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Delaware High-Yield Opportunities Fund Quarterly commentary June 30, 2017

Overview

US high yield bonds, as measured by the BofA Merrill Lynch US Cash Pay High Yield Index, returned +2.16% during the second quarter, while European and global high yield bonds returned +2.89% and +2.08%, respectively, based on BofA Merrill Lynch indices.

The US market returned +1.1% in April and +0.9% in May on the back of falling rates, rising equity prices, and stable if unspectacular economic data, and generated break-even returns in June as supply fears drove West Texas Intermediate oil down nearly $10 a barrel. US high yield bond yields and spreads fell by 27 and 7 basis points, respectively, over the quarter, to end at 5.56% and 378 basis points. (One basis point equals one-hundredth of a percentage point.)

US high yield returns were positively correlated with credit quality. BB-rated bonds outperformed at +2.59%, followed by +1.76% for B-rated bonds and +1.70% for CCC-rated bonds. The strongest performing sectors were gaming (+3.92%), industrials (+3.21%), and housing (+3.06%), while energy (-2.87%, the only negative sector), retail (+0.94%), and broadcasting (+1.03%) lagged.

New issuance totaled $69 billion for the quarter (down 10% from a year earlier), of which 61% was for refinancing and 67% was rated split BB or higher. Mutual fund flows improved to +$0.5 billion from -$8.2 billion in the first quarter, while bonds that were lost to calls, tenders, and maturities outpaced new issues, leading to net negative new issuance and positive technical indicators during the quarter. (Source: Bank of America Merrill Lynch.)

Within the Fund

The Fund’s strongest sector contributors were energy, basic industry, and leisure. The strongest individual contributors were SFR Group (cable TV), Scientific Games International (casino games), and Sprint (telecommunications). SFR Group rose on French regulatory approval for an acquisition, Scientific Games International rose on strong operating trends, and Sprint rose on acquisition rumors.

The Fund’s largest sector detractors were healthcare, consumer goods, and finance. The largest individual detractors were Revlon (cosmetics), Calpine (utility), and JBS Investments (food processing). Revlon fell on poor operating results, Calpine declined on rumors of a possible sale and releveraging, and JBS Investments dropped on news of a criminal investigation of its Brazilian parent company.

Outlook

Despite the unexpected weakness in oil during June, the broader backdrop of stable growth, buoyant capital markets, low absolute rates, and benign new-issue quality imply below-average defaults and a supportive near-term environment for high yield demand and prices. Barring an unexpected decline in growth or inflation, we expect the US Federal Reserve to remain on its tightening track and to begin its balance sheet tapering program, both of which argue for a modest rise in rates during the second half of the year.

Assuming 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 for the balance of the year. Accordingly, portfolio 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.

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)

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.

Institutional Class shares available only available to certain investors. See the prospectus for more information.

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 US investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

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