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Delaware Healthcare Fund Quarterly commentary March 31, 2015

Within the Fund

During the first quarter of 2015, Delaware Healthcare Fund (Institutional Class shares and Class A shares at net asset value) posted a positive return yet underperformed its benchmark, the Russell 3000® Healthcare Index.

In terms of performance attribution across the Fund’s portfolio as a whole, security selection and sector allocations detracted from performance versus the benchmark.

In absolute terms, the Fund benefited from positive performance across most sectors during the period. Relative to the benchmark, the Fund benefited from underweight positions in certain sectors that performed poorly within the benchmark. Within the blue-chip medical products sector, for instance, the Fund’s underweight position in Johnson & Johnson (which accounted for more than 8% of the benchmark’s overall weighting) contributed to performance. The stock depreciated during the period as the company was required to pay damages stemming from lawsuits involving its antipsychotic drug Risperdal.

There were several favorable factors that caused shares of device-maker Boston Scientific to appreciate during the quarter. In February, for example, the company reached an agreement with Johnson & Johnson over a long-running lawsuit, significantly reducing the potential liabilities related to the case. Following in the footsteps of recent healthcare acquisitions, Boston Scientific agreed to buy Endo International’s urology portfolio, further strengthening its urology division.

Belgium-based UCB, a global biopharmaceutical company, struggled during the quarter, and the stock’s negative effects were compounded by the Fund’s overweight position. During the period, the company announced 2014 results that were lower than expectations, and it issued lower guidance for 2015. We feel that UCB’s core offerings of pharmaceuticals along with promising testing for new products (for example, the treatment of lupus) should benefit the firm going forward.

As the overall healthcare industry experienced another round of growth, the Fund’s underweight in Biogen, which appreciated during the quarter, detracted from the Fund’s relative performance. Late in the quarter, the company announced favorable results for its treatment of Alzheimer’s disease. Biogen plans to move the drug into further testing this year. We note that treatment for Alzheimer’s can be challenging, and other healthcare firms have faced setbacks when pursuing therapies in the past.


Healthcare equities continued their strong performance during the first quarter of 2015. Within the S&P 500® Index, for instance, the healthcare sector was the strongest performer during the quarter. This run-up in prices wasn’t the only news, of course. Other events transpired that will shape our view as we make our way through 2015:

  • Affordable Care Act (ACA). The insurance exchanges created by the ACA opened more than one year ago, and 7.3 million people have purchased insurance since. Although the success of the ACA is mixed and debated, it appears the healthcare industry has responded well; the healthcare portion of the S&P 500 Index returned more than 25% in 2014. There are still plenty of unknowns related to the ACA, and we will be monitoring developments closely, paying attention to any implications for asset prices. (Data: U.S. Department of Health and Human Services, Standard and Poor’s).
  • 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 GlaxoSmithKline 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 like those 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 stocks weighted by market value, and is often used to represent performance of the U.S. stock market.

Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.


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

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 (06/30/2015)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)8.20%15.52%19.61%29.38%25.02%n/a20.20%09/28/2007
Class A (at offer)1.99%8.90%12.75%26.84%23.56%n/a19.28%
Institutional Class shares8.22%15.63%19.87%29.67%25.30%n/a20.41%09/28/2007

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 definition)

Expense ratio
Class A (Gross)1.35%
Class A (Net)1.35%
Institutional Class shares (Gross)1.10%
Institutional Class shares (Net)1.10%
Top 10 holdings as of 06/30/2015
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Eli Lilly & Co.6.0%
SINA Corp/China5.9%
Bristol-Myers Squibb Co.5.3%
Chugai Pharmaceutical Co. Ltd.3.9%
GlaxoSmithKline PLC3.6%
UCB S.A.3.4%
Boston Scientific Corp.3.2%
Quest Diagnostics Inc.3.0%
Anthem Inc.2.6%
Total % Portfolio in Top 10 holdings43.7%

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.

Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.

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