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Delaware Dividend Income Fund Quarterly commentary March 31, 2015

Within the Fund

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

Large-cap value equity

Within the large-cap value equity portion of the Fund, investments in consumer staples and industrials contributed the most to performance. The big story in consumer staples was Kraft Foods Group. In late March, the company agreed to merge with H.J. Heinz in a deal led by 3G Capital and Berkshire Hathaway. Kraft shares rose 35% on the day of the announcement and were up 39% for the quarter. We’ll want to get a better idea of the valuation of the new company to see if there’s a compelling reason to own the shares over the long term. In industrials, each of the three stocks outperformed, led by defense contractor Northrop Grumman, up 9.7%. The company reported solid quarterly results and raised its full-year guidance for both sales and per-share earnings.

Investments in materials and energy caused the largest drags on returns. The one materials sector holding, specialty chemical company DuPont, trailed the broader sector, -2.7% versus 0.5%. An overweight allocation in energy detracted from the large-cap value portfolio of the Fund.

Real estate investment trusts (REITs)

Within the equity real estate investment trust (REIT) portion of the Fund, investments in the retail, shopping centers, and apartments sectors detracted most from performance during the quarter.  Wheeler Real Estate Investment Trust in the retail sector was the bottom performer among the Fund’s REIT holdings. In addition, poor stock selection in shopping centers and apartments, along with an unhelpful underweight in the strong-performing apartments sector, hurt performance.

Stock selection in the specialty, mixed, and industrial REIT sectors aided performance. In the mixed sector, CyrusOne, a data center owner and operator, and Duke Realty, a company that owns industrial and medical office properties, had strong quarters. Duke Realty has transformed itself over the past five years. Historically, Duke had been a Midwest suburban office company. Recognizing the low growth of that asset class, the company began investing in higher-growth medical office and industrial properties. Today, its exposure to suburban offices is just 15% of total assets.

International value equity

The Fund’s international value equity portion performed well during the quarter due to strong stock selection and favorable regional and sector allocation. Positive stock selection in financials, information technology, and telecommunications more than offset weakness in consumer staples and industrials. Sector allocation was positive primarily due to a favorable underweight exposure to utilities. On a regional basis, strong stock selection in Japan and the United Kingdom more than offset weakness in continental Europe. Regional allocation was positive primarily due to an underweight exposure to the U.K. and strong performance by emerging market holdings. Net currency effect was negative primarily due an adverse exposure to the Canadian dollar.

Fixed income

Within the Fund’s high yield bond portion, top sector contributors were media, retail, and utilities, while the top individual contributors were Calumet Specialty Products (refining), Northern Oil and Gas (exploration and production), and Wind Telecommunications (European wireless provider). Calumet Specialty Products and Northern Oil advanced as a result of stronger-than-expected earnings reported during the period. Wind Telecommunications advanced on the announcement of a partial tender for its bonds.

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

The Fund’s portion in emerging market debt had a slight negative effect on performance for the quarter. Emerging market investments remain challenged by the significant move in both currencies and commodities.

Outlook

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

  • Despite its modest return in the first quarter of 2015, the broad U.S. market has made substantial gains since bottoming in March 2009. The annualized total return for the S&P 500 Index for the six years ended March 31, 2015 has been 19.7%. Given our belief that higher starting valuations lead to lower long-term returns, we’re anticipating mid-single-digit annualized returns over the next five-plus years. Near term, the market environment appears more uncertain to us. In any event, we think owning what we view as higher-quality U.S. stocks with attractive valuations and favorable risk/reward profiles gives us a better chance to deliver competitive returns.
  • REITs have continued to rise, propelled by low rates, limited supply, and investors’ seemingly unquenchable thirst for yield. With interest rates even lower in Europe and Japan, the result has been a global rally in real estate securities. Many companies can now cross borders and raise cheap capital, even after paying to hedge foreign currencies against the strong dollar. We believe that our philosophy — that it’s important to understand the cost and availability of debt and equity capital — is being adopted by others on a global scale. Investors who have been waiting for real estate fundamentals to improve missed the first quarter gains in European real estate markets. Regardless of the region, we believe a balanced approach to capital markets and real estate analysis is prudent in identifying under- and overvaluation in real estate securities.
  • The United States is the relative star in an environment of historically low global bond yields and weak economic growth, implying sustained demand for U.S. credit and the potential for reasonably rapid recoveries from market declines. Credit metrics remain sound outside of commodity-based companies, and barring a significant and sustained rise in leveraged buyout (LBO) activity or an unexpected U.S. slowdown, we believe baseline returns for high yield bonds should continue to be centered on the coupon.

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.

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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.

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 877 693-3546 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 (03/31/2015)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)1.48%1.48%6.70%11.47%10.65%6.65%8.30%12/02/1996
Class A (at offer)-4.35%-4.35%0.52%9.28%9.34%6.02%7.95%
Institutional Class shares1.46%1.46%6.95%11.75%10.92%6.92%8.48%12/02/1996
S&P 500 Index0.95%0.95%12.73%16.11%14.47%8.01%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 04/30/2015
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Occidental Petroleum Corp.1.5%
Quest Diagnostics Inc.1.5%
Intel Corp.1.4%
Verizon Communications Inc.1.4%
Cisco Systems Inc.1.4%
Broadcom Corp.1.4%
AT&T Inc.1.4%
Bank of New York Mellon Corp.1.4%
Johnson Controls Inc.1.4%
Archer-Daniels-Midland Co.1.4%
Total % Portfolio in Top 10 holdings14.2%

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.

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