Q2 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 Funds category for the second quarter of 2020, as well as longer-term periods?

Given recent stock market turbulence surrounding the COVID-19 pandemic, we are pleased the Fund outperformed its Morningstar category peers for the quarter ended June 30, 2020. The Fund rose 13.97% while the category average increased 13.04% during the same period. On a year-to-date basis, the Fund recorded a positive total return of 2.89% as compared to the category average’s loss of 3.59%.

Although the Fund fared well during a challenging short-term market period, we believe it is even more important to pay attention to longer time frames. In fact, the Fund’s performance has ranked in the top 5% or better for 3, 5, 10 and 15-year periods ended June 30, 2020. The Fund is one of only 3 funds in its Morningstar category to achieve this performance feat (out of 205 funds). We believe this outperformance is primarily due to our investment approach, owning companies with 10+ years of consistent growth in both stock price and earnings for the equity portfolio, and high-quality fixed income.

What changes have been made to the Fund’s allocation?

As part of our long-term approach, we believe having a flexible allocation is important. Through various market cycles, we opportunistically adjust our allocation among equities, fixed income and cash. For the past decade, we have been offensively positioned with an equity allocation above 60%, and often approaching the higher end of the 50-70% range. At the end of 2019, the Fund’s equity allocation was 62%. However, over the past few months, we believe the stock market has become overly bullish on a short-term basis and that it was prudent to take a more defensive approach until more is known regarding the ongoing economic impact of COVID-19. Therefore, we have reduced our allocation to stocks. As of June 30, 2020, the Fund held 55% in equities and 45% in high-quality fixed income and cash.

How is the Fund different from its Morningstar allocation peers?

We believe there are three key factors that set the Fund apart from other balanced funds:

1. Flexible allocation: While many balanced funds are tied to a static 60/40 allocation between stocks and bonds, the Fund takes a flexible approach to allocation based on relative opportunities and risks.

2. Smaller market cap: Relative to the Morningstar 50-70% Equity Allocation Funds category, the Fund tends to invest in smaller companies. As of June 30, 2020, the Fund’s average market cap was $37 billion, while the category average market cap was $76 billion. We believe the flexibility to invest in smaller companies allows us to invest in companies with a potentially longer growth runway.

3. Growth emphasis: Within the Fund’s equity portfolio, we own growth-oriented companies—specifically those that have demonstrated a history of 10 or more years of consistent growth in both stock price and earnings. Many of our Morningstar category peers have a value stock bias or blended style within their equity portfolios.

Average Annual Returns as of 06/30/20

QTD 1 Yr 3 Yr 5 Yr 10 Yr 15 Yr
Investor - VLAAX 13.97% 8.16% 11.76% 9.81% 11.60% 8.03%
Institutional - VLAIX1 14.04 8.41 12.04 10.06 11.73 8.11
60/40 S&P 500/Barclays U.S. Aggregate Bond 13.32 8.58 8.93 8.41 10.08 7.33
Morningstar 50-70% Equity Allocation Cat. Avg. 13.04 2.23 4.75 4.89 7.33 5.27
Morningstar Category Rank (%) - VLAAX 11 1 1 2 5
# of Funds in Category 684 636 558 412 293
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 06/30/20, the Fund’s Top 10 Holdings were as follows: Danaher Corp (1.55%), Ecolab Inc (1.49%), Roper Technologies Inc (1.47%), Accenture PLC Class A (1.47%), Thermo Fisher Scientific Inc (1.39%), Teledyne Technologies Inc (1.28%), Mastercard Inc A (1.25%), S&P Global Inc (1.24%), Union Pacific Corp (1.24%), Cintas Corp (1.15%)

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 / 558 funds; 5 Year / 5 stars / 500 funds; 10 Year / 5 stars / 381 funds; ) VALLX (3 Year / 3 stars / 1237 funds; 5 Year / 3 stars / 1084 funds; 10 Year / 3 stars / 809 funds; ) VLEOX (3 Year / 3 stars / 577 funds; 5 Year / 4 stars / 508 funds; 10 Year / 4 stars / 377 funds; ) VALSX (3 Year / 4 stars / 558 funds; 5 Year / 5 stars / 500 funds; 10 Year / 4 stars / 381 funds; ) VLAAX (3 Year / 5 stars / 636 funds; 5 Year / 5 stars / 558 funds; 10 Year / 5 stars / 412 funds; ) VALIX (3 Year / 5 stars / 309 funds; 5 Year / 5 stars / 278 funds; 10 Year / 5 stars / 194 funds; ) VAGIX (3 Year / 2 stars / 379 funds; 5 Year / 2 stars / 330 funds; 10 Year / 4 stars / 248 funds; ) VLHYX (3 Year / 2 stars / 147 funds; 5 Year / 2 stars / 139 funds; 10 Year / 1 stars / 105 funds; )

Source: Morningstar Direct