Value Line Asset Allocation Fund N-CSRCertified annual shareholder report (management investment company)

On behalf of all of us here at Value Line Funds, I hope you and your families are safe and well during these challenging times.

Know that our long-term commitment to you, our Fund shareholders, remains unchanged. As such, we are pleased to present you with this annual report for Value Line Small Cap Opportunities Fund, Inc. and Value Line Asset Allocation Fund, Inc. (individually, a “Fund” and collectively, the “Funds”) for the 12 months ended March 31, 2021.

The annual period was highlighted by each Fund being recognized for both its long-term performance and attractive risk and return profiles.

On the following pages, the Funds’ portfolio managers discuss the management of their respective Fund(s) during the annual period. The discussions highlight key factors influencing recent performance of the Funds. You will also find a schedule of investments and financial statements for each Fund.

Before reviewing the performance of your individual mutual fund investment, we encourage you to take a brief look at the major factors affecting the financial markets during the 12 months ended March 31, 2021, especially given the newsworthy events of the annual period.

The COVID-19 pandemic wreaked havoc on the U.S. and global economies at the start of the annual period before an accelerated rollout of vaccine distribution in the first quarter of 2021 helped push economies into a higher gear.

As the annual period began in April 2020, countries were forced to shut down business and other workplaces in an effort to gain some control over the pandemic, and the lockdowns, in turn, caused the U.S. and global economies to go into a recession. U.S. Gross Domestic Product (GDP) growth dropped to an annualized growth rate of  -31.4% in the second quarter of 2020, the lowest U.S. GDP reading historically for any quarter. U.S. unemployment leapt from 3.5% at the end of 2019 to 14.7% in April 2020. Retail sales plunged. Manufacturing also took a major hit, with the Institute for Supply Management (ISM) Manufacturing Survey dropping to 41.5 in April, well below the level widely considered to be a sign of contraction. Services, the largest sector of the U.S. economy, was impacted even more, shrinking for the first time in a decade. The ISM Services Index fell to 41.8 in April 2020 from a reading of 52.5 just one month earlier.

With the situation dire, worry around potential corporate bankruptcies and mortgage defaults — and fears of an economic recession taking hold — drove monetary and fiscal authorities to spring into action. In March 2020, just before the annual period began, the U.S. Federal Reserve (the Fed) cut short-term interest rates from 1.5% to near zero, committed to buy an unlimited amount of U.S. Treasury and agency mortgage-backed securities, increased the scope of its asset purchase program to include investment grade and high yield corporate bonds, and started numerous credit facilities to help buoy the municipal bond market. Many other developed market central banks also added accommodation, while several emerging market central banks embarked on quantitative easing for the first time. On the fiscal front, the U.S. government had enacted a $2+ trillion relief bill, unleashing a massive stimulus plan to stem economic damage that included direct checks to many Americans, billions of dollars available to small businesses, and increases to the amount Americans could obtain from unemployment insurance.

These monetary and fiscal measures successfully stemmed further significant declines in the capital markets. Work-at-home scenarios, masks and social distancing measures also helped segments of the U.S. economy re-open gradually in phases, pushing third quarter U.S. GDP to a 33.4% growth rate on an annualized basis, the fastest growth rate since the government began to track quarterly GDP data in 1947. However, prospects for the economy became somewhat clouded by the fall of 2020. COVID-19 cases, hospitalizations and deaths increased rapidly during the fourth calendar quarter, reaching new highs in some states. Partial lockdowns were re-established. U.S. GDP registered an annualized growth rate of 4.3% for the fourth quarter of 2020.

Although some economic strength was sapped by the pandemic spikes, most economic indicators held up, or improved, during the second half of the annual period. The economy was supported in large part by optimism around the initial rollout of effective COVID-19 vaccines, resolution of the U.S. elections and a late but material fiscal stimulus package passed by Congress in December 2020 and yet another in March 2021, each earmarked primarily toward financial help for individuals and small

Despite concerns that strong economic growth, supported by fiscal and monetary stimulus, could trigger higher inflation, the U.S. economy was expected, at the end of the annual period, to have grown by an annualized rate of approximately 6% in the first quarter of 2021.

U.S. equities, as measured by the S&P 500® Index3, returned 56.35% during the 12 months ended March 31, 2021, though this masked heightened volatility. After registering its worst first quarter return on record, the S&P 500® Index soared in the second quarter of 2020 to record its best quarter since the fourth quarter of 1998 and then continued to rally through August before declining in September and October 2020. Market sentiment then turned decidedly positive in the last months of 2020, with investors encouraged by better than expected third quarter corporate earnings, economic resilience, substantial monetary support from the Fed and optimism that COVID-19 vaccines would support a broad re-opening of the U.S. economy in 2021. The resolution of the U.S. elections and the U.S. government’s unveiling of a long-awaited stimulus package in December were also positives, removing two key sources of uncertainty. U.S. equities maintained healthy gains in the first quarter of 2021. Despite concerns about rising inflation, higher long-term interest rates and trading anomalies in certain heavily shorted stocks, the market was supported by investor confidence the Fed would maintain its near-zero interest rates for an extended period. The accelerated rollout of multiple COVID-19 vaccines and eased activity restrictions, along with the passage of another fiscal stimulus package and the proposal of a jobs and infrastructure bill, provided a further boost to optimism about re-opening the economy,

For the annual period overall, virtually all segments of the U.S. equity market posted robust double-digit returns. However, attributable to the second half of the annual period, there was a reversal of two long-standing trends. First, on a relative basis, small-cap stocks within the U.S. equity market, which had lagged through the first nine months of 2020, performed best for the annual period as a whole, followed at some distance by mid-cap and then large-cap stocks. Second, value stocks outperformed growth stocks in the small-cap and mid-cap segments of the U.S. equity market, though, as was the case since 2017, growth stocks continued to outperform value stocks within the large-cap segment of the U.S. equity market. The broadening of the rally away from mega-cap technology stocks was primarily tied to the news of the COVID-19 vaccines, which emboldened investors to look for opportunities in more economically-sensitive, value-oriented market sectors. (All as measured by the FTSE Russell indices.3)

Among the sectors of the S&P 500® Index, all 11 posted double-digit positive returns for the annual period. Materials, energy and industrials were the strongest performing sectors during the annual period. Utilities, consumer staples and real estate, each traditionally considered more defensive, were the weakest sectors of the S&P 500® Index during the annual period.

The broad U.S. fixed income market, as measured by the Bloomberg Barclays US Aggregate Bond Index4, posted a return of 0.71% during the annual period, significantly underperforming the broad U.S. equity market.

Sovereign yield curves in most developed and emerging market countries outside Europe steepened5 significantly, led by the U.S. Short-term yields declined modestly, while longer-term yields increased materially. In the U.S., yields across the maturity spectrum fluctuated, but strong demand for U.S. Treasuries as a “safe haven” and easy central bank policy kept short-term yields rather range-bound near historical lows. Meanwhile, the growth implications of additional U.S. fiscal stimulus and COVID-19 vaccine rollouts and interpretation of the Fed’s policy shift as being more tolerant of higher inflation caused a sell-off in intermediate-term and longer-dated securities. (Remember, there is an inverse relationship between bond prices and yield movements, so that bond prices rise when yields decrease and vice versa.) Global central banks remained extremely accommodative throughout.

More specifically, the yield on the three-month U.S. Treasury fell approximately eight basis points to end the annual period at 0.03%, and the yield on the two-year U.S. Treasury declined approximately seven basis points to end the annual period at 0.16%. (A basis point is 1/100th of a percentage point.) The yield on the bellwether 10-year U.S. Treasury rose approximately 104 basis points to end the annual period at 1.74%. Yields on the 30-year U.S. Treasury increased approximately 106 basis points to end the annual period at 2.41%.

The Fund’s investment objective is long-term growth of capital.

The Fund (Investor Class) generated a total return of 65.92% during the 12 months ended March 31, 2021. This compares to the 94.85% return of the Fund’s benchmark, the Russell 2000® Index1, during the same annual period.

While posting robust double-digit absolute positive returns, the Fund underperformed the Russell 2000® Index on a relative basis during the 12-month reporting period due primarily to stock selection. Sector allocation also detracted, albeit more modestly, from relative results.

Further, during the annual period, the U.S. equity market rebounded powerfully from its March 2020 lows, with lower-quality, more volatile stocks leading the gains. The Fund, which had performed better than the broad U.S. equity market in the early 2020 decline, held higher-quality stocks on average than did the Russell 2000® Index and could not keep pace.

On an absolute basis, the Russell 2000® Index had gains in all of its 11 sectors during the annual period, while the Fund had absolute gains in each of the ten sectors in which it was invested.

Relative to the Russell 2000® Index, weak stock selection in the industrials, information technology and health care sectors detracted most from the Fund’s results. Having a position in cash, albeit a small one, during an annual period when the Russell 2000® Index rallied strongly also dampened the Fund’s relative results. Only partially offsetting these detractors was the positive contribution of underweighted allocations to real estate and utilities, the two weakest sectors in the Russell 2000® Index during the annual period.

During the annual period, among the stocks that detracted most from the Fund’s relative performance were its largest holdings, characterized by more consistent long-term growth records and lower volatility than the average stock in the Russell 2000® Index. These stocks could not keep up with the Russell 2000® Index during the annual period in spite of satisfactory company operating performance. Among those stocks that posted solid absolute percentage gains but lagged the Russell 2000® Index and thus detracted from the Fund’s relative performance during the annual period were RLI, a specialty insurance company; Chemed, a hospice and palliative care services provider; and Exponent, a science and engineering consulting firm within the industrials sector. The Fund was additionally hurt by not owning those stocks in the Russell 2000® Index that soared more than 1000% during the annual period, such as specialty electronic game and computer entertainment software retailer GameStop and clinical stage biotechnology company Novavax.

Among the individual stocks that contributed most to the Fund’s relative results were solar power company SolarEdge Technologies, shoe manufacturer Crocs and advertising technology company Trade Desk. Each of these company’s share prices more than doubled during the annual period, each benefiting from stronger than expected operating performance.

The Fund did not use derivatives as part of its strategy during the reporting period.

The Fund’s investment objective is to achieve a high total investment return (current income and capital appreciation) consistent with reasonable risk. For this purpose, risk takes into account volatility and other factors as determined by EULAV Asset Management (the “Adviser”).

The Fund (Investor Class) generated a total return of 24.93% during the 12 months ended March 31, 2021. Though posting robust double-digit absolute gains, the Fund underperformed the 34.09% return of the Fund’s blended benchmark, comprised 60% of the S&P 500® Index and 40% of the Bloomberg Barclays US Aggregate Bond Index (the “Bloomberg Barclays Index”), during the same annual period.

The Fund’s equity portfolio underperformed the S&P 500® Index, while the Fund’s fixed income portfolio outperformed the Bloomberg Barclays Index during the reporting period. As equities significantly outperformed fixed income overall, asset allocation contributed positively to Fund results during the annual period.

Though posting robust double-digit absolute gains, the equity portion of the Fund underperformed its benchmark, the S&P 500® Index, on a relative basis due primarily to stock selection overall and, to a lesser extent, to sector allocation.

Broadly speaking, it was lower-quality, more volatile stocks that were most hurt by the early 2020 stock market correction but that then rebounded most in the subsequent market comeback. The equity portion of the Fund favors higher-quality stocks with more consistent, less volatile track records on average than does the S&P 500® Index, and thus such positioning detracted during the annual period as a whole.

More specifically, the equity portion of the Fund was hurt most by weak stock selection in the information technology, financials and industrials sectors. Having no exposure to energy, which was the second-strongest performing sector in the S&P 500® Index during the annual period, also detracted. Only partially offsetting these detractors was the equity portion of the Fund’s effective stock selection in health care, consumer staples and utilities, which contributed positively. Having underweighted allocations to consumer staples and utilities, which each lagged the S&P 500® Index during the annual period, also proved beneficial.

Among the stocks that detracted most from the equity portion of the Fund’s relative results was technology hardware giant Apple, as the Fund did not hold this strongest contributor to the S&P 500® Index during the annual period. Also detracting significantly were positions in hospice and palliative care services provider Chemed and aerospace and defense company Northrop Grumman, which each generated only single-digit percentage gains during the annual period. Investors instead favored lower-quality stocks that had been hit harder by the COVID-19-induced U.S. equity market correction in early 2020.

Among the individual stocks that contributed most to the equity portion of the Fund’s relative results were several whose shares at least doubled in price during the annual period, each benefiting from stronger than expected operating performance. These top positive contributors included Cintas, an industrial services provider; Cadence Design Systems, a software technology, design and consulting services provider; and EPAM Systems, a software and information technology services provider.

During the annual period, we initiated positions in drug discovery and development research tools and support services provider Charles River Laboratories International and power management solutions manufacturer Monolithic Power Systems, each featuring a solid long-term history of consistent gains in earnings and stock price.

Among those names eliminated from the equity portion of the Fund during the annual period were Equifax, a software and technology services company; VeriSign, a domain name registry services and Internet infrastructure provider; and O’Reilly Automotive, an automotive aftermarket parts retailer and supplier. We believed each had become less consistent in delivering long-term gains in earnings and stock price.

During the 12-month period ended March 31, 2021, the equity portion of the Fund’s allocation relative to the S&P 500® Index in financials and health care increased. The equity portion of the Fund’s allocation relative to the S&P 500® Index in real estate decreased during the annual period.

As of March 31, 2021, the equity portion of the Fund was overweighted relative to the S&P 500® Index in information technology, industrials, materials and financials and was underweighted relative to the S&P 500® Index in the communication services, consumer staples, consumer discretionary, utilities and real estate sectors. The equity portion of the Fund was rather neutrally weighted relative to the S&P 500® Index in health care and had no exposure to the energy sector on March 31, 2021.

We kept the fixed income portion of the Fund’s duration shorter than that of the Bloomberg Barclays Index for most of the annual period. This positioning detracted during the first five months of the annual period when interest rates declined overall. However, when interest rates began to rise in August 2020 and continued to do so through the end of the annual period, such positioning proved beneficial. Duration is a measure of the Fund’s sensitivity to changes in interest rates.

From a sector perspective, the fixed income portion of the Fund outperformed its benchmark, the Bloomberg Barclays Index, primarily due to its positioning within the corporate bond sector. Strong performance by positions in a number of BBB-rated investment grade corporate bonds, which outperformed higher-rated issues during the annual period, boosted relative results. So, too, did exposure to high yield corporate bonds, which generally outperformed investment grade corporate bonds during the annual period.

Exposure to U.S. Treasuries detracted most. During the annual period, there was a significant steepening of the U.S. Treasury yield curve, as shorter-term maturity yields fell, while longer-term maturity yields rose substantially. (Remember, there is an inverse relationship between bond prices and yield movements, so that bond prices rise when yields decrease and vice versa.) The fixed income portion of the Fund benefited from an increased allocation to U.S. Treasuries in the two-year to five-year segment of the yield curve during the annual period. However, exposure to U.S. Treasuries with longer-term maturities hurt performance.

Overall, we sought to mitigate risk within the fixed income portion of the Fund given significant concerns about the U.S. and global economies due to the COVID-19 pandemic. We increased the fixed income portion of the Fund’s exposure to U.S. Treasuries, primarily in the two-year to five-year segment of the yield curve, which was the best performing segment of the yield curve during the annual period and thus added value. Within the investment grade corporate bond sector, we modestly increased exposure to BBB-rated bonds as well as to industries, such as energy and leisure, that we believed would benefit from a stronger economy as COVID-19 restrictions were eased. We increased the fixed income portion of the Fund’s allocation to the securitized sector because of what we viewed as its rather defensive posture in a rising interest rate environment.