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Delaware Foundation® Conservative Allocation Fund Quarterly commentary March 31, 2014 Class A (DFIAX)

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Economic overview

During the first quarter of 2014, business confidence and consumer confidence followed diverging paths. The Organization for Economic Cooperation and Development (OECD) compiles composite leading indicators to reflect business and consumer confidence for individual member countries and for the whole organization. The most recently available data indicate that during the quarter, consumer confidence rose in most developed economies, whereas business confidence declined.

The International Monetary Fund (IMF) maintains and regularly updates a set of short-term forecasts covering the global economy and individual countries and regions. As of the date of this commentary, the most recent IMF projections were those issued in April 2014. In general, the new forecasts were quite similar to those which had been published in October 2013, though the IMF has become slightly more optimistic about the near-term outlook for major developed economies, but has lowered its forecast for economic growth in Russia over the next two years. The IMF noted that in many developed countries, inflation is low, output gaps are large, and fiscal consolidation is continuing. In the IMF’s view, monetary authorities need to continue providing support while economic recovery is not fully secure.

Projected economic growth rate 2014 estimate 2015 estimate
Oct 2013 Apr 2014 Oct 2013 Apr 2014
World 3.6% 3.6% 3.9% 3.9%
Advanced economies 2.0% 2.2% 2.5% 2.3%
United States 2.6% 2.8% 3.4% 3.0%
Euro area 1.0% 1.2% 1.3% 1.5%
Japan 1.2% 1.4% 1.2% 1.0%
United Kingdom 1.9% 2.9% 2.0% 2.5%
Emerging and developing economies 5.1% 4.9% 5.3% 5.3%
Brazil 2.5% 1.8% 3.2% 2.7%
China 7.3% 7.5% 7.1% 7.3%
India 5.1% 5.4% 6.3% 6.4%
Russia 3.0% 1.3% 3.5% 2.3%

Source: International Monetary Fund, World Economic Outlook, October 2013 and April 2014

Changes in the value of the major currencies were generally quite modest during the first quarter of 2014. The Funds generally focus on trade-weighted currencies, which represent a composite value relative to each country’s major trading partners. During the quarter, the trade-weighted British pound and the trade-weighted yen both strengthened, while the trade-weighted euro weakened. The value of the trade-weighted dollar strengthened very slightly during the quarter. In general, an economy’s competitiveness tends to be enhanced by currency depreciation, and to be impaired by currency appreciation.

Trade-weighted currency Source 12/31/13 3/31/14 Change
U.S. dollar (USD) U.S. Treasury via Bloomberg 80.0 80.1 +0.1%
Euro (EUR) Bank of England via Bloomberg 97.7 97.0 -0.7%
Sterling (GBP) Bank of England via Bloomberg 84.5 85.4 +0.9%
Japanese yen (JPY) Bank of England via Bloomberg 132.8 135.5 +2.0%

Source: Bloomberg, April 2014

The prices of many commodities rose during the quarter. There were increases in the Thomson Reuters/CoreCommodity CRB Index and the S&P GSCI® Index, which are both broad commodity indices, and also in the spot prices of crude oil and gold. All else equal, a rise in commodity prices is likely to mean better profits for materials companies, but lower margins for industrials companies.

Category Benchmark 12/31/13 3/31/14 Change
Broad commodities S&P GSCI 632.3 648.9 +2.6%
Broad commodities Thomson Reuters/CoreCommodity CRB Index 280.2 304.7 +8.7%
Crude oil West Texas Intermediate spot 98.42 101.58 +3.2%
Gold New York spot price 1205.65 1284.01 +6.5%

Source: Bloomberg, April 2014

The available statistical data suggest that the U.S. economy continued to expand at a relatively modest pace during the quarter. The Federal Reserve’s “beige book,” covering the period ending February 2014, reported that consumer spending had increased in most districts. The beige book noted that unusually severe winter weather had impaired economic activity in a number of sectors, though the report also acknowledged that there are continuing modest improvements in residential real estate across the country. The Bureau of Labor Statistics (BLS) of the U.S. Commerce Department estimated that the seasonally adjusted U.S. unemployment rate in March 2014 was 6.7%, unchanged from the level prevailing at the end of 2013.

Market overview

During the first quarter of 2014, most major equity indices produced positive total returns, with the exception of emerging market equities. Global fixed income investment grade securities generated stronger returns than their U.S. peers during the quarter.

Style Benchmark Index return for 1Q14 (in USD)
U.S. large-cap growth Russell 1000® Growth Index +1.1%
U.S. large-cap value Russell 1000® Value Index +3.0%
U.S. small-cap  Russell 2000® Index  +1.1%
International growth MSCI EAFE Growth Index (gross) +0.2%
International value MSCI EAFE Value Index (gross) +1.3%
Emerging markets MSCI Emerging Markets Index (gross) -0.4%
U.S. fixed income Barclays U.S. Aggregate Index
+1.8%
Global fixed income Barclays Global Aggregate Index
+2.4%

Sources: Bloomberg, Barclays, MSCI, and Russell, April 2014

Within the Funds

The Asset Allocation Committee’s decisions are taken collectively, and the weightings assigned to individual asset classes reflect the consensus of opinion across the Committee. Sentiment across the Committee weakened during the quarter, resulting in a decision to reduce slightly the tactical allocation to emerging market equities. In addition, the Committee decided to partially hedge exposure to global equity markets by means of short positions in equity index futures. The portfolios remain overweight in fixed income securities and emerging market equities, underweight in international growth and international value, and roughly neutral in U.S. equities, though with a greater allocation to the concentrated large-cap growth and large-cap value sleeves.

Relative to strategic policy weights
Asset class Comment Underweight Neutral Overweight
U.S. large-cap core Remain broadly diversified
U.S. large-cap growth Underweight energy, industrials
U.S. large-cap value Underweight financials
U.S. small-cap core Remain broadly diversified
International growth Low active weights by sector and region
International value Underweight financials
Emerging markets Underweight financials
Diversified fixed income Focusing on corporates and selective opportunities in high yield
Cash and cash equivalents Yields continue to be quite low

Notes: The graphic above is based on tactical positions of Delaware Foundation Funds relative to the strategic policy weights for each Fund, with tactical and strategic weights adjusted by total assets under management (AUM) in each Fund, and breakpoints at 0.5%, 1%, and 3%; weights reflect tactical positioning as of March 31, 2014; actual sleeve weights may deviate from tactical weights due to different rates of asset appreciation and other factors; tactical weights may vary from time to time, and Delaware Investments makes no commitment to update this information in a timely manner; tactical weights are provided for information purposes only and should not be construed as asset allocation advice.

The Funds also continued to be underweight in cash, reflecting the low yields currently available for cash-like instruments. Within the equity sleeves, most of the investment teams remained underweight in financial sector stocks during the quarter, reflecting their continued concern about the risks associated with these securities. Conversely, the majority of the equity investment teams continued to be overweight in technology and healthcare during the quarter.

Outlook

As noted above, consumer sentiment in many developed economies generally improved during the first quarter of 2014, though business sentiment fell slightly. The Committee continues to believe that global economic recovery will likely require consumers to begin spending more freely, and the Fed’s beige book indicates continuing evidence that this is occurring in the U.S. economy, despite falling public-sector expenditures. There is still good reason to be apprehensive about the economic outlook for Europe, where austerity-based policies have generally been associated with deteriorating conditions. There is also some justification for mild concern about the current political situation in the U.S., where certain political actors appear decreasingly willing to maintain the historical commitment to compromise among the different branches of government. However, the Committee continues to believe that the global economy is gradually moving toward more normal conditions.

As described above, the Funds continue to have a slightly defensive position relative to their strategic policy weights. Nevertheless, the Committee continues to believe that the global macroeconomic environment may continue to improve, though probably at a rather slow pace. The market fluctuations of the past few years have tended to confirm the Committee’s view that over the medium term, the Funds’ commitment to global diversification may prove beneficial, as participating in a large number of different markets may help reduce the risk that any single market might deliver disappointing performance during any particular period.

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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.

Definitions

Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.

The Barclays Global Aggregate Index provides a broad-based measure of the global investment grade fixed-rate debt markets.

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

The MSCI EAFE Growth Index is a subset of the MSCI EAFE Index, which measures equity market performance across developed market countries in Europe, Australasia, and the Far East, and consists of those securities classified by MSCI as most representing the growth style.

The MSCI EAFE Value Index is a subset of the MSCI EAFE Index, which measures equity market performance across developed market countries in Europe, Australasia, and the Far East, and consists of those securities classified by MSCI as most representing the value style.

The MSCI Emerging Markets Index measures equity market performance across emerging market countries worldwide.

Index “net” return approximates minimum possible dividend reinvestment, after deduction of withholding tax at the highest possible rate. Index “gross” return approximates the maximum possible dividend reinvestment.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe, and includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe, and includes those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe.

The S&P GSCI Index, formerly Goldman Sachs Commodity Index, is a world production-weighted index composed of the principal physical commodities that are the subject of active, liquid futures markets.

The Thomson Reuters/CoreCommodity CRB Index is a widely recognized measure of global commodities markets that is designed to provide a representation of long-only, broadly diversified investments in commodities.

Performance

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 (03/31/2014)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)1.58%1.58%6.62%6.26%11.94%6.01%5.05%12/31/1997
Class A (at offer)-4.26%-4.26%0.50%4.19%10.62%5.38%4.67%
Institutional Class shares1.64%1.64%6.88%6.51%12.24%6.28%5.32%12/31/1997
Barclays U.S. Aggregate Index1.84%1.84%-0.10%3.75%4.80%4.46%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.

Barclays U.S. Aggregate Index (view)

Expense ratio
Class A (Gross)1.36%
Class A (Net)1.13%
Institutional Class shares (Gross)1.11%
Institutional Class shares (Net)0.88%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursements from Jan. 28, 2014 to Jan. 28, 2015. Please see the fee table in the Fund’s prospectus for more information.

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
Teva Pharmaceutical Industries Ltd.0.5%
Microsoft Corp.0.4%
EOG Resources Inc.0.4%
Toyota Motor Corp.0.4%
ARYZTA AG0.4%
QUALCOMM Inc.0.4%
Google Inc.0.4%
Visa Inc.0.4%
Novartis AG0.4%
MasterCard Inc.0.4%
Total % Portfolio in Top 10 holdings4.1%

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.

This Fund is subject to the same risks as the underlying styles in which it invests.

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.

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.

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.

The Fund may experience portfolio turnover in excess of 100%, which could result in higher transaction costs and tax liability.

Risk controls and asset allocation models do not promise any level of performance or guarantee against loss of principal. Each Fund has a different level of risk.

Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors.

REIT investments are subject to many of the risks associated with direct real estate ownership, including changes in economic conditions, credit risk, and interest rate fluctuations.

Not FDIC Insured | No Bank Guarantee | May Lose Value