Print Banner

Print commentary

View printable commentary E-mail this page

This commentary is currently not available. Please check back later.

Delaware Diversified Floating Rate Fund Quarterly commentary September 30, 2015


During the third quarter of 2015, fixed income 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 effect 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 Federal Reserve pointed to moderate growth conditions but seemed concerned with both below-target inflation and turbulent global markets. At this point, 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 U.S. 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 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 Committee’s (FOMC’s) 2.0% objective.

Within the Fund

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

Following is an overview of the key drivers of Fund performance during the quarter:

Investment grade corporate credit

  • Volatility in credit spreads continued as new-issue supply and idiosyncratic risks caused sentiment to remain cautious, causing all four major subsectors to generate negative returns.
  • The Fund’s longer-dated maturities resulted in an increase in price volatility relative to the benchmark.
  • There was a small shift away from industrials and into financials. One of the main reasons for our maintaining approximately 14% of the Fund in financials was the lower event risk associated with shareholder-friendly activity, plus the banking sector’s improved balance sheets.
  • Industrials represented the largest allocation to high grade credit and were a key reason for the underperformance. Exxon Mobil, which we sold during the quarter, and Motorola Solutions were among the detractors.

High yield and bank loans

  • The Fund’s high yield assets were the weakest-performing group within the portfolio. The main contributor to performance was a position in Chesapeake Energy, which impacted Fund performance by nearly 7 basis points (a basis point is one hundredth of a percentage point).
  • After being quite resilient for most of the year, the bank loan asset class experienced some price deterioration during the third quarter. Higher-quality loans outperformed lower-rated credits in the CCC bucket.
    • Loans within the Fund generated a -0.65% total return, detracting nearly 20 basis points from Fund performance. The average allocation for the period was 31%, which is a reduction of close to 5% from the prior quarter. The average quality of loan assets remains low BB.
    • Several of the bottom-performing investments in the Fund were bank loans. The technology company, Avaya, experienced selling pressure after a soft earnings release, while Ocean Rig, a driller, continued to move lower in price as well. We reduced exposure to the latter name during the quarter.

Structured products

  • We increased the Fund’s allocation to structured product during the period as we shifted toward a more liquid, higher-quality portfolio. Asset-backed securities generated a slight positive total return and represented more than 7% of the Fund’s net assets, on average.
  • The Fund’s collateralized loan obligations generated a slightly negative return of -0.10% after the price resiliency of the loan market waned.


  • Interest rates generally moved lower during the quarter. Consequently, the Fund’s exposure to interest rate swaps that were used for hedging purposes detracted from performance. Additionally, the decline in swap spreads negatively affected performance.
  • The Fund’s exposure to credit hedges were not material to performance, and these included positions in iTraxx European Crossover, investment grade CDX, and emerging markets CDX.


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, leading 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.

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 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 personal consumption expenditures price index (core PCE) consists of the actual and imputed expenditures of households and includes data pertaining to durable and nondurable goods and services. It is essentially a measure of goods and services targeted toward 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)-1.12%-0.20%-1.08%0.85%1.69%n/a1.80%02/26/2010
Class A (at offer)-3.85%n/a-3.78%-0.07%1.13%n/a1.30%
Institutional Class shares-1.06%-0.14%-0.84%1.06%1.92%n/a2.04%02/26/2010
BofA Merrill Lynch US Dollar 3-Month Deposit Offered Rate Co0.07%0.20%0.25%0.27%0.31%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 Deposit Offered Rate 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.

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.

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.

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