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Delaware High-Yield Opportunities Fund Quarterly commentary March 31, 2017

Overview

US high yield bonds, as measured by the BofA Merrill Lynch US Cash Pay High Yield Index, returned +2.71% during the first quarter, while US leveraged loans, European high yield, and global high yield returned +1.07%, +1.69%, and +2.87%, respectively, based on BofA Merrill Lynch indices.

The US market returned nearly 3% during January and February as Trump stimulus enthusiasm lifted rates as well as most risk assets, before partially retracing those gains in March amid administration stumbles, falling oil prices (supply-related), mutual fund outflows, and softer-than-expected first quarter growth trends. High yield bond yields and spreads fell 23 basis points and 20 basis points, respectively, over the quarter, to end at 6.24% and 456 basis points. (One basis point equals one-hundredth of a percentage point.)

Returns were correlated with risk, with CCC-rated bonds outperforming at +4.28%, followed by +2.33% for B-rated bonds and +2.02% for BB-rated bonds. The strongest-performing sectors were healthcare (+4.33%), chemicals (+4.26%), and cable and satellite (+4.12%), while retail (-2.35%, the only negative sector), metals and mining (+1.53%), and consumer products (+1.60%) lagged.

New issuance totaled $94 billion for the quarter, slightly ahead of the prior year period, with roughly two-thirds for refinancing. Mutual fund flows totaled -$7.7 billion (a near record) for the quarter, with all of the outflows occurring during the second two weeks of March in the face of US Federal Reserve tightening, heavy new issuance, and narrow spreads. This effectively unwound nearly all of the $8 billion of post-election inflows. (Source: Bank of America Merrill Lynch.)

Within the Fund

The Fund’s largest sector detractors were telecommunications, energy, and healthcare. The largest individual detractors were L Brands (retail), Gulfport Energy (exploration and production), and Chesapeake Energy (exploration and production). L Brands fell due to continuing sales declines at its Victoria’s Secret unit, while Gulfport Energy and Chesapeake Energy fell due to rising oil inventories and falling energy prices in March.

The Fund’s strongest sector contributors were banking, capital goods, and basic industry. The strongest individual contributors were Tenet Healthcare (hospitals), Iasis Healthcare (hospitals), and Scientific Games International (wagering games manufacturing). Tenet Healthcare and Iasis Healthcare gained on the postponement of healthcare legislation, while Scientific Games International rose on improved earnings.

Outlook

Against a backdrop of stable (if unspectacular) growth, buoyant capital markets, oil prices above $50 a barrel, and benign new-issue trends, defaults appear likely to remain well below average in 2017 (the last 12 months were at 1.8% through March; 0.8% excluding energy). Assuming a liquidity premium of 325 basis points, the current spread at 456 basis points offers 131 basis points to absorb default losses, which implies a 2.2% forward default rate on an assumed 60% loss rate on defaults.

Given stable economic and capital market conditions, high yield valuations at current spread levels are full, but not yet stretched. This may represent a distinction without a difference, and in any event we expect coupon-oriented returns in 2017. Accordingly, Fund strategy is focused on income and capital preservation, expressed through an overweight in B-rated issues and an underweight in both higher-quality BB-rated and lower-quality CCC-rated names.

The BofA Merrill Lynch US Cash Pay High Yield Index tracks the performance of US dollar–denominated below-investment-grade corporate debt, currently in a coupon paying period, that is publicly issued in the US 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.

This document may mention bond ratings published by nationally recognized statistical rating organizations (NRSROs) Standard & Poor’s, Moody’s Investors Service, and Fitch, Inc. For securities rated by an NRSRO other than S&P, the rating is converted to the equivalent S&P credit rating. Bonds rated AAA are rated as having the highest quality and are generally considered to have the lowest degree of investment risk. Bonds rated AA are considered to be of high quality, but with a slightly higher degree of risk than bonds rated AAA. Bonds rated A are considered to have many favorable investment qualities, though they are somewhat more susceptible to adverse economic conditions. Bonds rated BBB are believed to be of medium-grade quality and generally riskier over the long term. Bonds rated BB, B, and CCC are regarded as having significant speculative characteristics, with BB indicating the least degree of speculation of the three.

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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 delawarefunds.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 (03/31/2017)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)2.20%2.20%12.82%1.39%5.06%5.90%6.70%12/30/1996
Class A (at offer)-2.44%-2.44%7.70%-0.18%4.11%5.42%6.46%
Institutional Class shares2.25%2.25%13.08%1.63%5.33%6.20%7.00%12/30/1996
BofA Merrill Lynch U.S. High Yield Constrained Index2.71%2.71%16.87%4.64%6.85%7.43%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 US 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
Class ADHOAX
Class CDHOCX
Class RDHIRX

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 bond that is held by a portfolio will be prepaid prior to maturity, at the time when interest rates are lower than what the bond was paying. A portfolio may then have 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 US 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