Q3 2016 : Portfolio Manager Q&A

Download PDF Version

For the third quarter ended September 30, 2016, the Fund increased nearly 10%, outperforming the S&P 500 Index and the Morningstar Large Cap Growth Funds Category by over 600 and 400 basis points, respectively. Would you please discuss what contributed to this outperformance?

Stock selection was the key driver of the Fund’s outperformance. Strong performance from our Health Care holdings was the main contributor. The Fund’s Health Care holdings returned over 14%, while the sector only rose 1% for the S&P 500 Index. Medivation, one of the Fund’s largest holdings during the period, was up 35% on Pfizer’s purchase of the company for $14 billion in cash. The Fund also had sizable returns from stakes in other Health Care companies, including Edwards Lifesciences and Biogen, which both increased over 20% during the quarter.

The Technology sector was the big winner in the S&P 500 Index this quarter, rising nearly 13%. The Fund’s overweight allocation to this sector (33%) versus the Index (21%) was another important contributor. The Fund experienced broad-based strength in its Technology positions, with Alibaba, GrubHub, Facebook, and NXP Semiconductors all rising by double digits.

Would you please describe your investment philosophy when selecting large-cap growth companies and touch on the Fund’s sales and earnings growth rates?

Our investment philosophy is grounded in the belief that earnings growth is the primary driver of stock prices over the longer term. We look to own 30 to 50 leading large-cap companies that are positioned to grow both sales and earnings at a faster pace than the market and their peers. Many of these companies are found in faster growing sectors of the market, such as Information Technology, Health Care and Consumer Discretionary, and the Fund often has little-to-no exposure to slower growing sectors such as Energy or Utilities. The Fund’s holdings are usually driven by secular growth opportunities, rather than cyclical performance, so they are less dependent on the economic environment and more driven by their in- demand brands and unique products and services.

As of September 30, 2016, the Fund’s estimated 3-year sales growth rate was approximately 24%, significantly faster than the 6% sales growth expected for the S&P 500 Index. The Fund’s 3- to 5-year estimated earnings growth rate was 23%; more than double the approximately 10% earnings growth expected for the S&P 500 over the same timeframe.

Would you please brie y describe a few of the Fund’s top holdings?

The Fund’s top holding is Facebook, the world’s leading social network with over 1.7 billion active monthly users. We believe Facebook is well positioned, as its core advertising business continues to grow swiftly and the company monetizes its other products including Instagram and WhatsApp. Facebook’s pro table business model and market leadership position should enable the company to continue growing its sales and earnings at attractive rates of over 30% during the next few years. Additionally, Facebook is trading at 27 times next twelve month earnings as of September 30, 2016, which we feel is reasonable when considering their very strong growth profile and dominant market position.

Activision Blizzard, a leading developer and publisher of best-selling entertainment software games including Call of Duty, World of WarCraft, Skylanders and Candy Crush, is another top holding in the Fund. Like Facebook, Activision has a large and engaged customer base of over 500 million monthly active users. We expect margins will continue to expand in the coming years as gamers digitally download more games onto their mobile devices, which is more pro table for the company than consumers buying physical discs. We believe Activision can grow its sales at 15% and earnings at 20% in the coming years which should bode well for continued appreciation in its share price over time.

Average Annual Returns as of 09/30/16

QTD 1 Yr 3 Yr 5 Yr 10 Yr
Investor - VALLX 9.96% 16.08% 12.99% 16.48% 7.10%
Institutional - VLLIX1 10.02% 15.92% 12.94% 16.44% 7.08%
S&P 500 Index 3.85 15.43 11.16 16.37 7.24
Morningstar Large Growth Category Avg. 5.59 10.46 9.23 14.98 7.52
Morningstar Category Rank (%) - VALLX 4 4 19 63
# of Funds in Category 1629 1482 1285 924
Morningstar Return High Above Avg. Average
VALLX Gross / Net Expense Ratio*: 1.23% / 1.13% , VLLIX Gross / Net Expense Ratio**: 2.70% / 0.98%.
Morningstar rates funds based on enhanced Morningstar risk-adjusted returns.
Investor - VALLX Institutional - VLLIX1 S&P 500 Index Morningstar Large Growth Category Avg. Morningstar Category Rank (%) - VALLX # of Funds in Category Morningstar Return
QTD 9.96% 10.02% 3.85 5.59
1 Yr 16.08% 15.92% 15.43 10.46 4 1629
3 Yr 12.99% 12.94% 11.16 9.23 4 1482 High
5 Yr 16.48% 16.44% 16.37 14.98 19 1285 Above Avg.
10 Yr 7.10% 7.08% 7.24 7.52 63 924 Average
VALLX Gross / Net Expense Ratio*: 1.23% / 1.13% (as of 12/31/14)
Morningstar rates funds based on enhanced Morningstar risk-adjusted returns.
Morningstar Ratings and Categories based on risk adjusted returns of Investor class shares.
1Indicates Morningstar Extended Performance. Extended performance is an estimate based on the performance of the fund’s oldest share class, adjusted for fees. The Inception Date of VLLIX is November 1, 2015.

* Effective May 1, 2015 to June 30, 2016, EULAV Securities LLC (the “Distributor”) has contractually agreed to waive a portion of the Fund’s 12b-1 fee equal to 0.10% of the Fund’s average daily net assets. This waiver can be terminated or changed before June 30, 2016 only with the approval of the Fund’s board and the Distributor. The Fund’s performance would be lower in the absence of such waivers.

There are risks associated with investing in small and mid cap stocks, which tend to be more volatile and less liquid than stocks of large companies, including the risk of price fluctuations.

The performance data quoted herein represents past performance and does not guarantee future results. Market volatility can dramatically impact the fund's short term performance. Current performance may be lower or higher than figures shown. The investment return and principal value will fluctuate so that an investor's shares, when redeemed may be worth more or less than their original cost. Past performance data through the most recent month end is available at vlfunds.com or by calling 800.243.2729.

You should carefully consider investment objectives, risks, charges and expenses of Value Line Funds before investing. This and other information can be found in the fund's prospectus and summary prospectus, which can be obtained free of charge from your investment representative, by calling 800.243.2729, or by clicking on the applicable fund at www.vlfunds.com. Please read it carefully before you invest or send money. The inception dates of Value Line Mutual Funds range from 1950 to 2016. Value Line Funds are distributed by EULAV Securities LLC. Past performance is no guarantee of future results.

Portfolio holdings are subject to change and should not be considered a recommendation to buy or sell securities. Current and future portfolio holdings are subject to risk.

The average annual returns shown above are historical and reflect changes in share price, reinvested dividends and are net of expenses. Investment results and the principal value of an investment will vary.

The Morningstar Rating™ for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three- year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. VLIFX (3 Year / 5 stars / 583 funds; 5 Year / 4 stars / 507 funds; 10 Year / 3 stars / 370 funds; ) VALLX (3 Year / 4 stars / 1315 funds; 5 Year / 3 stars / 1161 funds; 10 Year / 3 stars / 805 funds; ) VLEOX (3 Year / 4 stars / 605 funds; 5 Year / 5 stars / 533 funds; 10 Year / 4 stars / 388 funds; ) VALSX (3 Year / 4 stars / 583 funds; 5 Year / 3 stars / 507 funds; 10 Year / 4 stars / 370 funds; ) VLAAX (3 Year / 4 stars / 723 funds; 5 Year / 4 stars / 616 funds; 10 Year / 4 stars / 429 funds; ) VALIX (3 Year / 4 stars / 354 funds; 5 Year / 4 stars / 290 funds; 10 Year / 5 stars / 219 funds; ) VLDSX (3 Year / 2 stars / 237 funds; 5 Year / 1 stars / 142 funds; 10 Year / N/A stars / N/A funds; ) VAGIX (3 Year / 2 stars / 854 funds; 5 Year / 2 stars / 754 funds; 10 Year / 2 stars / 540 funds; ) VLHYX (3 Year / 1 stars / 145 funds; 5 Year / 1 stars / 132 funds; 10 Year / 1 stars / 102 funds; )