Q2 2021 : Portfolio Manager Q&A

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Would you please comment on the Fund’s performance relative to the Morningstar 70-85% Equity Allocation Funds category for the second quarter of 2021, as well as longer-term periods?

The Fund produced an absolute return of 5.98% for the quarter ended June 30, 2021, in-line with the Morningstar category average of 5.92%. We are pleased with the positive return for the quarter, but we also recognize that longer-term performance relative to our category peers is more important to investors. Our investment approach of including fast-growing companies in the portfolio has served investors well as the Fund’s performance ranked in the top 3% or better for the 3, 5, 10 and 15-year periods ended June 30, 2021.

Please visit the Fund’s performance page for complete performance information.

Source: Morningstar as of 6/30/21

What were the primary drivers of the Fund’s performance in Q2?

The Fund’s performance was primarily driven by our overweight allocation to equities, as equites outperformed fixed income. Within the equity portfolio, the Information Technology (IT) sector was the largest contributing sector to performance. In IT, the Fund benefited from both our overweight allocation and stock selection. The Fund held an average 33% weighting, greater than the S&P 500’s 27% weighting, and the Fund’s IT stocks gained on average 13%, relative to the S&P 500 IT sector’s 12% gain. Some strong technology performers in the Fund included Nvidia (NVDA, +50%), a computer systems design services company; Crowdstrike (CRWD, +38%), a cybersecurity company; and Shopify (SHOP, +32%), which provides an e-commerce platform to online stores and retailers.

However, the Fund’s total return for the quarter was significantly held back by its overweight allocation and stock selection in the Health Care sector. The Fund had a 21% allocation to the sector relative to the Index’s 13% weighting. The Fund’s Health Care companies declined on average 3% while the Index’s Health Care companies gained 8%. One key detractor for the Fund was Exelixis (EXEL, -19%). Exelixis shares sold off sharply during the quarter on the news that its front-line liver cancer trial had failed to show an overall survival benefit despite having met its primary endpoint of progression free survival in the clinical trial.

What changes were made to the portfolio in Q2?

The Fund’s allocations among stocks, bonds and cash did not change significantly compared to the prior quarter. We maintain our conviction that equities provide the best opportunities for longer-term returns in the current market environment. As of June 30, 2021, the Fund held approximately 84% in equities, 11% in fixed income, and 5% in cash.

We continually evaluate the risk/reward profile of the companies we own, and accordingly we made a few changes to our stock holdings. We exited our positions in Estee Lauder (EL), Bristol Myers Squibb (BMY), and Zoetis (ZTS), and initiated a new position in Biogen (BIIB) after the Food and Drug Administration announced the approval of its drug Aduhelm for the treatment of Alzheimer’s disease.

How do the sales and earnings growth rates of the Fund’s stocks compare with the S&P 500?

Within the equity portfolio, we own fast-growing and market leading companies that we believe are well positioned for future sales and earnings growth, which we view as the key drivers of stock prices over the longer term. As of June 30, 2021, the Fund’s 3-year projected average annual sales growth rate was 26%, over twice the 11% estimated sales growth rate of the S&P 500. The Fund’s 3- to 5-year estimated forward earnings growth rate was 26%, 1.5x higher than the 17% rate projected for the S&P 500.

*EULAV Asset Management (the “Adviser”) and EULAV Securities LLC, the Fund’s principal underwriter (the “Distributor”), have agreed to permanently 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 from the month 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 only with the agreement of the Fund’s board. The Fund’s performance would be lower in the absence of such waivers.

As of 06/30/21, the Fund’s Top 10 Holdings were as follows: Exelixis Inc (3.49%), Biohaven Pharmaceutical Holding Co Ltd (3.30%), Amazon.com Inc (3.21%), Bank of America Corp (2.85%), Facebook Inc Class A (2.85%), Alphabet Inc Class A (2.61%), Exact Sciences Corp (2.60%), Visa Inc Class A (2.49%), Apple Inc (2.47%), JPMorgan Chase & Co (2.10%)

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 / 549 funds; 5 Year / 3 stars / 495 funds; 10 Year / 3 stars / 386 funds; ) VALLX (3 Year / 2 stars / 1133 funds; 5 Year / 2 stars / 1024 funds; 10 Year / 3 stars / 762 funds; ) VLEOX (3 Year / 3 stars / 575 funds; 5 Year / 3 stars / 506 funds; 10 Year / 4 stars / 381 funds; ) VALSX (3 Year / 3 stars / 1133 funds; 5 Year / 2 stars / 1024 funds; 10 Year / 2 stars / 762 funds; ) VLAAX (3 Year / 4 stars / 653 funds; 5 Year / 5 stars / 596 funds; 10 Year / 5 stars / 427 funds; ) VALIX (3 Year / 5 stars / 288 funds; 5 Year / 5 stars / 262 funds; 10 Year / 5 stars / 188 funds; ) VAGIX (3 Year / 1 stars / 376 funds; 5 Year / 2 stars / 331 funds; 10 Year / 4 stars / 247 funds; ) VLHYX (3 Year / 1 stars / 145 funds; 5 Year / 1 stars / 123 funds; 10 Year / 1 stars / 99 funds; )

Source: Morningstar Direct