Managing a fund based on P/E Ratio generally tends to put valuation ahead of other criteria when selecting stocks. The main categories which can be derived from P/E Ratios are Growth and Value funds.
Fund managers may intentionally invest in companies with a higher P/E than the market benchmark, because these tend to be considered Growth stocks. These companies are experiencing growth and are projected to continue to do so, which is seen in the high price of the stocks.
The opposite is true for a Value-seeking fund: they will primarily buy stocks with a low P/E ratio. The low price indicates that many investors may be skeptical of the company’s future earnings potential.
To calculate the P/E for a fund, the individual P/E ratios for the stocks held by the fund are averaged using each’s stock weighting in the portfolio.
Growth funds and Value funds tend to perform similarly, and there is no definitive “best” choice. If one is performing above their benchmark, the other one tends to be below the benchmark, but they trade places with some regularity as a result of market factors.
Value stocks tend to have high dividend yields, while growth stocks generally do not pay dividends.
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