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  • Trends and opportunities in global infrastructure
    in part because of what I call austerity risk I believe there will be more austerity measures implemented in many developed countries including the U S and the net effect is going to be a negative impact to economic growth The world has really seemed to move in a pendulum type way over the past 2 3 years from optimism about monetary stimulus as a catalyst for growth to pessimism about the high debt that resulted from fiscal imbalances In regard to our portfolio we re finding what we believe are the best relative values in the more defensive names In our opinion the more aggressive companies have basically played out most of their upside Q What are the defensive sectors within infrastructure Frishberg It can really vary on a country by country basis In some cases it s the regulated utilities where you have regulatory structures that lead to earnings and cash flows that are more predictable and stable over time On the other hand some of the large utilities in Europe for example are not as defensive because they tend to have greater exposure to commodity or energy prices Ultimately each infrastructure company s defensiveness is driven by the asset s underlying regulation or legal structure that governs its future cash flow generation capabilities and the risks therein We spend a lot of time conducting fundamental research on each company that we consider for investment to identify not only the opportunities but also the risks of each Q Would you give us an idea about your investment process What type of market environment would be most challenging for that process Frishberg We seek long term capital appreciation and current income by pursuing a bottom up stock by stock approach Two primary characteristics of that approach are We tend to shy away from commodity exposure because of the volatility of commodity prices We invest according to what we view as the long term cash flow generative power of an infrastructure company using a fundamental valuation oriented strategy Given these biases we may underperform in a market driven by transitory cyclical trends or where market prices deviate from underlying fundamentals We believe our portfolio performs best when markets focus on fundamental drivers and when valuation matters Q How would your portfolio perform in a period of rising interest rates or inflation Frishberg One of the general attractions to infrastructure investments are the assets pass throughs the price increase that get passed along to customers as a result of inflation We believe they offer a potential hedge against inflation and represent one of the more attractive aspects of investing in listed infrastructure About half our portfolio has relatively direct inflation pass throughs and by direct I mean formulaic With these types of assets there is a formula that actually sets the pricing power For example one of the toll roads owned by a large portfolio holding has more than 20 years left on its concession Every year it automatically raises its

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2013/trends-and-opportunities-global-infrasturcture (2016-04-26)
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  • Municipal fixed income markets: Second quarter review
    and 6 2 higher than the previous year The state passed its 2 781 billion 2014 General Fund budget a 2 9 increase over fiscal 2013 The budget includes a 2 increase in education spending and a personal property tax relief package exempting the first 100 000 valuation of personal property taxes It does not include expansion of Medicaid eligibility In Arizona the unemployment rate totaled 7 8 in May improved from prior months but slightly above the national average For the first 11 months of fiscal year 2013 revenues are 5 8 higher than last year and 2 3 above forecast Fiscal year to date General Fund revenues of 8 11 billion have been offset by 7 99 billion in spending The governor signed the 2014 8 8 billion General Fund budget into law on June 17 2013 This represents a 3 4 increase from fiscal 2013 Base revenues are projected to increase by 4 9 However one time factors including the expiration of the temporary 0 01 sales tax loss of 924 million would reduce 2014 collections by 253 million compared to fiscal 2013 This would result in an ending balance of 298 million and a Budget Stabilization Fund of 450 million State officials currently project a small 40 million shortfall in fiscal 2015 and a 217 million shortfall in fiscal 2016 The unemployment rate in Minnesota totaled 5 3 in May significantly lower than the national rate of 7 6 Minnesota operates on a biennial basis The two year 38 billion budget closed a 627 million shortfall The budget increases the income tax on high income earners to 9 85 eliminates some corporate tax subsidies and raises tobacco tax by 1 60 while reducing property tax pressures through refunds and more funding for aids to local governments It not only closed the deficit but also allowed Minnesota to make overdue payments to schools The state now projects an ending budgetary balance of 46 million at the end of fiscal 2015 Colorado s unemployment rate totaled 6 9 in May lower than the national rate The June 2013 General Fund revenue forecast for fiscal 2013 is 3 7 higher than the March forecast due largely to stronger individual income tax payments received in April Revenue for fiscal 2013 is estimated to increase 11 1 over fiscal 2012 The state projects a year end General Fund surplus of 1 1 billion all of which will go to the State Education Fund General Fund revenue for fiscal 2014 is expected to increase 0 8 less than what was anticipated in March due in part to the surge of income tax revenue in the current year The governor signed an 8 billion 2014 General Fund budget into law in April 2013 This represents a 6 8 increase over fiscal 2013 It projects that General Fund revenue will be 181 4 million more than the required reserve at the end of fiscal 2014 Under current law 30 million would be transferred to the Colorado Water Conservation Board s fund and 113 6 million would be transferred to the State Education Fund The unemployment rate in New York reached 7 6 in May State tax collections totaled 66 3 billion in fiscal 2013 3 1 higher than fiscal 2012 This was 0 6 above February estimates but 0 1 below initial estimates due to unexpected costs from Hurricane Sandy The state ended fiscal 2013 with a General Fund balance of 1 61 billion 9 9 less than the prior year but 9 2 more than the last financial projection This includes a 1 4 billion combined balance in the Tax Stabilization Reserve Fund and Rainy Day Fund For the first two months of fiscal 2014 tax collections were up 25 8 from collections during the same period last year due to strong personal income tax collections which grew 33 3 However more than 87 of this growth is primarily driven by strong estimated tax collections in April due to taxpayers efforts to shift income from 2013 to 2012 to avoid paying higher federal taxes The General Fund closing balance of 3 7 billion at the end of May was 287 9 million higher than budget projections This reflects 448 9 million in higher than anticipated receipts offset by 161 million in higher than anticipated spending In California the unemployment rate totaled 8 6 in May an improvement over prior months For the first 11 months of fiscal year 2013 California revenues are coming in 0 9 above the May estimates and 20 6 above prior year revenues This is partly due to temporary increases in the sales and personal income tax rates The governor signed a 96 3 billion 2014 General Fund budget into law meeting the deadline that relied on his more conservative revenue estimates and provided for a 1 1 billion reserve The budget found room for additional spending on education social services and healthcare by reducing plans to repay money owed to schools by roughly 650 million and using the more optimistic estimates for property taxes freeing up an additional 300 million because it reduced the state s obligation to fund schools The budget overhauls the state s K 12 system by creating a more just allocation of resources committing new funding to low income districts and ones serving English language learners and providing expanded flexibility It also expands Medicaid to 1 4 million low income residents The state s wall of debt will be reduced to less than 27 billion at the end of fiscal 2013 and projections show it will be reduced to less than 5 billion by the end of fiscal 2017 The unemployment rate in Pennsylvania totaled 7 5 in May slightly lower than the national rate of 7 6 Through the first 11 months of fiscal 2013 General Fund revenue collections totaled 26 billion 0 4 above estimates Sales taxes came in 3 7 below budget while personal income taxes came in 1 above estimates

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2013/municipal-fixed-income-markets-second-quarter-review (2016-04-26)
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  • Emerging markets: Mexico transforming, becoming a rising star
    9 2 Turkey 8 5 Chile 5 6 e South Korea 6 3 Estonia 7 6 Mexico 3 9 e Sweden 6 2 Chile 6 0 Estonia 3 2 Chile 6 1 Israel 4 6 Israel 3 1 e Mexico 5 6 Poland 4 5 Norway 3 1 Israel 4 8 Mexico 3 9 New Zealand 3 0 e Japan 4 4 Sweden 3 9 Turkey 2 2 Slovak Republic 4 2 South Korea 3 6 United States 2 2 e Poland 3 9 Slovak Republic 3 3 Poland 1 9 Germany 3 7 Iceland 3 1 Canada 1 8 e Data OECD May 2013 Estimates are noted as e GDP is the monetary value of all the finished goods and services produced within a country s borders in a specific time period and is usually calculated on an annual basis Table above is for illustrative purposes only Our perspective as investors The Delaware Investments fixed income team began 2013 with a relatively positive view on Mexico and our optimism continues through today Despite the social issues mentioned above we believe the Mexican government has shown discipline in keeping its fiscal picture from deteriorating even in the wake of the 2008 2009 global recession Furthermore the Bank of Mexico the country s central bank has used monetary policy effectively in our opinion restoring the economy to a normal growth rate while keeping inflation contained Across the portfolios we manage Mexican positions are concentrated chiefly in government and corporate debt This reflects our view that macroeconomic fundamentals are sound and that officials have plenty of flexible policy tools at their disposal On the corporate side we believe credit fundamentals are robust and liquidity is abundant What s more Mexico presents opportunities across a diverse collection of industries autos get a big share of the headlines but significant activity is happening in electronics paper products kitchen appliances and chemicals as well among others As we analyze opportunities across Mexico s diverse industries our investment decisions are disciplined and highly risk aware Our allocation to corporate bonds remains highly selective based on thorough objective bond by bond research A word about corruption Challenging but not squelching investor optimism Doing business in Mexico can be frustrating obtaining a construction permit for instance can take two and a half months paying a traffic ticket can take an entire day at the police station All of this bureaucracy has bred serious corruption and a cash based under the table economy has long been a shadowy part of Mexican life According to some estimates published recently in The Economist Mexican households spend about 32 billion pesos a year on bribes the equivalent of 2 5 billion U S dollars Surprisingly foreign investment into Mexico has continued at a healthy pace despite the heavy corruption suggesting as we believe that investors are not particularly affected by corruption worries Investors appear to be focusing on the country s stable economic framework instead The views expressed represent the investment Manager

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2013/emerging-markets-mexico-tranforming (2016-04-26)
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  • Stop. Look both ways. The global dash for yield may be leading some investors into oncoming traffic.
    sustainable dividend policy Regularly increasing rather than simply maintaining or worse cutting a dividend typically functions as a clarion call to the market about the health of an underlying business both for now and in the future The danger in simply chasing yield is evidenced to us in healthcare and mortgage real estate investment trusts REITs despite their high current yields Healthcare REITs are currently trading near a 45 premium to their net asset values have generally inadequate coverage ratios and in our opinion could be vulnerable to Medicare cuts Meanwhile mortgage REITs are especially susceptible to changes in the shape of the yield curve and to prepayment risk Data Bloomberg Like mortgage REITs companies that sport elevated but static dividend yields are usually vulnerable to sharp upward moves in interest rates Typically such businesses eventually become viewed as yield hogs offering investors scant intrinsic growth to offset the valuation contraction that generally accompanies rising bond and or cash yields The ability to increase dividends reflects a company s free cash flow and thus could attract a broader class of investors those seeking growth as well as income Retaining capital also allows a business to finance operations internally at no cost It is also important to note that from our perspective Even a growing and well covered dividend is not a sufficient reason to own a stock In doing due diligence it is vital that the company s longer term outlook appear favorable as well A diversified income producing fund should have the flexibility to selectively exploit attractive income opportunities outside the equity asset class such as in high yield bonds real estate or the mostly inefficient convertible bond space Like moths to the flame Of course we recognize that individual and institutional investors alike often are drawn toward whatever product is considered hot and in the current unnaturally low rate environment chasing dividend yield has generally been a profitable enterprise Then again so was buying dot com stocks in the late 1990s or Miami condos in the mid 2000s This is not to suggest that an equal comeuppance awaits the most egregious forms of equity yield chasing in coming years We are mindful however that even sound strategies can be taken to unreasonable extremes and the indiscriminate accumulation of the highest yielding stocks on that basis alone is misguided in our view We view the global dash for yield as being in its later innings and believe that the time has arrived to be more discriminating in choosing dividend paying stocks Credit quality not the size of the dividend should be of paramount importance While we cannot know when the income chasing game will end for investors who have accepted the flawed premise that more is better when it comes to dividends we doubt that it will end well The views expressed represent the Manager s assessment of the market environment as of June 2013 and should not be considered a recommendation to buy hold or sell any security

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2013/the-global-dash-for-yield-oncoming-traffic (2016-04-26)
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  • Fixed income markets: Improving, but risks remain
    glimmers of light in the last six months or so corporate and investment spending has been muted with many companies hoarding cash in the face of so much uncertainty out of Washington Europe China and the Middle East Given the sluggishness of the economy we believe the United States could be vulnerable to a potential shock coming from some geopolitical cause such as an unexpected slowdown in China or problems in the Middle East for example A challenging unemployment picture Broad U6 Unemployment Rate This chart which depicts the U 6 unemployment rate shows a much more significant unemployment problem than the popular estimate currently suggests U 6 refers to those unemployed and looking for work part time workers looking for full time work and discouraged workers who have dropped out of the labor force Data U S Department of Labor April 2013 On U S inflation Outlook remains subdued We do not expect inflation to rise much above a nominal 2 level for the foreseeable future The significant resource slack in the U S economy coupled with a sluggish growth rate suggests that it will be very difficult for inflation to become structurally embedded in the economy In addition we believe there is no expectation of inflation on the part of consumers which is essential for inflationary pressures to take root Furthermore from a monetary perspective the record breaking liquidity injected into the banking system by the U S Federal Reserve has largely remained trapped within bank reserves We believe the economy needs aggressive bank lending in order to provide capital and boost growth rates With banks exceptionally risk averse right now we just don t see much of an inflation threat In our view the weaker dollar combined with heightened geopolitical event risk particularly from the Middle East implies the potential for spikes in energy prices that could affect consumer spending However energy prices constitute a small portion of the final cost of goods and services and given the low growth rate that prevails today we see little likelihood that hikes in oil prices will ignite a broader inflation problem On the global economy Downside risks outweigh growth prospects In our view there are more downside risks at present than catalysts for growth We generally expect global economic output to remain well below its full potential as still robust growth in Asia is offset by recessionary conditions in Europe sluggish growth in the U S and slowing growth in several of the larger emerging market economies In particular the potential for slower than expected growth in both the U S and China and a disruptive worsening of the European situation could potentially affect output and consumer and business sentiment on a global basis On the European Union Continuing headwinds difficult solutions In our view the European crisis seems to us an outgrowth of forming a monetary union without an accompanying fiscal union With too much fiscal autonomy at the national level inadequate centralized oversight broadly different national economic

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2013/fixed-income-markets-improving-risks-remain (2016-04-26)
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  • An evolving monetary policy
    consumption such that it reaches highly speculative levels Within such an environment we believe that imprudent decisions can be made as shown in the banking and housing bubbles that preceded the financial crisis of 2007 2009 Bonds have become mispriced The Fed s asset purchases have supported bond prices pushing yields in certain areas of the market to historical lows This may create a situation in which bonds become valuable as an income instrument only with little potential for price appreciation The likelihood of inflation is intensified Despite heightened worries about inflation price levels have remained relatively tame reflecting factors that include 1 stubbornly high unemployment 2 slack in the manufacturing sector and 3 weakness in the velocity of money the rate at which money in circulation is used to purchase goods and services The possibility that the explicit thresholds are misinterpreted as actual policy goals One line of thinking is that the quantitative thresholds for unemployment and inflation could be interpreted as triggers for an immediate increase in short term rates The Fed has taken precautions to help prevent such misconceptions insisting that future policy actions will follow a balanced approach that is consistent with its long run goals of price stability and sustained output Furthermore policymakers have stressed the difference between a policy threshold and a reflexive trigger pointing out that thresholds will not be employed robotically but rather alongside a broad analysis of market indicators and financial developments Potential benefits Comments The likelihood of inflation is intensified While the likelihood of inflation is listed above as a potential danger it may have positive implications as well One of those considerations is from the viewpoint of a person or an organization that is paying down a loan Inflation allows debtors to repay loans in dollars that are less valuable than those they originally borrowed The perception of the Fed as being more communicative For the most part the Fed speaks in general terms when discussing its expectations As such the central bank rarely gives precise numerical thresholds when discussing its views on the future path of interest rates By including such specifics in its December 2012 statement the Fed has engaged in a higher degree of openness than it has ever pursued Will the Fed make a graceful exit We believe ending the asset buying programs will be among the first steps the Fed takes when it comes time to normalize monetary policy Presumably the next step will involve raising the fed funds rate interest rates charged by banks to each other for overnight loans to meet reserve requirements How quickly will this step be taken It s an important question because a too sudden increase in rates could spur bond markets to trade ahead of the Fed By way of example here s what happened to Treasury yields in early 2004 as financial markets recovered from the prolonged softness that set in between 2001 and 2003 March 2004 Yield on 10 year Treasury bonds 3 7 April

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2013/an-evolving-monetary-poilcy (2016-04-26)
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  • Interest rates are volatile. Are you sinking or floating?
    securities produce Therefore it is important to note that a certain level of income is not guaranteed and that the potential for loss of principal exists as well When interest rates Traditional fixed rate bonds Floating rate securities Rise Prices Fall Stable Income Stable Rise Fall Prices Rise Stable Income Stable Fall Source Frank J Fabozzi The Handbook of Fixed Income Securities New York McGraw Hill 2005 The chart above is for illustrative purposes only and is not representative of the performance of any specific investment Past performance does not guarantee future results Information is as of the date indicated and subject to change Unlike conventional bonds this combination provides the potential for floating rate instruments to help offset some of the volatility experienced in more traditional bond allocations if interest rates do begin to climb from their current levels see chart below Source Board of Governors of the Federal Reserve System April 2013 Most recent data available The 10 Year Treasury constant maturity rate represents the interest rate the U S government would pay on top of principal to the bondholder once 10 years have passed Speak with your financial advisor to learn more about floating rate securities and to determine if they are a suitable product for you Views expressed were current as of May 2013 are subject to change and may not reflect the manager s current views 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 visiting our 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 Fixed income securities can lose value and investors can lose principal as interest rates rise They also may be affected by economic conditions that hinder a 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 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

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/investment-ideas/2013/floating-rate-securities (2016-04-26)
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  • Joining the REIT club: What will it take to succeed?
    is important because by owning some form of physical real estate the company can introduce a measure of downside protection to its overall risk profile While we re talking about physical property we should mention that we tend to prefer REITs that hold diverse real estate assets in their respective portfolios and that the useful lives of their assets will not be exactly the same The quest to convert Successes are likely but so are failures Ultimately we believe there will be some genuine success stories and we think the odds look good for companies like those that have a stake in communications towers At the same time we think it s reasonable to presume that a number of conversions will not work We believe the unsuccessful attempts will ultimately falter because they do not offer investors the same income streams or other essential characteristics that are provided by traditional real estate assets There is also the issue of access to capital markets Remember that once a company becomes a REIT it no longer has sole discretion over its cash flows and is therefore more dependent on access to capital markets This reliance may not be a source of pressure during times of high liquidity as we are seeing today but let s remember that liquidity was sparse as recently as 2008 and REITs saw detrimental effects on their access to capital as well as their valuations Possible investment implications Across the portfolios we manage it s unlikely that we will make immediate allocation decisions based on the volume of newly converted REITs In and of themselves conversions won t lead us to quickly initiate new positions or eliminate older ones An increase in REIT conversions would simply expand our universe of investment possibilities and our research coverage would expand accordingly All along each investment candidate would be put through the same long standing research process that our team follows every day maintaining our dual focus on property and security level analysis With the above observations as a general backdrop here are specific thoughts on our day to day management amid a changing REIT market In 2012 we initiated a position in a company that had recently achieved a REIT designation The company is an operator of communications towers a business that we like very much not least because of its long duration cash flows that are matched with long duration debt as mentioned earlier We are monitoring for companies that lunge into conversions too aggressively chasing a boost in share price for instance In other words we are being careful of REIT transactions that seem too hasty or impatient We remain cognizant of the fact that any abuse of REIT status could generate a governmental regulatory response At the very worst legislators could rescind the features of the REIT structure and a widespread selloff could be sure to follow For a closer look at this type of shock see Canadian REIT markets in 2006 Since our investment portfolios are

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