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Delaware Corporate Bond Fund Quarterly commentary September 30, 2016


During the third quarter of 2016, the markets for risk assets continued to respond positively to the support of global central bank policies (that is, easy money). However, interest rates were slightly higher after a volatile quarter that saw more than one swing in sentiment around the U.S. Federal Reserve policy outlook. In addition to central-bank-driven asset price support, the U.S. markets have received strong technical support from non-U.S. investors who would otherwise face negative yields. However, on a currency hedged basis, this relative yield advantage basically disappeared during the quarter as the cost of hedging rose. Central to this change was an outsized rise in the 3-month London interbank offered rate (Libor) (approximately double the rise in the federal funds rate since November 2015), that was likely the unintended consequence of Washington’s money market fund reform and the shift out of prime money funds. Combine this with the clear selling of Treasury bonds by central banks including the People’s Bank of China (due to reserve management programs), and one has to be on watch for signs that some non-Fed tightening might already be taking place. Separately but notably, the fed funds outlook data saw another drop after the September Federal Open Market Committee (FOMC) meeting. As economic growth continues at a below-target pace, are the failures of years of easy monetary policy pointing us back to a new wave of fiscal policy actions?

Despite the negative yields seen throughout the global bond market, economic growth has not received a boost. Instead, imbalances have occurred as asset prices and debt levels have jumped. During September, corporate bonds were issued in Germany at negative yields. We believe this is an unsustainable situation because while it may be good for the borrower, it represents a true misallocation of savings for lender-investors — who can only make a return on their investment if they can sell it at a higher price to the next buyer. After this unprecedented period of global deflationary pressures, the markets have shifted to a point of disadvantaging the lender-investor, and we as investors must be aware and on guard.

Investment grade credit markets posted another solid quarter as global central bank–induced technicals have been a key driver of credit market outperformance, particularly in the United States, where foreign investors are being pushed toward U.S. credit in increasing numbers amid the ongoing search for yield. Revised expectations from the Fed, the Bank of Japan’s attempt to steepen the yield curve (10-year Japanese government bond target of 0%), and the Bank of England’s joining the European Central Bank with its own corporate bond purchase program, have all created an incredibly strong technical backdrop where demand continues to outstrip record supply levels. However, credit fundamentals remain challenged as a strong U.S. dollar and depressed commodity prices are still weighing on earnings, particularly for global issuers with significant non-U.S. exposure. Leverage also remains relatively high, compared to the previous cycle, and continues to rise, despite merger-and-acquisition volumes declining.

Idiosyncratic risks have begun to rise, most notably with regard to Deutsche Bank, adding to investors’ concerns about the health of the European banking sector. Deutsche Bank has underperformed peers as questions about its capital adequacy have intensified after the U.S. Justice Department proposed a potential $14 billion fine related to a mortgage-backed securities probe. Wells Fargo and Mylan also attracted headline attention as the latest companies to face increasingly hostile congressional panels amid consumer-related missteps (fraudulent account openings by Wells Fargo and purported dramatic EpiPen price increases by Mylan), although to date both have been more of an equity story, with bonds having minimal reaction.

Investment grade supply ended the quarter at $361 billion, 30% ahead of last year’s third-quarter total, after several months of record-breaking volumes. Year-to-date supply now stands at $1.08 billion, roughly 9% ahead of last year’s record pace. While some of this heavy supply is likely being pulled forward in anticipation of eventual Fed action, 2016 new-issuance totals are still projected to be flat or slightly more than last year’s record levels. Demand remains equally robust with order books averaging well over 3x, along with new-issue concessions coming in flat to slightly negative. Investment grade inflows totaled $7.8 billion for the quarter, marking 13 straight weeks of positive flows. (Data: Bank of America.)

Within the Fund

For the third quarter of 2016, Delaware Corporate Bond Fund (Institutional Class shares and Class A shares at net asset value) outperformed its benchmark, the Bloomberg Barclays U.S. Corporate Investment Grade Index.

What worked in the Fund:

  • High yield exposure, which outperformed amid positive risk sentiment
  • Security selection within the banking sector — primarily in subordinated debt and hybrid securities — and the technology sector, including newly issued first-lien bonds from the Dell-EMC merger
  • Positive security selection within the utilities sector, including allocation to hybrid debt, and avoiding negative credit events such as that involving FirstEnergy Solutions
  • An overweight to BBB-rated securities (58% of Fund assets, or roughly 10 percentage points higher than the benchmark) as credit quality was inversely related to security performance.

What did not work in the Fund:

  • An underweight to the energy sector, which has benefited from a rally in oil prices and overall positive risk sentiment
  • Adverse credit selection within the consumer cyclical sector, as private prison operator GEO Group has faced increased headline risk, most recently following the first U.S. presidential debate in which Democratic nominee Hillary Clinton indicated support for stopping the federal funding of private prisons and advocated that state governments follow suit
  • Intermediate curve positioning, which underperformed longer-dated securities as the Treasury curve bear flattened — meaning rates in the shorter end of the curve went up by a greater degree than in the longer end — amid evolving expectations for the Fed’s future rate policy.


Global central bank accommodation has continued to be the driving force behind the incredibly strong technical demand picture, while fundamentals remain relatively weak. Central bank buying activity has driven credit valuations through long-term averages, artificially reducing U.S. Treasury yields, and extending the global credit cycle through refinancing activity. Despite central bank support, global economic growth is weak, nonfinancial credit metrics have deteriorated, and earnings growth for global issuers remains lackluster.

Within the U.S., we anticipate another 18–24 months of modest economic expansion before an eventual downturn, which we believe should limit further upside in valuations at this advanced stage of the credit cycle. Outside the U.S., central bank divergence should eventually occur as the Fed slowly adjusts to normalization while Europe remains in the recovery phase of the cycle. Potential risks worth monitoring include further European Union fracture beyond the United Kingdom, China economic weakness, geopolitical risk, strong U.S. dollar / aggressive Fed actions, declining corporate margins, and idiosyncratic/issuer risk.


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 (09/30/2016)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)2.02%8.36%7.30%4.88%5.80%6.78%6.76%09/15/1998
Class A (at offer)-2.64%n/a2.45%3.27%4.83%6.29%6.49%
Institutional Class shares2.09%8.56%7.57%5.14%6.07%7.04%7.03%09/15/1998
Bloomberg Barclays U.S. Corporate Investment Grade Index1.41%9.20%8.56%5.63%5.14%5.91%n/a

Returns for less than one year are not annualized.

Class A shares have a maximum up-front sales charge of 4.50% 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.

Bloomberg Barclays U.S. Corporate Investment Grade Index (view definition)

Expense ratio
Class A (Gross)0.95%
Class A (Net)0.94%
Institutional Class shares (Gross)0.70%
Institutional Class shares (Net)0.69%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursements from Nov. 27, 2015 through Nov. 28, 2016. Please see the fee table in the Fund's prospectus for more information.

Share class ticker symbols
Institutional ClassDGCIX

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.

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, non-investment-grade bonds (junk bonds) involve higher risk than investment grade bonds.

The Fund 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 derivatives transaction depends upon the counterparties’ ability to fulfill their contractual obligations.

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