Delaware Diversified Floating Rate Fund

Objective

Delaware Diversified Floating Rate Fund seeks total return.

Strategy

The Fund generally invests at least 80% of net assets in a diversified portfolio of floating rate securities.

Fund information
Inception date02/26/2010
Dividends paid*Monthly
Capital gains paid*December

*If any.

Fund identifiers
NASDAQDDFAX
CUSIP245908660
Investment minimums
Initial investment$1,000
Subsequent Investments$100
Systematic withdrawal balance$5,000
Account features
CheckwritingNo
Payroll DeductionYes
IRAsYes

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.

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 month-end (03/31/2014)
YTD1 year3 year5 year10 yearLifetimeInception date
NAV (view definition)0.74%1.58%2.25%n/an/a2.63%02/26/2010
Max offer pricen/a-1.26%1.32%n/an/a1.94%
BofA Merrill Lynch USD 3-Month LIBOR Constant Maturity Index0.06%0.27%0.35%n/an/an/a
Average annual total return as of quarter-end (03/31/2014)
QTDYTD1 year3 year5 year10 yearLifetimeInception date
NAV (view definition)0.74%0.74%1.58%2.25%n/an/a2.63%02/26/2010
Max offer price-1.99%-1.99%-1.26%1.32%n/an/a1.94%
BofA Merrill Lynch USD 3-Month LIBOR Constant Maturity Index0.06%0.06%0.27%0.35%n/an/an/a

Returns for less than one year are not annualized.

Class A shares have a maximum up-front sales charge of 2.75% and are subject to an annual distribution fee.

Expense ratio
Gross1.01%
Net1.01%
Quarterly total returns @ NAV
Year1st quarter2nd quarter3rd quarter4th quarterAnnual return
20140.74%n/an/an/an/a
20130.90%-0.61%0.44%1.00%1.74%
20122.23%0.53%1.82%0.72%5.39%
20111.22%0.24%-2.42%1.17%0.17%
2010n/a-0.98%1.68%1.15%n/a
Portfolio characteristics - as of 03/31/2014
Share assets$229.5 million
Number of holdings509
Effective maturity (weighted average) (view definition)5.12 years
Effective duration (weighted average) (view definition).28 years
Annualized standard deviation, 3 years (view definition)1.88
SEC 30-day yield with waiver (view definition)1.71%
SEC 30-day yield without waiver (view definition)1.71%
Portfolio turnover (last fiscal year)112%
Portfolio composition as of 03/31/2014Total may not equal 100% due to rounding.
Investment grade corporate bonds41.5%
Bank loans28.2%
Foreign bonds21.2%
Structured products4.5%
Cash and cash equivalents2.9%
High yield corporate1.5%
Noncorporate securities0.2%
Top 10 holdings as of 03/31/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Apple Inc. 0.488 5/3/20181.2%
Kroger Co. 0.804 10/17/20161.0%
Hewlett-Packard Co. 1.182 1/14/20191.0%
Nuveen Investments Inc. 6.500 2/28/20190.9%
Merck & Co. Inc. 0.596 5/18/20180.9%
DaVita HealthCare Partners Inc. 4.000 8/1/20190.9%
Oracle Corp. 0.819 1/15/20190.9%
Metropolitan Life Global Funding I 0.769 7/15/20160.9%
US Bancorp/MN 0.726 11/15/20180.9%
JPMorgan Chase Bank NA 0.563 6/13/20160.8%
Total % Portfolio in Top 10 holdings9.4%

Holdings are as of the date indicated and subject to change.

Top sectors as of 03/31/2014
List excludes cash and cash equivalents.
Sector% of portfolio
Investment grade credits57.4%
High yield credits29.8%
Asset-backed securities5.0%
Emerging markets3.9%
Municipal bonds0.8%
MBS and CMOs0.3%
Distribution history - annual distributions (Class A)
Distributions ($ per share)
YearCapital gainsDividends
20140.0000.058
20130.0000.179
20120.0000.220
20110.0000.172
20100.0000.162
20090.0000.000
20080.0000.000
20070.0000.000
20060.0000.000
20050.0000.000
20040.0000.000
Paul Grillo

Paul Grillo, CFA

Co-Chief Investment Officer — Total Return Fixed Income Strategy

Start date on the Fund: February 2010

(View bio)


Roger Early

Roger Early, CPA, CFA, CFP

Co-Chief Investment Officer — Total Return Fixed Income Strategy

Start date on the Fund: February 2010

(View bio)


David Hillmeyer

David Hillmeyer, CFA

Senior Portfolio Manager

Start date on the Fund: February 2010

(View bio)


Adam Brown

Adam H. Brown, CFA

Portfolio Manager

Start date on the Fund: November 2011

(View bio)


You may qualify for sales-charge discounts if you and your family invest, or agree to invest in the future, at least $100,000 in Delaware Investments® Funds. More information about these and other discounts is available from your financial advisor, in the Fund's statutory prospectus under the section entitled "About your account," and in the Fund's statement of additional information under the section entitled "Purchasing shares."

The following table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.

Shareholder fees
Maximum sales charge (load) imposed on purchases as a percentage of offering price2.75%
Maximum contingent deferred sales charge (load) as a percentage of original purchase price or redemption price, whichever is lowernone
Annual fund operating expenses
Management fees0.50%
Distribution and service (12b-1) fees0.25%
Other expenses0.26%
Total annual fund operating expenses1.01%
Fee waivers and expense reimbursementsnone
Total annual fund operating expenses after fee waivers and expense reimbursements1.01%

1The Class A shares' distribution and service (12b-1) fees have been restated to reflect a permanent reduction to 0.25%.

2The Fund's investment manager, Delaware Management Company (Manager), has contractually agreed to waive all or a portion of its investment advisory fees and/or pay/reimburse expenses (excluding any 12b-1 fees, acquired fund fees and expenses, taxes, interest, inverse floater program expenses, short sale and dividend interest expenses, brokerage fees, certain insurance costs, and nonroutine expenses or costs, including, but not limited to, those relating to reorganizations, litigation, conducting shareholder meetings, and liquidations) in order to prevent annual fund operating expenses from exceeding, in an aggregate amount, 0.80% of the Fund's average daily net assets from Nov. 27, 2013 through Nov. 28, 2014. These waivers and reimbursements may only be terminated by agreement of the Manager and the Fund.

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Delaware Diversified Floating Rate Fund Quarterly commentary March 31, 2014 Class A (DDFAX)

Overview

The first quarter of 2014 presented several hurdles to the U.S. economy and to business, consumer, and investor confidence. Ukraine tensions, China economic challenges, the Federal Reserve’s apparent consensus for a mid-2015 (or earlier) shift to a regime of policy tightening, and lingering fears of euro-zone deflation all created challenges for financial markets.

However, the likelihood that higher short-term rates could be in store in the not-too-distant future must be founded on economic data. Based on this, we believe it’s likely that an increase in U.S. benchmark interest rates will not come before the second quarter of 2015.

After two months of weak economic statistics — at least partly caused by severe winter weather across most parts of the country — U.S. economic indicators were generally solid in March.

During the quarter, the 10-year Treasury yield fell from 3.03% to 2.72%, and the 2-year Treasury yield rose from 0.38% to 0.42% (source: Bloomberg).

The Barclays U.S. Aggregate Index recorded a strong return for the quarter as corporate bonds and longer-duration sectors led the way. Meanwhile, BBB-rated corporates, high yield corporate bonds, and emerging market bonds produced strong excess returns.

Within the Fund

For the first quarter of 2014, Delaware Diversified Floating Rate Fund (Class A shares at net asset value) generated a positive total return that outperformed its benchmark, the BofA Merrill Lynch U.S. Dollar 3-Month LIBOR Constant Maturity Index.

The Fund’s overweight (more than 50% of assets) to investment grade corporate bonds, particularly from the industrial and financial sectors, contributed to relative performance. The Fund’s allocation to bank loans contributed as well, although the margin of outperformance was relatively small despite the additional income generated by the asset class. Lower-quality bank loans posted the best returns, given that higher-quality loans were largely trading at or near par.

After a difficult 2013 for emerging markets, buyers returned to the asset class during the early months of 2014. With demand on the rise, the Fund’s allocation to emerging market debt contributed to relative and absolute performance.

Conversely, higher-quality holdings such as including AAA-rated asset-backed securities and investments in senior tranches of collateralized loan obligations detracted from relative performance, despite generating positive absolute returns.

The Fund used interest rate swaps to hedge risk associated with fixed-rate assets. In general, the hedges offset the price association of fixed-coupon bonds as Treasury rates moved lower.

As the quarter ended, the Fund continued to emphasize investment grade corporate credit and banks loans. High-quality corporate debt generally isn’t callable and thus allows for potential price appreciation if yields move lower. The Fund’s interest rate swap positions are intended to provide a degree of protection if rates move higher.

We remain comfortable with bank loan fundamentals and do not anticipate a meaningful or widespread increase in default rates this year. Notably, significant inflows to the bank loan sector have pushed prices in the secondary market higher than the call price. As such, we found better risk-adjusted returns from the primary bank loan market.

Outlook

While focusing on Fed Chairwoman Janet Yellen’s “six months” estimate and the more aggressive path for short-term interest rates forecasted by the majority of Fed officials, many market participants may have missed the comment suggesting that “the stance of policy that will be appropriate...will involve somewhat lower than would be normal short-term interest rates.”

Even before the Fed’s March meeting, the consensus view in the bond market clearly anticipated higher short, intermediate, and long-term rates. Under traditional economic conditions during an early-to-mid-stage expansion, rising short-term rates would translate to higher rates across the yield curve and to only a modestly flatter curve. Usually, it is during a late-stage expansion that the pinch from ongoing Fed tightening significantly weakens the economic outlook and causes a yield-curve flattening or inversion as intermediate- and longer-term rates stop rising with short-term rates.

However, the Fed’s need to maintain “somewhat lower than normal rates” may point to an alternative scenario for the current cycle. In essence, it is possible that extreme levels of global debt (especially less-than-productive government debt), combined with high levels of excess capacity, could create underlying deflationary forces even as the economic expansion matures.

Bond ratings are determined by a nationally recognized statistical rating organization (NRSRO).

Per Standard & Poor’s credit rating agency, bonds rated below AAA, including A, are more susceptible to the adverse effects of changes in circumstances and economic conditions than those in higher-rated categories, but the obligor’s capacity to meet its financial commitment on the obligation is still strong. Bonds rated BBB exhibit adequate protection parameters, although adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments. Bonds rated BB, B, and CCC are regarded as having significant speculative characteristics with BB indicating the least degree of speculation.

The Barclays U.S. Aggregate Index is a broad composite that tracks the investment grade domestic bond market.

[12493]

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.

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.

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.

The Funds 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.

Because the Fund may invest in bank loans and other direct indebtedness, it is subject to the risk that the Fund will not receive payment of principal, interest, and other amounts due in connection with these investments, which primarily depend on the financial condition of the borrower and the lending institution.

Not FDIC Insured | No Bank Guarantee | May Lose Value

Fund Finder

Daily pricing (as of 04/23/2014)

Class APriceNet changeYTD
NAV$8.63no chg0.87%
Max offer price$8.87n/an/a

Total net assets (as of 03/31/2014)

$508.4 million all share classes

Overall Morningstar RatingTM

Load waived

With load

Class A shares (as of 03/31/2014)

Load waivedWith loadNo. of funds
Overall33150
3 Yrs33150
Morningstar categoryNontraditional Bond

(View Morningstar disclosure)

Lipper ranking (as of 03/31/2014)

YTD ranking3 / 121
1 year3 / 108
3 years2 / 76
5 yearsn/a
10 yearsn/a
Lipper classificationUltra Sht Obligation Fds

(View Lipper disclosure)

Literature

Prospectuses and reports

Benchmark, peer group

BofA Merrill Lynch U.S. Dollar 3-Month LIBOR Constant Maturity Index (view)

Lipper Ultra Short Obligation Funds Average (view)

Additional information