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  • Attention fixed income investors: Let's talk about duration extension

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    Original URL path: /individual-investors/literature/insights/2014/attention-fixed-income-investors-lets-talk-about-duration-extension (2016-04-26)



  • A tame outlook for inflation
    possible loss of principal Past performance does not guarantee future results Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors 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 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 Kelley A McKee Portfolio Manager Equity Analyst View bio More from Kelley A McKee Corporate spending tilted toward shareholder friendly activities Optimism amid slower growth in manufacturing Capital spending In search of momentum See all from this author See all from this team Kelley A McKee biography Kelley A McKee CFA Vice President Portfolio Manager Equity Analyst Kelley A McKee is a portfolio manager for the Small Cap Value Mid Cap Value Equity team she joined the team in July 2005 as an equity analyst She is responsible for the analysis purchase and sale recommendations of basic industry capital spending and utilities securities for the firm s Small Cap Value Mid Cap Value portfolios Prior to joining Delaware Investments she participated in Lincoln Financial Group s rotational Professional Development Program for three years McKee earned a bachelor s degree in finance from Georgetown University and an MBA from The Wharton School of the University of Pennsylvania Donald G Padilla Senior Portfolio Manager View bio See all from this author See all from this team Donald G Padilla biography Donald G Padilla

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2014/a-tame-outlook-for-inflation (2016-04-26)
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  • Municipal bonds may be more attractive given today’s tax code
    basis points or 20 06 more in taxable equivalent yield simply based on the effects of higher taxes By comparison a solid generic corporate bond with a similar A rating would currently yield 5 23 At the federal level The 2012 2014 difference remains similar when the effects of tax changes at the federal level are isolated This is important because state level effects are less consistent as they vary from state to state Though the 28 bracket was left unchanged from the rates in 2012 the increase in taxes in 2014 has resulted in higher TEY for all tax brackets 33 or higher For example the corresponding pick up at the highest tax bracket in 2014 versus 2012 assuming the bond is generating a tax exempt yield of 6 is 137 basis points or approximately 15 This pick up is magnified for investors in states that have initiated their own tax changes as illustrated in the aforementioned California general obligation bond example Federal marginal tax rates and tax equivalent yields 2012 Federal tax bracket 28 33 35 Benchmark tax exempt yields Tax equivalent yields 2 0 2 78 2 99 3 08 3 0 4 17 4 48 4 62 4 0 5 56 5 97 6 15 5 0 6 94 4 46 7 69 6 0 8 33 8 96 9 23 2014 Federal tax bracket with Medicare tax 28 36 8 38 8 43 4 Benchmark tax exempt yields Tax equivalent yields 2 0 2 78 3 16 3 27 3 53 3 0 4 17 4 75 4 90 5 30 4 0 5 56 6 33 6 54 7 07 5 0 6 94 7 91 8 17 8 83 6 0 8 33 9 49 9 80 10 60 Data IRS taxation rates Delaware Investments tax equivalent yield calculations Assumes that the 3 8 Medicare tax is applied to investment income for Federal marginal tax brackets of 33 and above Some investors may not be subject to all or any of the Medicare tax A steady pace despite headwinds The municipal bond market has dealt with many obstacles and a barrage of negative headlines since the financial crisis But in many ways the market has evolved and gained popularity with a broader investor base worldwide all while navigating periods of intense volatility The one consistent positive has been the inherent value of municipal bonds Difficult economic times have resulted in a need for governments to increase revenues by raising taxes Consequently we believe the implementation of higher taxes at the federal state and local levels has only enhanced the attractiveness of municipal bonds This is because on a tax equivalent basis the value of the tax exemption rises as rates go higher 1 Taxable equivalent yield is defined as the yield a taxable bond must generate in order to equal the yield generated by a tax free investment 2 Note that this is for a bond with a 5 00 coupon that matures

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2014/municipal-bonds-more-attractive-in-todays-tax-code (2016-04-26)
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  • Sector spotlight: Healthcare
    government reimbursement for medical expenses rising costs of medical products and services pricing pressure and malpractice or other litigation Investments in small and or medium sized companies typically exhibit greater risk and higher volatility than larger more established companies Christopher S Adams Senior Portfolio Manager View bio More from Christopher S Adams Constructive conditions for healthcare stocks Despite recent gains opportunities still available in healthcare stocks 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 Kent P Madden Portfolio Manager Equity Analyst View bio More from Kent P Madden Trends in consumer spending Growing confidence amid constraints Housing recovery in closer view April housing data a tailwind for economic activity See all from this author See all from this team Kent P Madden biography Kent P Madden CFA Vice President Portfolio Manager Equity Analyst Kent P Madden is a portfolio manager for the Small Cap Value Mid

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2014/sector-spotlight-healthcare-small-cap-perspectives (2016-04-26)
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  • Municipal bond market update: A pleasant surprise for municipal investors in 2014?
    Barclays index return Data Morningstar as of April 2014 Return data based on the below Barclays Indices Index performance returns do not reflect any management fees transaction costs or expenses Indices are unmanaged and one cannot invest directly in an index Refer to disclosures below for index definitions Chart shown is for comparison purpose only View chart Municipal bond mutual fund flows Data J P Morgan Municipal Research and Lipper as of April 2014 Chart shown is for comparison purpose only As April came to a close we saw a continuation of these positive trends This was evidenced by the lack of the seasonal effect normally expected during tax filing time Typically during this period flows turn negative however flows shifted to slightly positive during this time Additionally demand for municipal bonds has been bolstered by higher 2013 tax rates increases in state and federal taxes as well as the additional 3 8 healthcare surcharge We expect that after investors meet with their accountants the reality of these tax hikes will further add to the appeal of the asset class potentially prolonging the improved technical environment within which we have recently been operating The views expressed represent the Manager s assessment of the market environment as of March 2014 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 The Barclays High Yield Municipal Bond Index measures the total return performance of the long term noninvestment grade tax exempt bond market The Barclays Municipal Bond Index measures the total return performance of the long term investment grade tax exempt bond market The Barclays U S Corporate High Yield Index is composed of U S dollar denominated noninvestment grade corporate bonds for which the middle rating among Moody s Investors Service Inc Fitch Inc and Standard Poor s is Ba1 BB BB or below The Barclays U S Corporate Investment Grade Index is composed of U S dollar denominated investment grade SEC registered corporate bonds issued by industrial utility and financial companies All bonds in the index have at least one year to maturity The Barclays 3 15 Year Blend Municipal Bond Index measures the total return performance of investment grade U S tax exempt bonds with maturities from 2 to 17 years The Barclays U S Aggregate Index is a broad composite that tracks the investment grade domestic bond market The Barclays U S Treasury Index measures the performance of U S Treasury bonds and notes that have at least one year to maturity 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

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2014/a-pleasant-surprise-for-municipal-investors-in-2014 (2016-04-26)
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  • Are airline stocks finally investable?
    A race to the bottom The United US Airways merger that wasn t By this time it was becoming clear that the only way for airlines to generate enough revenue to survive was to gain massive market share The problem with market share however is that it is easy to gain and easier to lose As soon as your competitors under price you they pick up your share Ultimately it becomes a race to the bottom in which nobody wins But there is one other way to pick up share from your competitors You consider buying them Mergers however are difficult to pull off in the best of times and next to impossible in the worst And for the airlines they were about to enter the worst The wheels came off the planes so to speak in 2000 when United Airlines made a bid for US Airways And while the government and consumer groups were opposed to the merger the biggest detractors were the employees particularly the United pilots So management did what it always does in this situation It bought off the pilots promising them that they would not lose any seniority A pilot s pay and what they fly are determined by seniority Or if they did they would receive the pay that they would have received had the merger not gone through United hoped that the combined entity would generate enough revenue to offset the extravagant some would say ridiculous contracts As the economy turned south in 2001 however and the Justice Department continued to oppose the merger United saw the writing on the wall paid US Airways a break up fee and walked away But there was one problem United had already promised its employees large wage hikes Pilots received 25 hikes with smaller wage hikes for the rest of the employees Overall United enacted a destructive 13 increase in its personnel line and failed to generate any additional revenue And because of pattern bargaining every other airline eventually had to match United filed bankruptcy in 2002 In fact virtually every major airline filed bankruptcy at least once in the decade with US Airways pulling off the trick twice once before and once after its merger with America West A combined Delta Northwest combination made it to 2005 before filing Bankruptcy begins to pay off Bankruptcy proved to be somewhat of a panacea to the airlines at least in terms of labor costs Contracts were broken pensions were frozen and staffs were downsized While not quite lean and mean its costs were more competitive and the airlines were making money by the middle of the decade Stocks rallied particularly after US Airways made a bid for Delta in 2006 one that ultimately failed but would have cut capacity and raised prices significantly on the east coast But that merger attempt proved to be the peak As the economy tumbled into the Great Recession airlines felt the pressure and their stocks tumbled as well US Airways for example which had peaked above 60 in 2007 fell to almost 2 per share by 2009 American Airlines was hit even worse falling from more than 60 per share to 2 and eventually filing bankruptcy a few years later Once again airline investors learned the hard way that these stocks were simply trading stocks Data Bloomberg But something different happened this time the airlines survived With lower costs and lawyers in charge instead of traditional airline guys the airlines took the focus off of market share and cut excess capacity instead Meanwhile Southwest which had survived the mid decade fuel price shock with a series of strategic hedges lost control of its other costs and saw its gap with the majors narrow Continental and United merged in 2010 followed a few years later by US Airways and American And as we enter 2014 the airlines look healthier than they have ever been in our view Close View chart Unbundling the flying experience fees have been a game changer for airlines Chart shown is for comparison purpose only View chart Consolidation has boosted major carriers market share Chart shown is for comparison purpose only Airlines have finally gotten their arms around their cost structures Airlines have finally discovered what the American Airlines CEO Doug Parker seemed to discover years ago He who has the lowest costs wins Since airlines are forced to compete on price they have to rely on low costs to make a profit And low costs are not simply a function of payroll For example Southwest Airlines had the highest hourly rate for its pilots for years yet maintained the lowest cost per seat mile flown source Wolfe Research How did it pull off that nifty trick By enacting work rules that paid pilots only when they flew instead of the traditional legacy carrier method of paying pilots for a guaranteed minimum number of hours no matter how many they flew As bankruptcies mounted and contracts were abrogated labor lost much of its bargaining power Eliminating in flight meals is nothing compared to slight work rule changes Airlines learned a new trick Ancillary fees Fees began as a way to offset internal costs such as by charging to talk to an agent over the phone rather than booking online But management teams eventually realized that these fees provided a way to raise revenues without actually raising ticket prices Baggage fees change fees etc have all become part of unbundling the product Want a premium seat That will cost you Need to check a bag There s another fee These fees also are very high margin with some of them including baggage and change fees closing in on 80 incremental margin In other words airlines that would have otherwise been only marginally profitable on a stand alone basis have become wildly so because of the ancillaries It is estimated that American Airlines will generate 2 billion from baggage and change fees alone which would be more than 1 5

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2014/are-airline-stocks-finally-investable (2016-04-26)
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  • Currency considerations in global equity investing
    traded commodity remain stable but peso denominated costs shrink and a 20 devaluation turns into a much greater increase in margins because most of it goes immediately to the company s bottom line Hedging against a peso depreciation in that case would defeat the very purpose of an equity investment in the stock True were we to consider a purely domestic Mexican bank or perhaps a toll road concessionaire we would look carefully at the risk of a peso depreciation and its implications for our dollar based return target but our analysis would be aimed more at buying the shares after rather than before the devaluation or conversely of exiting as such a risk arose Similarly to the Mexican silver miner Japanese companies that were significant net exporters and thus U S dollar or euro earners benefited greatly from last year s yen depreciation But for net importers such as utilities that earned in yen but imported natural gas coal oil and uranium priced in U S dollars the shoe was on the other foot and their earnings were hurt more than proportionally Only for purely domestic companies like retailers or most banks could earnings be said to move largely in line with the currency once it is translated back into our investor currency the U S dollar Even then company specific revenue and cost trends are typically more important determinants of returns And some Japanese companies missed out on the yen depreciation fun because as a response to early yen overvaluation they like one multinationalized Japanese auto manufacturer had become champions of exporting from the now higher cost United States to Japan In fact the great majority of companies whose stocks we invest in are multinationals with revenues and costs in many currencies especially in the case of European multinationals with most of their business naturally hedged by having so called local for local or region for region costs and revenues more or less matched around the globe Several of our France and Switzerland domiciled companies for example have only 5 10 or 20 of their business in France or Switzerland Indeed several Swiss quoted companies are formerly U S based but highly multinational firms that have undergone an inversion or formal de domiciling from the U S largely for tax reasons Thus we consider currencies as one but usually far from the most important determinant of most companies long term earnings and stock price potential and we do our analyses accordingly The views expressed represent the Manager s assessment of the market environment as of April 2014 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

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2014/currency-considerations-in-global-equity-investing (2016-04-26)
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  • Foreign exchange: No longer buried in the footnotes
    country To put a finer point on this the table below looks at a handful of nations showing the correlations between their security markets and their currencies Country equity markets versus currencies Country Correlation rolling 13 weeks Correlation rolling 52 weeks United Kingdom 0 13 0 29 Turkey 0 40 0 47 India 0 47 0 48 Russia 0 00 0 23 United States 0 41 0 43 Spain 0 34 0 14 Switzerland 0 56 0 54 Brazil 0 13 0 28 Data MSCI via Ned Davis Research Readings are as of Feb 15 2014 Rolling correlations are based on weekly percentage changes in each country s respective MSCI index versus that country s equal weighted currency index Q A with Wen Dar Chen portfolio manager international debt strategies Currency markets have many drivers and these drivers tend to vary through time What s your philosophy when it comes to pursuing currency strategies Chen Exchange rates are influenced by many factors including high liquidity and frequent bouts of volatility Read more Therefore risk return profiles for currencies can lie within a wider range than they do with other asset classes Because of this or at least in part the inclusion of currency exposure within our portfolios does not happen in a vacuum we believe it s better to make sure that currency positions are calibrated with other asset classes in order to help control the portfolio s overall risk return profile What are some factors that influence your inclusion of currencies in the portfolios you oversee Chen As we conduct daily research we monitor many factors that drive currency markets Notable examples include Read more central bank monetary policies government fiscal disciplines and policies place in the economic cycle political events external accounts trade balance current account unexpected disasters or events corporate capital flow due to merger acquisition or project funding 1 Currencies An Intelligent Tool to Help Manage Investment Risk ING U S Investment Management November 2012 2 A New Look at Currency Investing The Research Foundation of CFA Institute December 2012 Foreign currencies Up and down versus the dollar The WSJ Dollar Index measures the strength of the U S dollar against a basket of 16 of the world s major currencies From starting point to ending point the index has moved within a decently tight range during the past 12 months with a slight downward trend Despite the mild nature of the overall trend choppiness during the period was substantial Data Wall Street Journal ICAP Bank for International Settlements all via Dow Jones Daily observations Close The views expressed represent the Manager s assessment of the market environment as of March 2014 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

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