Post-script — Constructing business cycle tracking funds

The analysis in this book demonstrates that increasing leverage is the driving force of an economy fuelling the growth in profits. In essence it is debt that drives equity values as increasing leverage filters through to higher profits and rising capital values. However, increasing levels of debt are unsustainable as the rate of profit will eventually slow down, thus when economic agents begin to delever-age it impacts equity values. Although this trend can be observed, the turning point of a cycle when agents begin to deleverage and the profit expectations have shifted cannot be predicted. An analysis of multiple streams of macro and credit-related data does however highlight shifting expectations. The challenge of course is how can fund managers take advantage of this analytical framework in order to generate less volatile returns for the pension sector by preserving capital through the business cycle?