Q4 2020 : Portfolio Manager Q&A

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Would you please comment on the Fund’s performance relative to the Morningstar Small Growth category average for the quarter and the year?

The Fund produced a solid return of 23.00% for the quarter ending December 31, 2020 but lagged the Morningstar Small Growth Category average return of 27.28%. For the year, the Fund rose 26.60%, but underperformed the peer group return of 36.92%. While we lagged the category returns during these periods, we believe it is important to keep in mind that our investment process is designed with the goal of producing steady performance over time and doing so with less risk.

By investing in companies with a history of 10+ years of consistent growth in both stock price and earnings, and avoiding headline-grabbing, more volatile stocks, we typically have lagged the peer group’s performance when there is a sharp rally. In fact, in each of the past 10 calendar years, when the small-cap growth market, as measured by the Russell 2000 Growth Index, rose 20% or more, the Fund lagged in performance relative to its Morningstar peer group.

However, when the small-cap growth market advanced less than 20% or produced negative returns for the year, the Fund outperformed the peer group each year by an average of over 400 basis points.

Why should an investor consider investing in a small-cap fund amidst the market volatility of recent months?

*Source: Morningstar; 3/23/20-12/31/20.

2020 was marked by extreme volatility throughout the year, starting with a deep dive in the first quarter, followed by a rally in the stock markets later in the year. Interestingly, since the market low on March 23, 2020, small-cap companies, as measured by the Russell 2000 Index, have outperformed their larger cap brethren. As vaccines become available to more of the population, we expect the economy to improve. Smaller companies tend to be more sensitive to economic conditions and are poised to benefit from an improving economy.

We also believe it is important to invest in companies that have a lower risk profile. The Fund’s investment approach is to own companies with a track record of 10 or more years of consistent growth in both stock price and earnings. Companies with such a track record tend to produce more predictable operating results in a variety of economic conditions. As a result, the Fund has been awarded Morningstar’s “Low” Risk Rating for the 3, 5 and 10-year periods as of December 31, 2020. In addition, the Fund’s Sharpe Ratio ranks in the top 2% for risk adjusted return in the category over the 10-year period as of December 31, 2020.

What changes have you made to the Fund in Q4?

The Fund added one new company during the fourth quarter: Concentrix Corp. (CNXC). Concentrix is a technology company specializing in customer engagement and customer management, which spun off of former parent company SYNNEX. We exited six positions in the fourth quarter as they no longer met our stringent criteria. As a result of our long-term oriented investment process, we tend to hold our companies over a period of years as we monitor their stock price and earnings growth each year. As of December 31, 2020, the Fund held 107 companies.

Average Annual Returns as of 12/31/20

QTD 1 Yr 3 Yr 5 Yr 10 Yr
Investor - VLEOX 23.00% 26.60% 14.71% 15.22% 14.18%
Institutional - VLEIX1 23.08 26.94 14.99 15.51 14.33
Russell 2000 Index 31.37 19.96 10.25 13.26 11.20
Morningstar Small Growth Category Avg. 27.28 36.92 18.02 17.31 13.06
Morningstar Category Rank (%) - VLEOX 74 69 70 46
# of Funds in Category 616 576 505 381
Morningstar Risk Low Low Low
VLEOX Gross / Net Expense Ratio: 1.19% , VLEIX Gross / Net Expense Ratio*: 1.00% / 0.94%.
Morningstar rates funds based on enhanced Morningstar risk-adjusted returns.
Morningstar rates funds based on enhanced Morningstar risk-adjusted returns. Morningstar Ratings and Rankings based on 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 (VLEIX) is November 1, 2015.

* EULAV Asset Management (the “Adviser”) and EULAV Securities LLC, the Fund’s principal underwriter (the “Distributor”), have agreed to waive certain class-specific fees and/or pay certain class-specific expenses incurred by the Institutional Class so that the Institutional Class bears its class-specific fees and expenses at the same percentage of its average daily net assets as the Investor Class’s class-specific fees and expenses (excluding 12b-1 fees and any extraordinary expenses incurred in different amounts by the classes) (the “Expense Limitation”). The Adviser and the Distributor may subsequently recover from assets attributable to the Institutional Class the reimbursed expenses and/or waived fees (within 3 years after the fiscal year end in which the waiver/reimbursement occurred) to the extent that the Institutional Class’s expense ratio is less than the Expense Limitation or, if lower, the expense limitation in effect when the waiver/reimbursement occurred. The Expense Limitation can be terminated or modified before June 30, 2019 only with the agreement of the Fund’s board. The Fund’s performance would be lower in the absence of such waivers.

As of 12/31/20, the Fund’s Top 10 Holdings were as follows: Churchill Downs Inc (3.42%), Exponent Inc (3.15%), RLI Corp (2.91%), Five9 Inc (2.59%), Woodward Inc (2.43%), Stifel Financial Corp (2.37%), J&J Snack Foods Corp (2.17%), SPS Commerce Inc (2.05%), RBC Bearings Inc (2.04%), First Financial Bankshares Inc (1.91%)

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 / 3 stars / 560 funds; 5 Year / 3 stars / 500 funds; 10 Year / 4 stars / 379 funds; ) VALLX (3 Year / 3 stars / 1186 funds; 5 Year / 3 stars / 1065 funds; 10 Year / 3 stars / 788 funds; ) VLEOX (3 Year / 3 stars / 576 funds; 5 Year / 3 stars / 503 funds; 10 Year / 4 stars / 379 funds; ) VALSX (3 Year / 3 stars / 560 funds; 5 Year / 3 stars / 500 funds; 10 Year / 3 stars / 379 funds; ) VLAAX (3 Year / 4 stars / 641 funds; 5 Year / 4 stars / 574 funds; 10 Year / 5 stars / 412 funds; ) VALIX (3 Year / 5 stars / 307 funds; 5 Year / 5 stars / 276 funds; 10 Year / 5 stars / 185 funds; ) VAGIX (3 Year / 1 stars / 385 funds; 5 Year / 2 stars / 337 funds; 10 Year / 2 stars / 255 funds; ) VLHYX (3 Year / 1 stars / 144 funds; 5 Year / 1 stars / 123 funds; 10 Year / 1 stars / 99 funds; )

Source: Morningstar Direct