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Delaware Healthcare Fund Quarterly commentary September 30, 2015

Healthcare stocks were not immune to the struggles facing global economies during the third quarter of 2015. The healthcare sector within the S&P 500® Index experienced a quarterly decline for the first time since 2011 as the healthcare industry moved in sympathy with overall concerns among global markets.

In addition, the healthcare industry came under specific pressure from biotechnology companies, which were at the forefront of a debate over high prices for treatments. This in turn soured investors’ attitudes toward the subindustry and applied further downward pressure for biotech names, rounding out a turbulent quarter for the healthcare industry overall.

Within the Fund

During the quarter ended Sept. 30, 2015, Delaware Healthcare Fund (Institutional Class shares and Class A shares at net asset value) was also challenged by these broader concerns and as a result posted a negative return and underperformed its benchmark, the Russell 3000® Healthcare Index. In terms of performance attribution across the Fund’s portfolio as a whole, the Fund benefited from strong security selection, while sector allocation was a detractor compared to the index.

Several names were able to provide positive returns in the period, including the Fund’s holding of Belgium-based UCB. The successful sale of UCB’s generic pharmaceuticals subsidiary, Kremers Urban, to Lannett Company during the quarter boosted returns as the company continues its commitment to focus on its core products. UCB was also supported by raising its full-year revenue forecast on the success of its treatments for central nervous system disorders.

The Fund’s position in Teva, a leader in the generic drug space, appreciated as the company announced its acquisition of Allergan’s generic drug business during the quarter. The acquisition will further propel Teva as a global player in the generics arena and further enhance its already strong market share for global generics. The acquisition should also produce substantial cost savings for Teva.

Concerns arose during the period about hospital-related names, such as the fund’s holding of Tenet Healthcare, as diminishing Affordable Care Act (ACA) tailwinds weighed on investors’ minds ahead of next year’s election. Hospitals can be particularly sensitive to the various types of reforms within the ACA due to cost cutting pressures and controls on spending. Tenet also experienced higher operating costs in 2015, applying further pressure on the stock price. Overall, we are attracted to Tenet’s operating capacity in addition to favorable subsidies for patients enrolled in the federal exchanges.

A few of the Fund’s holdings reside outside of the typical scope of the healthcare industry, and some selections in this realm underperformed the broader markets. One such name was Sina, a leading Chinese Internet company, whose price moves were influenced less by fundamentals and more by generic worries stemming from the growing negative sentiment about China’s growth prospects. Although the Fund’s position in Sina may appear avant-garde, the company features the same attractive valuation and franchise opportunities that we expect from our core healthcare companies.


Despite the short-term struggles among healthcare equities, long-term performance has been positive and the sector has remained one of the better-performers within the S&P 500® Index over the past several years. Other events transpired that will shape our view as we make our way through the rest of 2015:

  • The 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 then. 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 such as those 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 (09/30/2015)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)-12.17%1.47%3.89%22.58%19.31%n/a17.59%09/28/2007
Class A (at offer)-17.20%n/a-2.10%20.18%17.89%n/a16.72%
Institutional Class shares-12.07%1.67%4.18%22.90%19.61%n/a17.80%09/28/2007
Russell 3000 Healthcare Index-11.64%-1.53%6.91%20.61%19.64%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 10/31/2015
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Eli Lilly & Co.5.7%
Bristol-Myers Squibb Co.5.5%
SINA Corp/China5.4%
GlaxoSmithKline PLC3.9%
Chugai Pharmaceutical Co. Ltd.3.8%
Gilead Sciences Inc.3.0%
Quest Diagnostics Inc.2.9%
Fresenius Medical Care AG & Co. KGaA2.6%
UCB S.A.2.5%
Total % Portfolio in Top 10 holdings42.5%

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