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Delaware Corporate 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 long 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 unchanged against a developed markets currency basket, but showed 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. This Fed scenario still seems potentially off track to us, 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 will 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.

Domestically, the majority of economic indicators suggest modest growth and a stabilizing economy. The U.S. Commerce Department revised second-quarter gross domestic product (GDP) growth upward in September to 3.9% (from the previous reading of 3.7%), revealing a somewhat more positive view of U.S. 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 most 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 Committees (FOMC’s) 2.0% objective.

Within the Fund

For the third 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, emerging market debt, and energy exposures, with high yield representing an average of about 12% of the Fund’s portfolio for the period.

Investment grade credit markets experienced another volatile quarter, as heavy supply was the primary factor weighing on spreads. Merger and acquisition activity has been the main driver of the heavy supply because financing conditions remain favorable and companies seek to gain scale efficiencies before the Fed embarks on policy normalization. Spreads widened from 1.45 percentage points to 1.69 percentage points over the quarter, led by significant weakness in metals/mining and energy as fears associated with deteriorating fundamentals in China and slowing global growth have collapsed commodity markets.

Against the backdrop of a global equity selloff, declining Chinese growth, falling commodity prices, uncertainty about the Fed’s liftoff date, and heavy mutual fund redemptions, high yield bonds returned -4.9% (as measured by the BofA Merrill Lynch U.S. High Yield Constrained Index) during the third quarter, while safe-haven assets such as Treasurys and municipal debt outperformed. The quarter’s weakest performers were energy (-16.0%), metals and mining (-15.0%), and chemicals (-8.5%). The communications sector suffered the spillover effects of Moody’s unexpected two-notch downgrade to Sprint’s capital structure, based on risk factors. Emerging markets continued to be affected by weak commodity prices, and many have seen their currencies depreciate sharply as the Fed prepares to lift rates. Downward revisions to emerging markets growth continued in September as China showed additional signs of deceleration.

From a duration standpoint, the Fund’s overweight to the intermediate segment — or the “belly” of the curve — and a corresponding underweight to the long end benefited performance as the curve flattened (with the majority of the rate action concentrated in the belly of the curve) amid heightened market volatility, global growth weakness, and the Fed’s dovish outlook on future growth prospects. We continued to use interest rate futures to manage curve and overall portfolio duration deviations relative to the index.


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 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. In our view, 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. Commodities could also 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, which could lead 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 BofA Merrill Lynch U.S. High Yield Constrained Index tracks the performance of U.S. dollar–denominated high yield corporate debt publicly issued in the U.S. domestic market, but caps individual issuer exposure at 2% of the benchmark.

The personal consumption expenditures price index (core PCE) consists of the actual and imputed expenditures of households and includes data pertaining to durable and non-durable goods and services. It is essentially a measure of goods and services targeted towards individuals and consumed by individuals.


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)-0.94%-1.01%-0.85%2.44%5.11%6.49%6.73%09/15/1998
Class A (at offer)-5.34%n/a-5.25%0.87%4.16%6.00%6.44%
Institutional Class shares-0.88%-0.83%-0.60%2.70%5.37%6.76%7.00%09/15/1998
Barclays U.S. Corporate Investment Grade Index0.83%-0.10%1.66%2.23%4.32%5.39%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, noninvestment 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