Delaware Limited-Term Diversified Income Fund

Objective

Delaware Limited-Term Diversified Income Fund seeks maximum total return, consistent with reasonable risk.

Strategy

The Fund invests primarily in investment-grade fixed income securities, and maintains an average effective duration from one to three years. The Fund is generally diversified across multiple types of fixed income securities.

Fund information
Inception date11/24/1985
Dividends paid*Monthly
Capital gains paid*Annually

*If any.

Fund identifiers
NASDAQDTRIX
CUSIP245912308
Investment minimums
Initial investment$1,000
Subsequent Investments$100
Systematic withdrawal balance$5,000
Account features
CheckwritingNo
Payroll DeductionYes
IRAsYes

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.

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 month-end (03/31/2014)
YTD1 year3 year5 year10 yearLifetimeInception date
NAV (view definition)0.65%-1.03%1.31%3.66%3.47%5.26%11/24/1985
Max offer pricen/a-3.76%0.38%3.09%3.18%5.16%
Barclays 1-3 Year U.S. Government/Credit Index0.23%0.68%1.18%1.95%2.81%n/a
Average annual total return as of quarter-end (03/31/2014)
QTDYTD1 year3 year5 year10 yearLifetimeInception date
NAV (view definition)0.65%0.65%-1.03%1.31%3.66%3.47%5.26%11/24/1985
Max offer price-2.10%-2.10%-3.76%0.38%3.09%3.18%5.16%
Barclays 1-3 Year U.S. Government/Credit Index0.23%0.23%0.68%1.18%1.95%2.81%n/a

Returns for less than one year are not annualized.

Class A shares have a maximum up-front sales charge of 2.75% 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.

Expense ratio
Gross0.91%
Net0.81%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursement from April 30, 2013 through April 30, 2014. Please see the fee table in the Fund's prospectus for more information.

Quarterly total returns @ NAV
Year1st quarter2nd quarter3rd quarter4th quarterAnnual return
20140.65%n/an/an/an/a
2013-0.15%-2.22%-0.06%0.62%-1.81%
20121.20%1.30%0.57%-0.59%2.49%
20110.11%1.98%1.32%-0.64%2.78%
20101.95%0.10%1.81%-0.19%3.70%
20091.81%4.76%4.38%1.40%12.89%
20082.36%-0.96%0.18%0.65%2.21%
20071.53%-0.03%2.16%2.57%6.36%
20060.04%0.47%2.42%0.80%3.76%
2005-0.01%1.47%-0.11%0.40%1.76%
20041.75%-1.33%1.48%0.42%2.31%
Portfolio characteristics - as of 03/31/2014
Share assets$703.3 million
Number of holdings570
Effective maturity (weighted average) (view definition)3.90 years
Effective duration (weighted average) (view definition)1.80 years
Annualized standard deviation, 3 years (view definition)1.84
SEC 30-day yield with waiver (view definition)0.82%
SEC 30-day yield without waiver (view definition)0.73%
Portfolio turnover (last fiscal year)236%
Portfolio composition as of 03/31/2014Total may not equal 100% due to rounding.
Credits45.4%
Asset-backed securities39.8%
Mortgage-backed securities9.2%
U.S. government securities4.8%
Commercial mortgage-backed securities0.8%
Top 10 holdings as of 03/31/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
GEDFT 2012-2 A1.8%
HBOS Capital Funding LP 6.071 6/29/20491.7%
FNCI AE05521.3%
GCCT 2012-3A A1.3%
AMXCA 2013-1 A1.2%
Leap Wireless International Inc. 4.500 7/15/20141.1%
GEDFT 2013-1 A1.1%
CHAIT 2013-A3 A31.1%
BCARD 2012-1A A11.1%
VWMT 2011-1A NOTE1.0%
Total % Portfolio in Top 10 holdings12.7%

Holdings are as of the date indicated and subject to change.

Top sectors as of 03/31/2014
List excludes cash and cash equivalents.
Sector% of portfolio
Asset-backed securities39.8%
Investment grade credits38.2%
MBS and CMOs9.2%
High yield credits5.2%
Emerging markets1.7%
Commercial mortgage-backed securities0.8%
Municipal bonds0.3%
Distribution history - annual distributions (Class A)
Distributions ($ per share)
YearCapital gainsDividends
20140.0000.036
20130.0000.140
20120.0150.175
20110.1250.221
20100.0410.246
20090.0000.336
20080.0000.348
20070.0000.377
20060.0000.363
20050.0000.357
20040.0000.334
Paul Grillo

Paul Grillo, CFA

Co-Chief Investment Officer — Total Return Fixed Income Strategy

Start date on the Fund: February 1999

(View bio)


Roger Early

Roger Early, CPA, CFA, CFP

Co-Chief Investment Officer — Total Return Fixed Income Strategy

Start date on the Fund: May 2007

(View bio)


Brian McDonnell

Brian C. McDonnell, CFA

Senior Portfolio Manager, Senior Structured Products Analyst, Trader

Start date on the Fund: April 2012

(View bio)


Thomas Chow

Thomas H. Chow, CFA

Chief Investment Officer — Corporate Credit

Start date on the Fund: October 2013

(View bio)


Adam Brown

Adam H. Brown, CFA

Portfolio Manager

Start date on the Fund: October 2013

(View bio)


You may qualify for sales-charge discounts if you and your family invest, or agree to invest in the future, at least $100,000 in Delaware Investments® Funds. More information about these and other discounts is available from your financial advisor, in the Fund's prospectus under the section entitled "About your account," and in the Fund's statement of additional information under the section entitled "Purchasing shares."

The following table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.

Shareholder fees
Maximum sales charge (load) imposed on purchases as a percentage of offering price2.75%
Maximum contingent deferred sales charge (load) as a percentage of original purchase price or redemption price, whichever is lowernone
Annual fund operating expenses
Management fees0.46%
Distribution and service (12b-1) fees0.25%
Other expenses0.20%
Total annual fund operating expenses0.91%
Fee waivers and expense reimbursements(0.10%)
Total annual fund operating expenses after fee waivers and expense reimbursements0.81%

1The Fund's distributor, Delaware Distributors, L.P. (Distributor), has contracted to limit the Fund's Class A shares' 12b-1 fees to no more than 0.15% of average daily net assets from April 30, 2013 through April 30, 2014. The waiver may be terminated only by agreement of the Distributor and the Fund.

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Delaware Limited-Term Diversified Income Fund Quarterly commentary March 31, 2014 Class A (DTRIX)

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.

However, the likelihood that higher short-term rates could be in store in the not-too-distant future must be founded on economic data. Based on this, we believe it’s likely that an increase in U.S. benchmark interest rates will not come before the second quarter of 2015.

After two months of weak economic statistics — at least partly caused by severe winter weather across most parts of the country — U.S. economic indicators were generally solid in March.

During the quarter, the 10-year Treasury yield fell from 3.03% to 2.72%, and the 2-year Treasury yield rose from 0.38% to 0.42% (source: Bloomberg).

The Barclays U.S. Aggregate Index recorded a strong return for the quarter as corporate bonds and longer-duration sectors led the way. Meanwhile, BBB-rated corporates, high yield corporate bonds, and emerging market bonds produced strong returns.

Within the Fund

For the first quarter of 2014, Delaware Limited-Term Diversified Income Fund (Class A shares at net asset value) generated a positive total return that outperformed its benchmark, the Barclays 1–3 Year U.S. Government/Credit Index.

  • The Fund’s overweight allocation to the high yield corporate sector, as well as strong security selection within the group, was the primary contributor to relative performance.
  • The Fund’s overweight allocation to high-quality corporate bonds also contributed. In particular, Fund holdings in the finance and banking sectors performed strongly.
  • The Fund’s overweight to emerging market bonds contributed as well. During the period, we favored U.S. dollar–denominated debt from the corporate (rather than sovereign) sector.
  • The Fund’s exposure to convertible bonds also contributed to outperformance. Given that the sector remains heavily influenced by the equity market, however, convertible debt was volatile amid a continued withdrawal of liquidity by the Fed.
  • We closely monitored credit quality in the corporate sector, particularly in new issuance. Volatility in the currency markets also was a factor in non-U.S. security selection.

Outlook

While focusing on Fed Chairwoman Janet Yellen’s “six months” estimate and the more aggressive path for short-term interest rates forecasted by the majority of Fed officials, many market participants may have missed the comment suggesting that “the stance of policy that will be appropriate...will involve somewhat lower than would be normal short-term interest rates.

Even before the Fed's March meeting, the consensus view in the bond market clearly anticipated higher short, intermediate, and long-term rates. Under traditional economic conditions during an early-to-mid-stage expansion, rising short-term rates would translate to higher rates across the yield curve and to only a modestly flatter curve. Typically, it has been only during a late-stage expansion that the pinch from ongoing Fed tightening significantly weakens the economic outlook and causes a yield-curve flattening or inversion as intermediate- and longer-term rates stop rising with short-term rates.

However, the Fed’s need to maintain “somewhat lower than normal rates” may point to an alternative scenario for the current cycle. In essence, it is possible that extreme levels of global debt (especially less-than-productive government debt), combined with high levels of excess capacity, could create underlying deflationary forces even as the economic expansion matures.

The Barclays U.S. Aggregate Index is a broad composite that tracks the investment grade domestic bond market.

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.

[12424]

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.

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.

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.

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.

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 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.

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

Fund Finder

Daily pricing (as of 04/17/2014)

Class APriceNet changeYTD
NAV$8.58no chg0.83%
Max offer price$8.82n/an/a

Total net assets (as of 03/31/2014)

$1.4 billion all share classes

Overall Morningstar RatingTM

Load waived

With load

Class A shares (as of 03/31/2014)

Load waivedWith loadNo. of funds
Overall33403
3 Yrs21403
5 Yrs33348
10 Yrs44246
Morningstar categoryShort-Term Bond

(View Morningstar disclosure)

Lipper ranking (as of 03/31/2014)

YTD ranking110 / 170
1 year133 / 158
3 years105 / 118
5 years68 / 102
10 years43 / 86
Lipper classificationSht-Intmt Inv Grade Debt

(View Lipper disclosure)

Literature

Prospectuses and reports

Benchmark, peer group

Barclays 1-3 Year U.S. Government/Credit Index (view)

Lipper Short-Intermediate Investment Grade Debt Funds Average (view)

Additional information