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Delaware High-Yield Opportunities Fund Quarterly commentary March 31, 2015

Overview

High yield bonds, as represented by the Barclays U.S. Corporate High-Yield Index, experienced a 0.7% decline during March, bringing their first quarter returns to +2.52%. Volatile oil, equity, and Treasury bond prices; uneven U.S. economic data; slowing Chinese growth; tension surrounding Yemen and the nuclear talks in Iran; and uncertain Greek debt negotiations all contributed to volatile performance during the quarter.

Returns were broadly correlated with credit quality, with BB-rated issues returning +2.7%, followed by B-rated issues at +2.2% and CCC-rated securities at +1.7%. Retail (+4.3%), food and beverage (+3.9%), and telecom (+3.0%) led all other sectors, while metals and mining (-0.8%), industrials (+1.5%), and financials (+1.6%) lagged. Yields tightened 48 basis points, to 6.06%, while spreads over Treasurys narrowed 22 basis points, to 479 basis points. (One basis point equals a hundredth of a percentage point.) (Data: Barclays.)

Despite the volatility and macro concerns noted above, technical conditions in the domestic high yield market were quite positive. Mutual fund inflows totaled $9.6 billion during the quarter, largely erasing the outflows of the previous quarter. New issuance for the quarter totaled $94 billion (a $6 billion increase from the first quarter of 2014), putting 2015 on pace to eclipse full-year 2014 issuance, which itself was the second highest on record. As a percentage of new issuance, refinancing totaled just 44%, the lowest level on an annualized basis since 2008. However, the balance thus far has been concentrated on general corporate purposes rather than leveraged buyout (LBO) activity. Nevertheless, three to four consecutive years of sub-50% refinancing has been highly predictive of a downturn in the credit cycle and an upturn in defaults, so we believe this metric should be closely watched. In the meantime, defaults remain exceptionally low, totaling just 1.8% on a trailing 12-month basis.

Within the Fund

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

The Fund’s top sector contributors were media, retail, and utilities, while the top individual contributors were Calumet Specialty Products (refining; 0.7% of Fund's net assets), Northern Oil and Gas (exploration and production; 0.4%), and Wind Telecommunications (European wireless provider; 0.5%). Calumet Specialty Products and Northern Oil advanced as a result of stronger-than-expected earnings reported during the period. Wind Telecommunications advanced on the announcement of a partial tender for its bonds.

Conversely, the Fund’s largest sector detractors on a relative basis were energy, leisure, and telecommunications. The biggest individual detractors were Intelsat (satellite operator; 1.3%), CHC Helicopter (oilfield services; 0.2%) and Ocean Rig (offshore drilling services; 0.1%). Intelsat declined due to lower-than-expected 2015 forward guidance, while CHC Helicopter and Ocean Rig declined due to persistently low energy prices and slowing drilling activity.

Outlook

The United States is the relative star in an environment of historically low global bond yields and weak economic growth, implying the likelihood for sustained demand for U.S. credit and the potential for reasonably rapid recoveries from market declines. Credit metrics remain sound outside of commodity-based companies, and barring a significant and sustained rise in leveraged buyout (LBO)activity or an unexpected U.S. slowdown, we believe baseline high yield returns should continue to be centered on the coupon.

The Barclays U.S. Corporate High-Yield Index is composed of U.S. dollar–denominated, noninvestment grade corporate bonds for which the middle rating among Moody’s Investors Service, Inc., Fitch, Inc., and Standard & Poor’s is Ba1/BB+/BB+ or below.

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.

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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 (06/30/2015)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)-0.07%2.14%-3.47%6.31%8.12%7.13%7.06%12/30/1996
Class A (at offer)-4.53%-2.45%-7.81%4.70%7.14%6.64%6.79%
Institutional Class shares-0.26%2.26%-3.47%6.41%8.31%7.41%7.34%12/30/1996

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)1.11%
Class A (Net)1.05%
Institutional Class shares (Gross)0.86%
Institutional Class shares (Net)0.80%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursement from Nov. 28, 2014 through Nov. 30, 2015. 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.

All third-party marks cited are the property of their respective owners.

Not FDIC Insured | No Bank Guarantee | May Lose Value