For decades, Delaware Investments stood as one of active management's most venerable names. Tracing its roots to the 1920s, the financial services giant began selling mutual funds in 1938. By the 1970s, it became one of the first distributors of separately managed accounts for institutions and other professional traders. 

Keeping track of Delaware's more recent history, though, can be a little like trying to put together a crossword puzzle.

In 2009, Delaware was swallowed by a larger investment conglomerate, Macquaire Group. A global manager of public funds, the Australian-based investment firm also is a big player in banking, private equity and other alternative markets around the world. In 2020, it continued to expand in the U.S. by acquiring another established financial services competitor, Waddell & Reed. The prize of such a mega-deal, according to industry analysts, was its Ivy family of funds. 

Today, investors can find a much greater assortment of different types of equity, fixed-income and alternative investments in Delaware's lineup. That's significant since Delaware's parent markets itself these days as a top-50 global asset manager, a top-10 insurance funds manager and the largest manager of infrastructure — or, real assets — in the world. 

"Macquarie has methodically integrated U.S.-based Delaware Investments since acquiring it in 2009," noted Morningstar's Tim Wong in an independent review of the parent as a fund manager. He added:

"Macquarie's opportunism has its merits, though it can engender staffing and product distractions when integrating overlapping capabilities, such as Waddell & Reed (Ivy Investments) and AMP Capital in 2021/22. More pertinently, across the substantial footprint of public market assets beyond fixed interest, we see few examples of clear strength or conditions that are clearly conducive to maintaining lasting success. When allied to an uneven history with internally managed equity capabilities (including Australian fundamental and Asian equities), we are more circumspect." ¹

Given its rather expansive designs to move deeper into investment management and alternative investment strategies, we thought it'd be worthwhile to put under our research microscope Delaware's active mutual funds. This analysis is part of our ongoing Deeper Look series, which investigates claims by managers of peer performance superiority by holding them to a higher standard — i.e., how they've done over longer periods against their respective indexes.

Controlling for Survivorship Bias

It's important for investors to understand the idea of survivorship bias. While there are 85 active mutual funds with five or more years of performance-related data currently offered through Delaware, it doesn't necessarily mean these are the only strategies this company has ever managed. In fact, there are 22 mutual funds that no longer exist. This can be for a variety of reasons including poor performance or the fact that they were merged with another fund. We will show what their aggregate performance looks like shortly.  

Fees & Expenses

Let's first examine the costs associated with Ivy's 85 strategies with five or more years of data. It should go without saying that if investors are paying a premium for investment "expertise," then they should be receiving above average results consistently over time. The alternative would be to simply accept a market's return, less a significantly lower fee, through an index fund.

The costs we examine include expense ratios, sales loads — front-end (A), back-end (B) and level (C) — as well as 12b-1 marketing fees. These are considered the "hard" costs that investors incur. Prospectuses, however, do not reflect the trading costs associated with mutual funds.

Commissions and market impact costs are real expenses associated with implementing a particular investment strategy and can vary depending on the frequency and size of the trades executed by portfolio managers.

We can estimate the costs associated with an investment strategy by looking at its annual turnover ratio. For example, a turnover ratio of 100% means that the portfolio manager turns over the entire portfolio in one year. This is considered an active approach, and investors holding these funds in taxable accounts will likely face a higher exposure to tax liabilities — such as short- and long-term capital gains distributions — than those incurred by passively managed funds.

The table below details the hard costs as well as the turnover ratio for all 85 active funds offered by Delaware that have at least five years of complete performance history. You can search this page for a symbol or name by using Control F in Windows or Command F on a Mac. Then click the link to see the Alpha Chart. Also, remember that this is considered an in-sample test; the next level of analysis is to do an out-of-sample test (for more information see here).

Please read the prospectus carefully to review the investment objectives, risks, charges and expenses of the mutual funds before investing. Delaware mutual fund prospectuses are available at https://www.delawarefunds.com/products/mutual-funds

On average, an investor who utilized a surviving Delaware active equity mutual fund strategy experienced a 1.13% expense ratio. Similarly, an investor who utilized a surviving active bond strategy from the company experienced a 0.84% expense ratio.

These expenses can have a substantial impact on an investor's overall accumulated wealth if they are not backed by superior performance. The average turnover ratios for surviving active equity and bond strategies from Delaware were 56.05% and 62.39%, respectively. This implies an average holding period of 19.23 to 21.41 months.

In contrast, most index funds have very long holding periods — decades, in fact, thus deafening themselves to the random noise that accompanies short-term market movements, and focusing instead on the long-term. Again, turnover is a cost that is not itemized to the investor but is definitely embedded in the overall performance.

Performance Analysis

The next question we address is whether investors can expect superior performance in exchange for the higher costs associated with Delaware's implementation of active management. We compare all of its 107 strategies — including current funds and those no longer in existence — against the respective Morningstar assigned benchmark to see how well each fund has delivered on its perceived value proposition.

We have included alpha charts for each of their current strategies at the bottom of this article. Here is what we found:

• 68.22% (73 of 107 funds) underperformed their respective benchmarks or did not survive the period since inception.

• 31.78% (34 of 107 funds) outperformed their respective benchmarks since inception, having delivered a positive alpha.

Here's the real kicker, however:

• 0.93% (1 of 107 funds) wound up outperforming their respective benchmarks consistently enough since inception to provide 97.5% confidence that such outperformance would persist (as opposed to being based on random outcomes).

As a result, this study shows that a majority of mutual funds offered as part of the Delaware family have not outperformed their Morningstar-assigned benchmark. The inclusion of the statistical significance of alpha is key to this exercise, as it indicates which outcomes are due to a skill that is likely to repeat and those that are more likely due to a random-chance outcome.

Regression Analysis

How we define or choose a benchmark is extremely important. If we relied solely on commercial indexes assigned by Morningstar, then we may form a false conclusion that Ivy has the "secret sauce" as active managers.

Since Morningstar is limited in terms of trying to fit the best commercial benchmark with each fund in existence, there is of course going to be some error in terms of matching up proper characteristics such as average market capitalization or average price-to-earnings ratio.

A better way of controlling these possible discrepancies is to run multiple regressions where we account for the known dimensions of expected return in the U.S. — i.e., market risk, size and relative price — as identified by the Fama/French Three-Factor Model.

For example, if we were to look at all of the U.S.-based strategies from Delaware that've been around for the past 10 years, we could run multiple regressions to see what each fund's alpha looks like once we control for the multiple betas that are being systematically priced into the overall market.

The chart below displays the average alpha and standard deviation of that alpha for the past 10 years through 2022. Screening criteria include funds with holdings of 90% or greater in U.S. equities and uses the oldest available share classes.