Time-Varying Factor Allocation.

This study provides evidence on whether predictive information can help to profitably allocate a cross-asset factor portfolio, covering well-known factors over the asset classes of equity, commodities, fixed income, and foreign exchange. The authors investigate the performance of a meaningful set of predictors, which they broadly divide into macro and market indicators. Their analysis indicates that tilting a global factor portfolio based on inflation and business-cycle signals can enhance performance, whereas most of the analyzed predictors do not notably improve decision making or are even counterproductive. The results are validated over an extensive out-of-sample period and under practical considerations, while surviving conservative transaction cost assumptions. In sum, the authors advise exercising skepticism when assessing outperformance based on return forecasting, given the challenges of selecting and adhering to the right variables beforehand. Nevertheless, their results suggest potential benefits of conditioning an investor's factor allocation on fundamental macroeconomic information and motivate future research to explore this link. [ABSTRACT FROM AUTHOR]