he observed. However, it worked extremely well after that bubble burst in the 2000-2002 period.

"Liquidity is also mean-reverting," he told attendees, adding that there is some evidence that mutual funds biased in favor of illiquid stocks have higher returns. "Stocks move in and out of favor as liquidity rises or falls and as valuations rise or fall."

In some ways, Ibbotson likened liquidity as a style to private equity, commenting that it is most appropriate for investors seeking higher returns with longer time horizons.