CBR Briefing #75

Active-mutual-fund portfolios have become more diversified and index-like

• When investors consider the liquidity of a stock portfolio, they should think not only of the liquidity of the underlying stocks, but also to what extent the portfolio is diversified, according to Chicago Booth’s Lubos Pastor and University of Pennsylvania’s Robert F. Stambaugh and Lucian A. Taylor.
• The researchers used this idea to derive a measure of a portfolio’s liquidity and analyze 2,789 actively managed mutual funds between 1979 and 2014.
• During this period, fund portfolios became more liquid, the researchers find. But while the liquidity of individual stocks has declined since 2000, the portfolio’s level of diversification has increased sharply.
• This increasing diversification captures a rise in closet indexing among active-mutual-fund managers—they hold stocks that cover more and more of the market and assign weights that increasingly resemble market benchmarks.