Australian superannuation funds should aim to hold more equities with limited liquidity in their portfolios, according to Yale School of Management practice of finance professor Roger Ibbotson. 

"We are actually saying that there is a missing style here and it is liquidity," Ibbotson, who is also Zebra Capital chief investment officer, said in an interview with Investor Weekly.

"Less liquid stocks have higher performance than higher liquid stocks."

Ibbotson and his colleagues, Yale School of Management professor of finance Zhiwu Chen and Zebra Capital co-portfolio manager Wendy Hu, recently updated their research on liquidity in a paper published on Zebra Capital's website.

"We found that the mutual funds that hold the less liquid stocks versus the mutual funds that hold the more liquid stocks - the top liquid quartile versus the bottom liquid quartile -there is a 2 to 3 per cent extra return from holding the less liquid stocks," he said.

"So just like mutual funds may have higher returns from holding small stocks instead of large stocks or mutual funds having a higher return for holding value stocks instead of growth stocks, we are saying that mutual funds are having higher returns for holding less liquid stocks versus more liquid stocks.

"It is about as strong as the other styles; it was even stronger over the period that we looked at."

The reason for the higher returns lies in the fact people do not like illiquid stocks and, therefore, they trade at a discount. By holding the stocks for at least two years, fund managers can capitalise on the discount.

"You do tend to have longer holding periods; this is not a strategy for day-traders. But most people don't need a lot of liquidity," Ibbotson said.

"Certainly this is true of Australian superannuation funds; they have very long horizons and they should take advantage of these liquidity premiums."

Ibbotson founded investment consulting firm Ibbotson Associates, which is owned by Morningstar.

Morningstar is also the parent company of Investor Weekly.