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Delaware High-Yield Opportunities Fund Quarterly commentary September 30, 2015


Against the backdrop of a global equity selloff, declining Chinese growth, falling commodity prices, uncertainty surrounding a U.S. Federal Reserve liftoff date, and heavy mutual fund redemptions, high yield bonds returned -5.02% for the third quarter, their second consecutive quarterly loss and the fourth out of the last seven quarters. High yield bond returns were correlated with credit quality, with BB-rated bonds returning -3.5%, followed by B-rated bonds at -5.7% and CCC-rated bonds at -8.4%. The weakest sectors were energy (-12.8%), metals and mining (-11.5%), and telecom (-2.5%), while the modest gainers were banking (+1.5%), healthcare (+1.3%), and leisure (+1.2%). High yield bond yields rose 1.4 percentage points to 8.0%, while spreads widened 1.53 percentage points, to 6.53 percentage points, both the widest levels since June 2012.

In addition to being affected by macro instability, high yield returns were exacerbated by the seasonally lower number of market participants and the now-familiar theme of poor bond market liquidity. At the fundamental level, however, the high yield story continued to be that of a bifurcated market, with the energy and commodity-linked sectors (together, approximately 20% of the market) experiencing worsening credit metrics and rising defaults, and the balance of the market continuing to experience generally stable credit metrics and below-average defaults. Note that by excluding energy and metals & mining, the adjusted high yield market yield and spread are roughly a percentage point narrower. Nevertheless, with a fifth of the market under pressure and new growth concerns emanating from China, Europe, and a number of the larger emerging market nations, we think it is reasonable to anticipate sustained elevated price volatility. In this context, however, we continue to forecast base run-rate approximating the market yield-to-worst.

Within the Fund

For the third quarter of 2015, Delaware High-Yield Opportunities Fund (Institutional Class and Class A shares at net asset value) posted negative returns and underperformed its benchmark, the BofA Merrill Lynch U.S. High Yield Constrained Index.

The Fund’s strongest sector contributors were real estate, capital goods, and transportation, while the strongest individual contributors were Syncora Holdings (financial guarantee insurance), Mattamy Homes (homebuilder), and Sable International (wireline telecom). Syncora rose after gaining regulatory approval to increase capital flexibility, Mattamy gained on improving industry trends, and Sable gained after reporting stronger operating metrics and the successful launch of a new debt offering.

Conversely, the Fund’s largest sector detractors on a relative basis were services, retail, and energy, while the largest individual detractors were Intelsat (satellite operator), Halcon Resources (energy exploration and production), and Abengoa (alternative energy). Intelsat declined due to a difficult operating environment, Halcon declined due to persistently low energy prices, and Abengoa declined due to concerns over adequate liquidity.


Given the fundamental and technical instability buffeting the high yield market — and the credit bifurcation discussed above — our portfolio strategy remains focused on sectors and issuers exhibiting strong credit metrics, attractive relative value, and above-average trading liquidity. For example, we have positioned the Fund to be significantly underweight both energy and metals & mining (which includes the beleaguered coal sector) given the uncertainty regarding future energy prices, and we are overweight the defensive sectors of utilities, services, and leisure.

Perhaps counterintuitively, we also continue to overweight higher-quality CCC-rated issuers given our view that recent underperformance should reverse once macro conditions stabilize, yield-oriented investors re-enter the market, and credit fundamentals reassert themselves as the primary driver of valuation. Finally, we are mindful of the recent rise in idiosyncratic risk, in which issuers exhibiting even a modest or temporary credit weakness are overpenalized by the market. We view such situations as potential opportunities given our expectation that U.S. growth continues on its steady, if unspectacular, course; rates stay low and the demand for yield-oriented instruments remains high.

The BofA Merrill Lynch U.S. High Yield Constrained Index tracks the performance of U.S. dollar–denominated high yield corporate debt publicly issued in the U.S. domestic market, but caps individual issuer exposure at 2% of the benchmark.

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

Per Standard & Poor’s credit rating agency, bonds rated below AAA 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 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)-6.05%-4.04%-7.22%2.42%5.37%6.29%6.60%12/30/1996
Class A (at offer)-10.30%n/a-11.34%0.84%4.41%5.81%6.34%
Institutional Class shares-5.75%-3.62%-6.98%2.69%5.66%6.60%6.90%12/30/1996
BofA Merrill Lynch U.S. High Yield Constrained Index-4.88%-2.50%-3.54%3.47%5.94%7.13%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.

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. High Yield Constrained Index (view definition)

Expense ratio
Class A (Gross)1.12%
Class A (Net)1.05%
Institutional Class shares (Gross)0.87%
Institutional Class shares (Net)0.80%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursement from Nov. 27, 2015 through Nov. 28, 2016. Please see the fee table in the Fund's prospectus for more information.

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.

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.

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