The third quarter of 2013 was filled with important news events. By late August, we were in the midst of the Syrian chemical weapons saga and had already experienced the city of Detroit’s filing for bankruptcy in July. Despite the significance of these events, most market analysts were pointing to September for a series of even more critical, potentially market-moving events. It would have been hard to overstate the significance of the stream of headline-worthy news items that followed. After kicking off the month with a surprisingly weak employment report, the news quickly shifted to Larry Summers’ withdrawing his name from consideration for the Federal Reserve chairmanship.
Of course, things were just warming up. On Sept. 18, the Fed decided not to begin tapering its asset purchase program, and as the month ended the federal government shut down many of its nonessential activities while the powers in Washington seemed to be far apart on any compromise. The Fed’s decision was based on four factors: (1) economic data have not been strong enough to suggest that the recovery is self-reinforcing, (2) inflation remained below the target range, (3) budget battles in Washington created the risk of additional headwinds for the economy, and (4) the bond market’s reaction to the Fed’s May-June tapering guidance had resulted in an unwelcome tightening of financial conditions. All in all, market volatility continues and this is unlikely to change as we approach the debt limit around mid-October.
Within the Fund
For the third quarter of 2013, Delaware Limited-Term Diversified Income Fund (Class A at net asset value) generated a negative rate of return and underperformed its benchmark, the Barclays 1-3 Year U.S. Government/Credit Index.
- Modest emerging market bond positions within the Fund continued to perform poorly.
- Although the Fund’s “anchor” position in floating rate AAA-rated asset-backed securities continued to work within a portfolio context, the floating rate nature of the position caused it to lag fixed-rate bonds.
- Hedging against both non-U.S. dollar exposure and the Fund’s intermediate duration emphasis (in corporate and mortgage-backed holdings) were negative factors during the period.
Looking forward, the Fund’s position in non-U.S. dollar bonds has been significantly reduced and its currency hedging has also been reduced. We have been replacing these positions with a combination of very short duration high yield bonds and floating rate bank loans. Overall, the interest rate sensitivity of the Fund has been reduced by these trades and we have not chosen to replace this duration during this period of extreme fiscal uncertainty and high market volatility.
So, the Fed chose to delay the start of tapering its current asset purchase program and interest rates fell. This is logical — if a large buyer of government bonds decides to continue buying those bonds, it helps to maintain the supply-demand balance. But there is a problem: Since March 2009, every time the Fed has actually initiated or expanded a version of QE that involved “printing money” (so excluding “Operation Twist” and the principal reinvestment actions), interest rates have trended higher, not lower. Significant declines in rates since 2009 have generally occurred in between QE programs or during Operation Twist.
To be clear, there have been times when, in anticipation of upcoming QE actions, government bonds have rallied and rates have fallen, but these trends have consistently reversed once actual asset purchases have begun. The only direct beneficiary during the asset purchase programs (with the related printing of money and creation of excess liquidity) has been risk asset prices. We believe that understanding this information will be important as investors try to manage their risk exposures during the various possible versions of tapering during the months and quarters to come.
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 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 (09/30/2013)|
|YTD||1 year||3 year||5 year||10 year||Lifetime||Inception|
|Class A (NAV)||-0.06%||-2.42%||-2.99%||0.86%||3.90%||3.53%||5.31%||11/24/1985|
|Class A (at offer)||-2.78%||-5.10%||-5.63%||-0.09%||3.33%||3.24%||5.20%|
|Institutional class shares||-0.02%||-2.42%||-2.96%||1.01%||4.04%||3.68%||5.45%||06/01/1992|
|Barclays 1-3 Year U.S. Government/Credit Index||0.40%||0.47%||0.62%||1.08%||2.53%||2.92%||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.
Barclays 1-3 Year U.S. Government/Credit Index (view)
|Class A (Gross)||0.91%|
|Class A (Net)||0.81%|
|Institutional class shares (Gross)||0.66%|
|Institutional class shares (Net)||0.66%|
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.
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.
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