Delaware Limited-Term Government Fund
Supplement to Statement of Additional Information dated
April 28, 1999
The following replaces the section Mortgage-Backed
Securities under Investment Objective and Policies:
Mortgage-Backed Securities
In addition to mortgage-backed securities issued or
guaranteed by the U.S. government, its agencies or
instrumentalities, the Fund may also invest up to 35% of its
assets in securities issued by certain private,
nongovernment corporations, such as financial institutions,
if the securities are fully collateralized at the time of
issuance by securities or certificates issued or guaranteed
by the U.S. government, its agencies or instrumentalities.
Two principal types of mortgage-backed securities are
collateralized mortgage obligations (CMOs) and real estate
mortgage investment conduits (REMICs). The Fund currently
invests in privately-issued CMOs and REMICs only if they are
rated at the time of purchase in the two highest grades by a
nationally-recognized rating agency.
CMOs are debt securities issued by U.S. government
agencies or by financial institutions and other mortgage
lenders and collateralized by a pool of mortgages held under
an indenture. CMOs are issued in a number of classes or
series with different maturities. The classes or series are
retired in sequence as the underlying mortgages are repaid.
Prepayment may shorten the stated maturity of the obligation
and can result in a loss of premium, if any has been paid.
Certain of these securities may have variable or floating
interest rates and others may be stripped (securities which
provide only the principal or interest feature of the
underlying security).
Stripped mortgage securities are usually structured
with two classes that receive different proportions of the
interest and principal distributions on a pool of mortgage
assets. A common type of stripped mortgage security will
have one class receiving some of the interest and most of
the principal from the mortgage assets, while the other
class will receive most of the interest and the remainder of
the principal. In the most extreme case, one class will
receive all of the interest (the "interest-only" class),
while the other class will receive all of the principal (the
"principal-only" class). The yield to maturity on an
interest-only class is extremely sensitive not only to
changes in prevailing interest rates but also to the rate of
principal payments (including prepayments) on the related
underlying mortgage assets, and a rapid rate of principal
payments may have a material adverse effect on the
security's yield to maturity. If the underlying mortgage
assets experience greater than anticipated prepayments of
principal, the Fund may fail to fully recoup its initial
investment in these securities even if the securities are
rated in the highest rating categories.
Although stripped mortgage securities are purchased and
sold by institutional investors through several investment
banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established
trading markets have not yet been fully developed and,
accordingly, these securities are generally illiquid and to
such extent, together with any other illiquid investments,
will not exceed 10% of the Fund's net assets.
REMICs, which were authorized under the Tax Reform Act
of 1986, are private entities formed for the purpose of
holding a fixed pool of mortgages secured by an interest in
real property. REMICs are similar to CMOs in that they
issue multiple classes of securities and certain REMICs also
may be stripped.
The Fund may also invest in CMOs, REMICs and commercial
mortgage-backed securities (CMBS) that are not issued or
guaranteed by, or fully collateralized by securities issued
or guaranteed by, the U.S. government, its agencies or
instrumentalities ("non-agency mortgage-backed securities").
These securities are secured by the underlying collateral of
the private issuer. The Fund may invest its assets in such
privately-issued CMOs, REMICs and CMBS only if the
securities are rated in the top rating category by a
nationally-recognized statistical rating organization (e.g.,
AAA by S&P or Aaa by Moody's). The Fund may not invest more
than 20% of its assets in securities, including CMOs, REMICS
and CMBS, that are not issued or guaranteed by, or fully
collateralized by securities issued or guaranteed by, the
U.S. government, its agencies or instrumentalities.
CMBS are issued by special purpose entities that
represent an undivided interest in a portfolio of mortgage
loans backed by commercial properties. The loans are
collateralized by various types of commercial property,
which include, but are not limited to, multi-family housing,
retail shopping centers, office space, hotels and health
care facilities. Private lenders, such as banks or
insurance companies, originate these loans and then sell the
loans directly into a CMBS trust or other entity. CMBS are
subject to credit risk, prepayment risk and extension risk.
The Manager addresses credit risk by investing in CMBS that
are rated in the top rating category by a
nationally-recognized statistical rating organization.
Although prepayment risk is present, it is of a lesser
degree in the CMBS than in the residential mortgage market.
Unlike other asset classes, commercial loans have structural
impediments to refinancing that include lockout periods,
prepayment penalties, yield maintenance and defeasance.
These devices reduce the uncertainty introduced by
prepayment options. The Manager carefully analyzes the
composition and proportions of various prepayment provisions
to protect against unscheduled payments. Extension risk is
the risk that balloon payments (i.e., the final payment on
commercial mortgages, which are substantially larger than
other periodic payments under the mortgage) are deferred
beyond their originally scheduled date for payment.
Extension risk measures the impact of a borrower's ability
to pay the balloon payment in a timely fashion, while
maintaining loan payments in accordance with the terms
specified in the loan. For the investor, extension will
increase the average life of the security, generally
resulting in lower yield for discount bonds and a higher
yield for premium bonds. The Manager models and stress
tests extension risk and invests only in structures where
extension risk is acceptable under various scenarios.
