Print Banner

Print commentary

View printable commentary E-mail this page

This commentary is currently not available. Please check back later.

Delaware Limited-Term Diversified Income Fund Quarterly commentary June 30, 2016

Overview

In response to ongoing support from global central banks, the Barclays U.S. Aggregate Index recorded a positive return for the second quarter of 2016, with lower-quality bonds outperforming higher-rated investment tiers within that index. Although most broad-market fixed income indices produced solid returns, high yield corporate bonds and global Treasurys ex U.S. were the strongest performers, with the asset-backed securities (ABS) and mortgage-backed securities (MBS) sectors lagging during the quarter. Rate declines within the government sector were significant, however, with yields on the 2-year and 10-year Treasury notes falling from 0.72% to 0.58% and from 1.77% to 1.47%, respectively.

A brief bout of volatility in late June triggered by the British vote to exit the European Union raised the question of whether the so-called Brexit referendum will be the first of many such actions by various countries taken in an effort to preserve their nationalist goals at the expense of a global economic agenda. Regardless of the eventual answer, the issue is almost certain to increase market uncertainty — and thus volatility — for many quarters ahead. Meanwhile, the Federal Open Market Committee’s (FOMC’s) June meeting may have foreshadowed a major shift in domestic monetary policy in coming years, with members projecting fewer rate cuts this year and significantly lower policy rates for 2017 and 2018, relative to previous expectations. Federal Reserve Chairwoman Janet Yellen gave form and substance to the numbers, citing an aging population and relatively low productivity as structural forces that could make the current low level of rates a long-lasting phenomenon.

Lagging economic indicators painted a mixed picture of the U.S. economy, with corporate profits recovering but job growth slipping. On the inflation front, core personal consumption expenditures (the Fed’s preferred inflation gauge) fell slightly to 1.6%. Until personal income and wage-and-salary income show greater evidence of acceleration, the consumer inflation trend will remain muted. Combining these factors with growing global concerns and a strong U.S. dollar, our view is that the market has priced out any rate increases by the FOMC until the middle of 2018.

As the June quarter ended, a key question remained unanswered: Will asset prices fall to a level that reflects very weak economic growth, or will central bank policies finally succeed in pushing growth to much higher levels, and thus justify current asset prices? In recent months, bond prices for many weak or declining corporate credits have risen far more than their fundamental credit metrics would support. With higher, more normal rates of growth having failed to materialize deep into an economic expansion, it is reasonable to give serious consideration to the risks of continued slow global growth.

Within the Fund

Delaware Limited-Term Diversified Income Fund (Institutional Class shares and Class A shares at net asset value) outperformed its benchmark, the Barclays 1–3 Year U.S. Government/Credit Index, for the second quarter of 2016.

The Fund’s overweight allocation to investment grade corporate bonds, combined with strong security selection in the investment grade sector, were the primary drivers of performance for the period. Out-of-benchmark allocations in MBS, commercial mortgage-backed securities (CMBS), high yield bonds, and emerging market debt also contributed to relative performance, as these sectors outperformed the return of the benchmark. Conversely, the Fund’s allocation to ABS detracted from relative performance.

Outlook

We believe that an economic landscape fraught with fundamental and political uncertainty will continue to weigh heavily on domestic and global growth expectations. Globalization trends of the past 30 years are being called into question amid an increase in nationalistic leanings worldwide. These concerns should translate into an environment where corporate profits remain challenged and low interest rates present hurdles for the world’s financial companies.

Despite having spent a considerable portion of their monetary ammunition, we expect central banks to provide verbal support for markets and to take additional steps as warranted. Nevertheless, some central banks, including the Bank of Japan, have seen policies lead to unexpected outcomes that present additional challenges, rather than the expected solutions.

As always, the U.S. labor market will remain a key focus area for investors. After two months of softer payroll readings, we will look to incoming data for clues regarding wage growth, inflation expectations, and the willingness of consumers to provide additional economic support. It is our expectation that investors will continue searching for income opportunities wherever they might be found, which could lead to risk-reward dislocations across assets. In light of today’s demanding environment, we believe it is especially appropriate to maintain our longtime emphasis on a fundamental approach to investing in fixed income markets.

Mortgage-backed securities are fixed income securities that represent pools of mortgages, with investors receiving principal and interest payments as the underlying mortgage loans are paid back. Many are issued and guaranteed against default by the U.S. government or its agencies or instrumentalities, such as Freddie Mac, Fannie Mae, and Ginnie Mae. Others are issued by private financial institutions, with some fully collateralized by certificates issued or guaranteed by the U.S. government or its agencies or instrumentalities.

The Barclays U.S. Aggregate Index is a broad composite that tracks the investment grade domestic bond market.

[17232]

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)1.05%2.52%2.43%1.66%1.14%3.57%4.99%11/24/1985
Class A (at offer)-1.72%-0.32%-0.38%0.73%0.59%3.28%4.90%
Institutional Class shares1.20%2.60%2.59%1.86%1.30%3.72%4.29%06/01/1992
Bloomberg Barclays 1-3 Year U.S. Government/Credit Index0.67%1.65%1.59%1.22%1.10%2.80%n/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.

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 1-3 Year U.S. Government/Credit Index (view definition)

Expense ratio
Class A (Gross)0.92%
Class A (Net)0.82%
Institutional Class shares (Gross)0.67%
Institutional Class shares (Net)0.67%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursement from April 29, 2016 through May 1, 2017. 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 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.

If and when the Fund invests in forward foreign currency contracts or uses other investments to hedge against currency risks, the Fund will be subject to special risks, including counterparty risk.

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.

Diversification may not protect against market risk.

All third-party marks cited are the property of their respective owners.

Not FDIC Insured | No Bank Guarantee | May Lose Value