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Value Line: Big name, small returns
Value Line's newsletter is terrific, but its mutual funds don't follow its advice. Fortunately, there's an ETF that does.
By Timothy Middleton
Value Line has a great reputation in investing circles. Over the past 25 years, its Investment Survey newsletter's stock picks have gained 14.2% a year, vs. 12.4% for the broad stock market, according to the Hulbert Financial Digest.
But mutual funds run by Value Line have been stuck in the cellar. Morningstar gives Value Line's equity funds, which account for two-thirds of the firm's assets under management, a combined risk/performance score of 1.14 on a scale where 5 is best and 1 is worst. The big problem: Value Line's funds haven't been strict enough in following Value Line's own stock-ranking system.
One Value Line fund, though, has begun to show some life by sticking with the system's picks. Value Line Income & Growth (VALIX) has spurted 5.9% this year, as of April 5, ranking it among the top 10% of similar funds, according to Morningstar. Over three years, its 18.77% return ranks among the top 4% of its peer group.
Whether Value Line can continue that success and extend it to the other 13 funds in its family is hard to tell. Fortunately, there are independent mutual funds that do adhere very closely to Value Lines go-go growth-investment approach. Three are closed-end funds, and a fourth is a new exchange-traded fund. They are worth a look because the value style of investing that has dominated the last six years wont last forever. When growth comes back into favor, Value Line's system should thrive.
Related news and commentary on MSN Money
Newfound value?
Value Line tracks about 1,700 stocks, mostly large and mid-size, and ranks them according to several criteria. Those include share-price, earnings momentum and earnings surprises (reporting bigger earnings gains than the market expected).
The highest-scoring 100 stocks get a ranking of 1 and the next 300 a 2 on a scale of 5. The newsletter has thrived by sticking with those picks. Funds affiliated with Value Line are supposed to concentrate on these top-tier issues and avoid those with lower rankings. But Value Line's own managers haven't been disciplined enough in following the rankings.
Value Line Income & Growth has been managed for the last four years, and transformed, by Bradley Brooks. In June 2005, Brooks was also named to run the companys flagship Value Line Fund (VLIFX) Fund. As of April 5, that fund is ahead 12.3% for the year, more than twice the markets return.
Laura Pavlenko Lutton, a Morningstar analyst, says Brooks has very little discretion in running Value Line Fund. He runs it exclusively on that ranking system, she says. The fund only holds stocks ranked 1 or 2; if it falls to a 3, he sells it. He doesnt have any discretion beyond that model.
When I contacted Brooks for an interview, I began by asking whether the Income & Growth fund had enough of its money in stocks to meet its prospectus's 65% minimum. (It does, holding nearly 60% in stocks and another 6% in convertible bonds, which qualify under the prospectus's requirements.) Brooks turned me over to the firms lawyer. I was unable to reach him subsequently.
Lutton follows the flagship fund and says she wants to wait and see how they deal with big swings in the market. She says their momentum style would likely lead them to sell in a downturn, but "I dont know how quickly they can get out of a stock.
Another reason not to invest in the funds: Value Line (VALU, news, msgs) is under the cloud of a Securities and Exchange Commission inquiry into trading done on behalf of its funds by Value Line Securities, a subsidiary. That trading was halted before the SEC inquiry was made public. A Value Line attorney says the company is cooperating with the investigation.
An ETF solution
As I mentioned earlier, there are other ways to take advantage of Value Line's investing prowess -- three closed-end funds and an ETF.
I dont like closed-end funds because they are much more difficult than mutual funds to research and because their prices are very unpredictable. The share-price performance of all three closed-end funds linked to Value Line has significantly exceeded the funds' return on net asset value, because their discount to net asset value (NAV) has decreased over the last year. The discount is still around 12% on all three of them, however.
That means you are buying $1 worth of the stocks they own for 88 cents. This sounds like a good deal, unless the discount widens and your 88 cents has fallen to, say, 82 cents. It is this uncertainty that makes closed-ends so unappealing to me.
That's not to say the performance of the funds has been terrible. First Trust Value Line (FVL, news, msgs) shot up 28.7% in the 12 months ended April 5. The two other closed-end funds that license Value Lines rankings are First Trust Value Line Dividend (FVD, news, msgs), up 18% in the last 12 months, and First Trust Value Line & Ibbotson (FVI, news, msgs), up 31.6%.
Exchange-traded funds arent subject to steep discounts or premiums, so I would be more interested in PowerShares Value Line Timeliness Select (PIV, news, msgs). It owns 50 stocks that have a No. 1 ranking in timeliness and also high scores for safety and technical factors.
This fund is ahead 12.4% this year. It was launched only late last year, so it doesnt have much of a record. But the ETF structure is very transparent and efficient. The funds holdings are fully disclosed, and the ETF structure makes it possible to trade without incurring capital gains, because shares are swapped with cooperating institutions, not purchased for cash. (See an article I wrote a few weeks ago about PowerShares and what I call the "A smarter breed of ETFs.")
As for Value Line funds, I would join the great majority of investors who pay them no mind -- their total assets are little more than $3 billion, despite their famous name and lengthy records, which in the case of the flagship goes back to 1950.
But the Value Line newsletter is very, very good, and the ETF allows straightforward access to its best ideas.
At the time of publication Timothy Middleton didnt own any securities mentioned in this article.
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