Q:  What is the history and objective of the fund? A : Delaware Corporate Bond Fund was established on September 15, 1998 and the fund currently manages $1.42 billion in assets. The fund seeks to provide investors with total return by primarily investing in investment grade corporate bonds. Q:  How would you define your investment philosophy? A : Our philosophy has been to concentrate on the risk sectors within the marketplace, including corporate risk, and we have determined that those markets are inefficient relative to risk-free assets like U.S. Treasuries and agency mortgage-backed securities. We believe it is a relationship-driven market in which an asset manager must be nimble enough to have resources for identifying and tracking opportunities to avoid problem credits, but also have the scale necessary to be influential with Wall Street for efficient execution. Q:  Would you explain how you convert that philosophy into an investment strategy? A : The basic guideline of the fund is to maintain a minimum of 80% in investment grade corporate bonds and a maximum of 20% in below investment grade debt, as well as a maximum of 35% in non-US related exposures. The investment process starts with idea generation, conducting proprietary research, moving on to security selection and portfolio construction, before ending with risk management. Our process is composed of formal and informal activities. The informal meetings are a mixture of meetings held by the team that follows daily events, earnings calls, rating actions, and macro-economic events from the Americas to Europe to Asia. On the other hand, our formal meetings, which are chaired by our senior investment heads, are comprised of structured top-down, macro oriented discussions that cover topics such as current allocation among different sectors or asset classes, economic data, performance attribution- the current success of the strategy relative to its goals, and trading liquidity conditions. Q:  What are you trying to achieve through your focus on total return? A : Generally speaking, total return is designed to generate the maximum amount of capital return based on the investment decisions that have been put forth consistent with the guidelines of the strategy or client. By practicing active management, we are able to identify various tendencies and situations in the markets. A large part of that is based on historical spread relationships or fundamental differences of opinion within the marketplace, and some of it is due to technical factors that include the amount of new issuance, the dollar price disparities and the interest rate and credit curve shape differentials. The combination of all these factors helps us in developing our broad market overview. What’s more, it enables us to find market inefficiencies that can be capitalized on, led by a research team that understands the financial and operational characteristics of each credit that we are evaluating. Q:  What kind of analytical steps does your research process involve? A : Our process starts with our research team, where we have 16 analysts organized by industry across the rating spectrum, including high yield and the capitalization curve. Not only do they look at senior debt, but they also monitor valuation changes upon subordinated debt and preferred securities. Within our high yield and convertible strategies, equity positions are also used. After identifying companies that reflect stable or improving business conditions or financial metrics, our analysts, in coordination with the traders and portfolio managers, make recommendations on names and parts of the capital and term structure in which we should be involved. And with a prospective view in mind, analysts also offer suggestions and alerts for potential mistakes, deteriorating situations or detrimental types of events that could impact the credit and change the market’s perception of the value of a particular security. Some of the information that our research team takes into account includes company management discussions, reviews of financial disclosures and filings, as well as insights from visits to industry conferences or specific company events. Although we keep abreast of current ratings assigned by the nationally recognized agencies, we do not necessarily rely on what they eventually state. It is now evident in the wake of the global financial crisis that the rating agencies are generally late, so we are not solely applying their ratings opinion when it comes to security selection and portfolio construction. Q:  Where do you find your sources of alpha? A : Our typical investment grade portfolio will hold somewhere around 120 issuers. Then, we look further down within these names to identify the right security and the most appropriate position in the capital structure that offers us the best risk-adjusted value. All in all, we are assessing the amount of upside or downside protection each opportunity provides and what risks we are accepting in order to achieve the projected returns. For example, in late 2008, as the global financial crisis was coming to a head, our senior financial analyst started focusing on the largest systemic banks, such as Wells Fargo, Bank of America, and JPMorgan. At that critical stage and in a chaotic environment, his decisions helped us avoid many of the more problematic and volatile names within the sector. In the end, the largest banks that we kept on our screen emerged in better shape and continue to be around today. And as the recovery became more apparent over time, we started to expand our holdings into regional banks and we managed to capitalize from the credit spreads that were tightening as risk sentiment improved. In 2009, there was limited to no appetite from investors for financial risk but there was a lot of demand for securities in the defensive sectors such as pharmaceutical names, food and beverage companies and utilities. We performed a timely analysis and determined that those companies were going to be survivors in the global financial crisis primarily because they had plenty of liquidity and financial flexibility. Eventually, many of these companies, especially in high yield, addressed many of the refinancing needs and were generating enough cash flow. Furthermore, all of them had other options, such as asset sales that they could rely on in order to manage in a very tough economic environment. In line with our expectations, companies in these sectors profited from the conditions, but as spreads started to narrow and other sectors improved for a myriad of reasons, we started rotating into more opportunistic names with better upside potential. What has really benefited the portfolio over the last few years is avoiding pitfalls as well as knowing where to turn as risk sentiment rebounded. Most recently we have applied this successful formula within the regulated hybrid space of utility and pipeline companies, as well as within emerging market names, where many of the businesses have a much healthier fiscal and economic outlook. Presently, we think that some non-corporate risks like Build America Bonds and taxable municipals look very attractive compared to higher quality investment grade opportunities. Our firm has an ability to look across the corporate and credit space, and this fund has the flexibility to invest in a broad range of fixed income asset classes offering diversification, income, and liquidity advantages. Our limitations of 20% in high yield or below investment grade securities and no more than 35% in foreign securities provide us with enough flexibility to optimize and capitalize from arising opportunities in the marketplace. Q:  Do you have any preferences in terms of your general investment opportunities? A : I believe that there are some basic drivers that we need to be comfortable with at a certain level. First of all, what is the liquidity profile of the company that we are involved in? Second, are there future refinancing needs driven by capital expenditure plans or debt maturities that they need to come back to the market with? Another point of consideration is the financial strength of the organization measured in terms of free cash flow, interest coverage, and other debt related metrics, as well as the operational metrics which are industry specific. Q:  How do you build your portfolio? A : The fund is benchmarked against the Barclays U.S. Corporate Investment Grade Index. With regard to position sizes, our classification system is not driven by ratings but is entirely based on our analysts’ opinions and commentaries as to where they believe a particular company is positioned within its industry cycle and financial or credit profile. Basically, the structure of Delaware Investments’ Corporate Bond Fixed Income portfolio is made up of these four classifications. The Core holdings portion accounts for 50% - 70% of the portfolio composition and produces relatively low turnover. The Expected Ratings Upgrades and Undervalued Securities segments range from 10% - 30% of the portfolio. The Opportunistic holdings can typically range from 5% - 10%. Ultimately, it is a valuation judgment among the traders, analysts, and portfolio managers to find the best relative value in the marketplace. With respect to upgrade candidates – names within the low BBB and high BB rated space that are likely to be upgraded to investment grade, or mid-or-high BBB the credit ratings of these companies are improving based on operational and financial metrics that we believe the market and the rating agencies will soon realize and reward accordingly. Next, we have the Undervalued category. These are names with a certain bias that the market has placed against them, typically irrationally. A good example of opportunities that present themselves under this classification would be the Macondo oil spill in the Gulf of Mexico. When the crisis occurred, most every energy name reacted in kind because there became a belief that it would be years and highly expensive before we were going to be drilling in the Gulf of Mexico again. Names directly and indirectly affected from the Macondo well oil spill recovered quickly, and we were able to capitalize on that by actively and properly positioning the portfolio. Most recently, European-related credits fit into this Undervalued classification because the amount of sovereign ratings volatility among European credits is now very similar to what has occurred in the past within the emerging market space. As European peripheral sovereign ratings are being downgraded, ratings of entities domiciled within their borders are being impacted as well, despite the fact that the operations of many of these companies are multinational and widely diversified beyond peripheral Europe. Looking at those types of situations, we seek to identify those entities we consider ‘survivors’ and offer us the best risk adjusted opportunity. Finally, the most short-term in nature spread specific or price specific type of classification is our Opportunistic bucket. These securities provide us with the opportunity to take advantage of an over exuberant type of market. We may not like the company from a long-term point of view, but if we believe there is no near-term risk with the company’s restructuring or defaulting and that, given the technical trends within the marketplace, there is a short-term opportunity, we will take advantage of that. Within our core type names we will be holding somewhere between a one and two percent per issuer exposure and they are probably going to be long-term holdings within the portfolio. We may hold less to fund other opportunities or we may hold up to around two percent when we feel that the valuations make sense. We typically hold anywhere between 75 basis points to 125 basis points in the upgrade and undervalued type names, certainly taking into account not only the amount of volatility that is associated within each of those names but also the amount of liquidity provided too. The opportunistic or short-term in nature situations will typically be 25 to 50 basis points. Finally, we would characterize ourselves as benchmark agnostic. Though we understand consultants and clients will generally evaluate us based on sector, quality, and duration weightings, our sector and quality allocations are a by-product of our issuer and security selection process. This allows us to be a “best ideas” cash-based manager rather than an index-oriented or strictly income-oriented manager. Q:  What is your sell discipline? A : Our sell discipline centers around early identification of deteriorating situations. If we cannot identify a logical reason to continue to hold a security, or when the downside is very difficult to measure, then we will exit the position. Securities also become sell candidates based on relative value assessments or when spread/price targets are achieved. Finally, technical differences, such as a new issue being announced, dollar price differentials or capital structure compensation may become inconsistent and thus generate an opportunity. Q:  How do you view and manage risk in the portfolio? A : We are not duration manipulators, meaning we do not take any significant interest rate risks relative to the benchmark. Nor do we have large currency biases. We are going to be very close to the overall benchmark, plus or minus a quarter to a half year in maturity. Relying on our core strengths as a team, we manage risk through our rigorous bottom-up fundamental proprietary research and credit selection. We feel that the bulk of the risk is going to be monitored and maintained by first selecting the right credit and then adjusting and identifying the right parts of the capital structure or securities that are outstanding to protect the portfolio against problems down the road. Also, we manage risks by monitoring the amount of liquidity that we can depend on within the marketplace for certain names or securities. Q:  How do you achieve your goal of generating total return when the rate regime changes? A : First of all, we could consider introducing interest rate swaps which will take out some of the interest rate volatility. Additionally, we have to understand the technicals and corporate risk within the marketplace. We believe that investment grade corporates, and credit in general, will be an asset class that benefits from that deep and increasing demand. We believe that it is not only a growing market, but one that continues to be a large demand-oriented market. Even in the case of a rising interest rate environment, as long as the fundamentals are sound and the tail risk events are on the sidelines, we think that the investment grade corporate market is going to do well.