Interpreting Factor Loadings Against an Emerging Markets Benchmark

Summary

The document raises questions about interpreting CAPM, Fama–French three- and five-factor, and Carhart regressions for an actively managed emerging markets fund. The fund shows a negative SMB coefficient against broad emerging markets data, but the coefficient loses statistical significance when the fund is evaluated against its own benchmark. The questioner suggests benchmark similarity in size exposure may explain the change and asks why momentum and other factor coefficients are insignificant.

No regression output or definitive explanation is provided, so these points remain hypotheses rather than conclusions. The comparison illustrates that estimated factor exposures and their significance can depend on the reference portfolio and on shared exposures between a fund and its benchmark. The document also asks whether a long investment horizon explains an insignificant momentum loading, but supplies no evidence to establish that link. Interpreting the results would require the data, model specification, benchmark composition, and uncertainty around the estimates.

Key ideas

• Factor coefficients for an emerging markets fund can differ when estimated against broad market data versus its own benchmark.
• A negative SMB estimate may lose significance when the benchmark shares similar size exposures.
• The document proposes explanations for insignificant momentum, value, profitability, and investment coefficients but does not test them.
• Factor regression results need to be interpreted in light of benchmark composition and model uncertainty.

Tags

# Interpreting Factor Coefficients for an Emerging Markets Fund against the Market and its Benchmark


# Interpreting Factor Coefficients for an Emerging Markets Fund against the Market and its Benchmark












I ran CAPM, FF3, FF5 and Carhart models for an emerging markets fund against the FF data for emerging markets and against its own benchmark. I am constantly getting negative SMB's which shows relevant information about the fund but my SMB coeff go from being significant to being insignificant when regressing against the benchmark. What might be the reason behind this? The fund dictates its holding somewhat from said benchmark and is actively managed long-term oriented capital growth emerging markets fund.

Further, would I be correct in assuming that momentum is insignificant as it takes recent performance into account whereas the fund looks at long-term (5-7 yrs) in terms of performance.

As per my understanding, the reason for SMB being insignificant could be that against the market, the size effect is more pronounced as it has a broader size diversification whereas with the benchmark, which has similar large sized factor, it leads to having an insignificant SMB.

Finally, I would appreciate of anyone could give any substantial reasons for the HML, CMA and RMW factors not being significant as well please.

Thank you!

Any help on this would be appreciated

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.