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
20140.0000.044
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 December 31, 2013 Class A (DDFAX)

Overview

In the fourth quarter of 2013, heartening progress was made on both the economic and political fronts. For instance, payroll statistics improved, economic growth accelerated, and Congress was able to agree on a federal budget. As a result, equities rose and interest rates pushed higher, reaching their peak for all of 2013. In addition, on Dec. 18, the Federal Reserve decided to begin tapering its asset-purchasing program (to be implemented in January 2014), and it announced a likely series of deliberate steps to end the program late in 2014.

Growth in U.S. gross domestic product was revised upward in December, to a 4.1% annual rate for the third quarter. Although core prices moved modestly and consistently higher during the quarter, inflation was weaker (and more volatile), due primarily to energy prices. The Fed continued to maintain its target range of zero to 0.25% on short-term interest rates.

During the fourth quarter, the 10-year Treasury yield rose from 2.61% to 3.03%, and the 2-year Treasury rose from 0.32% to 0.38%. Interest rates fell early in the quarter but rose steadily after that.

The Barclays U.S. Aggregate Index lost 0.14% for the quarter, with Treasurys and mortgage-backed securities (MBS) the biggest losers. However, commercial mortgage-backed securities (CMBS) and corporate bonds helped offset the decline. Financials and BBB-rated corporates produced particularly good results. High yield corporate and emerging market bonds likewise performed strongly. (Data: Barclays.)

Within the Fund

In the fourth quarter of 2013, 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.

Approximately 16% of the Fund’s assets were invested in bonds issued by the financial services industry, which were its largest contributors to performance. The Fund’s holdings in bank loans, high yield bonds, and convertible bonds, which tended to be of lower quality, also provided positive results, although its positions in them were modest.

Higher-quality assets such as collateralized loan obligations and AAA-rated asset-backed securities (ABS) generated a positive return but underperformed lower-quality assets such as bank loans. Also impairing the Fund’s performance slightly were credit hedges on select bonds.

We continued to emphasize noncallable investment grade corporate bonds and bank loans because of their diversification and return potential.

In the quarter, as always, the Fund’s duration was kept extremely short, averaging more than three months, which helped minimize the negative effects of rising interest rates. This duration was achieved mainly by investing in floating-rate investments and interest rate swaps.

The Fund’s portfolio did not change significantly in the quarter. We did, however, increase the Fund’s position in noninvestment grade bonds and trimmed the Fund’s position in lower yielding, high-quality assets such as asset-backed securities.

About 5% of the Fund was invested in emerging market corporate and sovereign bonds, which outperformed after having hurt results in the third quarter. The Fund’s interest rate swaps successfully helped to hedge the interest rate risk of fixed-coupon holdings.

Outlook

Federal Reserve forecasts still suggest that short-term rates should stay low through 2015. This, along with a modest inflation outlook, should help keep 10-year Treasury yields below 3.50% in early 2014. Stronger-than-expected economic growth could result in a test of this threshold, while any return by bond investors to a so-called “flight to quality” could generate a rally, which could lower yields to 2.50% or even 2.00%. We believe that Treasury inflation-protected securities (TIPS) are still close to full value, given the potential for a continuing softness in inflation.

We continue to see value in agency MBS, which offer attractive risk-adjusted yields versus those of other bonds. Although there remains debate on how long the Fed will continue to buy MBS at the current rate, the technical picture remains positive: MBS new issuance is down considerably due to the rise in interest rates and, in our judgment, is unlikely to increase in the near term.

As we see it, macroeconomic risks trump fundamental risks in the bond market. Credit spreads should move in tandem with interest rate volatility and macroeconomic issues in the coming quarter. We continue to believe that credit spreads can tighten further from current levels and that the performance of investment grade securities remains highly dependent on the direction of interest rates. We expect the investment grade market to be subject to bouts of volatility in the near term, as investors look for cues from factors that include: (1) the timing of any future Fed tapering actions, (2) the policies of new Fed chairwoman Janet Yellen, (3) federal debt ceiling and budget negotiations, (4) risks related to China’s economic prospects, (5) the pace of merger and acquisition activity, (6) global geopolitics, and (7) the course of recovery in Europe.

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.

[11960]

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 04/17/2014)

Class APriceNet changeYTD
NAV$8.63no chg0.84%
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