Can diversification across economic states improve portfolio performance? In their November 2020 paper entitled “Investing Through a Macro Factor Lens”, Harald Lohre, Robert Hixon, Jay Raol, Alexander Swade, Hua Tao and Scott Wolle study interactions between three economic “factors” (growth, defensive/U.S. Treasuries and inflation) and portfolio building blocks (asset classes and conventional factor portfolios). Their proxies for economic factors are: broad equity market for growth; U.S. Treasuries for defensive; and, spread between inflation-linked bonds and U.S. Treasuries for inflation. To diversify across economic states, they calculate historical performance of each portfolio building block during each of four economic regimes: (1) rising growth and rising inflation; (2) rising growth and falling inflation; (3) falling growth and rising inflation; and, (4) falling growth and falling inflation. They then look at benefits of adding defensive and inflation economic factor overlays to a classis 60%/40% global equities/bonds portfolio. Using monthly economic factor data and asset class/conventional factor portfolio returns during February 2001 through May 2020, they find that: Keep Reading