Regardless of the discussion on what factors, the focus on diversification across risk factors is better than just asset class diversification. Too often when there is a common shock to the markets correlations across asset classes move to one. This movement to a correlation of one is the disappointment with traditional diversification and a key driver for factor-based work especially with respect to macro factors.
Factor-based work also better identifies and isolates the inherent risks in a portfolio whether size,, profitability, value, momentum, growth or inflation. Not until risks are identified can they actually be managed.
However, it is the dynamic use of factors where there is the potential for true excess returns. Factors may be time varying, so the management of factors is the next level of advancement. The management of factors could be called strategy. Hence, we believe that strategy is the bets form of diversification and allows for the greatest amount of diversification.
Andrew Ang of Columbia U. has used the analogy that asset classes are meals or food while factors are the nutrients in the meal. If that is the case, then strategy is the cooking of the food and nutrients. A great chef can make your meal better.