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Delaware High-Yield Opportunities Fund Quarterly commentary March 31, 2014 Class A (DHOAX)

Overview

Against a backdrop of seesawing equity and Treasury markets, high yield bonds, as measured by the BofA Merrill Lynch U.S. High Yield Constrained Index, returned 3.0% during the first quarter, while leveraged loans returned 1.0% (data: J.P. Morgan). High yield bond yields fell 40 basis points, to 5.4%, while spreads fell 27 basis points to 413 basis points. Loan yields increased 3 basis points to 5.2%, while spreads tightened 10 basis points, to 425 basis points. (A basis point equals one one-hundredth of a percentage point.)

The seemingly inexorable decline in yields and spreads continued during the first quarter, as the high yield market successfully shrugged off volatile stock and Treasury markets along with geopolitical instability, weak U.S. economic data, and a somewhat rocky public debut by incoming Federal Reserve Chairwoman Janet Yellen. While high yield spreads have room for further compression (at least by historical standards), they have reached a post-crisis low, while yields are now deep into record low territory. However, the high yield market remains the highest yielding sector of the U.S. bond market and, as such, has continued to attract strong investor interest.

Within the Fund

For the first quarter of 2014, Delaware High-Yield Opportunities Fund (Class A shares at net asset value) generated a positive total return but underperformed that of its benchmark, the BofA Merrill Lynch U.S. High Yield Constrained Index. The Fund’s top sector contributors were basic industry, healthcare, and insurance. Top individual contributors included Algeco Scotsman (modular trailer leasing), Par Pharmaceutical (generic drug manufacturing), and American International Group (insurance).

Meanwhile, the largest detractors from relative performance on a sector level were energy, telecommunications, and utilities. Bottom performers at the individual security level included Quiksilver (outdoor sports equipment), GenOn (utility), and Akorn (ophthalmic pharmaceuticals). GenOn lagged in line with the utility sector, Quiksilver underperformed on modestly weaker-than-expected first quarter earnings, and Akorn declined on softer full-year 2014 guidance from the company.

Outlook

With a benign domestic macroeconomic environment, stable corporate credit metrics, and sustained demand for both high yield loans and bonds, conditions have remained supportive for the leveraged credit sector. However, while credit trends remain benign, the continued compression of high yield credit spreads diminishes the market’s ability to absorb future interest rate increases.

While we believe policy rates are unlikely to move anytime soon given substantial labor market slack, market rates are under no such constraint and could certainly shift higher in the event of unexpectedly strong economic growth. This risk likely accounts for the record flows into floating-rate bank loan instruments, but has also increased the average price for a BB or B-rated loan. Given a stable rate backdrop, we believe the tight spreads prevailing in the high yield bond market and high dollar price of the loan market imply that returns going forward could consist largely of income.

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.

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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 (03/31/2014)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)2.77%2.77%8.02%8.68%17.27%8.50%7.65%12/30/1996
Class A (at offer)-1.75%-1.75%3.26%7.02%16.17%8.00%7.37%
Institutional Class shares2.83%2.83%8.31%8.99%17.60%8.82%7.96%12/30/1996
BofA Merrill Lynch U.S. High Yield Constrained Index2.99%2.99%7.51%8.69%18.13%8.54%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)

Expense ratio
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