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Delaware Dividend Income Fund Quarterly commentary June 30, 2015

Within the Fund

For the second quarter of 2015, Delaware Dividend Income Fund (Institutional Class shares and Class A shares at net asset value) underperformed its benchmark, the S&P 500® Index.

Large-cap value equity

Within the large-cap value equity portion of the Fund, investments in industrials and healthcare had a negative effect on performance. In industrials, Waste Management fared the worst with a decline of -13.9%. The company reported lower-than-expected revenue for the first quarter of 2015 (primarily because of lower prices for recycling commodities) and lowered its earnings-per-share guidance for the year. We continue to believe that Waste Management has an attractive risk-reward profile. In healthcare, drug and medical products distributor Cardinal Health was the laggard in the group, falling -6.9%. Given the stock’s strong performance over the past several quarters, the decline was likely due, in part, to profit taking.

Investments in consumer staples and energy performed well. Global snack and beverage maker Mondelez International was the Fund’s strongest performer in consumer staples, up 14.4%. The company’s most recent quarterly results came in ahead of expectations, owing to higher prices and better expense management. In energy, exploration and production (E&P) company Occidental Petroleum led the way, advancing 7.6%. The company’s shares appeared to benefit from positive comments from several analysts, the relative strength of its assets and balance sheet, and the rise in oil prices during the quarter.

Real estate investment trusts (REITs)

Within the equity REIT portion of the Fund, our underweight allocation to the self-storage sector, along with weak stock selection in the mixed and lodging sectors, detracted from performance during the quarter. In the mixed sector, Duke Realty — an owner of industrial, office, and medical office space — was unable to avoid the REIT selloff even though its fundamentals remained solid.

Stock selection in the office and diversified REIT sectors, along with a fortunate underweight in the lagging healthcare sector, aided performance. Early this year, we reduced the Fund’s healthcare weighting, as we believed interest rates had found a bottom at the same time that healthcare REITs were trading at the top of their valuation range. That decision contributed to the Fund’s performance in the second quarter. If rates begin to stabilize, this sector would warrant additional weight. Fundamentally, we think the sector is in good condition, the only caveat being that senior housing has experienced some increased supply, rendering year-over-year comparisons less attractive for senior-housing providers Ventas and Health Care REIT.

International value equity

The Fund’s international value equity portion performed well during the quarter primarily due to strong stock selection. Regional stock selection was positive, with strength in Japan and the euro zone more than offsetting weakness in the United Kingdom and Europe ex euro zone. Overall, regional allocation was negative due to unfavorable exposure to Canada and emerging markets. Stock selection on a sector basis was strong in telecommunications, financials, and healthcare, which more than offset adverse stock selection in consumer staples. Net currency effect was negative, primarily due to an underweight exposure to the British pound and exposure to the U.S. dollar.

High yield bonds

Within the Fund’s high yield bond portion, top sector contributors were basic industry, capital goods, and automotive, while top individual contributors were Columbus International (cable TV), Ocean Rig (oil field services), and Oasis Petroleum (E&P). Columbus gained on expectations of a near-term call of its bonds, Ocean Rig gained after a successful equity offering, and Oasis gained after reporting strong operating metrics.

Conversely, the largest sector detractors were services, media, and telecommunications. The biggest individual detractors were Intelsat (satellite operator), CHC Helicopter (oilfield services) and Chesapeake Energy (E&P). Intelsat declined due to lower-than-expected 2015 forward guidance, while CHC Helicopter and Chesapeake declined due to persistently low energy prices and slowing drilling activity.


The Fund’s convertibles exposure was approximately flat for the quarter, underperforming the BofA Merrill Lynch All U.S. Convertibles Index by approximately half a percentage point. The Fund’s holdings in these hybrid securities tend to be more yield sensitive rather than equity sensitive, so it follows that performance was weaker in an environment where the equity markets were generally positive while fixed income markets, especially the credit markets, were generally negative.


Moving into the third quarter of 2015, several notable themes, possibilities, and developments bear monitoring. These include the following:

  • Our view has always been that volatility in REIT share prices is driven by investor fear and greed in the capital markets rather than real estate fundamentals. Given the contractual nature of leases and the stability of cash flows, one might not expect REITs to be so volatile. However, when an industry is highly leveraged and required to pay out 90% of its taxable income in dividends, its dependence on capital markets can drive share prices to extremes. The second quarter of 2015 was the opposite of the fourth quarter of 2014, which saw REITs sell off early before reversing course and heading toward new highs. This time, REITs posted early gains before selling off. With share prices down approximately 15% from their mid-January peak and down 10% for the quarter overall, we believe now is a good time to add to REIT exposure. (Data: FTSE, Bloomberg.)
  • The outlook for high yield bonds is predicated on credit trends and U.S. economic growth. On a year-to-date basis, refinancing activity has recrossed the important 50% threshold as a percentage of issuance, and default activity, while up modestly month over month, is down relative to last year and concentrated in the ailing energy and coal space. Credit spreads are hovering around the long-term average and, adjusting for energy, are inside the long-term average, suggesting that high yield bonds are approaching full valuation. Nevertheless, against the backdrop of a stable credit cycle, stable if not spectacular economic growth, and the prospect of imminent Federal Reserve rate hikes, investor demand for the high income of high yield bonds and the floating rate feature of high yield loans should remain firm. Accordingly, we expect yield-to-worst will remain a reasonable forecast of run-rate returns for both asset classes. (Data: J.P. Morgan Chase, Bloomberg.)
  • It wouldn’t surprise us if the U.S. stock market were to trade in a broad range in the coming years. A number of countervailing forces could keep market levels in check. On the positive side, U.S. capital markets continue to offer relative stability and the domestic economy appears on track to continue its modest expansion. Corporate balance sheets remain strong, supporting the return of capital to shareholders through buybacks and dividends. We believe challenges facing the stock market include the prospect of higher short-term interest rates in the United States; slowing global gross domestic product (GDP) growth and the weaker overall demand that comes with it; high levels of indebtedness globally; falling productivity in the U.S. and evidence of higher wage growth (a negative for profit margins); and, foremost in our minds, its rich valuation. Our belief is that annualized equity market returns will likely be below average looking out five to seven years. Because of this, we’re maintaining a somewhat defensive posture among the Fund's large-cap value stocks, emphasizing companies that, in our view, appear to have more predictable cash flows and earnings, sound balance sheets, and less potential downside volatility.

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 BofA Merrill Lynch All U.S. Convertibles Index tracks the performance of domestic corporate convertible bonds and convertible preferred stock issues of all qualities that have a market value of $50 million or more at issuance.


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 (06/30/2015)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)-1.91%-0.46%0.36%10.97%11.54%6.20%8.08%12/02/1996
Class A (at offer)-7.56%-6.18%-5.38%8.78%10.22%5.57%7.73%
Institutional Class shares-1.85%-0.41%0.61%11.24%11.82%6.47%8.25%12/02/1996
S&P 500 Index0.28%1.23%7.42%17.31%17.34%7.89%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 definition)

Expense ratio
Class A (Gross)1.10%
Class A (Net)1.10%
Institutional Class shares (Gross)0.85%
Institutional Class shares (Net)0.85%
Top 10 holdings as of 07/31/2015
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
United States Treasury Note/Bond 2.125 5/15/20252.6%
Pfizer Inc.1.4%
Raytheon Co.1.4%
Bank of New York Mellon Corp.1.4%
Waste Management Inc.1.3%
Mondelez International Inc.1.3%
Quest Diagnostics Inc.1.3%
Allstate Corp.1.3%
BB&T Corp.1.3%
AT&T Inc.1.3%
Total % Portfolio in Top 10 holdings14.6%

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.

All third-party marks cited are the property of their respective owners.

Not FDIC Insured | No Bank Guarantee | May Lose Value