What type of portfolio manager seeks companies that are considered to have higher earnings potential?
a) Credit quality managers. b) Growth managers. c) Value managers. d) Sector rotation managers.
The correct answer and explanation is:
The correct answer is b) Growth managers.
Growth managers are portfolio managers who focus on identifying companies that are expected to have strong future earnings growth. These managers look for businesses that have higher earnings potential, often investing in companies that are in expansion phases or have innovative products or services. Growth investing is typically associated with a higher risk, as the stocks of these companies may be volatile or priced higher based on future expectations rather than current profitability. Growth stocks are expected to grow faster than the market average, and as a result, they often do not pay dividends, preferring to reinvest earnings into the company’s expansion.
In contrast, credit quality managers (a) focus on managing the creditworthiness of debt instruments within a portfolio, ensuring that bonds or loans have a low risk of default. These managers are primarily concerned with fixed income securities and the financial health of the issuing companies or governments.
Value managers (c) seek companies that are undervalued relative to their intrinsic value. They look for stocks that are trading below their true worth, often in the belief that the market will eventually recognize the company’s value. These managers typically focus on stable companies with solid fundamentals but may not necessarily have high growth potential.
Sector rotation managers (d) focus on shifting investments between different sectors of the economy based on market conditions. Their aim is to take advantage of economic cycles by investing in sectors that are expected to perform well in a particular phase of the cycle, rather than seeking companies with high earnings potential.
Growth managers are primarily focused on maximizing returns by investing in high-growth potential companies, often at a higher risk.