Comments on recent market volatilityDelaware Investments portfolio managers share their perspectives on recent market conditions.

Frank Morris

Francis X. Morris Senior Vice President,
Chief Investment Officer – Core Equity

Macroeconomic forecasts typically do not play a meaningful role when we select securities. However, in light of Standard and Poor’s downgrade of U.S. government debt as well as the recent market volatility, we believe that such events could lead to challenging equity market conditions over the near- to medium-term, and will continue to monitor the situation closely. Having said that, we will attempt to seek opportunities that may arise as a result of current market conditions and more importantly, positions that we believe could potentially provide benefits over the long-term.

A big part of our investment process involves allocating capital to companies that we believe have superior business models, attractive long-term growth potential, strong balance sheets, as well as those that we believe can outperform their peers in a slow-growth economy or in an environment where access to outside financing is limited. With this framework in mind, we believe we are appropriately positioned, and we look to use any widespread selloff, including those of recent sessions, as an opportunity to invest in companies with solid long-term earnings growth prospects that are trading at what we believe are attractive valuations.

These downgrades may have repercussions for certain clients’ investment guidelines. For example, investment guidelines may not anticipate a downgrade of U.S. Treasury debt below AAA (and with that the average quality of many indices). This could restrict a desirable portfolio action or even direct the sale of one or more portfolio holdings. If this is the case, we strongly recommend that you provide at least temporary relief from your guidelines relating to investments in U.S. government securities, consistent with your investment objective.

Client service offices will be in touch in the event there are any questions about your guidelines.

IMPORTANT RISK CONSIDERATIONS

Investing involves risk, including the possible loss of principal.

Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies.

Liu-Er Chen

Liu-Er Chen, CFA Senior Vice President,
Chief Investment Officer – Emerging Markets and Healthcare

As a result of global trade and financial linkages, emerging markets are not immune to the challenges facing developed markets. While we believe the full consequences of these challenges have yet to be fully felt, we don’t attempt to position our portfolios in response to a particular macroeconomic outlook or event. This includes last week’s downgrade of U.S. debt obligations by Standard and Poor’s as well as the market volatility that came before and after the downgrade.

Instead, we believe volatility can potentially be beneficial for long-term investors such as us and we will continue to monitor the situation closely and look for any potential opportunities that may arise. Looking forward, we will seek to take advantage of any market corrections to help reposition the portfolio toward companies that we feel have the potential to benefit from the trends we continue to see for emerging markets.

These downgrades may have repercussions for certain clients’ investment guidelines. For example, investment guidelines may not anticipate a downgrade of U.S. Treasury debt below AAA (and with that the average quality of many indices). This could restrict a desirable portfolio action or even direct the sale of one or more portfolio holdings. If this is the case, we strongly recommend that you provide at least temporary relief from your guidelines relating to investments in U.S. government securities, consistent with your investment objective.

Client service offices will be in touch in the event there are any questions about your guidelines.

IMPORTANT RISK CONSIDERATIONS

Investing involves risk, including the possible loss of principal.

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.

Ty Nutt

D. Tysen Nutt Jr. Senior Vice President,
Senior Portfolio Manager,
Team Leader

Despite recent market volatility and fearful investor sentiment, we remain consistent in our positioning, philosophy, and process. Our concerns about the global economy and valuation of the U.S. stock market have, for a while now, been reflected in the protective positioning of the portfolio through our sector strategy, capitalization focus on larger companies, and selection of companies that we believe have more consistent earnings from diverse revenue sources.

In light of recent market declines, we’re seeing a larger number of potential investment ideas and are considering ways to be more opportunistic as prices become increasingly more attractive. Overall, we continue to maintain a positive outlook on U.S. stocks, which we believe may provide potential protection against longer-term inflation.

 

These downgrades may have repercussions for certain clients’ investment guidelines. For example, investment guidelines may not anticipate a downgrade of U.S. Treasury debt below AAA (and with that the average quality of many indices). This could restrict a desirable portfolio action or even direct the sale of one or more portfolio holdings. If this is the case, we strongly recommend that you provide at least temporary relief from your guidelines relating to investments in U.S. government securities, consistent with your investment objective.

Client service offices will be in touch in the event there are any questions about your guidelines.

IMPORTANT RISK CONSIDERATION

Investing involves risk, including the possible loss of principal.

Joe Baxter

Joseph R. Baxter Senior Vice President,
Head of Municipal Bond Department,
Senior Portfolio Manager

The Standard & Poor’s (S&P) downgrades of recent days pose psychological headwinds for securities markets as many investors try to sort through a complicated mix of factors that can affect securities prices.

Within municipal markets specifically, the current investment environment exhibits the uncertainties that existed in late 2010 after a well-known analyst predicted widespread municipal defaults. At the time, municipal markets experienced investor outflows during a period of illiquidity which sent rates higher. This rate move, over time, reversed as the dire predictions proved incorrect and states’ revenues showed improvement. This time around, we believe municipal markets will once again be resilient, and we encourage investors to keep in mind that rating downgrades at the federal level do not necessarily imply downgrades for individual states. (As S&P reiterated in an August 8 release, state and local credit quality will continue being analyzed on a standalone basis, independently of U.S. sovereign debt.)

In the quarters ahead, we believe much will depend on factors that include 1) the Budget Control Act that was passed last week, and 2) prospects for U.S. economic growth, which had been weakening prior to the downgrade. In both cases, outcomes will be difficult to predict. When you look at the budget act, for instance, you certainly see a broad framework for spending reductions and/or tax reform — but the specifics are yet to be completely spelled out.

As risk appetites continue to fluctuate, we believe periods of volatility will be likely. With that in mind, we remind investors to view municipal bonds as longer-term investments that have historically done relatively well at weathering uncertainty. In the meantime, we will continue managing money the way we always have, with an emphasis on credit research, security selection, and risk awareness.

 

These downgrades may have repercussions for certain clients’ investment guidelines. For example, investment guidelines may not anticipate a downgrade of U.S. Treasury debt below AAA (and with that the average quality of many indices). This could restrict a desirable portfolio action or even direct the sale of one or more portfolio holdings. If this is the case, we strongly recommend that you provide at least temporary relief from your guidelines relating to investments in U.S. government securities, consistent with your investment objective.

Client service offices will be in touch in the event there are any questions about your guidelines.

IMPORTANT RISK CONSIDERATIONS

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.

Fixed income securities may also be subject to prepayment risk, the risk that the principal of a fixed income security that is held by a Fund may be prepaid prior to maturity, potentially forcing the Fund to reinvest that money at a lower interest rate.

Funds that invest primarily in one state may be more susceptible to the economic, regulatory, and other factors of that state than funds that invest more broadly.

Substantially all dividend income derived from tax-free funds is exempt from federal income tax. Some income may be subject to the federal alternative minimum tax (AMT) that applies to certain investors. Capital gains, if any, are taxable.

Chris Beck

Christopher S. Beck, CFASenior Vice President,
Chief Investment Officer – Small-Cap Value / Mid-Cap Value Equity

In the small- and mid-cap space, we believe that last week’s downgrades have had more of a psychological (rather than an economic) effect. There continues to be, in our opinion, a low chance of default because the Treasury will continue to pay interest and principal on obligations that are due.

Currently, we believe that the more important issues are the situation in Europe and the threat of a recession and/or rising interest rates in the United States. However, the downgrade virtually guarantees, in our view, that short-term interest rates will not be increased any time soon. As long as interest rates remain low, borrowing costs should not be a concern in the small- and mid-cap space. However, that could change if the downgrade begins to affect corporate yields. So far, we haven’t seen any indication that that will happen.

Our primary focus is corporate profits and the overall state of the economy. We are not necessarily bullish, but we are optimistic about the generally strong free cash flow figures we’re seeing from the companies in our portfolio. We believe the cash flow numbers will likely remain strong, unless the economy stumbles badly.

As of today’s date, Aug. 9, 2011, we do not plan to make any significant transactions in response to the downgrade or the recent market volatility. We have been very pleased, for the most part, with the profits being generated by the holdings we own.

These downgrades may have repercussions for certain clients’ investment guidelines. For example, investment guidelines may not anticipate a downgrade of U.S. Treasury debt below AAA (and with that the average quality of many indices). This could restrict a desirable portfolio action or even direct the sale of one or more portfolio holdings. If this is the case, we strongly recommend that you provide at least temporary relief from your guidelines relating to investments in U.S. government securities, consistent with your investment objective.

Client service offices will be in touch in the event there are any questions about your guidelines.

IMPORTANT RISK CONSIDERATIONS

Investing involves risk, including the possible loss of principal.

Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies.

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.

Paul Grillo

Paul Grillo, CFA Senior Vice President,
Co-Chief Investment Officer – Total Return Fixed Income Strategy

The enormous buildup of debt during the last two decades continues to have ramifications both for politics and for the capital markets around the globe. Many developed nations in particular have built up debt levels (in all parts of their society) that are greater than 300% of their gross domestic product (GDP). In years past, asset prices were moved to high or extreme levels based on this financing. However, when poor loan collateral performance was introduced via Early Pay Defaults* on sub-prime mortgage securitizations in the fall of 2006, it started a shockwave that is still affecting the global financial markets today.

As politicians and government leaders have tried to deal with the damaging growth aspects of the deleveraging that has ensued, two of the most popular actions seem to have been 1) increasing government spending to stimulate demand and shore up/re-capitalize commercial banks, and 2) injecting significant monetary stimulus into their respective economies. While deleveraging has generally taken place through the destruction of outstanding debt (defaults) and some pay downs of principal, perhaps the dominant theme in recent years has been the transfer of private obligations to the public domain.

Within this environment, we believe 2011 marks a new phase of the credit crisis, in which global investors are making choices about which sovereign debt is apparently either safe enough, or attractive enough, for return opportunity. The recent intensity of the capital market selloffs, in our opinion, represents escalated investor concern over stagnant or declining growth rates across the developed world. This is significant because austerity programs have become increasingly difficult or impossible to implement under today’s very slow growth, or recessionary, environments, and leaves policy makers in many developed countries with few remaining options other than keeping interest rates at their current low levels, likely through the next couple of years.

During this phase of the credit crisis, we, as investors, should go back to an environment in which high quality fixed income investments should continue to perform well in our opinion. While it has become difficult to make this assessment with the current low level of yields for these investments, do not be fooled. To us, today’s environment is about returning capital intact, and not searching for stretched return on capital. In our opinion, high quality country debt should continue to meet this goal (Australia, Norway, and Canada) while high debt-to-GDP countries should continue to struggle (Greece, Ireland, Portugal, and now Italy and Spain). Additionally, we continue to view corporate debt — both high grade and high yield — as an attractive option as many of these entities have either already restructured or delevered to face the growth challenges that lie ahead.

In our opinion, growth challenges should continue to intensify sovereign concerns and U.S. government debt ratings will come under further pressure as our recovery stalls. However, possibly the biggest concern, in our opinion, revolves around the effects that the slow-growth environment could have on France. France is currently an “AAA rated” country that we believe is key to the ongoing bailouts of the peripheral European nations. If France’s AAA rating were threatened, we believe the European Financial Stability Facility (ESFS) that Europe is counting on to assist in peripheral financing over the next two years (it has recently been granted expanded responsibility for this action) might be called into question.

We will continue to monitor credit indicators for this country as a barometer for sovereign crisis levels. Yet, given the many macroeconomic uncertainties that remain in place, quality, liquidity, an emphasis on downside protection through careful corporate and sovereign credit selection will remain keys to our approach to fixed income security selection as we face the remainder of 2011.


Current positioning across our diversified mutual funds:

  • Regarding international investments, we continue to concentrate on developing countries that offer natural resources or competitive labor advantages as well as those that we believe offer credible fiscal and monetary policy.
  • In the developed world, the characteristics we seek are much the same. Our core investments include Australian, Norwegian, and Canadian government bonds. These countries have similar characteristics in that they are natural-resource rich, and have exercised good fiscal discipline in covering their populations with social or savings safety nets.
  • We maintain a core investment in the high grade corporate sector, where credit fundamentals have continued to improve. We maintain an overweight to the finance sector, mostly in domestic bank and finance companies, which are partially hedged with credit default swaps on the European banking sector.
  • We have hedged some of our investments in the high yield bond sector.
  • We have small exposure to U.S. Treasury debt. We also have exposure to agency mortgage-backed securities (MBS) for their added yield potential.

*An Early Payment Default generally is considered to be a property owner who defaults on their payments within a short period of time of the close on the loan.

These downgrades may have repercussions for certain clients’ investment guidelines. For example, investment guidelines may not anticipate a downgrade of U.S. Treasury debt below AAA (and with that the average quality of many indices). This could restrict a desirable portfolio action or even direct the sale of one or more portfolio holdings. If this is the case, we strongly recommend that you provide at least temporary relief from your guidelines relating to investments in U.S. government securities, consistent with your investment objective.

Client service offices will be in touch in the event there are any questions about your guidelines.

IMPORTANT RISK CONSIDERATIONS

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.

Fixed income securities may also be subject to prepayment risk, the risk that the principal of a fixed income security that is held by a 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. 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 a Fund to obtain precise valuations of the high yield securities in its portfolio.

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.

If and when a Fund invests in forward foreign currency contracts or uses other investments to hedge against currency risks, it will be subject to special risks, including counterparty risk.

The views expressed were current as of Aug. 9, 2011, and are subject to change at any time.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting our fund literature page or calling 800 362-7500. Investors should read the prospectuses and the summary prospectuses carefully before investing.

IMPORTANT RISK CONSIDERATIONS

Investing involves risk, including the possible loss of principal.

This report does not take into account the investment objectives, financial situation, or particular needs of any particular person. Investing in securities or financial products entails certain risks, including the possible loss of the entire principal amount invested. Investors should consult their own investment professionals regarding their individual investment programs.

Delaware Investments has no duty to update this report, and the opinions, estimates, and other view expressed in this report may change without notice. No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this report.

The content is informational only. It is not intended and should not be construed to be a presentation of information for any mutual fund.

These materials represent the views and opinions of the author(s) regarding the economic conditions, asset classes, securities, issuers or financial instruments referenced herein. Any reproduction of these materials, in whole or in part, or the divulgence of any of the contents thereof, without prior consent of Delaware Investments is prohibited. Certain information contained herein has been obtained from sources that Delaware Investments believes to be reliable as of the date presented; however Delaware Investments cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. Delaware Investments has no obligation to update any or all of such information; nor do we make any express or implied warranties or representations as to the completeness or accuracy or accept responsibility for errors. These materials are not intended as an offer or solicitation with respect to the purchase or sale of any security or other financial instrument or any investment management services and should not be used as the basis for any investment decision. No liability whatsoever is accepted for any loss (whether direct, indirect, or consequential) that may arise from any use of the information contained in or derived from this report. Delaware Investments and its affiliates may make investment decisions that are inconsistent with the recommendations or views expressed herein, including for proprietary accounts of Delaware Investments or its affiliates.

The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or funds to particular clients or prospects. No determination has been made regarding the suitability of any securities, financial instruments or funds for particular clients or prospects. For any securities or financial instruments mentioned herein, the recipient(s) of this report must make its own independent decisions.

Conflicts of Interest: Delaware Investments and its affiliates may have investment advisory or other business relationships with the issuers of securities referenced herein. Delaware Investments and its affiliates, officers, directors and employees may from time to time have long or short positions in and buy or sell securities or financial instruments referenced herein. Delaware Investments affiliates may develop and publish research that is independent of, and different than, the information contained herein. Delaware Investments personnel other than the author(s), such as sales, marketing, and trading personnel, may provide oral or written market commentary or ideas to clients of Delaware Investments or prospects or proprietary investment ideas that differ from the views expressed herein. Additional information regarding actual and potential conflicts of interest is available in Part II of Form ADV for Delaware Management Business Trust.