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Delaware High-Yield Opportunities Fund Quarterly commentary June 30, 2016

Overview

High yield bonds, as measured by the BofA Merrill Lynch U.S. Cash Pay High Yield Index, returned 6.4% during the second quarter, bringing year-to-date returns to 9.9%. Prior to Britain’s surprising “Brexit” vote to leave the European Union, the second quarter was a “risk-on” period, with returns seeming to benefit from the continued recovery in oil (up 26%), a strong Treasury rally (10-year Treasurys returned 3.0%), a dovish Federal Reserve pivot in the face of weak labor data, and strong institutional demand for U.S. high yield.

Returns appeared strongly correlated with risk, with CCC-rated issues returning 12.6%, followed by B-rated bonds at 4.4%, and BB-rated bonds at 3.4%. Sector returns were led by energy (up 21.7%), metals and mining (15.3%), and telecom (5.7%), while healthcare (2.2%), food and beverage (2.1%), and retail (1.4%) lagged. Despite $5 billion of fund redemptions during the quarter, technical conditions remained well supported by $26 billion of coupon flow (with an estimated 50% reinvested) and anecdotal evidence of continued strong foreign institutional demand for high yielding U.S.-dollar assets. The market yield fell 75 basis points to 7.50%, while the spread fell 55 basis points to 646 basis points. (A basis point equals one hundredth of a percentage point.)

Within the Fund

During the second quarter of 2016, Delaware High-Yield Opportunities Fund (Institutional Class shares and Class A shares at net asset value) underperformed its benchmark, the BofA Merrill Lynch U.S. High Yield Constrained Index.

The Fund’s strongest sector contributors were consumer goods, capital goods, and healthcare. The strongest individual contributors were AK Steel (steel manufacturing), EnLink Midstream Partners (energy pipelines), and Freeport McMoRan (copper/gold mining). All three companies rose in sync with the first-half rally in energy and industrial commodities, which improved their outlook for earnings and liquidity.

Conversely, the Fund’s largest sector detractors on a relative basis were energy, basic industry, and financial services. The biggest individual detractors were BlueLine Rental (equipment rental), L Brands (retail women’s apparel), and Penske Automotive (auto dealerships). BlueLine declined on signs of a more competitive landscape, L Brands sold off on poor first-quarter earnings at its Victoria’s Secret unit, while Penske declined in anticipation of weaker U.K. sales after the Brexit vote.

Outlook

The post-Brexit selloff across equity markets and the backup in high yield appeared to reflect the surprise of the British vote more than any imminent economic impact. And while declining capital markets can induce fundamental weakness, we believe that seems unlikely in general, and in the United States in particular. The strong snapback in high yield and U.S. equity markets as the quarter closed would tend to support such a view. And despite the bounce in oil prices, we still expect energy defaults to rise materially over the next 18 months, although at $50 a barrel we believe the carnage is likely to be significantly less than at $25 a barrel. A flurry of recent debt, equity, and debt-for-equity deals in the energy space indicates significant investor interest in acquiring cheap assets now that the worst has seemingly passed.

Assuming broader employment and consumption trends hold up, we believe the higher-quality, noncommodity sectors of the market should continue to experience below-average defaults, implying that ex-energy spreads in the 600-plus basis point range continue to provide adequate compensation for risk. In this context, we would expect base-case returns for the balance of the year to be range-bound around the coupon.

Given our expectation of coupon-like returns, portfolio strategy is focused on capital preservation, with an emphasis on the B and BB rating tiers. The Fund is underweight energy and industrial commodities, while overweight the more defensive healthcare, financial services, and consumer goods sectors. In each instance, we favor well-capitalized, large-cap names exhibiting what we view as strong, predictable cash flows, ample liquidity, noncomplex capital structures, and minimal refinancing risk. We believe this strategy can outperform under the conditions described above by delivering a competitive income stream while minimizing both volatility and downside risk relative to the market as a whole.

Bond ratings are determined by a nationally recognized statistical rating organization.

Per Standard & Poor’s credit rating agency, bonds rated below AAA 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 of the three.

The BofA Merrill Lynch U.S. Cash Pay High Yield Index tracks the performance of U.S. dollar–denominated below-investment-grade corporate debt, currently in a coupon paying period, that is publicly issued in the U.S. domestic market. Qualifying securities must have at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule, and a minimum amount outstanding of $100 million. .

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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 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 (06/30/2016)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)3.40%5.73%-3.44%1.61%4.02%6.12%6.49%12/30/1996
Class A (at offer)-1.29%0.90%-7.81%0.05%3.05%5.63%6.24%
Institutional Class shares3.46%6.16%-2.96%1.87%4.29%6.42%6.79%12/30/1996
BofA Merrill Lynch U.S. High Yield Constrained Index5.88%9.32%1.74%4.20%5.70%7.50%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.

BofA Merrill Lynch U.S. High Yield Constrained Index (view definition)

Expense ratio
Class A (Gross)1.12%
Class A (Net)1.05%
Institutional Class shares (Gross)0.87%
Institutional Class shares (Net)0.80%

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. Additionally, the Fund's Class A shares are subject to a blended 12b-1 fee of 0.10% on all shares acquired prior to June 1, 1992 and 0.25% on all shares acquired on or after June 1, 1992. All Class A shares currently bear 12b-1 fees at the same rate, the blended rate based on the formula described above. This method of calculating Class A 12b-1 fees may be discontinued at the sole discretion of the Fund's Board of Trustees.

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 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.

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