Within the Fund
Delaware Healthcare Fund (Class A shares at net asset value) posted a positive return for the second quarter of 2014, outpacing its benchmark, the Russell 3000® Healthcare Index.
Across the Fund’s portfolio as a whole, the positive effect of security selection was the main driver of outperformance versus the index.
At the sector level, biotechnology was the Fund’s strongest performer, mainly driven by the success of Idenix Pharmaceuticals. As a developer of drugs for treating hepatitis C, Idenix was acquired by Merck as it looked to strengthen its hepatitis C portfolio. The company offered Idenix more than triple its share price at the time of the acquisition. With 150 million people being treated for hepatitis C worldwide (and newer medicines coming to market with higher cure rates and fewer side effects), the market has experienced a bout of acquisitions and partnerships, with Idenix being a recent beneficiary of this trend.
Within the Fund’s blue chip medical products sector, Allergan, the maker of the popular Botox treatment, appreciated on the news that Canada-based Valeant Pharmaceuticals International was aggressively attempting to buy it out. As of this writing, Valeant has presented multiple offers to Allergan, all of which have been rejected.
The Fund’s positive results within the biotechnology sector were offset somewhat by underperformers such as Seattle Genetics. Despite delivering a positive earnings release, investors expected higher sales and became concerned that the company’s upside potential may be limited. This resulted in the stock trading lower for the quarter.
Despite the Fund’s positive return during the quarter, underperformance was noted within the so-called unclassified group. Notable underperformers included SINA and Sohu.com, Chinese Internet companies that have leading products in gaming, news, entertainment, search, and video. These companies’ websites and mobile applications are an important part of Chinese internet users’ daily lives. The stocks faced headwinds as the Chinese government became increasingly vigilant about content distributed on the internet. Both companies have had some of their online video content banned in recent months. The government has revoked some of SINA’s internet licenses as well. The effects of these actions on potential advertising revenue have caused these stocks to underperform, and we believe that the share prices already reflect these concerns. In regards to Sohu, we believe the company continues to trade at a significant discount to the sum of its parts and that the market is not fully appreciating the value of its individual assets, particularly the rapidly growing video business.
Healthcare equities continue their strong performance year-to-date. Within the S&P 500® Index, for instance, the healthcare sector is the third-strongest performer thus far in 2014. This run-up in prices hasn’t been the only news, of course. Other events transpired that have shaped our view as we head into the third quarter of 2014:
- The Affordable Care Act (the Act). Early in the quarter, it was announced that an estimated eight million people signed up for private insurance in the health insurance marketplace created by the Act, further increasing the number of insured Americans. There are still plenty of unknowns related to the Act, and we will be monitoring developments closely, paying special attention to any implications for asset prices.
- Manufacturers of brand-name drugs were challenged as patents expired. Patent expiration meant that successful brand-name drugs started losing ground to generic formulations. This was an important shift, because brand-name drugs produced by companies like AstraZeneca and Eli Lilly (to name just two) have long enjoyed impressive sales records and a significant share of their respective markets. Such firms will continue to face so-called “patent cliffs.”
In light of factors mentioned above, we continue putting a premium on disciplined, intensive research when analyzing investment opportunities for the Fund’s portfolio. We favor companies that exhibit such traits as:
- proven competitiveness
- seasoned management teams
- stock valuations that are discounted meaningfully from our estimates of intrinsic value
These characteristics are part of our daily considerations as we follow our conservative, stock-by-stock approach to portfolio management.
The S&P 500 Index measures the performance of 500 mostly large-cap stock s weighted by market value, and is often used to represent performance of the U.S. stock market.
The views expressed represent the Manager's assessment of the Fund and market environment as of the date indicated, 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. Information is as of the date indicated and subject to change.
Document must be used in its entirety.
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
Performance data current to the most recent month end may be obtained by calling 800 523-1918 or visiting delawareinvestments.com/performance.
Total returns may reflect waivers and/or expense reimbursements by the manager and/or distributor for some or all of the periods shown. Performance would have been lower without such waivers and reimbursements.
|Average annual total return as of quarter-end (06/30/2014)|
|YTD||1 year||3 year||5 year||10 year||Lifetime||Inception|
|Class A (NAV)||5.27%||13.03%||33.24%||22.22%||27.13%||n/a||20.29%||09/28/2007|
|Class A (at offer)||-0.78%||6.53%||25.54%||19.83%||25.63%||n/a||19.23%|
|Institutional Class shares||5.36%||13.16%||33.59%||22.55%||27.42%||n/a||20.49%||09/28/2007|
|Russell 3000 Healthcare Index||4.35%||10.38%||30.86%||22.41%||21.35%||n/a||n/a|
Returns for less than one year are not annualized.
Class A shares have a maximum up-front sales charge of 5.75% and are subject to an annual distribution fee.
Prior to January 28, 2010, the Fund had not engaged in a broad distribution effort of its shares and had been subject to limited redemption requests. The returns reflect expense limitations that were in effect during certain periods and which may have been lower than the Fund's current expenses. The returns would have been lower without expense limitations.
Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.
Russell 3000® Healthcare Index (view)
|Class A (Gross)||1.38%|
|Class A (Net)||1.38%|
|Institutional Class shares (Gross)||1.13%|
|Institutional Class shares (Net)||1.13%|
|Top 10 holdings as of 07/31/2014|
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
|Holding||% of portfolio|
|Eli Lilly & Co.||8.3%|
|Teva Pharmaceutical Industries Ltd.||5.6%|
|Idenix Pharmaceuticals Inc.||4.6%|
|Bristol-Myers Squibb Co.||4.1%|
|Chugai Pharmaceutical Co. Ltd.||3.9%|
|Fresenius Medical Care AG & Co. KGaA||3.8%|
|Quest Diagnostics Inc.||3.6%|
|Total % Portfolio in Top 10 holdings||50.7%|
Institutional Class shares are only available to certain investors. See the prospectus for more information.
All third-party marks cited are the property of their respective owners.
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 its summary prospectus, which may be obtained by clicking the prospectus link located in the right-hand sidebar or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.
Investing involves risk, including the possible loss of principal.
Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors.
Healthcare companies are subject to extensive government regulation and their profitability can be affected by restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, and malpractice or other litigation.
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.
Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies.
“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.
Not FDIC Insured | No Bank Guarantee | May Lose Value