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Delaware Corporate Bond Fund Quarterly commentary June 30, 2016

Overview

Investment grade corporate bonds performed well despite late quarter volatility caused by Britain’s vote to leave the European Union, or Brexit, an action that took the market by surprise. Though Brexit briefly interrupted the firm market tone, price action was fairly orderly (excluding Yankee financials) and wider risk premiums (spreads) attracted buying interest from investors as the global search for yield continued to drive support for corporate credit. Importantly, market-based expectations for Federal Reserve policy action plummeted in sympathy with implied probabilities for a December rate hike, declining to less than 10% (from 50% pre-Brexit) as the “lower for longer” theme gained ground.

The Barclays U.S. Corporate Investment Grade Index returned 3.57% for the quarter — outperforming duration-matched Treasurys by 99 basis points — as spreads tightened from 165 basis points to 156 basis points. (A basis point equals one hundredth of a percentage point.) Investment grade supply ended the quarter at $354 billion, virtually unchanged from last year’s second quarter. Year-to-date issuance stands at $714 billion, roughly in line with last year’s record pace. Demand remained robust as the global negative yield backdrop continued to drive foreign investors toward the U.S. market.

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 Federal Open Market Committee (FOMC) until the middle of 2018.

As the second 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

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

What worked in the Fund:

  • Security selection within the banking sector, primarily in subordinated debt and hybrids
  • An overweight to the utilities sector, which outperformed amid a sharp decline in rates
  • Positive security selection within sovereign-owned entities, including both developed country exposure (industrial hybrids) and emerging market country exposure.

What did not work in the Fund:

  • An underweight to the energy sector, which benefited from a strong rally in oil prices
  • Adverse security selection combined with relatively conservative positioning within high yield, as “risk-on” sentiment prior to Brexit drove performance, led by higher-risk / low-quality sectors and issues.

Outlook

Despite a slight reduction in mergers and acquisitions volume, event risk remains high within investment grade credit, consistent with the late phase of a credit cycle when low borrowing rates support share buybacks and other leveraging transactions. Fundamentally, issuer-specific revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) trends have deteriorated due to commodity price weakness, slowing domestic growth, and U.S. dollar strength. The decline in new-issue concessions highlights improving investor demand, including a global search for yield that has proved to be a powerfully positive technical factor.

The Brexit vote generated anxiety and uncertainty, which could provide opportunities to take advantage of mispriced securities on which we remain fundamentally constructive. For example, the selloff in domestic banks appears overdone from a fundamental perspective, though we would expect additional volatility due to the contagion effect from the European financial sector. Within the industrial sector, we are primarily monitoring energy (exploration and production) and chemicals and communications companies for attractive entry points.

An economic landscape fraught with fundamental and political uncertainty could 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.

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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)3.31%6.21%4.18%4.35%5.54%7.08%6.74%09/15/1998
Class A (at offer)-1.36%1.49%-0.45%2.76%4.57%6.58%6.46%
Institutional Class shares3.37%6.34%4.44%4.61%5.80%7.35%7.01%09/15/1998
Barclays U.S. Corporate Investment Grade Index3.57%7.68%7.94%5.42%5.43%6.24%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.

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.

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