Commentaries

Brad Frishberg
Managing Director,
Chief Investment Officer of Infrastructure Securities — Macquarie Capital Investment Management LLC

Investments in Delaware Macquarie Global Infrastructure Fund are not and will not be deposits with or liabilities of Macquarie Bank Limited ABN 46 008 583 542 and its holding companies, including their subsidiaries or related companies, and are subject to investment risk, including possible delays in repayment and loss of income and capital invested. No Macquarie Group company guarantees or will guarantee the performance of the funds, the repayment of capital from the Fund, or any particular rate of return.

Macquarie Capital Investment Management LLC, an affiliate of Delaware Distributors, L.P., is the Fund's sub-adviser. The sub-adviser is responsible for the investment management of the Fund's assets.

The views expressed represent the Manager's assessment of the market environment as of September 2011 and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's current views.

Carefully consider the Fund's investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Fund's prospectus and, if available, its summary prospectus, which may be obtained by visiting www.delawareinvestments.com or calling 800 523-1918. Investors should read the prospectus and, if available, the summary prospectus carefully before investing.

Investing involves risk, including the possible loss of principal.

IMPORTANT RISK CONSIDERATIONS

International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors. Because the Fund concentrates its investments in securities issued by companies principally engaged in the infrastructure industry, the Fund has greater exposure to the potential adverse economic, regulatory, political, and other changes affecting such entities.

“Nondiversified” Funds may allocate more of their net assets to investments in single securities than “diversified” Funds. Resulting adverse effects may subject these Funds to greater risks and volatility.

Charts are for illustration purposes only. Past performance is not a guarantee of future results.

Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index. Past performance is not a guarantee of future results.

The Barclays Capital Global Aggregate Index provides a broad-based measure of the global investment grade fixed-rate debt markets.

The Barclays Capital U.S. Aggregate Index measures the performance of more than 8,000 publicly issued investment grade (Baa3/BBB- or better) corporate, U.S. government, mortgage- and asset-backed securities with at least one year to maturity and at least $250 million par amount outstanding.

The MSCI Emerging Markets Index measures equity market performance across emerging market countries worldwide.

The MSCI World Index is a free float-adjusted market capitalization weighted index designed to measure equity market performance across developed markets worldwide.

Index “net” return approximates the minimum possible dividend reinvestment, after deduction of withholding tax at the highest possible rate.

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of the U.S. stock market.

The S&P Global Infrastructure Index is composed of 75 of the largest publicly listed companies in the global infrastructure industry. The index has balanced weights across three distinct infrastructure clusters: transportation, utilities, and energy.

The S&P SmallCap 600 Index measures the performance of 600 mostly small-cap stocks weighted by market value, covering approximately 3% of the U.S. stock market.

The S&P Global Property Index measures the investable universe of publicly traded property companies, and comprises more than 450 constituents from more than 35 countries. To qualify for inclusion in the index, a company must derive more than 60% of revenue from real estate development, management, rental, and/or direct investment in physical property.

Holdings are as of the date indicated and subject to change.

All third-party trademarks cited are the property of their respective owners.

Standard deviation measures historical volatility of returns.

[7851]

Graham McDevitt
Global Strategist,
Senior Portfolio Manager

Investments in Delaware International Bond Fund are not and will not be deposits with or liabilities of Macquarie Bank Limited ABN 46 008 583 542 and its holding companies, including their subsidiaries or related companies, and are subject to investment risk, including possible delays in repayment and loss of income and capital invested. No Macquarie Group company guarantees or will guarantee the performance of the funds, the repayment of capital from the Fund, or any particular rate of return.

The views expressed represent the Manager's assessment of the market environment as of September 2011 and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager's current views.

Carefully consider the Fund's investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Fund's prospectus and, if available, its summary prospectus, which may be obtained by visiting www.delawareinvestments.com or calling 800 523-1918. Investors should read the prospectus and, if available, the summary prospectus carefully before investing.

Investing involves risk, including the possible loss of principal.

IMPORTANT RISK CONSIDERATIONS

Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer's ability to make interest and principal payments on its debt.

The Fund may also be subject to prepayment risk, the risk that the principal of a fixed income security that is held by the Fund may be prepaid prior to maturity, potentially forcing the Fund to reinvest that money at a lower interest rate.

High yielding, noninvestment grade bonds (junk bonds) involve higher risk than investment grade bonds. The high yield secondary market is particularly susceptible to liquidity problems when institutional investors, such as mutual funds and certain other financial institutions, temporarily stop buying bonds for regulatory, financial, or other reasons. In addition, a less liquid secondary market makes it more difficult for the Fund to obtain precise valuations of the high yield securities in its portfolio.

International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

The Fund may invest in derivatives, which may involve additional expenses and are subject to risk, including the risk that an underlying security or securities index moves in the opposite direction from what the portfolio manager anticipated. A derivative transaction depends upon the counterparties' ability to fulfill their contractual obligations.

Because the Fund may invest in bank loans and other direct indebtedness, it is subject to the risk that the Fund will not receive payment of principal, interest, and other amounts due in connection with these investments, which primarily depend on the financial condition of the borrower and the lending institution.

“Nondiversified” Funds may allocate more of their net assets to investments in single securities than “diversified” Funds. Resulting adverse effects may subject these Funds to greater risks and volatility.

Charts are for illustration purposes only.

[7851]

Chris Gowlland
Vice President,
Senior Quantitative Analyst

Inflation since the start of the global financial crisis

Around the world, many countries now appear to be fully recovered from the global financial crisis of 2007–2009. Indeed, a number of emerging markets have been growing so rapidly in recent quarters that they are now starting to experience accelerating inflation. The monetary authorities in several of these countries have therefore started implementing policies that they believe will slow down the pace of economic expansion and help bring the rate of price increases back to target levels.

By contrast, the U.S. clearly has not yet returned to anything close to a normal rate of economic growth; indeed, the recent revisions to gross domestic product figures over the past three years indicate that the recession was longer and deeper than anyone realized at the time. Unemployment remains stubbornly high, real estate markets still seem broadly depressed, households are continuing to deleverage, banks and other credit providers have not shifted toward looser conditions, and the Federal Reserve recently reported that firms' abilities to pass on price increases remain mixed. Many European economies are experiencing broadly similar patterns, particularly those that are currently implementing sharp austerity programs.

Over the near term, while economic growth remains depressed, there seems to be no clear mechanism by which aggregate demand can rise to a point where inflation could become a reasonable worry domestically. In the medium term, it may be fair to assume that the U.S. and other developed countries will finally limp their way back to something resembling normal economic growth, at which point the monetary authorities are likely to once again monitor inflationary pressures, with a bias toward intervention whenever prices appear to be climbing more rapidly than the target range.

Sector outlook

Which sectors and industries are likely to do well or badly in this type of environment? A scan of the active sector exposures across Delaware Investments may provide a few clues about what certain investment teams at Delaware Investments are thinking.

One set of potential choices may be financial intermediary firms, which have become strongly embedded in the economic system and gained significant legislative protection from litigation. In most countries, only a handful of firms exist in market niches such as card processors, credit rating agencies, custodian banks, and securities exchanges. Such firms may enjoy a degree of insulation from broader market pressures, allowing them to seek and retain high operational efficiency without undue fear of being disintermediated. To this extent, they may be able to achieve rising margins even if inflation remains quiescent over the near-to-medium term.

Another group of firms which may do well in the current market environment are those which focus on providing services to the public sector, in areas such as healthcare, information technology and security. Governments at all levels are seeking to reduce headcount and increase efficiency, and thus are eager to lean on the expertise of for-profit firms.

The most successful firms in this category tend to be adept at winning long-term contracts by submitting minimum bids, and then diligently monitoring change requests which may occur as the relationship evolves. Firms which have a single dominant customer, such as a national or subnational government, may be more vulnerable if that customer decides unilaterally to change the terms and conditions of the monopsonistic relationship (that is, a market situation in which the product or service of several sellers is sought by only one buyer).

Experience suggests, however, that public-sector customers of outsourcing services generally recognize that such arrangements won't be viable if the suppliers are squeezed too hard. So while governments may occasionally adopt a hostile posture in the short term, particularly in periods when austerity is in fashion, their stance over longer periods may be more accommodating.

A further category of companies that could benefit from current conditions might be midsized and large utilities. Admittedly, utilities in all countries tend to be subject to a welter of regulatory controls, but they also have attributes that may be advantageous in the current climate. Many utilities in this size range already have significant leverage, but there may well be opportunities for them to extend the duration of their debt at attractive rates, given their stable business models and steady cash flows. Separately, it appears that regulators at the national and local levels are still generally supportive of continued domestic consolidation, which may lead to higher operational efficiency and better margins.

Companies closely linked to the exploration and production of oil may also benefit from the current environment. (By contrast, firms that are tightly focused on onshore production of natural gas might be viewed as more speculative, given their generally shorter track records, together with the geological and economic uncertainties associated with these efforts.) From the mid-1980s to the end of the 1990s, the price of crude oil generally fluctuated around $20 a barrel. Since that time, the price of oil has rarely dropped below $50 a barrel, and more recently has generally floated between $70 and $100 a barrel. Oil and petrochemicals continue to play a central role in the world economy, and the continuing development of China, India, and other emerging countries may lead to further increases in demand. It is true that some nontraditional sources of crude oil do exist — but most of these are still at relatively early stages of development, and on present evidence do not appear likely to exert significant downward pressure on average prices. (Source: U.S. Department of Commerce, July 31, 2011.)

Increasing oil demand

Oil and petrochemicals continued to play a central role in the world economy for the period shown, and the continuing development of China, India, and other emerging countries may lead to further increases in demand.

*Values are as of December of each year.
All charts shown throughout are for illustrative purposes only.

 (Source: U.S. Department of Commerce, July 31, 2011)

While some industries may appear likely to perform well in the current climate, others may struggle. Hypermarkets (that is, superstores that combine a supermarket and a department store) have benefited in recent years from the rapid expansion of Chinese export capabilities, but they may struggle to maintain their operating performance if the Chinese government continues pursuing its recent policy of allowing the currency to appreciate. Cable network operators and telecommunications providers are now competing directly with each other to provide bundled services in many local markets. With little prospect that their competitive challenges can be resolved by further consolidation, both may experience rising churn and customer acquisition costs. Finally, although the major U.S. auto companies were able to avoid total collapse during the global financial crisis, they may continue to face significant difficulties, given the mismatch between their core expertise and the attributes now favored by consumers domestically and overseas.

IMPORTANT RISK CONSIDERATIONS

Investing involves risk, including the possible loss of principal.

The views expressed represent the Manager's assessment of the market environment as of September 2011, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice.

If and when a Fund invests in forward foreign currency contracts or uses other investments to hedge against currency risks, the Fund will be subject to special risks, including counterparty risk.

International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

Roger A. Early,
CPA, CFA, CFP
Senior Vice President,
Co-Chief Investment Officer –
Total Return Fixed
Income Strategy

Despite the fragile nature of the U.S. economic recovery, inflation appears to be ticking up, raising concerns about a drawn-out inflationary spiral. How realistic are these concerns? What are some of the factors putting pressure on prices today, not just in the U.S., but internationally?

Roger Early, senior vice president and co-chief investment officer for total return fixed income strategies, considers these questions while discussing his team's inflation expectations.

Click on each question to read its answer or scroll down the page.

• The Fed has massively pumped up its balance sheet in recent years. Why hasn't this expansion resulted in notable inflation?
• For a long time, investors have believed that expansionary monetary policy aggravates the risks of inflation. Do you think this an outdated piece of conventional wisdom?
• If the money supply isn't a dominating factor, what is?
• What about demand levels here in the U.S.?
• How is your outlook affecting your team's portfolio allocation decisions?

Q: The Fed has massively pumped up its balance sheet in recent years. Why hasn't this expansion resulted in notable inflation?

Data: The Federal Reserve, as of June 2011.

*Velocity rates in this chart are based on a measure of the money supply that economists refer to as M2. It includes (but is not limited to) the following forms of money: currency in circulation, commercial bank deposits, overnight repurchase agreements between commercial banks, savings accounts, and time deposits under $100,000.

Velocity measurements shown above are based on seasonally adjusted quarterly readings.

Data: Federal Reserve Bank of St. Louis, as of June 2011.

 

Q: For a long time, investors have believed that expansionary monetary policy aggravates the risks of inflation. Do you think this an outdated piece of conventional wisdom?

Q: If the money supply isn't a dominating factor, what is?

Q: What about demand levels here in the U.S.?

Q: How is your outlook affecting your team's portfolio allocation decisions?

Ways to alleviate the effects of inflation:

• Download our Delaware Inflation Protected Bond Fund commentary.
• Download our Delaware Inflation Protected Bond Fund fact sheet.

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Carefully consider Delaware Inflation Protected Bond Fund's investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Fund's prospectus and, if available, its summary prospectus, which may be obtained by visiting www.delawareinvestments.com or calling 800 523-1918. Investors should read the prospectus and, if available, the summary prospectus carefully before investing.

IMPORTANT RISK CONSIDERATIONS

Investing involves risk, including the possible loss of principal.

The views expressed represent the Manager's assessment of the market environment as of June 6, 2011, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice.

Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer's ability to make interest and principal payments on its debt.

Funds that invest in fixed income securities can also be subject to prepayment risk, the risk that the principal of a fixed income security that is held by the Fund may be prepaid prior to maturity, potentially forcing the Fund to reinvest that money at a lower interest rate.

Interest payments on inflation-protected debt securities will vary as the principal and/or interest is adjusted for inflation.

Delaware Inflation Protected Bond Fund may experience portfolio turnover in excess of 100%, which could result in higher transaction costs and tax liability.

Delaware Inflation Protected Bond Fund may invest in derivatives, which may involve additional expenses and are subject to risk, including the risk that an underlying security or securities index moves in the opposite direction from what the portfolio manager anticipated. A derivative transaction depends upon the counterparties' ability to fulfill their contractual obligations.

International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.