| Value Line Core Bond Fund |
Statement of Changes in Net Assets for the Six Months Ended July 31, 2013 (unaudited) and for the Year Ended January 31, 2013 |
| | | Six Months Ended | | | | |
| | | July 31, 2013 | | | Year Ended | |
| | | (unaudited) | | | January 31, 2013 | |
| | | | | | | |
| Operations: | | | | | | |
| Net investment income | | $ | 462,787 | | | $ | 1,639,618 | |
| Net realized gain on investments | | | 75,318 | | | | 1,779,984 | |
| Change in net unrealized appreciation/(depreciation) | | | (3,444,311 | ) | | | (866,255 | ) |
| Net increase/(decrease) in net assets from operations | | | (2,906,206 | ) | | | 2,553,347 | |
| | | | | | | | | |
| Distributions to Shareholders: | | | | | | | | |
| Net investment income | | | (547,872 | ) | | | (1,614,009 | ) |
| Net realized gain from investment transactions | | | — | | | | (25,662 | ) |
| Total Distributions | | | (547,872 | ) | | | (1,639,671 | ) |
| | | | | | | | | |
| Capital Share Transactions: | | | | | | | | |
| Proceeds from sale of shares | | | 1,353,907 | | | | 2,261,091 | |
| Net assets of shares issued in connection with merger (Note 4) | | | 73,396,078 | | | | — | |
Proceeds from reinvestment of dividends and distributions to shareholders | | | 474,362 | | | | 1,273,759 | |
| Cost of shares redeemed | | | (10,359,761 | ) | | | (6,101,213 | ) |
| Net increase/(decrease) in net assets from capital share transactions | | | 64,864,586 | | | | (2,566,363 | ) |
| Total Increase/(Decrease) in Net Assets | | | 61,410,508 | | | | (1,652,687 | ) |
| | | | | | | | | |
| Net Assets: | | | | | | | | |
| Beginning of period | | | 30,550,377 | | | | 32,203,064 | |
| End of period | | $ | 91,960,885 | | | $ | 30,550,377 | |
| Distributions in excess of net investment income, at end of period | | $ | (94,740 | ) | | $ | (9,655 | ) |
| See Notes to Financial Statements. |
| 17 |
Value Line Core Bond Fund |
| Notes to Financial Statements (unaudited) |
1. Significant Accounting Policies
Value Line Core Bond Fund (the “Fund”), is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management investment company. The primary investment objective of the Fund is to maximize current income through investment in a diversified portfolio of primarily investment grade, fixed income obligations, including securities issued or guaranteed by the U.S. government, its agencies or instrumentalities (U.S. government securities), mortgage-backed securities, asset-backed securities, corporate bonds, and other fixed income securities. Sovereign debt, or securities issued or secured by non-U.S. governments, as well as securities issued by supranational agencies, may be held by the Fund, provided the investments are U.S. dollar-denominated. As a secondary investment objective, the Fund will seek capital appreciation, but only when consistent with its primary objective. The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry.
The following significant accounting policies are in conformity with generally accepted accounting principles for investment companies. Such policies are consistently followed by the Fund in the preparation of its financial statements. Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results may differ from those estimates.
(A) Security Valuation: The Directors have determined that the value of bonds and other fixed income corporate securities be calculated on the valuation date by reference to valuations obtained from an independent pricing service that determines valuations for normal institutional-size trading units of debt securities, without exclusive reliance upon quoted prices. This service takes into account appropriate factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data in determining valuations. Bonds and fixed income securities are valued at the evaluated bid on the date as of which the net asset value is being determined. Securities, other than bonds and other fixed income securities, not priced in this manner are valued at the midpoint between the latest available and representative bid and asked prices or, when stock valuations are used, at the latest quoted sale price as of the regular close of business of the New York Stock Exchange on the valuation date.
The Board of Directors (the “Board”) has adopted procedures for valuing portfolio securities in circumstances where market quotes are not readily available, and has delegated the responsibility for applying the valuation methods to the Adviser. The Fund’s Valuation Committee was established by the Board to oversee the implementation of the Fund’s valuation methods and to make fair value determinations on behalf of the Board, as instructed. The Adviser monitors the continued appropriateness of methods applied and determines if adjustments should be made in light of market changes, events affecting the issuer, or other factors. If the Adviser determines that a valuation method may no longer be appropriate, another valuation method may be selected, or the Valuation Committee will be convened to consider the matter and take any appropriate action in accordance with procedures set forth by the Board. The Board shall review the appropriateness of the valuation methods and these methods may be amended or supplemented from time to time by the Valuation Committee. In addition, the Fund may use the fair value of a security when the closing price on the primary exchange where the security is traded no longer reflects the value of a security due to factors affecting one or more relevant securities markets or the specific issuer. Short-term instruments with maturities of 60 days or less, at the date of purchase, are valued at amortized cost which approximates market value.
| Value Line Core Bond Fund |
| |
| July 31, 2013 |
(B) Fair Value Measurements: The Fund follows fair valuation accounting standards (FASB ASC 820-10) which establish a definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion of changes in valuation techniques and related inputs during the period. These inputs are summarized in the three broad levels listed below:
| | |
| • | Level 1 – Inputs that reflect unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access at the measurement date; |
| | |
| • | Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly, including inputs in markets that are not considered to be active; |
| | |
| • | Level 3 – Inputs that are unobservable. |
Transfers between investment levels may occur as the markets fluctuate and/or the availability of data used in an investment’s valuation changes. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
The following table summarizes the inputs used to value the Fund’s investments in securities as of July 31, 2013:
| | | | | | | | | | | | | |
| Value Line Core Bond Fund | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Assets | | | | | | | | | | | | |
| Corporate Bonds & Notes | | $ | 0 | | | $ | 23,101,137 | | | $ | 0 | | | $ | 23,101,137 | |
| Commercial Mortgage-Backed Securities | | | 0 | | | | 5,223,023 | | | | 0 | | | | 5,223,023 | |
| Foreign Government | | | 0 | | | | 488,307 | | | | 0 | | | | 488,307 | |
| Long-Term Municipal Securities | | | 0 | | | | 763,556 | | | | 0 | | | | 763,556 | |
| U.S. Treasury Obligations | | | 0 | | | | 30,417,227 | | | | 0 | | | | 30,417,227 | |
| U.S. Government Agency Obligations | | | 0 | | | | 31,419,669 | | | | 0 | | | | 31,419,669 | |
| Total | | $ | 0 | | | $ | 91,412,919 | | | $ | 0 | | | $ | 91,412,919 | |
The Fund follows the updated provisions surrounding fair value measurements and disclosures on transfers in and out of all levels of the fair value hierarchy on a gross basis and the reasons for the transfers as well as to disclosures about the valuation techniques and inputs used to measure fair value for investments that fall in either Level 2 or Level 3 of the fair value hierarchy.
The Fund’s policy is to recognize transfers between levels at the beginning of the reporting period.
The amounts and reasons for all transfers in and out of each level within the three-tier hierarchy are disclosed when the Fund had an amount of total transfers during the reporting period that was meaningful in relation to its net assets as of the end of the reporting period. An investment asset’s or liability’s level within the fair value hierarchy is based on the lowest level input, individually or in aggregate, that is significant to fair value measurement. The objective of fair value measurement remains the same even when there is a significant decrease in the volume and level of activity for an asset or liability and regardless of the valuation techniques used.
| Value Line Core Bond Fund |
| |
Notes to Financial Statements (unaudited) |
For the six months ended July 31, 2013, there were no Level 3 investments. The Schedule of Investments includes a breakdown of the Schedule’s investments by category.
(C) Repurchase Agreements: The Fund may enter into repurchase agreements, under the terms of a Master Repurchase Agreement, with selected commercial banks and broker-dealers, under which the Fund acquires securities as collateral and agrees to resell the securities at an agreed upon time and at an agreed upon price. The Fund, through the custodian or a sub-custodian, receives delivery of the underlying securities collateralizing repurchase agreements. The Fund’s custodian takes possession of the underlying collateral securities, the value of which exceeds the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, it is the Fund’s policy to mark-to-market on a daily basis to ensure the adequacy of the collateral. In the event of default of the obligation to repurchase, under the Master Repurchase Agreement, the Fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral or proceeds may be subject to legal proceedings. There were no open repurchase agreements at July 31, 2013.
(D) Distributions: It is the policy of the Fund to distribute all of its net investment income to shareholders. Dividends from net investment income will be declared daily and paid monthly. Net realized capital gains, if any, are distributed to shareholders annually or more frequently if necessary to comply with the Internal Revenue Code. Income dividends and capital gains distributions are automatically reinvested in additional shares of the Fund unless the shareholder has requested otherwise. Income earned by the Fund on weekends, holidays and other days on which the Fund is closed for business is declared as a dividend on the next day on which the Fund is open for business.
(E) Federal Income Taxes: It is the Fund’s policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies, including the distribution requirements of the Tax Reform Act of 1986, and to distribute all of its taxable income to its shareholders. Therefore, no federal income tax provision is required.
Management has analyzed the Fund’s tax positions taken on federal and state income tax returns for all open tax years (fiscal years ended January 31, 2010 through January 31, 2013), and has concluded that no provision for federal or state income tax is required in the Fund’s financial statements. The Fund’s federal and state income tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
(F) Foreign Currency Translation: The books and records of the Fund are maintained in U.S. dollars. Assets and liabilities which are denominated in foreign currencies are translated to U.S. dollars at the prevailing rates of exchange. The Fund does not isolate changes in the value of investments caused by foreign exchange rate differences from the changes due to other circumstances.
Income and expenses are translated to U.S. dollars based upon the rates of exchange on the respective dates of such transactions.
| Value Line Core Bond Fund |
| |
| July 31, 2013 |
Net realized foreign exchange gains or losses arise from currency fluctuations realized between the trade and settlement dates on securities transactions, the differences between the U.S. dollar amounts of dividends, interest, and foreign withholding taxes recorded by the Fund, and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the value of assets and liabilities, other than investments, at the end of the fiscal period, resulting from changes in the exchange rates. The effect of the change in foreign exchange rates on the value of investments is included in realized gain/loss on investments and change in net unrealized appreciation/depreciation on investments.
(G) Security Transactions and Related Income: Security transactions are accounted for on the date the securities are purchased or sold. Realized gains and losses on securities transactions are determined using the identified cost method. Interest income, adjusted for the amortization of discount and premium, is earned from settlement date and recognized on the accrual basis. Gains and losses realized on prepayments received on mortgage-related securities are recorded as interest income.
The Fund may invest in Treasury Inflation-Protection Securities (TIPS). The principal value and interest payout of TIPS are periodically adjusted according to the rate of inflation based on the Consumer Price Index. The adjustments for principal and income due to inflation are reflected in interest income in the Statement of Operations.
(H) Representations and Indemnifications: In the normal course of business, the Fund enters into contracts that contain a variety of representations and warranties which provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote.
(I) Security Transactions: Securities transactions are recorded on a trade date basis. Realized gains and losses from security transactions are recorded on the identified-cost basis. Interest income, adjusted for amortization of discount and premium, is earned from settlement date and recognized on the accrual basis. Dividend income is recorded on the ex-dividend date.
(J) Accounting for Real Estate Investment Trusts: The Fund owns shares of Real Estate Investment Trusts (“REITs”) which report information on the source of their distributions annually. Distributions received from REITs during the year which represent a return of capital are recorded as a reduction of cost and distributions which represent a capital gain dividend are recorded as a realized long-term capital gain on investments.
(K) Foreign Taxes: The Fund may be subject to foreign taxes on income, gains on investments, or currency repatriation, a portion of which may be recoverable. The Fund will accrue such taxes and recoveries as applicable, based upon its current interpretation of tax rules and regulations that exist in the markets in which it invests.
(L) Securities Lending: Under an agreement with State Street Bank & Trust (“State Street”), the Fund can lend its securities to brokers, dealers and other financial institutions approved by the Board of Directors. By lending its investment securities, the Fund attempts to increase its net investment income through receipt of interest on the loan. Any gain or loss in the market price of the securities loaned that might occur and any interest or dividends declared during the term of the loan would accrue to the account of the Fund. Risks of delay in recovery of the securities or even loss of rights in the collateral may occur should the borrower of the securities fail financially. Generally, in the event of a counter-party default, the Fund has the right to use the collateral to offset the losses incurred. The lending fees received and the Fund’s portion of the interest income earned on the cash collateral are included in the Statement of Operations.
| Value Line Core Bond Fund |
| |
Notes to Financial Statements (unaudited) |
Upon entering into a securities lending transaction, the Fund receives cash or other securities as collateral in an amount equal to or exceeding 102% of the current market value of the loaned securities. Any cash received as collateral is invested by State Street Global Advisors, acting in its capacity as securities lending agent (the “Agent”), in The Value Line Funds collateral account, which is subsequently invested into joint repurchase agreements. A portion of the dividends received on the collateral is rebated to the borrower of the securities and the remainder is split between the Agent and the Fund.
The Fund enters into joint repurchase agreements whereby its uninvested cash collateral from securities lending is deposited into a joint cash account with other funds managed by the investment adviser and is used to invest in one or more repurchase agreements. The value and face amount of the joint repurchase agreement are allocated to the funds based on their pro-rata interest. A repurchase agreement is accounted for as a loan by the fund to the seller, collateralized by securities which are delivered to the fund’s custodian. The market value, including accrued interest, of the initial collateralization is required to be at least 102% of the dollar amount invested by the funds, with the value of the underlying securities marked to market daily to maintain coverage of at least 100%. There were no open joint repurchase agreements at July 31, 2013.
(M) Subsequent Events: On September 19, 2013, the Board of Directors of the Fund approved a plan to change the fiscal year end of the Fund from January 31 to December 31; the change will be effective December 31, 2013.
Management has evaluated all other subsequent transactions and events through the date on which these financial statements were issued and has determined that no additional items require disclosure.
2. Investment Risks
Securities issued by U.S. Government agencies or government-sponsored enterprises may not be guaranteed by the U.S. Treasury. The Government National Mortgage Association (“GNMA” or “Ginnie Mae”), a wholly-owned U.S. Government corporation, is authorized to guarantee, with the full faith and credit of the U.S. Government, the timely payment of principal and interest on securities issued by institutions approved by GNMA and backed by pools of mortgages insured by the Federal Housing Administration or guaranteed by the Department of Veteran Affairs. Government-related guarantors (i.e., not backed by the full faith and credit of the U.S. Government) include the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”). Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA, but are not backed by the full faith and credit of the U.S. Government. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but its participation certificates are not backed by the full faith and credit of the U.S. Government.
| Value Line Core Bond Fund |
| |
| July 31, 2013 |
3. Capital Share Transactions and Distributions to Shareholders
Transactions in capital stock were as follows:
| | | | | | | |
| | | Six Months Ended | | | | |
| | | July 31, 2013 (unaudited) | | | Year Ended January 31, 2013 | |
| Shares sold | | | 270,476 | | | | 452,862 | |
| Shares issued in connection with merger | | | 14,453,737 | | | | — | |
| Shares issued to shareholders in reinvestment of dividends | | | 94,808 | | | | 255,621 | |
| Shares redeemed | | | (2,067,721 | ) | | | (1,222,950 | ) |
| Net increase/(decrease) | | | 12,751,300 | | | | (514,467 | ) |
| Dividends per share from net investment income | | $ | 0.0351 | | | $ | 0.2531 | |
| Distributions per share from net realized gains | | $ | — | | | $ | 0.0040 | |
4. Reorganization
On March 22, 2013, the Value Line Core Bond Fund (the “Surviving Fund”) acquired all of the assets and assumed the liabilities of the Value Line U.S. Government Securities Fund, Inc. (the “Acquired Fund”), in a tax-free exchange for Federal tax purposes, pursuant to a plan of reorganization (the “Reorganization”) approved by the Board of both Funds and shareholders of record of the Acquired Fund as of the applicable record date. All of the expenses incurred in connection with the Reorganization were paid by both the Acquired and Surviving Funds proportionately based on the Funds’ respective net assets. The total Reorganization costs are $172,439. The value of shares issued by the Surviving Fund is presented in the Statement of Changes in Net Assets. The following table sets forth the number of shares issued by the Surviving Fund, the net assets and unrealized appreciation or depreciation of the Acquired Fund immediately prior to the Reorganization, and the net assets of the Surviving Fund immediately prior to and after the Reorganization:
| | | | | | | | | | | | |
Date of` Reorganization | Surviving Fund | | Shares Issued In Acquisition | | Net Assets Before Reorganization | | Net Assets After Reorganization | |
| 3-22-13 | | | | 14,453,737 | | $ | 29,565,559 | | $ | 102,961,637 | |
| | | | | | | | | | | | |
Date of Reorganization | Acquired Fund | | | Shares Outstanding | | | Acquired Portfolio Net Assets | | | Acquired Portfolio Unrealized Depreciation | |
| 3-22-13 | Value Line U.S
Securities
Government Fund, Inc. | | | 6,308,486 | | $ | 3,396,078 | | $ | 1,483,441 | |
| Value Line Core Bond Fund |
| |
| Notes to Financial Statements (unaudited) |
Assuming the Reorganization had been completed on February 1, 2013, the beginning of the year for the Surviving Fund, the Surviving Fund’s pro forma results of operations for the period ended July 31, 2013 would have been as follows:
| | | | |
| Net investment income | | $ | 1,144,752 | |
| Net loss on investments | | $ | (3,296,374 | ) |
| Net decrease in net assets from operations | | $ | (3,368,993 | ) |
| |
| Because the combined investment portfolios have been managed as a single integrated portfolio since the closing of the Reorganization, it is not practicable to separate the amounts of revenue and earnings of the Acquired Fund that have been included in the Surviving Fund’s Statement of Operations since March 22, 2013. |
| |
| 5. Purchases and Sales of Securities |
| |
| Purchases and sales of investment securities, excluding short-term securities, were as follows: |
| | | | |
| | | Six Months Ended | |
| | | July 31, 2013 | |
| | | (unaudited) | |
| PURCHASES: | | | |
| U.S. Treasury & Government Agency Obligations | | $ | 8,905,429 | |
| Other Investment Securities | | | 20,123,604 | |
| Total Purchases | | $ | 29,029,033 | |
| SALES: | | | | |
U.S. Treasury & Government Agency Obligations | | $ | 24,846,246 | |
| Other Investment Securities | | | 4,412,693 | |
| Total Sales | | $ | 29,258,939 | |
| | | | | |
| 6. Income Taxes | | | | |
| | | | | |
| At July 31, 2013, information on the tax components of capital is as follows: | | | | |
| | | | | |
| Cost of investments for tax purposes | | $ | 92,839,648 | |
| Gross tax unrealized appreciation | | $ | 1,258,307 | |
| Gross tax unrealized depreciation | | | (2,685,036 | ) |
| Net tax unrealized depreciation on investments | | $ | (1,426,729 | ) |
7. Investment Advisory Fee, Service and Distribution Fees and Transactions With Affiliates
An advisory fee of $196,636 was paid or payable to EULAV Asset Management (the “Adviser”) for the six months ended July 31, 2013. This was computed at an annual rate of 0.50% of the Fund’s average daily net assets during the period prior to any fee waivers. The Adviser provides research, investment programs, supervision of the investment portfolio and pays costs of administrative services and office space. The Adviser also provides persons, satisfactory to the Fund’s Directors, to act as officers of the Fund and pays their salaries. Effective February 1, 2013, and renewed annually through June 30, 2014, the Adviser contractually agreed to waive 0.10% of the advisory fee. The fees waived amounted to $39,327 for the six months ended July 31, 2013. The Adviser has no right to recoup previously waived amounts.
| Value Line Core Bond Fund |
| |
| July 31, 2013 |
The Fund has a Service and Distribution Plan (the “Plan”), adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, which compensates EULAV Securities LLC (the “Distributor”) for advertising, marketing and distributing the Fund’s shares and for servicing the Fund’s shareholders at an annual rate of 0.25% of the Fund’s average daily net assets. Fees amounting to $98,318 before fee waivers were accrued under the Plan for the six months ended July 31, 2013. Effective February 1, 2013, and renewed annually through June 30, 2014, the Distributor contractually agreed to reduce the 12b-1 fee by 0.05%. The fees waived amounted to $19,664 for the six months ended July 31, 2013. The Distributor has no right to recoup previously waived amounts.
Direct expenses of the Fund are charged to the Fund while common expenses of the Value Line Funds are allocated proportionately based upon the Funds’ respective net assets. The Fund bears all other costs and expenses.
Certain officers and a Trustee of the Adviser are also officers and a director of the Fund. At July 31, 2013, the officers and directors of the Fund as a group owned 2,744 shares, representing less than 1% of the outstanding shares.
| Value Line Core Bond Fund |
| |
| Financial Highlights |
Selected data for a share of capital stock outstanding throughout each period:
| | | | | | | | | | | | | | | | | | | |
| | | Six Months Ended | | | | | | | | | | | | | | | | |
| | | July 31, 2013 | | | | | | Years Ended January 31, | | | | |
| | | (unaudited) | | | 2013 | | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
| Net asset value, beginning of period | | $ | 5.07 | | | $ | 4.92 | | | $ | 4.95 | | | $ | 4.70 | | | $ | 3.89 | | | $ | 4.83 | |
| Income from investment operations: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | 0.03 | | | | 0.26 | | | | 0.29 | | | | 0.30 | | | | 0.28 | | | | 0.32 | |
Net gains or (losses) on securities (both realized and unrealized) | | | (0.16 | ) | | | 0.15 | | | | (0.03 | ) | | | 0.25 | | | | 0.81 | | | | (0.95 | ) |
| Total from investment operations | | | (0.13 | ) | | | 0.41 | | | | 0.26 | | | | 0.55 | | | | 1.09 | | | | (0.63 | ) |
| Redemption fees | | | — | | | | 0.00 | (1) | | | 0.00 | (1) | | | 0.00 | (1) | | | 0.00 | (1) | | | 0.00 | (1) |
| Less distributions: | | | | | | | | | | | | | | | | | | | | | | | | |
| Dividends from net investment income | | | (0.04 | ) | | | (0.26 | ) | | | (0.29 | ) | | | (0.30 | ) | | | (0.28 | ) | | | (0.31 | ) |
| Distributions from net realized gains | | | — | | | | (0.00 | )(1) | | | — | | | | — | | | | — | | | | — | |
| Total distributions | | | (0.04 | ) | | | (0.26 | ) | | | (0.29 | ) | | | (0.30 | ) | | | (0.28 | ) | | | (0.31 | ) |
| Net asset value, end of period | | $ | 4.90 | | | $ | 5.07 | | | $ | 4.92 | | | $ | 4.95 | | | $ | 4.70 | | | $ | 3.89 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total return | | | (2.68 | )%(2) | | | 8.49 | % | | | 5.48 | % | | | 12.01 | % | | | 28.92 | % | | | (13.42 | )% |
| Ratios/Supplemental Data: | | | | | | | | | | | | | | | | | | | | | | | | |
| Net assets, end of period (in thousands) | | $ | 91,961 | | | $ | 30,550 | | | $ | 32,203 | | | $ | 34,885 | | | $ | 37,787 | | | $ | 25,924 | |
Ratio of expenses to average net assets(3) | | | 1.16 | %(4) | | | 1.62 | % | | | 1.55 | % | | | 1.48 | %(5) | | | 1.56 | % | | | 1.50 | % |
Ratio of expenses to average net assets(6) | | | 1.01 | %(4) | | | 1.32 | % | | | 1.25 | % | | | 1.13 | %(7) | | | 1.13 | % | | | 0.98 | % |
Ratio of net investment income to average net assets | | | 1.18 | %(4) | | | 5.18 | % | | | 5.95 | % | | | 6.20 | % | | | 6.51 | % | | | 7.17 | % |
| Portfolio turnover rate | | | 38 | %(2) | | | 103 | % | | | 50 | % | | | 42 | % | | | 51 | % | | | 39 | % |
(1) (2) | Amount is less than $.01 per share. Not annualized. |
| (3) | Ratio reflects expenses grossed up for the custody credit arrangement and grossed up for the waiver of a portion of the advisory fee by the Adviser and a portion of the service and distribution plan fees by the Distributor. The ratio of expenses to average net assets, net of custody credits, but exclusive of the fee waivers would have been 1.48% for the year ended January 31, 2009 and would have been unchanged for the other periods shown. |
| (5) | Ratio reflects expenses grossed up for the reimbursement by Value Line, Inc. of certain expenses incurred by the Fund. |
| (6) | Ratio reflects expenses net of the custody credit arrangement and net of the waivers of a portion of the advisory fee by the Adviser and a portion of the service and distribution plan fees by the Distributor. |
| (7) | Ratio reflects expenses net of the reimbursement by Value Line, Inc. of certain expenses incurred by the Fund. |
| See Notes to Financial Statements. |
| 26 |
Value Line Core Bond Fund
| |
| FACTORS CONSIDERED BY THE BOARD IN APPROVING CONTINUANCE OF |
| THE INVESTMENT ADVISORY AGREEMENT |
| FOR VALUE LINE CORE BOND FUND |
The Investment Company Act of 1940 (the “1940 Act”) requires the Board of Directors, including a majority of Directors who are not “interested persons” of Value Line Core Bond Fund (formerly, Value Line Aggressive Income Trust, the “Fund”), as that term is defined in the 1940 Act (the “Independent Directors”), to annually consider the continuance of the Fund’s investment advisory agreement (“Agreement”) with its investment adviser, EULAV Asset Management.1
In considering whether the continuance of the Agreement was in the best interests of the Fund and its shareholders, the Board requested and the Adviser provided such information as the Board deemed to be reasonably necessary to evaluate the terms of the Agreement. At meetings held throughout the year, including the meeting specifically focused upon the review of the Agreement, the Independent Directors met in executive sessions separately from the non-Independent Director of the Fund and any officers of the Adviser. In selecting the Adviser and approving the continuance of the Agreement, the Independent Directors relied upon the assistance of counsel to the Independent Directors.
Both in the meeting specifically focused upon the review of the Agreement and at other meetings, the Board, including the Independent Directors, received materials relating to the Adviser’s investment and management services under the Agreement. These materials included information regarding: (i) the investment performance of the Fund, including comparisons to a peer group of funds consisting of the Fund and all retail and institutional intermediate investment-grade debt funds, regardless of asset size or primary channel of distribution (the “Performance Universe”), and its benchmark index, each as classified and prepared by Lipper Inc., an independent evaluation service (“Lipper”); (ii) the investment process, portfolio holdings, investment restrictions, valuation procedures, and financial statements for the Fund; (iii) purchases and redemptions of the Fund’s shares; (iv) the general investment outlook in the markets in which the Fund invests; (v) arrangements with respect to the distribution of the Fund’s shares; (vi) the allocation and cost of the Fund’s brokerage (none of which was effected through any affiliate of the Adviser, including the Distributor); and (vii) the overall nature, quality and extent of services provided by the Adviser.
As part of their review, the Board requested, and the Adviser provided, additional information in order to evaluate the quality of the Adviser’s services and the reasonableness of its fees under the Agreement. In a separate executive session, the Independent Directors reviewed information, which included data comparing: (i) the Fund’s management fee, transfer agent and custodian fees, Rule 12b-1 fee, and other non-management expenses, to those incurred by a peer group of funds consisting of the Fund and 13 other retail no-load intermediate investment-grade debt funds (excluding outliers), as selected objectively by Lipper (“Expense Group”), and a peer group of funds consisting of the Fund, the Expense Group and all other retail no-load intermediate investment-grade debt funds (excluding outliers), as selected objectively by Lipper (“Expense Universe”); (ii) the Fund’s expense ratio to those of its Expense Group and Expense Universe; and (iii) the Fund’s investment performance over various time periods to the average performance of the Performance Universe as well as the appropriate Lipper Index, as selected objectively by Lipper (the “Lipper Index”).
1 For periods prior to December 23, 2010, the term “Adviser” means the Adviser’s predecessor entities that previously served as the Fund’s adviser, EULAV Asset Management, LLC and Value Line, Inc. (“VLI”). Likewise, for periods prior to December 23, 2010, the term “Distributor” refers to the predecessor entities of the Fund’s current distributor, EULAV Securities LLC (the “Distributor”), which included EULAV Securities, Inc. and Value Line Securities, Inc.
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In their executive session, the Independent Directors also reviewed information regarding: (a) the financial results and condition of the Adviser and the Distributor and their profitability from the services that have been performed for the Fund and the Value Line family of funds; (b) the Adviser’s investment management staffing and resources; (c) the ownership, control and day-to-day management of the Adviser; and (d) the Fund’s potential for achieving economies of scale. In support of its review of the statistical information, the Board was provided with a description of the methodology used by Lipper to determine the Expense Group, the Expense Universe and the Performance Universe to prepare its information.
The Board observed that there is a range of investment options available to shareholders of the Fund, including other mutual funds, and that the Fund’s shareholders have chosen to invest in the Fund.
The following summarizes matters considered by the Board in connection with its continuance of the Agreement. However, the Board did not identify any single factor as all-important or controlling, each Director may have weighed certain factors differently, and the summary does not detail all the matters that were considered.
Investment Performance. The Board reviewed the Fund’s overall investment performance and compared it to its Performance Universe and the Lipper Index during the period since the change in the Fund’s investment approach from a high yield fund to a core bond fund. For that period (December 3, 2012 through March 31, 2013), the Fund outperformed the Performance Universe average and the Lipper Index. The Board noted the prior performance of the Fund while it was managed as a high yield fund, but did not place much weight on that performance given the change in investment strategy.
The Adviser’s Personnel and Methods. The Board reviewed the background of the portfolio managers responsible for the daily management of the Fund’s portfolio, seeking to achieve the Fund’s investment objectives and adhering to the Fund’s investment strategies. The Independent Directors also engaged in discussions with the Adviser’s senior management responsible for the overall functioning of the Fund’s investment operations. The Board viewed favorably (i) the Adviser’s use of analytic tools in support of the portfolio management, compliance and shareholder relation functions which the Adviser previously committed resources to acquire, (ii) continuity of the Adviser’s staff attributable in part to its actions taken to attract and retain personnel, including its ongoing improvements to employee benefit programs and previous increases in base compensation and merit-based compensation for certain staff members to be more industry competitive, (iii) the addition of a co-portfolio manager for the Fund in December 2012, and (iv) that the Adviser continues to receive the Value Line ranking systems without cost. The Board concluded that the Fund’s management team and the Adviser’s overall resources were adequate and that the Adviser had investment management capabilities and personnel essential to performing its duties under the Agreement.
Management Fee and Expenses. The Board considered the Adviser’s management fee under the Agreement relative to the management fee applicable to the funds in the Expense Group and Expense Universe averages, both before and after applicable fee waivers. The Board noted that a permanent reduction in the management fee, effective February 1, 2013, had been agreed between the Adviser and the Board. This change eliminated 0.25% of the Fund’s annual management fee rate of 0.75% with respect to the first $100 million of the Fund’s net assets, effectively implementing a management fee at an annual rate of 0.50% of net assets without regard to asset levels. The Board also considered the Fund’s non-permanent, contractual management fee waiver, which had been extended through June 30,2014 in connection with the permanent reduction in management fee. This waiver is in an amount equal to 10 basis points of the Fund’s average daily net assets and cannot be changed during the contractual waiver period without the approval of the Board and the Adviser. Before giving effect to this fee waiver and fee waivers applicable to certain funds in the Expense Group, the Board noted that, for the most recent fiscal year for which audited financial data is available, the Fund’s management fee rate was higher than that of the Expense Group average. After giving effect to applicable fee waivers, the Board also noted that, for the most recent fiscal year for which audited financial data is available, the Fund’s management fee rate was higher than that of the Expense Group median and the Expense Universe median. The Board noted that the Adviser bears the costs of providing fund accounting services for the Fund as part of the management fee. The Board was informed that the management fee rates for funds in the Expense Group and Expense Universe most likely did not include the provision of fund accounting services and, if it did, the Fund’s management fee rate would have compared more favorably. The Board concluded that the Fund’s management fee rate was satisfactory for the purpose of approving continuance of the Agreement.
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The Board also considered the Fund’s total expense ratio relative to its Expense Group and Expense Universe averages. The Distributor and the Board agreed that the Distributor will extend the existing contractual waiver of a portion of the Fund’s Rule 12b-1 through June 30, 2014. This waiver effectively reduces the Fund’s Rule 12b-1 fee rate from 0.25% to 0.20% of the Fund’s average daily net assets. Such waiver cannot be changed during the contractual waiver period without the approval of the Board and the Distributor. The Board noted that, for the most recent fiscal year for which audited financial data is available, the Fund’s expense ratio was higher than that of the Expense Group median and the Expense Universe median, after giving effect to fee waivers applicable to the Fund and certain funds in the Expense Group and Universe. The Board concluded that the average expense ratio was satisfactory for the purpose of approving continuance of the Agreement.
Nature, Extent and Quality of Services. The Board considered the nature, extent and quality of other services provided by the Adviser and the Distributor. At meetings held throughout the year, the Board reviewed the resources and effectiveness of the Adviser’s overall compliance program, as well as the services provided by the Distributor. The Board viewed favorably the additional resources devoted by the Adviser to enhance its and the Fund’s overall compliance program as well as steps being undertaken to enhance the shareholders’ experience with the Fund, such as a more robust website. The Board reviewed the services provided by the Adviser and the Distributor in supervising the Fund’s third party service providers. Based on this review, the Board concluded that the nature, quality, cost, and extent of such other services provided by the Adviser and the Distributor were satisfactory, reliable and beneficial to the Fund’s shareholders.
Profitability. The Board considered the level of profitability of the Adviser and the Distributor with respect to the Fund individually and in the aggregate for all the funds within the Value Line group of funds, including the impact of the restructuring of the Adviser and Distributor in 2010 and certain actions taken during prior years. These actions included the reduction (voluntary in some instances, contractual or permanent in other instances) of management and/or Rule 12b-1 fees for certain funds, the Adviser’s termination of the use of soft dollar research, and the cessation of trading through the Distributor. The Board also considered the Adviser’s continued attention to the rationalization and differentiation of funds within the Value Line group of funds to better identify opportunities for savings and efficiencies among the funds. The Board concluded that the profitability of the Adviser and the Distributor with respect to the Fund, including the financial results derived from the Fund’s Agreement, was within a range the Board considered reasonable.
| Value Line Core Bond Fund |
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Other Benefits. The Board also considered the character and amount of other direct and incidental benefits received by the Adviser and the Distributor from their association with the Fund. The Board concluded that potential “fall-out” benefits that the Adviser and the Distributor may receive, such as greater name recognition, appear to be reasonable, and may in some cases benefit the Fund.
Economies of Scale. The Board considered that, given the current and anticipated size of the Fund, any perceived and potential economies of scale were not yet a significant consideration for the Fund and that the addition of break points to the fee structure was not currently necessary.
Fees and Services Provided for Other Comparable Funds/Accounts Managed by the Adviser. The Board was informed by the Adviser that the Adviser does not currently manage any non-mutual fund account that has similar objectives and policies as those of the Fund.
Conclusion. The Board examined the totality of the information it was provided at the meeting specifically addressing approval of the Agreement and at other meetings held during the past year and did not identify any single controlling factor. Based on its evaluation of all material factors deemed relevant and with the advice of independent counsel, the Board concluded that the rate at which the Fund pays a management fee to the Adviser under the Agreement does not constitute a fee that is so disproportionately large as to bear no reasonable relationship to the services rendered and that could not have been the product of arm’s-length bargaining. Further, the Board concluded that the Fund’s Agreement, and the management fee rate thereunder, is fair and reasonable and voted to continue the Agreement as in the best interest of the Fund and its shareholders.
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The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities, and information regarding how the Fund voted these proxies for the 12-month period ended June 30 is available through the Fund’s website at http://www.vlfunds.com and on the SEC’s website at http://www.sec.gov. The description of the policies and procedures is also available without charge, upon request, by calling 1-800-243-2729.
| Value Line Core Bond Fund |
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| The Value Line Family of Funds |
In 1950, Value Line started its first mutual fund. Since then, knowledgeable investors have been relying on the Value Line Funds to help them build their financial futures. Over the years, Value Line Funds has evolved into what we are today – a diversified family of no-load mutual funds with a wide range of investment objectives – ranging from small, mid and large capitalization equities to taxable and tax-exempt fixed income. We also provide strategies that effectively combine both equities and fixed income, diligently taking into account the potential risk and reward of each investment.
1950 — The Value Line Fund seeks long-term growth of capital. Current income is a secondary objective.
1952 — Value Line Income and Growth Fund’s primary investment objective is income, as high and dependable as is consistent with reasonable risk. Capital growth to increase total return is a secondary objective.
1956 — Value Line Premier Growth Fund seeks long-term growth of capital. No consideration is given to current income in the choice of investments.
1972 — Value Line Larger Companies Fund’s sole investment objective is to realize capital growth.
1983 — Value Line Centurion Fund* seeks long-term growth of capital.
1984 — The Value Line Tax Exempt Fund seeks to provide investors with the maximum income exempt from federal income taxes while avoiding undue risk to principal. The fund may be subject to state and local taxes and the Alternative Minimum Tax (if applicable).
1986 — Value Line Core Bond Fund** seeks to maximize current income.
1987 — Value Line Strategic Asset Management Trust* seeks to achieve a high total investment return consistent with reasonable risk.
1993 — Value Line Small Cap Opportunities Fund*** invests in U.S. common stocks of small capitalization companies, with its primary objective being long-term growth of capital.
1993 — Value Line Asset Allocation Fund seeks high total investment return, consistent with reasonable risk. The Fund invests in stocks, bonds and money market instruments utilizing quantitative modeling to determine the asset mix.
| * | Only available through the purchase of Guardian Investor, a tax deferred variable annuity, or ValuePlus, a variable life insurance policy. |
| ** | Formerly known as the Value Line Aggressive Income Trust. |
*** Formerly known as the Value Line Emerging Opportunities Fund, Inc.
For more complete information about any of the Value Line Funds, including charges and expenses, send for a prospectus from EULAV Securities LLC, 7 Times Square, New York, New York 10036-6524 or call 1-800-243-2729, 9am–5pm CST, Monday–Friday, or visit us at www.vlfunds.com. Read the prospectus carefully before you invest or send money.
