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Delaware Corporate Bond Fund Quarterly commentary December 31, 2015


Financial markets finally took the Federal Reserve at its word during the fourth quarter of 2015 and discounted a December “liftoff” of benchmark interest rates. With investors assuring the Fed that it would be appropriate to raise rates, the actual increase in December caused only modest and brief volatility. Going forward, the markets likely will go back into “Fed-watch” mode to anticipate the trajectory of further rate increases over the next 12 to 24 months. Fed “dots” suggest four more 0.25-percentage-point increases in 2016, though the markets look for only two such increases. We lean in favor of the markets’ current view (fewer rather than more increases) and will continue to watch for signs of economic and financial stress that could put the Fed back on hold.

Energy prices suffered another leg down during the quarter, and U.S. gross domestic product (GDP) and inflation statistics will likely, once again, come in on the low side for the full year. Annual inflation statistics are widely expected to bounce higher by late spring 2016, as the sharp drop in energy prices from early 2015 falls out of the year-over-year numbers. Given continuing headwinds from various global trade factors, however, a best-case outcome for GDP growth in 2016 is likely to be another year of just muddling through. There is a clear divergence between the U.S. manufacturing sector (recession-like conditions) and service sector (decent growth conditions), which could point to more-challenging and volatile economic results in the near term.

In past business cycles, challenging and uncertain underlying economic conditions often have accompanied weak risk-asset performance. During the current cycle, however, this connection has been less relevant because financial asset prices have been driven higher by global central bank stimulus. Making investment decisions based on fundamentals in recent years often has been out of sync with the markets, as risk-asset prices were pushed higher simply by the widespread printing of money. Some portfolio managers who chose to take less risk in recent years due to below-target economic growth often were punished by the central bank- sponsored rise in risk-asset prices. Today, with the European Central Bank (ECB) and the Bank of Japan (BoJ) still providing significant monetary stimulus, risk-off trades could still be at risk of underperformance. However, risk-asset prices did not follow that pattern as closely in 2015, which raises the question: has something changed? The Fed has ended quantitative easing, but the totality of its actions have not meaningfully offset policies of the ECB and the BoJ.

Instead, central banks in emerging markets (EMCBs) could be the swing factor. Up until mid-2014, EMCBs had been enacting stimulus rather than asset purchases. Since then, EMCBs have been withdrawing liquidity by selling assets, a policy shift large enough to completely offset the asset purchases of central banks in the developed world. The change in central bank actions may result in a realignment of risk-asset prices with economic fundamentals. In that scenario, the risk-asset price volatility in 2015 could become even more pervasive in 2016. It may well be that reserve conditions in emerging markets will finally neutralize the ability of global central banks to keep pushing asset prices higher.

Domestic economic indicators showed mixed results throughout the fourth quarter. On the plus side, U.S. nonfarm payrolls increased by 271,000 in October, far exceeding expectations and helping to quell worries that the pace of employment growth was slowing. Overall, housing data and consumer confidence were positive as well. Although there was a slight downward revision to the third-quarter GDP estimate in December to 2.0% (from the previous reading of 2.1%), data indicated that household purchases boosted demand during the quarter as employment improved and fuel prices remain low. Conversely, U.S. Services Purchasing Managers” Index (PMI) business activity and manufacturing indicators continued to signal areas of weakness. While more recent U.S. economic indicators were favorable, these can easily be offset by continued weakness in China, Europe, and emerging market economies, and by subsequent volatility in the equity and commodity markets.

Within the Fund

For the fourth quarter of 2015, Delaware Corporate Bond Fund (Institutional Class shares and Class A shares at net asset value) underperformed its benchmark, the Barclays U.S. Corporate Investment Grade Index. The Fund’s performance was negatively affected by exposures to high yield credit and emerging market debt, with high yield representing an average of about 11% of the Fund’s portfolio for the period.

Investment grade markets finished the year with a negative tone as commodity weakness replaced record issuance as the main pressure point for the market. Credit performance has become increasingly bifurcated, with significant underperformance in energy and basic materials more than offsetting the relative outperformance of the majority of other financial and industrial sectors. The metals-and-mining and energy sectors were materially wider for the quarter as commodity prices continued their freefall, with oil, copper, platinum, and natural gas touching decade lows. Reacting to Fed policy, the dollar pushed close to a high for the year, putting additional pressure on oil prices and exacerbating the impact of the Organization of the Petroleum Exporting Countries’ decision to abandon production targets in an effort to drive out high-cost producers. Financials, noncyclicals, technology, media, telecommunications, and transportation outperformed the broader market over the period, with most investors remaining cautious heading into the new year. Driven largely by mergers and acquisitions (M&A), supply in 2015 set a new record at more than $1.25 trillion, a 14% increase from 2014. Expectations are for total supply to reach $1.30 trillion in 2016, with more than $215 billion in M&A-related supply already in the pipeline.

High yield bonds returned -2.79% during the fourth quarter, the third consecutive quarterly loss for the asset class, bringing 2015 returns to -5.0%. Prices were pressured lower by a mix of both fundamental and technical factors, principal among them the continuing price decline among energy (-30% year-to-date) and other industrial commodities. Those declines impacted issuers constituting approximately 20% (by dollar value) of high yield indices. In addition, broader concerns over slowing Chinese and emerging market growth, the unknown impact of rising short-term rates in the U. S. (courtesy of the Fed), volatile global equity prices, and poor seasonal high yield liquidity, coalesced into a “risk-off” sentiment that led to $10 billion of self-reinforcing fund redemptions during November and December. Market returns were correlated with credit quality, with BB-rated bonds leading at -0.3%, followed by B-rated bonds at -2.54% and CCC-rated bonds at -9.1%. Not surprisingly, two of the quarter”s biggest declines came in the commodity-related sectors of energy (-13.5%) and metals and mining (-11.8%) followed by transportation (-4.5%). Meanwhile, leaders resided in the relatively defensive and/or fundamentally positive sectors of cable TV (+2.8%), food and beverage (+1.3%), and telecom (+1.9%). (Data: J.P. Morgan.)

From a duration standpoint, the Fund”s overweight to the intermediate segment (the “belly” of the curve) and a corresponding underweight to the long end, detracted from performance. As a December liftoff for benchmark interest rates looked increasingly likely and the Fed ultimately delivered with a widely expected dovish outcome, the front end of the Treasury curve continued to sell off over the quarter, driving a strong bear-flattening move in Treasurys — a move in which rates in the shorter end of the curve go up by a greater degree than they do in the longer end.


We expect the U.S. economic expansion to continue at a modest pace, with the upside and downside risks to our growth forecast roughly equal. At this time, we believe the Fed”s goal of raising rates four times in 2016 is a lofty one.

Furthermore, we believe that currency volatility will remain a central theme in 2016. Manufacturing likely will continue to experience headwinds as global demand remains under pressure. We believe the path to the Fed’s target of 2% inflation level will be challenged — particularly in the second half of the coming year.

Moving into 2016, we think reduced Treasury supply, coupled with low inflation and competitively low global yields, should help limit upside surprises for domestic interest rates. Finally, the impact of central banks” and sovereign wealth funds” selling assets should not be underestimated or ignored.

The U.S. Services Purchasing Managers’ Index, or PMI, published by Markit Group, captures business conditions in the U.S. services sector.


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)-0.98%-1.98%-1.98%1.34%5.05%6.34%6.57%09/15/1998
Class A (at offer)-5.46%-6.41%-6.41%-0.19%4.08%5.86%6.28%
Institutional Class shares-0.92%-1.74%-1.74%1.59%5.31%6.61%6.84%09/15/1998
Barclays U.S. Corporate Investment Grade Index-0.58%-0.68%-0.68%1.67%4.53%5.29%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.

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

Barclays U.S. Corporate Investment Grade Index (view definition)

Expense ratio
Class A (Gross)0.95%
Class A (Net)0.94%
Institutional Class shares (Gross)0.70%
Institutional Class shares (Net)0.69%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursements from Nov. 27, 2015 through Nov. 28, 2016. 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, non-investment-grade bonds (junk bonds) involve higher risk than investment grade bonds.

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.

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

Not FDIC Insured | No Bank Guarantee | May Lose Value