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Delaware High-Yield Opportunities Fund Quarterly commentary March 31, 2016


High yield bonds, as measured by the BofA Merrill Lynch High Yield Cash Pay Index, returned 3.23% during the first quarter, snapping a string of three consecutive quarterly losses for the asset class. Through mid-February, the high yield market appeared on track for another significant loss, with index values falling 6% on the back of a 23% decline in the oil price, sagging global equities, and underwhelming U.S. growth data. However, following an agreement between major Organization of the Petroleum Exporting Countries (OPEC) producers and Russia to freeze production levels, aggressive European Central Bank easing, and dovish comments from Federal Reserve officials, oil soared 26% through the end of the quarter, carrying high yield and most other risk assets well into positive territory for the period.

Not surprisingly, energy bonds (13% of the BofA Merrill Lynch High Yield Cash Pay Index) experienced the widest price swing, first falling 20% along with oil and then recovering 25% to finish with a 2.7% total return. BB-rated issues outperformed (+3.7%) due to a broad flight-to- quality and a significant Treasury rally (10-year Treasurys returned +4.8%), followed by CCC-rated bonds (+3.6%), which benefited disproportionately from the snapback in energy bonds, and then B-rated bonds (+2.5%). Sector returns were led by basic industry (+6.5%), retail (+4.9%), and leisure (+3.9%), while healthcare (+0.7%), transportation (-0.3%) and banking (-1.0%) lagged. Mutual fund flows contributed to the price action, with $5 billion leaving the high yield market through mid-February, followed by nearly $14 billion of inflows over the balance of the quarter as investors chased returns. The market yield fell by 40 basis points to 8.3%, while the spread rose 21 basis points to 710 basis points. (A basis point equals one hundredth of a percentage point.)

We believe it is likely that the strong rally in high yield bonds since mid-February signals only that the market was significantly oversold at midquarter in the context of a modestly expanding economy and a highly accommodative Fed. And despite the bounce in oil prices, we still believe energy defaults may rise dramatically over the next 18 months, implying substantial market headline risk regardless of whether future credit losses prove to be already “priced” into the market. However, assuming employment and consumption trends hold up, the higher-quality, noncommodity sectors of the market should continue to experience below-average defaults, implying that spreads (not including energy) in the 600-plus basis point range continue to provide adequate compensation for risk. In this context, we would expect base-case returns for the balance of the year to be range-bound around the coupon.

Within the Fund

During the first quarter of 2016, 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 strongest sector contributors were consumer goods, technology, and telecommunications. The strongest individual contributors were AK Steel (steel manufacturing), HUB International (insurance broker), and Noble Energy (exploration and production). AK Steel and Noble Energy rose in sync with the oil and commodity rally that began in February, while HUB International recovered from oversold levels in late 2015.

Conversely, the Fund’s largest sector detractors on a relative basis were basic industry, energy, and banking. The biggest individual detractors were Immucor (pharmaceuticals), Credit Suisse (investment banking), and Calumet Specialty Products (refining). Immucor sold off on a weakening balance sheet, while Credit Suisse and Calumet declined on disappointing earnings.


Given our expectation of coupon-like returns, the Fund’s portfolio strategy is focused on capital preservation with an emphasis on the B and BB rating tiers. The Fund is underweight energy and industrial commodities, and overweight the more defensive healthcare, financial services, and consumer goods sectors. In each instance, we favor well-capitalized, large-cap names that exhibit strong, predictable cash flows, ample liquidity, noncomplex capital structures, and minimal refinancing risk. We believe that this strategy has the potential to outperform under the conditions described above by delivering a competitive income stream while minimizing both volatility and downside risk relative to the market as a whole.

Per Standard & Poor’s credit rating agency, bonds rated below AAA, including A, 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 BofA Merrill Lynch High Yield Cash Pay Index provides a general measure of the performance of fixed-rate, coupon-bearing bonds with an outstanding par of at least $50 million and a maturity range greater than or equal to one year. To be included in the index, bonds must be rated lower than BBB/Baa3. .


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 (03/31/2016)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)2.26%2.26%-6.68%-0.07%3.47%5.83%6.39%12/30/1996
Class A (at offer)-2.41%-2.41%-10.84%-1.56%2.51%5.35%6.14%
Institutional Class shares2.61%2.61%-6.44%0.18%3.75%6.13%6.69%12/30/1996
BofA Merrill Lynch U.S. High Yield Constrained Index3.25%3.25%-3.96%1.77%4.71%6.88%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, non-investment-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 derivatives 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