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Delaware Diversified Floating Rate Fund Quarterly commentary March 31, 2015

Overview

In our fourth quarter commentary, we called for “more, not less, volatility” in 2015.And during the first quarter of 2015, the markets delivered that volatility — right out of the gate. Interest rates dropped significantly during January, before retracing and consolidating the yield change during February and March. Intermediate and long maturities led the rate decline, while corporate credit returns benefited from a combination of fixed-rate bond duration and an attractively priced yield advantage.

During the quarter, the U.S. Federal Reserve removed its previous reference to “patience” with regard to the timing of a first rate increase. Based on both its words and its “dots,” the Fed seems headed toward a rate increase regime that starts in the second half of 2015 and progresses very gradually thereafter. The Federal Open Market Committee (FOMC) made it clear, however, that its dropping the pledge to be “patient” does not guarantee a near-term move in rates. Rather, it will continue to monitor economic conditions using a data-dependent process. Of course, even that scenario would almost certainly diverge from monetary policy overseas.

As global central banks implement quantitative easing (QE) policies and create massive liquidity, financial assets could continue to benefit. Portfolio managers must strike a strategic balance that acknowledges the wide dispersion of potential outcomes resulting from weak economic growth and almost nonexistent inflation, but also with strong underlying support for financial asset prices.

Economic indicators in the United States showed mixed results throughout the first quarter of 2015, suggesting that domestic economic growth moderated. Data for employment and manufacturing were solid, but consumer demand and housing showed weakness. Fourth quarter gross domestic product (GDP) growth came in unrevised at 2.2%, according to the U.S. Commerce Department. Though core inflation was slightly higher during the first quarter, headline prices were lower as falling energy prices provided an important dampening effect.

The Barclays U.S. Aggregate Index recorded a strong return in the first quarter as corporate bonds (especially those of lower quality) and longer-duration sectors led the way. Given the shift in the Treasury yield curve, short-to-intermediate-focused sectors produced lower nominal returns while BBB-rated corporates, high yield corporate bonds, and emerging market debt produced strong excess returns.

Within the Fund

For the first quarter of 2015, Delaware Diversified Floating Rate Fund (Institutional Class shares and Class A shares at net asset value) outperformed its benchmark, the BofA Merrill Lynch U.S. Dollar 3-Month LIBOR Constant Maturity Index.

Once again, the quarter was plagued by volatility, though risk premiums generally were unchanged for investment grade corporate credit, while high yield was tighter despite a late-quarter selloff. Energy names were more resilient after crude appeared to establish a range, and were close to unchanged for the period. However, iron ore prices continued under pressure.

The Fund had nearly 50% exposure to high grade credit, which outperformed the Fund’s benchmark. Industrials represented nearly half of this portion of the portfolio and added 0.10% to the Fund’s total return. At 15% of the Fund, financials contributed an additional 0.06%. The top-performing sector within high-grade credit was utilities, with a total return of 1.95%.

Bank loans, at 33% of total assets, contributed 0.72% of return to the Fund and was the strongest-performing asset class within the portfolio. In part, loan prices were supported by a relatively strong technical backdrop as issuance of collateralized loan obligations was robust, coupled with a relatively benign new-issue calendar.

A small allocation to high yield credit contributed 0.03% to Fund performance.

Returns based on credit quality highlight the impact lower-rated securities had on the Fund, with B and CCC-rated credit returning 2.03% and 2.41%, respectively.

The Fund’s exposure to asset-backed securities essentially earned its income during the period.

Outlook

Among the most important — and unresolved — economic questions facing investors is whether deflation will be a bigger risk than inflation over the next several years. That’s because despite the massive money-printing efforts by key central banks in recent years, little progress has been made toward hitting inflation targets. We believe something fundamental is at work here, and critically, it could not come at a worse time.

The global debt overhang is challenging enough, but servicing debts during a period of deflation places substantially more pressure on the debtor. Sourcing the needed free cash becomes, by definition, much more difficult. If the debts are owed in other currencies, even governments may not be able to print their way out of the problem. Default risks would rise and could be the most fundamental source of performance challenges in risk assets. Plenty of optimistic and pessimistic market scenarios exist for the near term, but we will strive to maintain our balanced, research-driven, risk-managed approach, which we believe can help us maneuver around the challenges to come.

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.

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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.

Performance

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 delawareinvestments.com/performance.

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 (03/31/2015)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)0.73%0.73%0.28%1.95%2.02%n/a2.17%02/26/2010
Class A (at offer)-2.05%-2.05%-2.43%1.01%1.46%n/a1.61%
Institutional Class shares0.68%0.68%0.41%2.20%2.25%n/a2.40%02/26/2010
BofA Merrill Lynch USD 3-Month LIBOR Constant Maturity Index0.06%0.06%0.23%0.31%0.33%n/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.

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

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

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

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.

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.

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

Not FDIC Insured | No Bank Guarantee | May Lose Value