Q3 2018 : Portfolio Manager Q&A

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The Fund significantly outperformed the Russell 2000 Index for the quarter ended September 30, 2018. What drove this outperformance?

We are pleased the Fund outperformed its benchmark Russell 2000 Index by 437 basis points for the most recent quarter, as the Fund rose by 7.95% whereas the Index increased 3.58%. The Fund also outperformed the Morningstar Small Growth Fund category average return of 7.00% for the quarter ended September 30, 2018.

Solid stock selection drove the outperformance relative to the Index and Morningstar peers. When evaluating stocks for the Fund, we utilize the proprietary Value Line Timeliness and Safety Ranking System to identify smaller companies with a long-term history of consistent growth in both stock price and earnings over many years. This approach has led us to a significant overweight in the Industrials sector, which was an important contribution to the Fund’s outperformance during the quarter.

Two companies of note for the quarter were Heico Corp (HEI, +27%), an aerospace and electronics company, and Teledyne Technologies, Inc. (TDY, +24%), which provides technology for several industries. Heico and Teledyne are among the Fund’s top holdings and have been in the portfolio for 12 and seven years, respectively, due to their consistent, historical growth.

How does the Fund’s level of risk compare to other small-cap funds?

Source: Morningstar

Smaller companies tend to be more naturally volatile than their larger counterparts as they generally offer more growth potential. To meet our goal of outperformance over time while being mindful of risk, the Fund seeks high-quality companies on the higher capitalization end of the small-cap range. These companies must have a history of long- term consistent growth in both stock price and earnings.

As a result of this risk conscious approach, we are pleased that the Fund was awarded a “Low” risk rating from Morningstar for the 3, 5 and 10 year periods as of September 30, 2018. In addition, the Fund’s Sharpe Ratio, a measure of risk-adjusted return, ranks among the top quartile (25%) of funds in the Morningstar Small Growth category out of 160 funds for the 3, 5 and 10 year periods ended September 30, 2018.

How have Fund holdings changed over the last quarter?

Due to the recent appreciation of many companies, we have had the opportunity to sell or reduce our percentage of some positions in the Fund that have grown since we first invested in them, freeing up the capital to add new companies to the portfolio. Consistent with our view of providing exceptional risk adjusted returns, we sold 15 companies and added 11 new small-cap stocks in the third quarter.

Average Annual Returns as of 09/30/18

1 Yr 3 Yr 5 Yr 10 Yr
Investor - VLEOX 18.55% 16.38% 11.92% 12.15%
Institutional - VLEIX1 18.87 16.67 12.09 12.23
Russell 2000 Index 15.24 17.12 11.07 11.11
Morningstar Small Growth Category Avg. 24.44 18.39 11.75 12.57
Morningstar Category Rank (%) - VLEOX 74 72 48 59
# of Funds in Category 702 606 532 404
Morningstar Return Below Avg. Average Average
Morningstar Risk Low Low Low
VLEOX Gross / Net Expense Ratio: 1.21% / 1.21% , VLEIX Gross / Net Expense Ratio*: 1.01% / 0.96%.
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 09/30/18, the Fund’s Top 10 Holdings were as follows: Heico Corp (3.86%), Teledyne Technologies Inc (3.68%), Lennox International Inc (3.39%), Tyler Technologies Inc (3.04%), Pool Corp (2.56%), The Toro Co (2.33%), RLI Corp (2.08%), AptarGroup Inc (2.05%), Chemed Corp (2.05%), WEX Inc (1.87%)

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 / 5 stars / 537 funds; 5 Year / 5 stars / 487 funds; 10 Year / 3 stars / 341 funds; ) VALLX (3 Year / 3 stars / 1253 funds; 5 Year / 4 stars / 1120 funds; 10 Year / 2 stars / 811 funds; ) VLEOX (3 Year / 3 stars / 591 funds; 5 Year / 4 stars / 516 funds; 10 Year / 4 stars / 392 funds; ) VALSX (3 Year / 4 stars / 537 funds; 5 Year / 4 stars / 487 funds; 10 Year / 4 stars / 341 funds; ) VLAAX (3 Year / 5 stars / 702 funds; 5 Year / 4 stars / 620 funds; 10 Year / 4 stars / 450 funds; ) VALIX (3 Year / 5 stars / 315 funds; 5 Year / 5 stars / 270 funds; 10 Year / 4 stars / 192 funds; ) VAGIX (3 Year / 2 stars / 887 funds; 5 Year / 2 stars / 785 funds; 10 Year / 5 stars / 568 funds; ) VLHYX (3 Year / 1 stars / 146 funds; 5 Year / 1 stars / 128 funds; 10 Year / 1 stars / 106 funds; )

Source: Morningstar Direct