Q2 2017 : Portfolio Manager Q&A

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How does the Fund differentiate itself among its Morningstar 70-85% Equity Allocation peers?

One key differentiator between the Fund and the majority of our peers lies in the construction of the equity portfolio. The majority of our equity holdings are currently leading large-cap growth companies. We seek to own growing companies with unique products or services, compete in industries with high barriers to entry, and have market-leading positions. We tend to favor companies that have high rates of sustainable sales and earnings growth as we believe these are two big drivers of share prices over the longer term. By comparison, currently less than 20% of Morningstar 70-85% Equity Allocation Funds allocate primarily to large-cap growth companies.

We believe this differentiating factor is important for balanced fund investors seeking long-term capital appreciation as we feel that earnings growth is the primary driver of share prices over the longer term. Among Morningstar’s 70-85% Equity Allocation Funds, the Fund was the only fund (out of 154) to be in the top 5% in performance over the 1-, 3-, 10- and 15-year times frames as of June 30, 2017.

What drove the Fund’s outperformance compared to the 60/40 S&P 500/ Bloomberg Barclays US Aggregate Bond Index in the second quarter of 2017?

Over the quarter, the Fund rose 5.13%, outperforming its blended Index by over 250 basis points. The Fund also outperformed the S&P 500 Index’s return of 3.09% by 200 basis points, despite having a 16% average weighting in fixed income/cash and 84% in equities.

Within the equity portfolio, outperformance was driven by the Fund’s overweight allocations in the Information Technology and Health Care sectors, which were among the stronger areas of the market this quarter along with superior stock selection in these sectors. In Technology, the Fund had an average weighting of approximately 28% compared to the S&P 500 Index’s weighting of 23%. The Fund’s Technology holdings appreciated 9% on average, well ahead of the S&P 500 Information Technology sector’s increase of 4%. We saw broad-based strength in most of the Fund’s IT holdings and a few stand out performers included Activision, Alibaba, GrubHub and PayPal.

The Health Care Sector was the strongest performer in the S&P 500 Index this period, rising over 7%. The Fund had an average weighting of 28%, significantly higher than the S&P 500’s at 14%. The Fund’s Health Care holdings outperformed helped by strong performances from Edwards Lifesciences, Kite Pharma, Medidata Solutions and Vertex Pharmaceuticals.

Would you please highlight a recent purchase in the equity portfolio?

Exact Sciences (EXAS) is one example of a fast-growing company that was recently purchased. Exact Sciences is a medtech company best known for its unique product, Cologuard, which is a non-invasive DNA screening test to detect colorectal cancer and precancer. As a result of the graying population and growing demand for this product due to its ease of use relative to a traditional colonoscopy, we anticipate the company’s sales will grow at a rapid pace in the coming years.


Average Annual Returns as of 06/30/17

QTD 1 Yr 3 Yr 5 Yr 10 Yr
Investor - VALIX 5.13% 19.47% 6.88% 10.22% 6.13%
Institutional - VLIIX1 5.27 19.71 6.73 10.12 6.09
60/40 S&P 500/Barclays U.S. Aggregate Bond 2.45 10.62 6.76 9.66 6.10
Morningstar 70-85% Equity Allocation Cat. Avg. 2.34 13.44 4.20 9.27 4.37
Morningstar Category Rank (%) - VALIX 4 2 20 2
# of Funds in Category 376 334 291 210
Morningstar Return High Above Avg. High
VALIX Gross / Net Expense Ratio: 1.16% , VLIIX Gross / Net Expense Ratio*: 4.82% / 0.90%.
Morningstar rates funds based on enhanced Morningstar risk-adjusted returns.
Morningstar Ratings and Categories based on risk adjusted returns of Investor class shares.
1Represents the performance of the Institutional Class shares after November 1, 2015 (inception of the share class) and Investor Class for periods prior to that date.

* 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