Q1 2017 : Portfolio Manager Q&A

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What factors were responsible for the Fund’s outstanding performance in the first quarter?

The Fund’s strong performance was a reflection of our asset allocation decisions and stock selection. As of March 31, 2017, the Fund had an 85% weighting in equities, comprised primarily of faster growing large-cap companies, and 15% in fixed income and cash. The Fund outperformed the Morningstar 70%-85% Equity Allocation Funds Category by nearly 400 basis points in the first quarter.

During the period, the Fund benefited from investors’ rotation back into more secular growth-oriented companies, especially in the faster growing sectors such as Information Technology and Health Care. The Fund’s overweight allocation and stock selection in the IT and Health Care sectors were the primary drivers of the Fund’s performance. Among the Fund’s equity holdings in the Technology sector that significantly added to performance during the quarter were Activision Blizzard, Mobileye, Facebook and Broadcom, as these companies increased 39%, 59%, 23% and 24%, respectively. In the Health Care sector, the Fund was aided by strong performances from Vertex Pharmaceuticals, Jazz Pharmaceuticals and DexCom, which rose 48%, 33% and 42%, respectively.

While we are pleased with this short-term performance, we would emphasize the Fund’s consistency over longer-term periods. For each of the 1, 3, 5 and 10 year time frames as of March 31, 2017, the Fund achieved top quartile performance among the Morningstar 70-85% Equity Allocation Funds category.

How did merger and acquisition activity impact the Fund during the first quarter of 2017?

During the quarter, two of the Fund’s holdings, Zeltiq Aesthetics and Mobileye, entered agreements to be acquired. Leading pharmaceutical company, Allergan PLC, best known for its blockbuster product Botox, expanded its presence in the aesthetics market by offering to purchase Zeltiq for $2.5 billion. Zeltiq is known for its CoolSculpting System which offers non-invasive fat removal through its cooling technology. During the first quarter, Zeltig’s price increased 29%. Mobileye, a leading provider of software and design solutions used in camera-based Advanced Driver Assistance Systems, agreed to be acquired by Intel for $15 billion, resulting in Mobileye’s stock price rising 59% in the first quarter of 2017.

How might the Fund’s equity and fixed income allocations change over the next year?

We believe the Fund’s flexible allocation provides a strategic advantage for investors particularly in a rising interest rate environment. While the Fund continues to favor stocks over fixed income exemplified by a current equity allocation of 85%, we remain nimble and responsive to market conditions. For example, we could adjust the allocation mix during market volatility or following a sharp rise in equity prices. However, in an environment of rising rates, we believe many balanced fund investors will continue to seek capital appreciation through a greater allocation to equities.


Average Annual Returns as of 03/31/17

QTD 1 Yr 3 Yr 5 Yr 10 Yr
Investor - VALIX 8.72% 14.00% 6.22% 8.78% 6.06%
Institutional - VLIIX1 8.77 14.36 6.02 8.65 6.00
60/40 S&P 500/Barclays U.S. Aggregate Bond 3.97 10.48 7.29 8.92 6.21
Morningstar 70-85% Equity Allocation Cat. Avg. 4.81 12.55 4.51 7.85 6.00
Morningstar Category Rank (%) - VALIX 22 10 21 4
# of Funds in Category 397 347 286 216
Morningstar Return Above Avg. Average Above Avg.
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.
Investor - VALIX Institutional - VLIIX1 60/40 S&P 500/Barclays U.S. Aggregate Bond Morningstar 70-85% Equity Allocation Cat. Avg. Morningstar Category Rank (%) - VALIX # of Funds in Category Morningstar Return
QTD 8.72% 8.77 3.97 4.81
1 Yr 14.00% 14.36 10.48 12.55 22 397
3 Yr 6.22% 6.02 7.29 4.51 10 347 Above Avg.
5 Yr 8.78% 8.65 8.92 7.85 21 286 Average
10 Yr 6.06% 6.00 6.21 6.00 4 216 Above Avg.
VALIX Gross / Net Expense Ratio: 1.16% (as of 05/01/17)
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 2016. 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 / 581 funds; 5 Year / 4 stars / 504 funds; 10 Year / 3 stars / 373 funds; ) VALLX (3 Year / 4 stars / 1284 funds; 5 Year / 3 stars / 1145 funds; 10 Year / 3 stars / 805 funds; ) VLEOX (3 Year / 4 stars / 603 funds; 5 Year / 4 stars / 533 funds; 10 Year / 4 stars / 396 funds; ) VALSX (3 Year / 3 stars / 581 funds; 5 Year / 3 stars / 504 funds; 10 Year / 4 stars / 373 funds; ) VLAAX (3 Year / 5 stars / 727 funds; 5 Year / 4 stars / 653 funds; 10 Year / 4 stars / 431 funds; ) VALIX (3 Year / 4 stars / 334 funds; 5 Year / 3 stars / 290 funds; 10 Year / 5 stars / 210 funds; ) VLDSX (3 Year / 2 stars / 245 funds; 5 Year / 1 stars / 155 funds; 10 Year / N/A stars / N/A funds; ) VAGIX (3 Year / 2 stars / 856 funds; 5 Year / 3 stars / 757 funds; 10 Year / 2 stars / 539 funds; ) VLHYX (3 Year / 1 stars / 142 funds; 5 Year / 1 stars / 132 funds; 10 Year / 2 stars / 104 funds; )