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  • Trends in consumer spending: Growing confidence amid constraints
    cost of healthcare and the fact that it is a necessary service is cutting into other areas of potential consumer spending Disclosure Gasoline spending Gasoline spending Many analysts have expected cheaper gasoline prices to boost other areas of consumer spending According to some estimates the average household will spend 26 less on gasoline in 2015 than in 2014 Overall this chart suggests that as consumers have paid less for fuel they have spent some of their savings in select retail industries Disclosure Automobile versus light trucks Automobile versus light trucks In addition as the price of gasoline has fallen buyers of new vehicles have shifted their buying habits Consider that less than three years ago with gasoline at 3 67 a gallon the sales split between automobiles and light trucks was 50 50 More recently with gasoline at 2 29 a gallon automobile sales have declined to represent 43 of total sales while light trucks have increased their share to 57 Sources U S Bureau of Economic Analysis and U S Energy Information Administration Outlook Outlook As shown in the preceding slides several factors are influencing the direction of consumer spending On the positive side consumer sentiment is trending upward which typically bodes well for future spending activity However smaller appetites for debt together with higher savings rates and more focused spending are factors that we will continue to monitor through our research process Overall we retain our bias toward economically sensitive areas of the market including those that may feel the effects of a healthier consumer Footnote and disclosure A household s disposable income is measured after accounting for taxes Overall consumer expenditures are based on an annual survey conducted by the Bureau of Labor Statistics and displayed in consumer units Personal Consumption Expenditures PCE is the primary estimated measure of consumer spending on goods and services in the U S economy PCE shows how much of the income earned by households is being spent on current consumption monthly Spending source U S Labor Department s Bureau of Labor Statistics Chart data U S Commerce Department s Bureau of Economic Analysis Disposable personal income percentage change from year ago monthly seasonally adjusted annual rate Personal consumption expenditures percentage change from year ago monthly seasonally adjusted real rate Close Disclosure Source U S Bureau of Economic Analysis Chained 2009 Real rates Shown as a percentage of total PCE Close Disclosure Source Gasoline spend for 2015 estimated by the U S Energy Information Administration EIA based on U S Labor Department s Consumer Expenditures Survey and EIA s Short Term Energy Outlook March 2015 Retail sales data U S Census Bureau Monthly seasonally adjusted Close Launch slideshow Charts are for illustrative purposes only The views expressed represent the Manager s assessment of the market environment as of December 2015 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 Views are subject to change without notice

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2015/trends-in-consumer-spending (2016-04-26)
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  • Investing in China: Opportunities and challenges
    investment led GDP growth slowing This change is supported by the recent manufacturing Purchasing Managers Index PMI in October which slowed to 49 8 while the services PMI held steady at 53 1 With China s growth rate clearly slowing however a key question for many investors has become What will China do in the face of slowing economic growth With its most recent rate cut of 25 basis points and reserve requirement rate cut of 50 basis points the PBOC has confirmed our view that China will continue its monetary easing policies One basis point equals a hundredth of a percentage point We note that China has a significant monetary policy toolbox at its disposal which it is likely to use to help stabilize growth We believe the market has underestimated the amount of liquidity to come from the PBOC The most recent rate cuts added approximately 680 billion renminbi of liquidity to the market Since November 2014 China has cut interest rates six times a total of 150 basis points and the reserve requirement rate five times a total of 250 basis points We expect significant liquidity to be injected in coming months to keep cost of funding and rates low Finally the recent renminbi depreciation will help some export industries but is too small to have a major impact on the overall economy We believe the depreciation was to support domestic liquidity easing Our outlook on China Overall we are cautiously optimistic on the China story but we do stress that China is a unique and evolving economy As investors we are focused on investing in Chinese companies that benefit from domestic demand and structural growth We tend to prefer companies that generate the majority of their revenue domestically in Asia avoiding exporters and state owned enterprises We also tend to invest in companies that we believe offer some notable growth themes In general we think old economy sectors like banking energy metals and mining materials and property will continue to slow in a scenario of overall benign economic growth But we believe that new economy sectors like insurance healthcare consumers and alternative energy could be more resilient and generate above GDP growth with government support In addition we re optimistic that deleveraging at the corporate level will continue to take place as overcapacity serves to reduce capital expenditure in many parts of the economy All of this bears close watching over time given China s macro dynamics Our team continues to be focused on performing rigorous fundamental company analysis seeking to uncover opportunity in attractively priced shares of favorable growth companies that exhibit a strong corporate governance focus The views expressed represent the Manager s assessment of the market environment as of December 2015 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 Views are subject to change without notice and may not reflect the Manager s views Carefully consider

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2015/investing-in-china-opportunities-and-challenges (2016-04-26)
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  • An update on credit market conditions
    low rate environment Putting a finer point on it We believe the balance of indicators support our assessment of the current stage of the credit cycle That being said we think there are sources of pressure that bear watching and a good share of the negative data lie within the investment grade space The most notable weakness stems from commodity based sectors but as mentioned above some deterioration is also evident in the healthcare and technology sectors due to debt financed M A and share buybacks which has led to year to date supply being at or above the prior full year levels for those two sectors As a result nonfinancial leverage is at a 15 year high If this trend continues we think any earnings declines will be particularly painful for issuers who are nursing overleveraged balance sheets Oversupply in the market continues to be one of the main risks for further risk premium compression The investment grade market is expected to see further supply in the coming quarters accompanying large potential M A deals that have been recently announced although they are not likely to affect supply until 2016 With recent hawkish Fed testimony and fed funds futures indicating that a December liftoff is now greater than a 50 50 probability M A activity may reach its peak in 2015 This should eventually provide some supply relief down the road although the benefits will take time to be realized as the current excess supply pipeline is worked down Once supply fades we expect demand for investment grade credit to return particularly from liability driven investors and overseas investors such as central banks that seek competitive yields Lower expected supply from other fixed income asset classes such as commercial mortgage backed securities residential mortgage backed securities and asset backed securities should further support investment grade technicals in time as well Bringing it all together Valuations and a re emphasis on risk We were more optimistic on investment grade valuations at the beginning of the year as spreads had cheapened to what we believed were attractive levels however event risk another year of record supply and global growth concerns affecting commodity prices have created headwinds and are justifying wider risk premiums At this point there are no clear near term catalysts for further tightening at the index level given Fed uncertainty fourth quarter supply expectations heavy event risk weakening earnings growth and global growth concerns China As such investment grade risk premiums should remain volatile in the near term as pockets of stability will be met with additional supply placing pressure on secondary levels Apart from the fundamentals noted above we are also concerned about some of the more prevalent macro risks that markets are facing including Uncertainty related to China s growth outlook This is already presenting a major overhang to market risk premiums Further deterioration in China has the potential to derail the U S economic recovery and put more pressure on already weakening corporate earnings Our base

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2015/an-update-on-credit-market-conditions (2016-04-26)
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  • Municipal bonds and rising interest rates: A historical perspective
    a recession an event that we would characterize as unlikely at this juncture In general the Delaware Investments family of municipal bond funds performed positively during the 2004 2006 rate hike cycle and we found that we benefited from credit investments given how our intermediate strategies were positioned in that period Our typical competitor s intermediate strategy tends to hold higher quality issues and does not have the credit exposure that we utilize in our strategy We also generally favor utilizing the long end of the curve 15 years and beyond which is considered out of benchmark relative to the typical intermediate strategy These overweights to credit and curve and their contributions to outperformance were differentiators before and can be again Standardized performance tables for Delaware Investments municipal bond funds are available here Choose a specific fund from the list on the left side of the web page and then select the performance tab Standardized performance tables for Delaware Investments municipal bond funds are available here Choose a specific fund from the list on the left side of the web page and then select the performance tab For more information about the historical performance of Delaware Investments municipal bond funds including performance in the 2004 2006 rising interest rate environments please contact your regional director or call 877 693 3546 Standardized performance tables for Delaware Investments municipal bond funds are available here Choose a specific fund from the list on the left side of the web page and then select the performance tab Flows into the intermediate funds category were solid during the 2004 2006 period and have also been strong in 2015 as we approach the next rate hike period Year to date intermediate strategies have seen positive net flows of 5 compared to 1 for all municipal bond funds source Simfund This is not surprising since many investors tend to shy away from longer strategies in the face of rising rates preferring to stay shorter on the curve until rates actually rise The fact that nominal rates are near historic lows only exacerbates that tendency We expect intermediate funds to see strong flows as the next rate rising cycle gets under way and we believe it makes sense for advisors to discuss this strategy as a viable option for those investors looking for credit exposure with less duration In summary As suggested earlier markets are looking toward normalization of the federal funds rate in the near future While we do not look for the past to predict what lies ahead this next rising rate period is expected to have similar effects on the rate curves as did the 2004 2006 period In a bear flattening environment the long end of the curve outperforms rises less than the shorter end and having an income cushion to offset the negative price action becomes paramount to maximizing your return potential Based on our view of the economy which we believe will continue to progress albeit at a moderate pace we do

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  • Despite periods of cooling in 2015, municipals generally see support
    the municipal bond market in 2016 We believe that bond income should sufficiently offset any price declines that may be prompted by the onset of higher interest rates The Federal Reserve will become increasingly likely to raise rates in late 2015 Bond issuance could see an uptick largely based on refinancings In terms of new money issuance we think 2015 could be the fourth consecutive year of lower volume However looking out longer term we believe financing for sorely needed infrastructure projects could be a driver This will depend on political will and policy priorities but it s a pressing situation that we will continue monitoring 3 6 trillion Estimated investments needed in U S infrastructure by 2020 Data American Society of Civil Engineers as of Nov 14 2014 Most recent data available Do municipal bonds make sense for you Do municipal bonds make sense for you No asset class can avoid periodic bouts of volatility and municipal bonds have seen their share of market movement That being said we think it s worth reminding people why munis are an attractive complement to other assets in the portfolio of an individual investor We don t think it s too conservative to refer to municipal bonds as rainy day assets Among the characteristics that make municipal bonds unique consider the following two standout traits Tax features Tax features Generally speaking income generated by municipal bonds is not subject to federal taxes and in certain cases tax exemption is granted by state and local authorities as well This feature is particularly attractive when you consider the so called taxable equivalent yield that a taxable security would have to generate in order to match a tax free yield Data Thomson Municipal Market Data Bloomberg Credit strength Credit strength Over the long term municipal debt has posted default rates that are substantially lower than those for comparably rated corporate debt Municipal rated debt Corporate rated debt AAA 0 00 0 48 AA 0 01 0 99 A 0 06 2 72 BBB 0 37 4 41 Below investment grade 7 52 32 41 Data Moody s Investors Service August 2015 Launch slideshow Charts are for illustrative purposes only The views expressed represent the Manager s assessment of the market environment as of October 2015 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 Views are subject to change without notice and may not reflect the Manager s views Carefully consider the Funds investment objectives risk factors charges and expenses before investing This and other information can be found in the Funds prospectuses and their summary prospectuses which may be obtained by visiting the fund literature page or calling 800 523 1918 Investors should read the prospectus and the summary prospectus carefully before investing IMPORTANT RISK CONSIDERATIONS Investing involves risk including the possible loss of principal Past performance does not guarantee future results Fixed income securities and bond funds

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  • Bond market playbook: Diversification, risk control, and patience
    risk appetite on high yield corporate bonds Data BofA Merrill Lynch via Federal Reserve Bank of St Louis Daily observations All charts shown are for comparison purposes only Now the bad news With interest rates at 60 year lows and with yield spreads for all sectors at or below long term averages these two drivers of bond market returns seem to have run their course This is the tyranny of bond math and it means returns going forward could be muted relative to prior years and should consist largely of coupon income Which brings us to the Federal Reserve What about the effects of monetary policy The Fed is and has been anxious to begin normalizing its extraordinarily accommodative monetary policy which would mean slowly unwinding or selling back into the market roughly 4 trillion in holdings of Treasurys and mortgages as well as lifting the federal funds rate which at 0 0 25 is effectively bottomed out as shown in Chart 3 A negative federal funds rate is a possible but unlikely policy direction While the Fed s balance sheet is likely to remain static for now Fed officials will likely begin the process of normalizing the federal funds rate as soon as they are satisfied that markets are showing the right combination of 1 economic growth and stronger labor markets in the U S and 2 a measure of economic stability around the world We believe normalizing is unlikely to entail a significant boost to the federal funds rate More than likely it ll be a gradual and incremental series of small increases that may play out over several years View chart Chart 3 Federal funds rate lower for longer Close chart Chart 3 Federal funds rate lower for longer Data U S Federal Reserve All charts shown are for comparison purposes only Unfortunately during the last year the Fed has been confronted with unacceptably low economic growth in the U S distressingly low inflation and signs of slowing growth in places like China emerging market economies and Europe This means that the Fed is on hold for now and while a rate bump is possible in December it appears increasingly unlikely Ironically investors have been fretful that the Fed will wait too long to initiate rate hikes thus risking rising inflation and an overheated economy But now the Fed appears to be facing a different dilemma With growth slowing around the world should it risk a rate increase now possibly triggering even slower U S growth and by extension slower global growth or should it leave the federal funds rate at 0 0 25 and risk depriving itself of a key tool to stimulate growth should it need to do so in the future Investment ramifications Given the deteriorating global growth dynamics described above and the groundswell in downside risks to the U S economy we are not overly concerned about an imminent or significant increase in interest rates But we are concerned about this scenario The

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2015/bond-market-playbook (2016-04-26)
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  • Constructive conditions for healthcare stocks
    be considered a recommendation to buy hold or sell any security and should not be relied on as research or investment advice Views are subject to change without notice and may not reflect the Manager s current views The views expressed are general in nature and do not relate to a particular mutual fund Carefully consider the Funds investment objectives risk factors charges and expenses before investing This and other information can be found in the Funds prospectuses and their summary prospectuses which may be obtained by visiting the fund literature page or calling 800 523 1918 Investors should read the prospectus and the summary prospectus carefully before investing IMPORTANT RISK CONSIDERATIONS Investing involves risk including the possible loss of principal Past performance does not guarantee future results Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors Healthcare companies are subject to extensive government regulation and their profitability can be affected by restrictions on government reimbursement for medical expenses rising costs of medical products and services pricing pressure and malpractice or other litigation REIT investments are subject to many of the risks associated with direct real estate ownership including changes in economic conditions credit risk and interest rate fluctuations Investments in small and or medium sized companies typically exhibit greater risk and higher volatility than larger more established companies 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 Christopher S Adams Senior Portfolio Manager View bio More from Christopher S Adams Despite recent gains opportunities still available in healthcare stocks Sector spotlight Healthcare See all from this author See all from this team Christopher S Adams biography Christopher S Adams CFA Vice President Senior Portfolio Manager Christopher S Adams is a senior portfolio manager on the firm s Core Equity team He also performs analysis and research to support the portfolio management function From 1995 to 1998 he was the firm s vice president strategic planning Prior to joining Delaware Investments in 1995 as assistant vice president of strategic planning Adams had approximately 10 years of experience in the financial services industry in the U S and U K including positions with Coopers Lybrand The Sumitomo Bank Bank of America and Lloyds Bank Adams holds both bachelor s and master s degrees in history and economics from the University of Oxford England and received an MBA with dual concentrations in finance and insurance risk management from The Wharton School of the University of Pennsylvania He is a past president of the CFA Society of Philadelphia Subscribe to Insights Thought leadership from our portfolio managers and analysts on trending topics Email I want email notices Upon each new posting Weekly Please select your subscription frequency I m interested in Insights from All investment teams Or select Equity

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  • The banking sector: Optimism in a post-crisis environment
    of pursuing organic growth Relatively strong balance sheets mean that more firms are in positions to acquire new businesses To be sure overall deal volume has been facilitated by generic forces as well including 1 the availability of historically inexpensive debt and 2 elevated share prices which generally enhance the likelihood that prospective deals will actually close successfully Since the earliest iterations of finacial markets investors have tried and largely failed to predict changes in interest rates But we think it makes sense to expect a steeper yield curve in the quarters ahead as the U S Federal Reserve looks to end an era of loose monetary policy At this writing the Fed appears to be on course to begin raising short term rates later this year or in early 2016 and we expect long term Treasury yields to rise as well As rates climb banks could likely see a lift in net interest margins measured as the spread between the interest paid on deposits and the interest earned on loans This humble but important source of income which has been soft in recent years could be poised to make a larger contribution when interest rates begin ticking upward see chart below View chart A long suppressed source of income Ready for a revival Close chart A long suppressed source of income Ready for a revival Net interest margins across U S banks remain under pressure in what has been a prolonged environment of low interest rates Given widespread expectations of monetary tightening by the end of 2015 interest margins will likely begin making stronger contributions to bank performance Data Federal Financial Institutions Examination Council via Federal Reserve Bank of St Louis Quarterly observations Outlook and expectations During the coming months outcomes within the banking industry will depend on factors such as economic growth the timing of rate hikes and continued management of regulatory costs On the whole we expect to see such factors trend favorably setting the stage for stronger bank profitability This is not to say that we don t expect challenges To maximize competitiveness we believe bank executives will have to rely on agility innovation and collaboration They will have to accommodate a tighter regulatory environment which could mean stricter internal controls and additional compliance staff This will not come easily at all firms especially smaller banks but we believe the regulatory overhang should be less onerous than is currently expected We also note that bank balance sheets already appear strong enough to meet most regulatory requirements that are likely to come along While we think it makes sense to consider an increased allocation to the financial services sector we don t think investments should be made blindly without regard to the underlying quality of the firms themselves Here are a few company level attributes that we believe are worth emphasizing a disciplined approach to controlling costs diversified revenue streams good credit quality within investment and loan portfolios a range of product lines that are well priced

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