| March 26
March 26 Bets on financial companies and
Europe's beat-up economy helped maintain a decade-long winning
streak at the Delaware Extended Duration Bond Fund rolling in
The $603 million Delaware fund recently received
the U.S. Lipper 2014 Excellence in Fund Management award. It
swept Lipper's 3-year, 5-year and 10-year categories for
corporate debt BBB-rated funds.
The fund has been the top dog in a field with some big
stars, including Dan Fuss, whose track record at Loomis Sayles
has earned him the nickname "The Buffett of Bonds."
"The fixed income team at Delaware has done an outstanding
job delivering top performance in a field crowded with talent,"
said Jeff Tjornehoj, head of Lipper Americas Research. He also
cited Mark Kiesel at Pimco as a tough competitor.
Tjornehoj said the Delaware fund dives into longer
maturities and emerges with terrific results.
"Relative to many of its peers, it's not the smoothest ride
for investors," Tjornehoj said. "But over the long run, they've
actually delivered less volatility than the fund's benchmark
while still beating it substantially by almost two percentage
points per year over the last ten years."
The Delaware fund can also be contrarian, not unlike a stock
picker who looks for value in places that other investors flee,
said Tom Chow, senior vice president and chief investment
officer of corporate credit at Delaware Investments. The company
is part of Macquarie Group Ltd.
"We know what's in the benchmark. But we don't just invest
in names in the benchmark. We do our own homework," Chow said.
In the fiscal year ended July 31, the fund had plenty of
exposure to Europe, despite its instability. The fund benefited
from investments in Spanish telecommunications provider
Telefonica and Italian wireless operator Wind Telecom
as it focused on industries with defensive credit
characteristics, such as steady cash flow.
"Credit markets are a fascinating place," Chow said. "There
are all shades of colors, rather than black and white. It's what
keeps things interesting."
The fund's average annual return over the past 10 years was
8.3 percent as of March 25, easily beating the 5.15 percent
return on the Barclays Long U.S. Corporate Index. The fund's net
expense ratio is 0.96 percent on an annual basis.
As an investor in corporate debt, the fund looks for
stability and consistency, Chow said.
"We don't necessarily need growth for the company to meet
their obligations to us," Chow said.
The fund says it takes a bond-by-bond approach to find
undervalued issuers but stays away from debt with unattractive
Over the past year, the fund saw strength in the financial
sector. Bonds of U.K.-based bank Lloyds TSB Bank Plc
and U.S. insurance companies American International Group Inc
and MetLife Inc helped lift the fund's
performance. Another U.S. insurance provider, Prudential
Financial Inc, also boosted the fund's results,
according to disclosures to investors.
TEAMWORK OFFSETS RISK
The fund is supported by what Chow describes as a flat
organization of 85 people. Portfolio managers, traders and
researchers work together constantly to protect the fund from
being whipsawed by risk.
They have conversations about bond credit quality daily, if
not hourly, Chow said.
As the U.S. economy stabilizes, Chow has been watching how
some corporate management teams become more preferential toward
stock investors versus debtholders. Examples include borrowing
money at historically low interest rates to repurchase company
stock or for corporate takeovers.
Those kinds of moves can boost shareholder value and won't
likely become a problem for debtholders in A-rated companies,
even if the economy sours or operations encounter headwinds. But
companies with higher leverage and less resources may not be as
resilient, Chow said.
"If operations slow down, you generate less cash. That can
turn into a problem for bondholders," he said.
During the 2013 fiscal year, the fund was hurt by exposure
to Barrick Gold Corp, the world's biggest gold miner. A
28 percent dive in bullion prices caught producers by surprise,
putting balance sheets under stress.
Delaware bond funds, including the extended duration fund,
sidestepped some of Barrick's problems by being nimble.
"We actively managed the funds' positions in these holdings,
periodically increasing the funds' exposure at lower prices
while reducing the funds' allocations as the securities began to
recover," Delaware Investments said in its annual report to bond
(Reporting By Tim McLaughlin; Editing by Lauren Young and