The third quarter of 2013 was filled with important news events. By late August, we were in the midst of the Syrian chemical weapons saga and had already experienced the city of Detroit’s filing for bankruptcy in July. Despite the significance of these events, most market analysts were pointing to September for a series of even more critical, potentially market-moving events. It would have been hard to overstate the significance of the stream of headline-worthy news items that followed. After kicking off the month with a surprisingly weak employment report, the news quickly shifted to Larry Summers’ withdrawing his name from consideration for the Federal Reserve chairmanship.
Of course, things were just warming up. On Sept. 18, the Fed decided not to begin tapering its asset purchase program, and as the month ended the federal government shut down many of its nonessential activities while the powers in Washington seemed to be far apart on any compromise. The Fed’s decision was based on four factors: (1) economic data have not been strong enough to suggest that the recovery is self-reinforcing, (2) inflation remains below the target range, (3) budget battles in Washington create the risk of additional headwinds for the economy, and (4) the bond market’s reaction to the Fed’s May-June tapering guidance had resulted in an unwelcome tightening of financial conditions. All in all, market volatility continued and this is unlikely to change as we approach the debt limit around mid-October.
The Barclays U.S. Aggregate Index recorded a solid positive return for the third quarter as mortgage-backed securities (MBS), commercial mortgage-backed securities (CMBS), and corporate bonds led the way. Financials, as well as A-rated and BBB-rated corporates, had particularly good results. High yield corporate bonds and non-U.S. bonds (developed and emerging markets) all produced strong returns.
Within the Fund
For the third quarter of 2013, Delaware Diversified Income Fund (Class A shares at net asset value) generated a positive rate of return and outperformed its benchmark, the Barclays U.S. Aggregate Index.
- The Fund’s focus on intermediate-to-longer Treasury maturities detracted from returns as longer Treasury issues rose in yield.
The negative effects mentioned above were more than offset by the positive effects of the allocations that follow.
- Government-backed MBS performed well during the quarter. The Fund’s emphasis on 15- and 30-year lower-coupon MBS resulted in security-specific performance in line with the benchmark. Asset-backed securities (ABS) outperformed the benchmark as we maintained the Fund’s emphasis on short-maturity and floating-rate issues. Commercial mortgage-backed securities (CMBS) provided strong relative performance and the Fund’s focus in the 5-year part of the yield curve was a benefit.
- The Fund’s continued overweight in investment grade corporate bonds boosted relative performance during the quarter as corporate bonds generally experienced tighter credit spreads. Security selection had a mostly neutral effect, as our focus on the intermediate part of the credit curve (a negative) was offset by specific issuer selection.
- The high yield bond market was among the strongest sources of performance during the quarter. The Fund’s exposure had a positive effect on relative performance. Security selection further boosted performance. Investments in bank loans showed more-moderate positive results.
- Positions in emerging market debt had a slightly positive effect on performance for the quarter. Both U.S. dollar–based and local currency–denominated sovereign issues outperformed. Corporate issues experienced modest spread widening and lagged sovereign bonds.
- Non-dollar developed markets positively affected total returns during the quarter as interest rate exposures helped performance. Certain currency hedging positions slightly detracted from performance.
The Fed chose to delay the start of tapering its current asset purchase program and interest rates fell. This is logical to us — if a large buyer of government bonds decides to continue buying those bonds, it helps to maintain the supply-demand balance. But there is a problem: since March 2009, every time the Fed has actually initiated or expanded a version of quantitative easing (QE) that involved “printing money” (so excluding “Operation Twist” and the principal reinvestment actions), interest rates have trended higher, not lower. Significant declines in rates since 2009 have generally occurred in between QE programs or during Operation Twist.
To be clear, there have been times when, in anticipation of upcoming QE actions, government bonds have rallied and rates have fallen, but these trends have consistently reversed once actual asset purchases have begun. The only direct beneficiary during the asset purchase programs (with the related printing of money and creation of excess liquidity) has been risk asset prices. We believe that understanding this information will be important as investors try to manage their risk exposures during the various possible versions of tapering during the months and quarters to come.
Mortgage-backed securities are fixed income securities that represent pools of mortgages, with investors receiving principal and interest payments as the underlying mortgage loans are paid back. Many are issued and guaranteed against default by the U.S. government or its agencies or instrumentalities, such as Freddie Mac, Fannie Mae, and Ginnie Mae. Others are issued by private financial institutions, with some fully collateralized by certificates issued or guaranteed by the U.S. government or its agencies or instrumentalities.
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 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 (09/30/2013)|
|YTD||1 year||3 year||5 year||10 year||Lifetime||Inception|
|Class A (NAV)||0.83%||-2.52%||-1.98%||3.38%||8.25%||6.44%||7.53%||12/29/1997|
|Class A (at offer)||-3.72%||-6.90%||-6.43%||1.80%||7.25%||5.95%||7.21%|
|Institutional class shares||0.78%||-2.34%||-1.84%||3.60%||8.49%||6.69%||7.57%||10/28/2002|
|Barclays U.S. Aggregate Index||0.57%||-1.89%||-1.68%||2.86%||5.41%||4.59%||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.
Aggregate Index (view)
Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.
|Class A (Gross)||0.90%|
|Class A (Net)||0.90%|
|Institutional class shares (Gross)||0.65%|
|Institutional class shares (Net)||0.65%|
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 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.
If and when the Fund invests in forward foreign currency contracts or uses other investments to hedge against currency risks, the Fund will be subject to special risks, including counterparty risk.
Diversification may not protect against market risk.
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.
Not FDIC Insured | No Bank Guarantee | May Lose Value