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Delaware Core Plus Bond Fund Quarterly commentary September 30, 2015


During the third quarter of 2015, the markets experienced significant swings in the level of rates, the shape of the yield curve, and the valuation of risk assets. By the end of the quarter, “up in quality” outperformed, intermediate and longer-term maturities registered a meaningful drop in yields, and shorter-term rates treaded water. Global factors had a major impact on all parts of the markets. The U.S. dollar was “sharply unchanged” against a developed markets currency basket, but showed significant strength against emerging markets currencies. The quarter also saw a renewal of the downtrend in energy prices and broad weakness across most commodity prices. During the quarter, the U.S. Federal Reserve pointed to moderate growth conditions but seemed concerned with both below-target inflation and turbulent global markets. Several Fed members, including chairwoman Janet Yellen, have pointed to a late 2015 “liftoff” in short-term rates. We believe the “most likely” Fed scenario still seems potentially off track, as it would come despite a strong U.S. dollar, lower commodity prices, and below-target inflation statistics. Rarely has the Fed begun to tighten in the face of these types of factors.

It seems clear to us that the employment situation is no longer the major factor driving the Fed; inflation has become a larger factor. Current inflation results, along with the intermediate outlook for both U.S. and global inflation, strongly suggest that the Fed may have to take a cautious track on any tightening. Yellen has pointed to the potential for rising resource utilization as a future source of upward pressure on wages and overall inflation. In Yellen’s view, this could be the driver that moves inflation back to the Fed’s target 2% level. However, it is interesting that Fed projections for inflation do not reach the 2% target until 2018. In addition, Mario Draghi of the European Central Bank (ECB) recently projected an upcoming shift to negative inflation rates in Europe. Given the Fed’s propensity for having to reduce overly optimistic forecasts during this entire economic expansion, even its call for a 2018 return to target inflation could prove to be premature. Although dismissed by many as poor forecasting tools, market-based inflation break-evens also suggest that there may be more downside risk than upside risk on the inflation outlook. In recent days, the break-even rate on 10-year Treasury inflation-protected securities (TIPS) traded below 1.4% after having traded at more than 2.3% in early 2014. In fact, this move down in break-even rates has accounted for virtually the entire drop in nominal 10-year Treasury note yields since the end of 2013. Real rates on 10-year TIPS have recently traded above 0.7% or very close to the levels reached at the end of December 2013. So while we all wait for the Fed — and the Fed waits for inflation — our oft-voiced concern about deflation being the bigger enemy of this expansion continues.

Domestically, the majority of economic indicators suggest modest growth and a stabilizing economy. The U.S. Commerce Department revised second-quarter U.S. gross domestic product (GDP) upward in September to 3.9% (from the previous reading of 3.7%), revealing a somewhat more positive view of economic growth heading into midyear. Additionally, the latest report on jobless claims suggests that the labor market maintains positive momentum, while initial claims data and the continuing claims report provided further support for an improved outlook on labor markets. In the wake of this positive tone, the Conference Board Consumer Confidence Index® rose in September to the highest level since January. Although many U.S. economic indicators were favorable, these positives were offset by heightened concerns surrounding the slowdown in China and emerging market economies, and subsequent volatility in the equity and commodity markets. Additionally, inflation remains benign and is being restrained by the plunge in energy costs and the stronger dollar. The most recent personal consumption expenditures price index (core PCE) data release of 1.3% remains below the Federal Open Market Committee’s (FOMC’s) 2.0% objective.

During the third quarter of 2015, yields on 10-year Treasurys declined from 2.35% to 2.04%, and despite volatility in short-term rates, yields on 2-year Treasurys remained unchanged, ending the quarter at 0.63%. The 3-month T-bill / 10-year T-note curve flattened 0.33 percentage points to 2.05% by the end of the quarter. The 1-month London interbank offered rate (Libor) remained essentially unchanged for the period, ending the quarter at 0.19%. (Data: Bloomberg.)

The Barclays U.S. Aggregate Index recorded a positive return in the third quarter as higher-quality bonds and longer-duration sectors led the way. Given the shift in the Treasury yield curve, short-to-intermediate focused sectors produced lower nominal returns, although mortgage-backed securities (MBS) and commercial mortgage-backed securities (CMBS) were relatively strong. U.S. TIPS, high yield corporate bonds, and emerging market bonds produced negative returns.

Within the Fund

Delaware Core Plus Bond Fund (Institutional Class shares and Class A shares at net asset value) underperformed its benchmark, the Barclays U.S. Aggregate Index, for the third quarter of 2015.

  • The Fund’s underweight positions in Treasury securities had a negative impact on relative returns as Treasury bonds outperformed other benchmark sectors. Our focus on intermediate to longer maturities contributed to performance as the yield curve flattened.
  • Government-backed mortgage-backed securities (MBS) outperformed the Barclays U.S. Aggregate Index during the quarter. Security-specific positioning within this sector had a positive effect. The Fund’s asset-backed securities (ABS) holdings underperformed the benchmark as we maintained our emphasis on short-maturity and floating-rate issues. CMBS had a positive effect on relative performance due to our overweight and security-specific selection.
  • Although we have reduced the Fund’s position in investment grade corporate bonds, exposure to these securities hurt relative performance during the quarter as corporate bonds lagged the benchmark.
  • The high yield bond market underperformed the Barclays U.S. Aggregate Index for the quarter. Overall, Fund exposure to the sector had a negative effect on relative performance. Investments in bank loans detracted from performance as well.
  • Positions in emerging market debt were a drag on Fund performance for the quarter. Emerging market spreads have widened year-to-date, surpassing the 10-year historical average (source: J.P. Morgan Emerging Markets Bond Index Global).
  • Non-dollar developed markets, while representing only a small allocation, produced positive results during the quarter.


Given the weak global growth backdrop and commodity volatility, we expect the FOMC to remain cautious and move only slowly in its policy normalization, eventually reaching rate liftoff by this December at the earliest. However, the impact of weaker global growth on the U.S. economic recovery and low inflation are risks to rate hikes in 2015. Modest U.S. growth and Fed tightening support higher Treasury yields by year-end 2015.

A further slowdown in global growth could weigh on U.S. growth and commodity-driven sectors. China’s further deteriorating growth trajectory remains a key risk for global growth and commodity prices. In addition to mounting weakness in China, commodities could continue to be pressured by a stronger dollar. Shareholder-friendly activity and limited earnings growth remain risks for corporate issuers and spreads. However, geopolitical risk accelerating in Europe and the Middle East could drive demand for “safe haven” assets, leading to lower rates and a widening of credit spreads. Finally, unprecedented stimulus by global central banks, at various phases, hiking or easing, could lead to lower-for-longer Treasury yields.

The Conference Board Consumer Confidence Index is a barometer of the health of the U.S. economy from the perspective of the consumer. The index is based on consumers’ perceptions of current business and employment conditions, as well as their expectations for six months hence regarding business conditions, employment, and income.

The J.P. Morgan Emerging Markets Bond Index Global (EMBIG) tracks total returns for U.S. dollar–denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities, including Brady bonds, loans, and Eurobonds.

The London interbank offered rate (Libor), published by the British Bankers’ Association, is a composite of the rates of interest at which banks borrow from one another in the London market, and it is a widely used benchmark for short-term interest rates.

Mortgage-backed securities are fixed income securities that represent pools of mortgages, with investors receiving principal and interest payments as the underlying mortgage loans are paid back. Many are issued and guaranteed against default by the U.S. government or its agencies or instrumentalities, such as Freddie Mac, Fannie Mae, and Ginnie Mae. Others are issued by private financial institutions, with some fully collateralized by certificates issued or guaranteed by the U.S. government or its agencies or instrumentalities.


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)0.42%0.50%1.56%1.66%3.34%5.06%6.08%08/16/1985
Class A (at offer)-4.14%n/a-3.01%0.12%2.40%4.57%5.91%
Institutional Class shares0.49%0.69%1.81%1.92%3.59%5.34%5.57%06/01/1992
Barclays U.S. Aggregate Index1.23%1.13%2.94%1.71%3.10%4.64%n/a

Returns for less than one year are not annualized.

Class A shares have a maximum up-front sales charge of 4.50% and are subject to an annual distribution fee.

Barclays U.S. Aggregate Index (view definition)

Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.

Expense ratio
Class A (Gross)1.20%
Class A (Net)0.90%
Institutional Class shares (Gross)0.95%
Institutional Class shares (Net)0.65%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursement from Nov. 28, 2014 through Nov. 30, 2015. Please see the fee table in the Fund's prospectus for more information.

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.

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.

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.

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.

If and when the 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.

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

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

Not FDIC Insured | No Bank Guarantee | May Lose Value