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Delaware Healthcare Fund Quarterly commentary December 31, 2015

Within the Fund

The healthcare industry rose sharply during the fourth quarter of 2015. In particular, many biotechnology companies rebounded as investors remained focused on company fundamentals.

During the three-month period ended Dec. 31, 2015, Delaware Healthcare Fund (Class A shares at net asset value) outperformed its benchmark, the Russell 3000® Healthcare Index. The Fund benefited from both positive asset allocation and security selection versus the index.

Shares of U.S.-based biotechnology firm Dyax rose in the period following the announcement that the company will be acquired by Shire PLC. Dyax produces Kalbitor, a drug that treats hereditary angioedema, or HAE. U.S. regulators have given Kalbitor priority designations, enabling the drug to skip phase-two trials and potentially reach the market sooner. Shire has begun to build a robust pipeline in recent years to combat HAE and currently offers two treatments; Dyax’s portfolio will further enhancing its offerings.

Japanese research-based Chugai Pharmaceutical benefited during the quarter following the announcement of a favorable designation by the Food and Drug Administration (FDA). Initially created by Chugai, Alectinib is a lung cancer agent that was first granted the FDA’s breakthrough therapy designation back in 2013 and recently was given priority review due to its favorable results and response rates. Shares of Chugai also benefited from strong earnings.

Our position in Sanofi underperformed during the quarter due to pricing pressure from competition. After its patent for Lantus, a diabetes drug, expired in the United States, competitors Eli Lilly and Boehringer Ingelheim obtained FDA approval for a new generic version. As a result, the company forecasted lower revenue within this specific division over the next several years, further affecting its stock price. However, other Sanofi divisions have been successful, including its biotechnology division Genzyme. Sanofi is also engaged in discussions with another healthcare provider regarding a potential asset swap involving its animal-health business.

As insurance exchanges established by the Affordable Care Act (ACA) begin their third year, hospital operators such as our holding of Tenet Healthcare are starting to be affected by slowing insurance enrollment as the number of subscribers begins to level out. As a result, Tenet posted lower year-over-year earnings during the fourth quarter of 2015. As the quarter neared conclusion, Tenet’s stock began to appreciate as ACA enrollment rose to 8.3 million subscribers in addition to announcing a four-year contract extension with its largest health plan customer, Aetna.


Despite the short-term struggles among healthcare equities in 2015, long-term performance has been positive. Healthcare remains one of the better-performing sectors within the S&P 500® Index over the past several years. Other events transpired that will shape our view as we enter 2016:

  • The Affordable Care Act (ACA). The insurance exchanges created by the ACA, now entering its third year, witnessed enrollment rise to 8.3 million by December 2015. Although the success of the ACA is mixed and debated, it appears that the healthcare industry has responded well. 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.
  • Manufacturers of brand-name drugs were challenged as patents expired. Patent expiration means that successful brand-name drugs started losing ground to generic formulations. This has been an important shift, because brand-name drugs produced by companies like Bristol-Myers Squibb and Amgen (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 above, we continue putting a premium on disciplined, intensive research when analyzing investment opportunities for the Fund. 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 (12/31/2015)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)9.82%11.43%11.43%25.26%19.16%n/a18.35%09/28/2007
Class A (at offer)3.51%5.04%5.04%22.80%17.76%n/a17.50%
Institutional Class shares9.83%11.66%11.66%25.52%19.45%n/a18.55%09/28/2007
Russell 3000 Healthcare Index8.81%7.14%7.14%24.32%20.51%n/an/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 definition)

Expense ratio
Class A (Gross)1.36%
Class A (Net)1.36%
Institutional Class shares (Gross)1.11%
Institutional Class shares (Net)1.11%
Top 10 holdings as of 01/31/2016
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Eli Lilly & Co.6.2%
SINA Corp/China5.9%
Bristol-Myers Squibb Co.5.8%
GlaxoSmithKline PLC4.2%
Chugai Pharmaceutical Co. Ltd.4.0%
Mylan NV3.2%
Quest Diagnostics Inc.3.2%
AstraZeneca PLC2.8%
Total % Portfolio in Top 10 holdings47.7%

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