Q2 2017 : Portfolio Manager Q&A

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With a return of 7.93% for the second quarter of 2017, the Fund outperformed the S&P 500 Index by nearly 500 basis points, more than double the Index’s return. What drove this outperformance?

We are pleased that the Fund’s outperformance continued in the second quarter. The Fund’s results were due to being overweight in strong performing sectors and effective stock selection. Primarily, the Fund’s holdings in the following overweighted sectors drove the outperformance in the second quarter:

1. Information Technology. The Fund had an average weighting of approximately 36% compared to the S&P 500 Index’s weighting of 23%. The Fund’s Technology holdings appreciated 12% on average, well ahead of the S&P 500 Information Technology sector’s increase of 4%. We saw broad-based strength in most of the Fund’s IT holdings and a few stand out performers included Activision, Alibaba, GrubHub and PayPal.

2. Health Care. The Fund had an average weighting of 32%, significantly higher than the S&P 500’s at 14%. The Health Care Sector was the strongest performer in the Index this period, rising over 7%. The Fund’s Health Care holdings outperformed, rising 9%, helped by strong performances from Edwards Lifesciences, Kite Pharma, Medidata Solutions and Vertex Pharmaceuticals.

Importantly, since the transition to a “best ideas” strategy in 2014, the Fund has outperformed its peers. In fact, as of June 30, 2017, the Fund had top decile performance in the Morningstar Large Growth Funds Category over the 1- and 3-year periods.

With the Fund’s limited number of holdings, what qualities do you look for in large growth companies?

We look to own between 25 and 50 leading growth companies that we believe are well-positioned for continued success and are usually supported by secular growth drivers. We are attracted to companies that have unique products or services, compete in industries with high barriers to entry, and have market-leading positions. We tend to favor companies with high rates of sustainable sales and earnings growth. Therefore many of the Fund’s companies tend to experience higher growth than their peers and regularly beat analysts’ expectations on both earnings and sales growth. As of June 30, 2017, the Fund had a 3- to 5-year estimated average earnings growth rate of 28% versus 12% for the S&P 500 Index and an estimated average 3-year sales growth of 24% versus 6% for the Index.

One example of a fast-growing company that was recently purchased in the Fund is Exact Sciences (EXAS). Exact Sciences is a medtech company best known for its unique product, Cologuard, which is a non-invasive DNA screening test to detect colorectal cancer and precancer. Due to its ease of use relative to a traditional colonoscopy, we anticipate the company’s sales will grow at a rapid pace in the coming years.

Two Fund holdings were acquired earlier this year. What is your perspective on continued merger and acquisition activity (M&A)?

We anticipate M&A activity will accelerate when there is more certainty regarding U.S. tax policy changes. With many large companies holding excess cash, we see numerous takeover opportunities in the Consumer Discretionary, Health Care and Technology sectors. While the Fund has benefited from past M&A activity, it is not a consideration when purchasing companies. We seek to own leading, fast-growing businesses; by nature, those attributes make some of our holdings attractive acquisition candidates.


Average Annual Returns as of 06/30/17

QTD 1 Yr 3 Yr 5 Yr 10 Yr
Investor - VALLX 7.93% 26.97% 12.60% 15.81% 7.00%
Institutional - VLLIX1 7.94% 27.16% 12.58% 15.80% 7.00%
S&P 500 Index 3.09 17.90 9.61 14.63 7.18
Morningstar Large Growth Category Avg. 5.01 20.02 8.80 13.87 7.51
Morningstar Category Rank (%) - VALLX 8 5 12 64
# of Funds in Category 1424 1277 1152 803
VALLX Gross / Net Expense Ratio*: 1.23% / 1.15% , VLLIX Gross / Net Expense Ratio*: 17.29% / 0.90%.
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. 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 / 4 stars / 560 funds; 5 Year / 4 stars / 491 funds; 10 Year / 2 stars / 365 funds; ) VALLX (3 Year / 4 stars / 1226 funds; 5 Year / 4 stars / 1110 funds; 10 Year / 3 stars / 786 funds; ) VLEOX (3 Year / 4 stars / 604 funds; 5 Year / 4 stars / 539 funds; 10 Year / 4 stars / 404 funds; ) VALSX (3 Year / 3 stars / 560 funds; 5 Year / 2 stars / 491 funds; 10 Year / 3 stars / 365 funds; ) VLAAX (3 Year / 4 stars / 719 funds; 5 Year / 4 stars / 668 funds; 10 Year / 4 stars / 458 funds; ) VALIX (3 Year / 3 stars / 317 funds; 5 Year / 4 stars / 277 funds; 10 Year / 5 stars / 199 funds; ) VAGIX (3 Year / 3 stars / 845 funds; 5 Year / 2 stars / 779 funds; 10 Year / 2 stars / 551 funds; ) VLHYX (3 Year / 2 stars / 137 funds; 5 Year / 1 stars / 127 funds; 10 Year / 1 stars / 103 funds; )

Source: Morningstar Direct