Q1 2020 : Portfolio Manager Q&A

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Would you please comment on the Fund’s outperformance relative to the Morningstar 50-70% Equity Allocation category average in the first quarter of 2020?

We are pleased the Fund performed well relative to its Morningstar category peers in the quarter ended March 31, 2020. While the Fund lost 9.72%, it outperformed by over 500 basis points relative to the category, which declined 14.74% for the three months ended March 31, 2020.

In fact, despite the recent period of unprecedented market volatility, the Fund has produced superior long-term results, as it ranks in the top decile (10% or better) for the 1, 3, 5, 10 and 15 year periods, among its peers in the Morningstar 50-70% Equity Allocation Category, as of March 31, 2020. Impressively, the Fund is 1 of only 4 funds (out of 276 in the category) to accomplish this performance feat.

What drove this outperformance in the midst of extreme volatility?


We believe this relative outperformance was primarily due to two factors:

1. Flexible asset allocation: The Fund has the flexibility to adjust its allocation between equities and fixed income based on relative opportunity. During the quarter, we exercised this flexibility while taking advantage of market swings to add to select, high-quality companies at what we perceived as attractive prices, as well as selling certain positions during short-term rallies. As of March 31, 2020, the Fund held 62% in equities and 38% in high-quality fixed income and cash.

2. Growth-oriented investment process: We have relied on our time-tested investment process of owning companies with a history of 10 or more years of consistent growth in both stock price and earnings. Accordingly, the equity portfolio consists of companies that have demonstrated success in a variety of stock markets and economic cycles.

What changes did you make to the equity portfolio as a result of the market volatility?

We are long-term investors and aim to hold high-quality names for a period of years. Therefore, short-term market volatility does not impact our investment process. However, the wild swings in the stock market provided some opportunities to reposition our weightings in several companies.

In the first quarter, we added one new stock to the equity portfolio: Shopify (SHOP) which provides a proprietary e-commerce platform for retailers. Other purchasing activity included adding to select holdings at relatively attractive prices. We also opportunistically trimmed certain positions to take advantage of short-term rallies. For example, we trimmed our position in Church & Dwight (CHD), which manufactures household cleaning and personal care products, as the stock price advanced quickly in the current environment.

From a sector perspective, the Fund’s weightings also did not change significantly. Through our process of owning companies with a history of 10+ years of consistent growth in both stock price and earnings, we often tend to own companies in the Information Technology and Industrials sector. As of March 31, 2020, the Fund’s largest sector weightings were Information Technology (23%) and Industrials (16%), compared to the Morningstar 50-70% Equity Allocation Funds category average weightings of 11% and 6%, respectively.


Average Annual Returns as of 03/31/20

QTD 1 Yr 3 Yr 5 Yr 10 Yr 15 Yr
Investor - VLAAX -9.72 0.75 8.21 6.77 9.58 7.36
Institutional - VLAIX1 -9.68 0.99 8.46 7.00 9.70 7.44
60/40 S&P 500/Barclays U.S. Aggregate Bond -10.88 -0.39 5.32 5.63 8.08 6.58
Morningstar 50-70% Equity Allocation Cat. Avg. -14.74 -7.01 1.48 2.40 5.75 4.54
Morningstar Category Rank (%) - VLAAX 3 1 2 2 6
# of Funds in Category 687 640 561 413 276
Morningstar Return High High High
VLAAX Gross / Net Expense Ratio: 1.07% ,VLAIX Gross / Net Expense Ratio: 0.82%.
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 (VLAIX) 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 03/31/20, the Fund’s Top 10 Holdings were as follows: Danaher Corp (1.73%), Roper Technologies Inc (1.69%), Accenture PLC Class A (1.60%), Thermo Fisher Scientific Inc (1.56%), Ecolab Inc (1.53%), Fiserv Inc (1.51%), Teledyne Technologies Inc (1.48%), Tyler Technologies Inc (1.40%), Mastercard Inc A (1.39%), Union Pacific Corp (1.35%)

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 / 565 funds; 5 Year / 5 stars / 503 funds; 10 Year / 5 stars / 387 funds; ) VALLX (3 Year / 3 stars / 1237 funds; 5 Year / 3 stars / 1084 funds; 10 Year / 3 stars / 813 funds; ) VLEOX (3 Year / 3 stars / 581 funds; 5 Year / 4 stars / 500 funds; 10 Year / 5 stars / 381 funds; ) VALSX (3 Year / 4 stars / 565 funds; 5 Year / 5 stars / 503 funds; 10 Year / 5 stars / 387 funds; ) VLAAX (3 Year / 5 stars / 643 funds; 5 Year / 5 stars / 561 funds; 10 Year / 5 stars / 413 funds; ) VALIX (3 Year / 5 stars / 309 funds; 5 Year / 5 stars / 277 funds; 10 Year / 5 stars / 194 funds; ) VAGIX (3 Year / 2 stars / 386 funds; 5 Year / 2 stars / 331 funds; 10 Year / 3 stars / 252 funds; ) VLHYX (3 Year / 2 stars / 151 funds; 5 Year / 2 stars / 139 funds; 10 Year / 1 stars / 109 funds; )

Source: Morningstar Direct