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Delaware Dividend Income Fund Quarterly commentary June 30, 2014 Class A (DDIAX)

Within the Fund

For the second quarter of 2014, Delaware Dividend Income Fund (Class A shares at net asset value) posted a positive return but underperformed its benchmark, the S&P 500® Index.

Within the large-cap value equity portion of the Fund, relative performance benefited from stock selection and, to a larger extent, positive sector allocation results. The largest contributions to relative performance came from investments in information technology and financials. Semiconductor manufacturers Intel and Broadcom advanced 20.7% and 18.4%, respectively. In mid-June, Intel raised its forecast for both revenue and profit margin for the current quarter and year. Earlier in the month, Broadcom announced that it was exploring strategic alternatives for its cellular baseband business, an area that had dragged down overall earnings per share by approximately 25% as recently as last year. In financials, Bank of New York Mellon led the way, up 6.7%. Its shares got a boost when activist investor Nelson Peltz announced that his investment partnership, Trian Fund Management, had amassed a 2.5% stake in the company. Elsewhere in the portfolio, energy exploration and production company ConocoPhillips was a top performer, gaining 22.9%. Sales and profits for the first quarter came in ahead of expectations as the company benefited from increased production, higher prices, and expanding margins.

The largest detractors from performance within the large-cap value equity portion of the Fund came in the healthcare and industrials sectors. Stock selection was the main source of negative attribution in each. The Fund’s six healthcare holdings had a combined return of just 0.5%. Shares of pharmaceutical maker Pfizer fared worst with a drop of -6.8%. In addition to reporting weaker-than-expected revenue for last quarter, Pfizer’s failed bid for United Kingdom–based AstraZeneca created some uncertainty around its long-range strategic plans. In industrials, defense contractors Raytheon and Northrop Grumman posted disappointing returns (-6.0% and -2.5%, respectively). Concerns about the effect of Pentagon budget constraints on several large programs put pressure on defense stocks, generally. Also, Raytheon reported a modest decrease in sales and did not raise its full-year guidance, which the market viewed as disappointing. Another weak performer in the portfolio was diversified specialty chemical company DuPont, which declined -1.8%. Near the end of the quarter, DuPont reduced earnings guidance for the year citing lower expected sales in its agricultural segment.

Within the equity real estate investment trust (REIT) portion of the Fund, stock selection in the shopping centers and healthcare sectors had a negative effect. While several small-cap healthcare companies outperformed during the quarter, the Fund’s underweight allocation to the healthcare sector detracted from performance. We maintained the Fund’s underweight because large-cap healthcare REITs have grown their asset bases to the point that incremental growth has become difficult to achieve. In shopping centers, Fund performance was hurt by a lack of exposure to two securities that modestly outperformed: Retail Properties of America and Weingarten Realty Investors.

Stock selection in the freestanding, office, and lodging REIT sectors aided Fund performance. Strategic Hotels & Resorts was a notable contributor in the lodging sector. A lack of investment in American Realty Capital Properties helped the Fund’s relative performance in the freestanding sector, as the company’s increase in outstanding shares that diluted shareholder equity, multiple acquisitions, and other questionable management actions sent American Capital Realty Properties shares down 9%.

With the Fund’s high yield bond portion, the top sector contributors were technology, media, and energy. Top individual contributors included First Data (transaction processing), Nuveen Investments (mutual funds), and Midstates Petroleum (oil exploration and production). First Data gained on news that equity sponsor KKR arranged a $3.5 billion private placement to help the company refinance high-cost debt. Nuveen gained on news of its acquisition by TIAA-CREF, and Midstates gained on the spike in oil prices caused by the tensions in Iraq.

Sectors that detracted from performance included consumer cyclicals, utilities, and financial services. Bottom performers at the individual security level included David’s Bridal (retail bridal gowns), Algeco Scotsman (modular trailer leasing), and Quiksilver (outdoor sports retailer). David’s Bridal and Algeco declined on weaker-than-expected first-quarter earnings, while Quiksilver underperformed due to weak second-quarter numbers and Moody’s decision to place its credit ratings on negative outlook.


Moving into the third quarter of 2014, several notable themes, possibilities, and developments bear monitoring. These include the following: 

  • After a period of notable resilience for stocks, our three- to five-year view is for below-average market gains. That’s not to say we’re bearish on equities. For long-term investors, we think stocks of higher-quality U.S. companies, trading at reasonable prices, have the potential to provide attractive returns relative to other investments. Near-term, things appear more uncertain to us. The U.S. market appears fully valued across numerous measures including book value, cash flow, earnings, and sales, but valuations are not at extreme levels. It’s been more than 1,000 days since the S&P 500 Index has had a correction of at least 10%, the fifth longest stretch on record (source: Leuthold Group). However, inflation and interest rates remain very low, as does market volatility, while profit margins and investor sentiment are near peak levels. Our cautious near-term view is reflected in the Fund’s positioning — overweights in traditionally defensive sectors (where valuations remain attractive) and a greater-than-usual emphasis on quality (that is, balance sheet strength, diversified sources of revenue, more predictable cash flows, and attractive dividends). 
  • REITs have continued to outperform in 2014 as both interest rates and supply have remained quite low. Taking advantage of lower rates, many REITs refinanced and extended the term of their debt for 7 to 10 years. At this point in past cycles, supply would be more than 2.1% of total inventory, which is the 30-year average. Today, supply is just 1%, with most property sectors seeing tight supply-demand ratios. We believe that low or limited supply is essential to maintaining the current positive market conditions for real estate investors. If nonfarm payrolls continue adding more than 200,000 jobs a month, rising wages could lead to higher inflation and an increase in interest rates. Although REITs historically have not correlated with interest rates, many investors in this cycle have treated REITs as a pure yield vehicle, and we would not be surprised to see these same investors flee the sector if rates were to rise. In that event, we believe a shorter-duration REIT portfolio (that is, hotel and apartment REITs) would fare well. (Data: Bloomberg.)
  • While the near-perfect confluence of factors that supported the high yield bond market during the first half of the year are unlikely to remain fully intact, we believe the key elements — moderate, noninflationary growth; low interest rates; stable credit trends; and strong demand for yield — are likely to persist for some time. In such an environment, investors need to distinguish between the valuation cycle and the credit cycle. At 3.99 percentage points off Treasurys, high yield values are full — though not stretched. Additional spread compression is certainly possible, and on a historical basis, even likely. However, spread compression should not be assumed, and expected high yield returns are likely, in our view, to consist largely of income. At present, the credit cycle remains in an expansionary phase, with abundant borrower access to both bank and public market credit. 

In light of these circumstances, we believe there is a strong argument for seeking companies that, in our view, have most or all of the following characteristics: They (1) appear undervalued, (2) have strong cash flows, (3) maintain manageable debt levels, (4) operate diversified businesses, and (5) have a history of delivering consistent dividends.

Diversification may not protect against market risk.


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)4.28%7.00%16.97%11.82%15.62%7.14%8.53%12/02/1996
Class A (at offer)-1.75%0.85%10.25%9.64%14.25%6.50%8.17%
Institutional Class shares4.34%7.13%17.27%12.10%15.91%7.40%8.70%12/02/1996
S&P 500 Index5.23%7.14%24.61%16.58%18.83%7.78%n/a

Returns for less than one year are not annualized.

Class A shares have a maximum up-front sales charge of 5.75% 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.

S&P 500® Index (view)

Expense ratio
Class A (Gross)1.12%
Class A (Net)1.12%
Institutional Class shares (Gross)0.87%
Institutional Class shares (Net)0.87%
Top 10 holdings as of 08/31/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Microsoft Corp.1.6%
Archer-Daniels-Midland Co.1.5%
Intel Corp.1.5%
Xerox Corp.1.4%
Kraft Foods Group Inc.1.4%
Bank of New York Mellon Corp.1.4%
Marathon Oil Corp.1.4%
Broadcom Corp.1.4%
Quest Diagnostics Inc.1.4%
Edison International1.4%
Total % Portfolio in Top 10 holdings14.4%

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.

The Fund may invest up to 45% of its net assets in high yield, higher-risk corporate bonds.

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.

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

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.

Not FDIC Insured | No Bank Guarantee | May Lose Value