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Delaware Inflation Protected Bond Fund Quarterly commentary June 30, 2014 Class A (DIPAX)

Overview

The domestic fixed income market was supported during the second quarter by continued central bank benevolence and a “Goldilocks” economy that was strong enough to sustain modest growth yet weak enough to contain inflation. Investors dismissed the poor first quarter U.S. gross domestic product report as being largely weather-related. Global asset prices also were affected by simmering geopolitical tensions in Ukraine and Iraq, as well as indications of significant healing in the U.S. labor market.

Yields were lower on longer maturities during the second quarter of 2014, with 10- to 30-year Treasury bonds showing the biggest drop in rates during the period (-0.20%). Responding to a slight improvement in economic momentum, short-term yields during the quarter were slightly higher. The 2-year/10-year Treasury curve flattened by 0.23 percentage points, to 2.07%. Ten-year Treasury inflation-protected securities (TIPS) yields followed nominals as break-even inflation rates rose from 2.14% to 2.28% and real yields fell from 0.58% to 0.25%.

Within the Fund

For the second quarter of 2014, Delaware Inflation Protected Bond Fund generated a strong positive total return but underperformed its benchmark, the Barclays U.S. TIPS Index.

The TIPS market performed well during the quarter, following the price appreciation in the 7–30 year part of the Treasury bond market as yields fell. The Fund participated in the market strength but its defensive duration (shorter than the index) caused performance to lag the index.

The Fund is maintaining its intermediate duration target to encourage lower interest rate sensitivity over a full rate cycle. The Fund’s positioning also continues to reflect our desire to avoid excessive break-even rate volatility in shorter-maturity TIPS. This is especially important in the current market environment where short-maturity TIPS are overvalued, in our opinion, because they are fully priced for the recent spike in energy prices.

Outlook

Federal Reserve forecasts suggest that short-term rates should stay near zero until at least the second quarter of 2015 and move higher at a slower-than-normal pace after that. The subdued pace of benchmark rate hikes, along with still-moderate inflation, should help keep 10-year Treasury yields below 3.5% during the remainder of 2014.

However, stronger-than-expected economic growth could cause a test of this upper band while any reasons for a return to a flight-to-quality or liquidity sentiment could create a rally that tests yield levels below 2.5%, or even 2.0%. So far, the market reaction to the actual tapering in asset purchases of $10 billion a month has been rather modest. Finally, we believe that TIPS are still at full value given the potential for continued softness in inflation.

[12900]

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 (09/30/2014)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)-2.85%1.07%-1.04%-2.38%1.92%n/a3.46%12/01/2004
Class A (at offer)-7.18%n/a-5.49%-3.85%1.00%n/a2.97%
Institutional Class shares-2.81%1.29%-0.81%-2.14%2.17%n/a3.70%12/01/2004
Barclays U.S. TIPS Index-2.04%3.67%1.59%1.34%4.48%n/an/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.

Prior to May 1, 2005, the Fund had not engaged in a broad distribution effort of its shares and had been subject to limited redemption requests. The returns reflect expense limitations that were in effect during certain periods and which may have been lower than the Fund's current expenses. The returns would have been lower without such expense limitations.

Barclays U.S. Treasury Inflation-Protected Securities (TIPS) Index (view)

Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.

Expense ratio
Class A (Gross)0.98%
Class A (Net)0.84%
Institutional Class shares (Gross)0.73%
Institutional Class shares (Net)0.59%

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.

Prior to May 1, 2005, the Fund had not engaged in a broad distribution effort of its shares and had been subject to limited redemption requests. The returns reflect expense limitations that were in effect during certain periods and which may have been lower than the Fund's current expenses. The returns would have been lower without such expense limitations.

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.

Interest payments on inflation-indexed debt securities will vary as the principal and/or interest is adjusted for inflation.

The Fund may experience portfolio turnover in excess of 100%, which could result in higher transaction costs and tax liability.

The Funds 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.

If and when the Fund invests in forward foreign currency contracts or uses other investments to hedge against currency risks, the Fund will be subject to special risks, including counterparty risk.

Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

Diversification may not protect against market risk.

Not FDIC Insured | No Bank Guarantee | May Lose Value