Q2 2017 : Portfolio Manager Q&A

Download PDF Version

How has the Fund performed against its peers over the past year as well as longer time frames?

For the one-year period ended June 30, 2017, the Fund rose 17.9% while the Morningstar Small Growth Funds Category average increased 23.1%. However, the Fund has fared favorably against the same peer group over longer time frames. For example, the Fund has outperformed the Category average for the past 3, 5, 10 and 15 year periods ended June 30, 2017. The Fund has accomplished this impressive record by focusing on high-quality companies with a track record of consistent growth in both earnings and stock price generally over a 10-year period or more.

Even more impressive, in addition to providing long-term oriented investors with outperformance relative to the Morningstar Category average, the Fund has garnered Morningstar’s lowest risk rating for the 3, 5, and 10 year periods ended June 30, 2017. Lastly, for the five year period ended June 30, 2017, the Fund’s Sharpe Ratio placed it among the top 2% of Funds in the Morningstar Small Growth category out of 533 funds.

With the Fund’s focus on consistent long-term growth in both earnings and stock price, how do sector weightings differ from the typical small growth fund?

The Fund typically holds a significant overweight to the Industrials sector compared to the Morningstar Small Growth category average. Many companies in this sector, such as holdings in Toro (TTC), Lennox International (LII) and Healthcare Services Group (HCSG), tend to have solid and consistent growth and operate in markets that are generally less sensitive to business conditions.

Given our stringent growth criteria, the Fund generally lacks companies in the Energy or Biotechnology sectors as these stocks generally have more volatile stock prices and inconsistent earnings. As of June 30, 2017, the Fund had a weighting of only 9% in the Health Care sector compared to a nearly 16% weighting for the Morningstar category average. Long-term fund holdings in Health Care include Parexel International (PRXL), a life sciences consulting firm that conducts clinical trials for pharmaceutical companies, and Chemed (CHE), a company with two subsidiaries that provide hospice care and plumbing and drain cleaning services.

Would you please discuss your strategy for buying and selling small-cap stocks in the portfolio?

The small-cap market is generally more ineffcient than their larger counterparts, which provides more opportunity to purchase companies at attractive prices. New purchases that have had a consistent and fairly strong track record of growth in earnings and stock price generally have experienced a recent strong quarter and have positive momentum. In many of these cases, we buy a small position (less than 1%), which we add to if the stock continues to meet our growth criteria.

With regard to our sell strategy, we aim to hold positions for a long-term period. In fact, the turnover for the Fund was 21% as of the fiscal year ended March 31, 2017 compared to the Morningstar Small Growth Funds category turnover average of 73%. Because each holding must maintain consistency of growth, we continually monitor companies’ quarterly earnings and stock price. If earnings and/or stock price become weaker, we often trim the positions to make these holdings a smaller part of the portfolio, and sell the position completely if the company no longer satis es our fundamental growth analysis.

Average Annual Returns as of 06/30/17

1 Yr 3 Yr 5 Yr 10 Yr 15 Yr
Investor - VLEOX 17.89% 8.98% 14.43% 7.73% 9.47%
Institutional - VLEIX1 18.19 9.15 14.53 7.78 9.51
Russell 2000 Index 24.60 7.36 13.70 6.92 9.19
Morningstar Small Growth Category Avg. 23.12 6.67 12.81 7.05 9.02
Morningstar Category Rank (%) - VLEOX 89 22 21 34 --
# of Funds in Category 678 599 533 398 --
Morningstar Return Above Avg. Above Avg. Average
Morningstar Risk Low Low Low
VLEOX Gross / Net Expense Ratio: 1.21% , VLEIX Gross / Net Expense Ratio*: 1.22% / 0.96%.
Morningstar rates funds based on enhanced Morningstar risk-adjusted returns.
Investor - VLEOX Institutional - VLEIX1 Russell 2000 Index Morningstar Small Growth Category Avg. Morningstar Category Rank (%) - VLEOX # of Funds in Category Morningstar Return Morningstar Risk
1 Yr 17.89% 18.19 24.60 23.12 89 678
3 Yr 8.98% 9.15 7.36 6.67 22 599 Above Avg. Low
5 Yr 14.43% 14.53 13.70 12.81 21 533 Above Avg. Low
10 Yr 7.73% 7.78 6.92 7.05 34 398 Average Low
15 Yr 9.47% 9.51 9.19 9.02 -- --
VLEOX Gross / Net Expense Ratio: 1.21% (as of 08/01/17)
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 Securities LLC (the "Distributor") contractually agreed to waive a portion of the Fund's 12b-1 fee in an amount equal to 0.10% of the Fund's average daily net assets for the period August 1, 2014 through July 31, 2015. The waiver cannot be modified or terminated before July 31, 2015 without the approval of the Fund's Board of Directors. 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 2017. 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 / 576 funds; 5 Year / 4 stars / 498 funds; 10 Year / 2 stars / 369 funds; ) VALLX (3 Year / 5 stars / 1258 funds; 5 Year / 5 stars / 1124 funds; 10 Year / 3 stars / 790 funds; ) VLEOX (3 Year / 4 stars / 600 funds; 5 Year / 4 stars / 531 funds; 10 Year / 4 stars / 394 funds; ) VALSX (3 Year / 4 stars / 576 funds; 5 Year / 3 stars / 498 funds; 10 Year / 4 stars / 369 funds; ) VLAAX (3 Year / 5 stars / 723 funds; 5 Year / 4 stars / 652 funds; 10 Year / 4 stars / 452 funds; ) VALIX (3 Year / 5 stars / 328 funds; 5 Year / 5 stars / 285 funds; 10 Year / 5 stars / 206 funds; ) VAGIX (3 Year / 2 stars / 849 funds; 5 Year / 3 stars / 762 funds; 10 Year / 2 stars / 531 funds; ) VLHYX (3 Year / 1 stars / 140 funds; 5 Year / 1 stars / 131 funds; 10 Year / 1 stars / 104 funds; )

Source: Morningstar Direct