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Delaware Inflation Protected Bond Fund Quarterly commentary March 31, 2014 Class A (DIPAX)

Overview

The first quarter of 2014 presented several hurdles to the U.S. economy and to business, consumer, and investor confidence. Ukraine tensions, China economic challenges, the Federal Reserve’s apparent consensus for a mid-2015 (or earlier) shift to a regime of policy tightening, and lingering fears of euro-zone deflation all created challenges for financial markets.

In that environment, nominal yields declined on longer-term maturities, with 10- to 30-year Treasury bonds experiencing the biggest drop in rates (30 to 40 basis points) during the period. (A basis point equals one one-hundredth of a percentage point.) Responding to a shift in Fed messaging, however, short-term rates were volatile — and higher. Accordingly, the 2-year to 10-year portion of the Treasury curve flattened by 35 basis points, to 230 basis points during the quarter.

Yields on 10-year Treasury inflation-protected securities (TIPS) mostly followed those on equivalent-maturity nominal Treasury securities as break-even inflation rates fell from 2.26% to 2.14%, and real yields fell from 0.76% to 0.58% (source: Bloomberg).

Within the Fund

For the first quarter of 2014, Delaware Inflation Protected Bond Fund (Class A shares at net asset value) generated a positive total return but underperformed its benchmark, the Barclays U.S. TIPS Index.

The TIPS market performed well during the quarter, following the 5- to 30-year part of the Treasury bond market to slightly lower yields and stronger prices. The Fund participated in this market strength; however, its defensive duration (shorter than the index) during the quarter caused performance to lag the index.

In an effort to reduce exposure to currency volatility, the Fund eliminated its exposure to non-U.S. inflation-linked bonds during the quarter. The Fund’s positioning continued to reflect our desire to avoid excessive break-even rate volatility in an environment that is experiencing lower-than-normal inflation and carries with it the potential risks of deflation.

Outlook

Fed forecasts still suggest that short-term rates should stay near zero until at least late in the first half of 2015. This factor, along with a very modest inflation outlook, should help keep 10-year Treasury yields below 3.5% during 2014. Stronger-than-expected economic growth could trigger a test of this upper band, while a re-emergence of sentiment favoring a flight-to-quality and liquidity could create a rally that tests yield levels below 2.5%, or even 2.0%.

To date, market reaction to the tapering of Fed asset purchases has been rather modest. We believe that TIPS are still close to full value given the potential for a continuing softness in inflation.

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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)1.01%1.01%-10.87%0.13%2.92%n/a3.64%12/01/2004
Class A (at offer)-3.53%-3.53%-14.91%-1.39%1.97%n/a3.13%
Institutional Class shares1.23%1.23%-10.56%0.38%3.20%n/a3.89%12/01/2004
Barclays U.S. TIPS Index1.95%1.95%-6.49%3.50%4.90%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