Fama-French around the world - there are differences

The Fama-French model is the standard which many use for looking at return decomposition of a stock portfolio. Returns are broken down by market risk, a small versus large market cap effect, and value effect based on book to market. However, there is now the five factor Fama-French model. Added to the model have been profitability and investment. Additionally, there is a momentum effect which many agree exists but which was excluded by Fama-French. This five factor model is going to be the core of any money manager in equity. There is no question that it should be be the benchmark standard for looking at alpha generation and risk for any money manger. 

So why is this important for a global macro manager? First, as a standard benchmark, the macro manager needs to know what he is giving up when he invests in a stock index. You have to be better at timing if you are not taking advantage of the other risk factors. The equity specific manager has an edge versus the macro manage. Second, the use of the five factor model can tell the macro manager if there is equity differentiation across region and countries. Assume the simple case that the factors are all the same across countries. In that world, there is no need to buy other stock indices. In the extreme, focus on the US market alone.  If there are difference in the factor weighting, it tell us there is differences from investing internationally

The latest research by Nusret Cakici of Fordham University suggests that the five factor model has different weights in different regions with some factors not being significant. The five factor model does a good job of explaining return behavior in North America, Europe, and global portfolios, but does not seem to work well in Asian markets including Japan. While value is redundant in the main markets of North America, Europe, and global portfolios, it is not in Asian markets. The Asian markets are different and offer unique return profiles. make sure you look at Asia and its differences.

This work is consistent with earlier work by Cakici which shows that emerging markets are different than developed markets using a three factor model with momentum. There is room for holding and trying to exploit a mixed equity portfolio for a macro manager.