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Delaware Diversified Floating Rate Fund Quarterly commentary December 31, 2013 Class A (DDFAX)


In the fourth quarter of 2013, heartening progress was made on both the economic and political fronts. For instance, payroll statistics improved, economic growth accelerated, and Congress was able to agree on a federal budget. As a result, equities rose and interest rates pushed higher, reaching their peak for all of 2013. In addition, on Dec. 18, the Federal Reserve decided to begin tapering its asset-purchasing program (to be implemented in January 2014), and it announced a likely series of deliberate steps to end the program late in 2014.

Growth in U.S. gross domestic product was revised upward in December, to a 4.1% annual rate for the third quarter. Although core prices moved modestly and consistently higher during the quarter, inflation was weaker (and more volatile), due primarily to energy prices. The Fed continued to maintain its target range of zero to 0.25% on short-term interest rates.

During the fourth quarter, the 10-year Treasury yield rose from 2.61% to 3.03%, and the 2-year Treasury rose from 0.32% to 0.38%. Interest rates fell early in the quarter but rose steadily after that.

The Barclays U.S. Aggregate Index lost 0.14% for the quarter, with Treasurys and mortgage-backed securities (MBS) the biggest losers. However, commercial mortgage-backed securities (CMBS) and corporate bonds helped offset the decline. Financials and BBB-rated corporates produced particularly good results. High yield corporate and emerging market bonds likewise performed strongly. (Data: Barclays.)

Within the Fund

In the fourth quarter of 2013, Delaware Diversified Floating Rate Fund (Class A shares at net asset value) generated a positive total return that outperformed its benchmark, the BofA Merrill Lynch U.S. Dollar 3-Month LIBOR Constant Maturity Index.

Approximately 16% of the Fund’s assets were invested in bonds issued by the financial services industry, which were its largest contributors to performance. The Fund’s holdings in bank loans, high yield bonds, and convertible bonds, which tended to be of lower quality, also provided positive results, although its positions in them were modest.

Higher-quality assets such as collateralized loan obligations and AAA-rated asset-backed securities (ABS) generated a positive return but underperformed lower-quality assets such as bank loans. Also impairing the Fund’s performance slightly were credit hedges on select bonds.

We continued to emphasize noncallable investment grade corporate bonds and bank loans because of their diversification and return potential.

In the quarter, as always, the Fund’s duration was kept extremely short, averaging more than three months, which helped minimize the negative effects of rising interest rates. This duration was achieved mainly by investing in floating-rate investments and interest rate swaps.

The Fund’s portfolio did not change significantly in the quarter. We did, however, increase the Fund’s position in noninvestment grade bonds and trimmed the Fund’s position in lower yielding, high-quality assets such as asset-backed securities.

About 5% of the Fund was invested in emerging market corporate and sovereign bonds, which outperformed after having hurt results in the third quarter. The Fund’s interest rate swaps successfully helped to hedge the interest rate risk of fixed-coupon holdings.


Federal Reserve forecasts still suggest that short-term rates should stay low through 2015. This, along with a modest inflation outlook, should help keep 10-year Treasury yields below 3.50% in early 2014. Stronger-than-expected economic growth could result in a test of this threshold, while any return by bond investors to a so-called “flight to quality” could generate a rally, which could lower yields to 2.50% or even 2.00%. We believe that Treasury inflation-protected securities (TIPS) are still close to full value, given the potential for a continuing softness in inflation.

We continue to see value in agency MBS, which offer attractive risk-adjusted yields versus those of other bonds. Although there remains debate on how long the Fed will continue to buy MBS at the current rate, the technical picture remains positive: MBS new issuance is down considerably due to the rise in interest rates and, in our judgment, is unlikely to increase in the near term.

As we see it, macroeconomic risks trump fundamental risks in the bond market. Credit spreads should move in tandem with interest rate volatility and macroeconomic issues in the coming quarter. We continue to believe that credit spreads can tighten further from current levels and that the performance of investment grade securities remains highly dependent on the direction of interest rates. We expect the investment grade market to be subject to bouts of volatility in the near term, as investors look for cues from factors that include: (1) the timing of any future Fed tapering actions, (2) the policies of new Fed chairwoman Janet Yellen, (3) federal debt ceiling and budget negotiations, (4) risks related to China’s economic prospects, (5) the pace of merger and acquisition activity, (6) global geopolitics, and (7) the course of recovery in Europe.

Per Standard & Poor’s credit rating agency, bonds rated below AAA, including A, 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 Barclays U.S. Aggregate Index is a broad composite that tracks the investment grade domestic bond market.


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 877 693-3546 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 (03/31/2014)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)0.74%0.74%1.58%2.25%n/an/a2.63%02/26/2010
Class A (at offer)-1.99%-1.99%-1.26%1.32%n/an/a1.94%
Institutional Class shares0.81%0.81%1.96%2.51%n/an/a2.89%02/26/2010
BofA Merrill Lynch USD 3-Month LIBOR Constant Maturity Index0.06%0.06%0.27%0.35%n/an/an/a

Returns for less than one year are not annualized.

Class A shares have a maximum up-front sales charge of 2.75% and are subject to an annual distribution fee.

BofA Merrill Lynch U.S. Dollar 3-Month LIBOR Constant Maturity Index (view)

Expense ratio
Class A (Gross)1.01%
Class A (Net)1.01%
Institutional Class shares (Gross)0.76%
Institutional Class shares (Net)0.76%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursement from Nov. 28, 2012 through Nov. 28, 2013. Please see the fee table in the Fund's prospectus for more information.

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 877 693-3546. 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.

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 the 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.

The Funds 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.

Because the Fund may invest in bank loans and other direct indebtedness, it is subject to the risk that the Fund will not receive payment of principal, interest, and other amounts due in connection with these investments, which primarily depend on the financial condition of the borrower and the lending institution.

Not FDIC Insured | No Bank Guarantee | May Lose Value