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Delaware Corporate Bond Fund Quarterly commentary June 30, 2014 Class A (DGCAX)


Though geopolitical noise remained elevated during the quarter, the reaction of credit markets was muted as easy monetary policy and improving global growth trumped the outlook for risk.

Investment grade corporate bonds returned 2.66% for the quarter, led by the cable/satellite, metals/mining, and paper sectors. Senior bank debt was among the worst performers as heavy supply weighed on the sector. Airlines and construction machinery also lagged. Spreads on the Barclays U.S. Corporate Investment Grade Index tightened from 1.06 to 0.99 percentage points during the quarter, ending at the pre-crisis levels of mid-2007. BBB-rated credits fared the best across the quality spectrum. (Source: Barclays Credit Research.)

Supply remained robust, with $309 billion in new issuance during the quarter, bringing the year-to-date total to $620 billion (source: Bank of America). This figure is well ahead of last year’s pace amid a relentless demand for fixed income. Full-year forecasts still call for a reduction in supply; however, interest rates, mergers-and-acquisitions activity, share buybacks, and financial supply are all wildcards that could influence ultimate supply levels. New-issue concessions are averaging approximately 0.06 percentage points.

Technical conditions remain in good shape with solid flow activity and strong demand for investment grade debt. Fund flows for the quarter were positive at $13.6 billion (source: UBS). Investment grade markets have been a relative safe haven from global volatility, particularly recent emerging market turmoil. Fundamentals are satisfactory as the growth in debt continues to be offset by strong coverage metrics, with issuers rolling debt at historically low yields, though revenue growth is still lagging nominal GDP. Cheap-and-easy financing has fueled a surge in M&A activity, although most deals have been credit-friendly to date.

Within the Fund

For the second quarter of 2014, Delaware Corporate Bond Fund (Class A shares at net asset value) generated a positive total return and outperformed its benchmark, the Barclays U.S. Corporate Investment Grade Index.

The high yield bond market was among the strongest sources of performance during the quarter, although the Fund’s investments in bank loans produced more-moderate positive results. The Fund’s positions in emerging market debt also had a positive impact on relative performance for the quarter. U.S. dollar–based issues were the primary source of that outperformance, while corporate issues experienced spread tightening.

Meanwhile, non-dollar developed markets, while representing only a small allocation of Fund assets, nonetheless produced solid returns during the quarter as interest rate exposures benefited performance. Currency hedging had a modest positive effect as well.


The M&A theme for 2014 remains in full swing, although, to date, the phenomenon has been credit-friendly and limited to large and cash-rich companies that have plenty of debt capacity. For example, AT&T recently offered to buy DirecTV for $48.5 billion, gaining more than 38 million video subscribers at home and in Latin America.

Another increasingly popular motivation for merger activity has been tax-related. M&A for the purpose of tax inversion has been on the rise, especially among U.S. corporations as the United States has the highest tax rates in the developed world. By reincorporating in a lower tax jurisdiction, companies have been lowering their cash taxes, increasing free cash flow generation, and putting to use large stockpiles of cash held offshore. Some recent examples include Medtronic, the second-largest maker of medical devices, which agreed to buy Covidien for $42.9 billion in cash and stock. The combined company will be based in Ireland for tax purposes and would free almost $14 billion in cash Medtronic now holds overseas.

Elsewhere, AbbVie has approached Shire with a merger proposal offer for $45.7 billion (44% cash and 56% equity). Shire has been mentioned as a tax-inversion partner for several companies recently. Looking forward, investors will be watching for signs of more aggressive deal making, growth prospects in Europe and China, and geopolitical/contagion risk.

M&A: A general term used to refer to the consolidation of companies.

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.


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 (06/30/2014)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)3.53%7.30%9.64%8.10%10.89%7.55%7.38%09/15/1998
Class A (at offer)-1.10%2.55%4.70%6.45%9.85%7.05%7.07%
Institutional Class shares3.60%7.44%9.92%8.37%11.16%7.82%7.65%09/15/1998
Barclays U.S. Corporate Investment Grade Index2.66%5.68%7.73%6.21%8.10%5.94%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.

Barclays U.S. Corporate Investment Grade Index (view)

Expense ratio
Class A (Gross)0.93%
Class A (Net)0.93%
Institutional Class shares (Gross)0.68%
Institutional Class shares (Net)0.68%

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.

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.

High yielding, noninvestment grade bonds (junk bonds) involve higher risk than investment grade bonds.

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.

Not FDIC Insured | No Bank Guarantee | May Lose Value