High yield bonds and loans returned -1.9% and -0.3% during the third quarter, bringing year-to-date returns to 3.7% and 2.1%, respectively. Geopolitical issues, rate fears, equity and Treasury market volatility, mutual fund outflows, and heavy new supply all contributed to the quarter’s negative performance. Returns were positively correlated with credit quality, with BB-rated issues leading at -1.3% compared to -1.7% for B-rated issues and -3.5% for CCC-rated securities.
All industry sectors were negative for the quarter, with particular weakness in gaming and metals and mining, and relative strength in utilities and financials. High yield bond yields rose by 117 basis points to 6.4%, while spreads widened 87 basis points, to 492 basis points. Loan yields rose 71 basis points to 5.67%, while loan spreads widened by 42 basis points to 441 basis points. (A basis point equals one one-hundredth of a percentage point.) The average bond price fell $3.78 to $101.96, while the average loan price fell $0.28 to $98.22. (Data: Merrill Lynch and J.P. Morgan.)
The third quarter proved to be a roller coaster for the high yield bond market, with heavy redemptions in July leading to a 1.2% loss, followed by +1.5% snapback in August and a further 2.5% loss in September. While movements in July and August were largely attributable to technical conditions associated with the ebb and flow of retail demand, September’s weakness had more complex roots. The resumption of U.S. military activity in the Mideast, the simmering Russia-Ukraine conflict, rate fears as Federal Reserve tapering nears an end, uncertainty over coming European Central Bank rate moves, and political and economic uncertainties both in Brazil and China all helped to spike volatility in the U.S. equity and Treasury markets, and led to $3.3 billion of fund outflows during the month. At the same time, new issuance surged from just $5 billion in seasonally slow August to $43 billion in September, adding a negative supply-demand dynamic to an already challenging environment. The net result was that the market finished the quarter with the highest spread and yield, and lowest dollar price, in nearly 12 months. (Data: Merrill Lynch and J.P. Morgan.)
Within the Fund
For the third quarter of 2014, Delaware High-Yield Opportunities Fund (Class A and Institutional Class shares at net asset value) posted a negative return and underperformed its benchmark, the BofA Merrill Lynch U.S. High Yield Constrained Index.
The Fund’s top sector contributors were basic industry, financial services, and gaming. The top individual contributors were Salix Pharmaceuticals (gastrointestinal drugs), BWAY Holding (metal/plastic containers), and Hanesbrands (apparel). Salix gained on successful drug trials and merger-and-acquisition activity, BWAY launched a new debt issue that traded to a premium over issue price, and Hanesbrands gained on expanding margins and an accretive acquisition.
The Fund’s largest detractors on a relative basis during the quarter came from the energy, media, and retail sectors. Bottom individual credits were Hercules Offshore (energy contract driller), Caesars Growth Properties (casino operator), and Midstates Petroleum (energy exploration and production). Hercules declined due to the unexpected loss of several drilling contracts, Caesars declined due to debt-restructuring negotiations at an affiliate, and Midstates declined due to the nearly $15-a-barrel decline in oil prices since mid-June.
Given the impressive lineup of political and economic uncertainties facing the world, we believe “risk-off” trades and elevated high yield volatility will continue, particularly as we approach year end when underwriters try to lock in gains and trading liquidity tends to experience normal seasonal erosion. Thus, technical conditions should remain challenging.
However, with the U.S. economy on a moderate, noninflationary growth track, and with a majority of new high yield issuance dedicated to refinancing, we believe stable credit trends and the current low default environment should persist well into 2015. Accordingly, while spreads are wide relative to expected default losses, we believe they are probably appropriate relative to challenging liquidity conditions, and thus, we believe returns may approximate the market yield.
Bond ratings are determined by a nationally recognized statistical rating organization (NRSRO).
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 of the three.
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 (09/30/2014)|
|YTD||1 year||3 year||5 year||10 year||Lifetime||Inception|
|Class A (NAV)||-2.25%||2.94%||7.03%||12.13%||10.50%||7.92%||7.44%||12/30/1996|
|Class A (at offer)||-6.64%||n/a||2.22%||10.47%||9.47%||7.43%||7.16%|
|Institutional Class shares||-2.19%||3.13%||7.30%||12.44%||10.81%||8.24%||7.74%||12/30/1996|
|BofA Merrill Lynch U.S. High Yield Constrained Index||-1.92%||3.61%||7.23%||10.94%||10.36%||8.21%||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.
Lynch U.S. High Yield Constrained Index (view)
|Class A (Gross)||1.11%|
|Class A (Net)||1.06%|
|Institutional Class shares (Gross)||0.86%|
|Institutional Class shares (Net)||0.81%|
Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursement from Nov. 27, 2013 through Nov. 28, 2014. 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.
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.
Not FDIC Insured | No Bank Guarantee | May Lose Value