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Delaware High-Yield Opportunities Fund Quarterly commentary December 31, 2016


U.S. high yield bonds, as measured by the BofA Merrill Lynch U.S. Cash Pay High Yield Index, returned 1.85% during the fourth quarter of 2016, bringing full-year returns to 17.3%. This marks the largest annual gain for the sector since 2009. Though rising interest rates, volatile energy prices, and election uncertainty muted returns in October and the first week of November, the subsequent U.S. presidential victory of Donald Trump and an Organization of the Petroleum Exporting Countries (OPEC) production agreement (which caused a spike in oil prices) underwrote a 1.95% gain in high yield debt in December. Returns were correlated with risk, with CCC-rated bonds outperforming at +5.9%, followed by +2.1% for B-rated bonds, and +0.7% for BB-rated bonds.

Consistent with the pattern since mid-February 2016, the energy and metals-and-mining sectors outperformed for the quarter, resulting in full-year returns of 38% and 44%, respectively, compared to 17% for the overall high yield market. Excluding commodities, the high yield sector gained just 0.8% for the quarter and 9.5% for the year. The strongest-performing sectors were metals and mining, energy, and technology, while healthcare, paper and packaging, and utilities lagged. High yield spreads fell 71 basis points to 430 basis points, while yields declined six basis points to end the quarter at 6.08%. (A basis point equals one hundredth of a percentage point.)

Within the Fund

During the fourth 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 healthcare, basic industry, and insurance. The strongest individual contributors were Transocean (drilling rigs), Zekelman Industries (steel pipe), and Gardner Denver (industrial machinery). Transocean and Gardner Denver gained due to their exposure to the improving energy market, while Zekelman benefited from improved operating performance and a rating agency upgrade.

The Fund’s largest sector detractors were energy, financial services, and media. The largest individual detractors were Digicel (telecommunications), Tenet Healthcare (hospitals), and Dynegy (electric utility). Digicel declined due to an unfavorable currency impact on earnings, Tenet underperformed because of the potential repeal of the Affordable Care Act, and Dynegy declined due to weak 2017 earnings guidance.


The major story for high yield in 2016 was the extraordinary recovery of the energy and commodity sectors, which helped to deliver historic returns for the market. The rally was exceptionally narrow, however, with 16 of 21 sectors underperforming the index average (source: J.P. Morgan). Given that the energy and commodity sectors are now fully valued, spreads are signaling full value across industries and rating tiers.

While overall leverage has crept steadily higher since 2010, other credit metrics, including interest coverage, liquidity, profitability, new-issue quality, and bank loan loss trends point to a healthy extension to the credit cycle. Consequently, defaults appear likely to remain well below average in 2017, suggesting that with spreads at 430 basis points as mentioned earlier, investors remain adequately compensated for both credit and liquidity risk.

Against this backdrop and our expectation of coupon-like returns in 2017, portfolio strategy is focused on income and capital preservation through an overweight in B-rated issues and an underweight in rate-sensitive BB-rated bonds and speculative CCC-rated bonds. We favor well-capitalized large-capitalization names that exhibit what we view as strong, predictable cash flows, ample liquidity, noncomplex capital structures, and minimal refinancing risk. We believe this strategy has the potential to 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.

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.

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 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 (12/31/2016)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)1.69%12.88%12.88%1.57%6.00%5.99%6.67%12/30/1996
Class A (at offer)-2.94%7.72%7.72%0.06%5.05%5.50%6.43%
Institutional Class shares1.75%13.48%13.48%1.83%6.28%6.29%6.97%12/30/1996
BofA Merrill Lynch U.S. High Yield Constrained Index1.88%17.49%17.49%4.73%7.35%7.45%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)1.14%
Class A (Net)1.05%
Institutional Class shares (Gross)0.89%
Institutional Class shares (Net)0.80%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursements from Nov. 28, 2016 through Nov. 28, 2017. 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.

Share class ticker symbols
Institutional ClassDHOIX

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