UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER
REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
| Investment Company Act file number: | 811-22050 | |
| Exact name of registrant as specified in charter: | Delaware Enhanced Global Dividend and | |
| Income Fund | ||
| Address of principal executive offices: | 2005 Market Street | |
| Philadelphia, PA 19103 | ||
| Name and address of agent for service: | David F. Connor, Esq. | |
| 2005 Market Street | ||
| Philadelphia, PA 19103 | ||
| Registrant’s telephone number, including area code: | (800) 523-1918 | |
| Date of fiscal year end: | November 30 | |
| Date of reporting period: | November 30, 2014 |
Item 1. Reports to Stockholders
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Delaware Enhanced Global Dividend
and Income Fund
Annual report
November 30, 2014
The figures in the annual report for Delaware Enhanced Global Dividend and Income Fund represent past results, which are not a guarantee of future results. A rise or fall in interest rates can have a significant impact on bond prices. Funds that invest in bonds can lose their value as interest rates rise.
Closed-end fund
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Delaware Management Holdings, Inc. and its subsidiaries (collectively known by the marketing name of Delaware Investments) are wholly owned subsidiaries of Macquarie Group Limited, a global provider of banking, financial, advisory, investment and funds management services. For more information, including press releases, please visit delawareinvestments.com.
Unless otherwise noted, views expressed herein are current as of Nov. 30, 2014, and subject to change for events occurring after such date.
Funds are not FDIC insured and are not guaranteed. It is possible to lose the principal amount invested.
Mutual fund advisory services are provided by Delaware Management Company, a series of Delaware Management Business Trust, which is a registered investment advisor. Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide.
Investments in Delaware Enhanced Global Dividend and Income Fund are not and will not be deposits with or liabilities of Macquarie Bank Limited ABN 46 008 583 542 and its holding companies, including their subsidiaries or related companies (Macquarie Group), and are subject to investment risk, including possible delays in repayment and loss of income and capital invested. No Macquarie Group company guarantees or will guarantee the performance of the Fund, the repayment of capital from the Fund, or any particular rate of return.
© 2015 Delaware Management Holdings, Inc.
All third-party marks cited are the property of their respective owners.
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Delaware Enhanced Global Dividend and Income Fund
December 9, 2014
Performance preview (for the year ended November 30, 2014)
| Delaware Enhanced Global Dividend and Income Fund @ market price |
1-year return | +5.02 | % | |||||||||
| Delaware Enhanced Global Dividend and Income Fund @ NAV |
1-year return | +4.94 | % | |||||||||
| Lipper Closed-end Global Funds Average @ market price |
1-year return | +9.22 | % | |||||||||
| Lipper Closed-end Global Funds Average @ NAV |
1-year return | +4.90 | % | |||||||||
Past performance does not guarantee future results.
For complete, annualized performance for Delaware Enhanced Global Dividend and Income Fund, please see the table on page 3.
Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.
| Unless otherwise noted, views expressed herein are current as of Nov. 30, 2014, and subject to change for events occurring after such date. |
| (continues) | 1 |
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Portfolio management review
Delaware Enhanced Global Dividend and Income Fund
2
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Delaware Enhanced Global Dividend and Income Fund
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Please obtain the performance data for the most recent month end by calling 800 523-1918.
Fund performance
| Average annual total returns through November 30, 2014
|
1 year
|
5 years
|
Lifetime
| |||||||
| At market price (inception date June 29, 2007) |
+5.02% | +8.77% | +4.20% | |||||||
| At net asset value (inception date June 29, 2007) |
+4.94% | +11.34% | +5.58% | |||||||
Diversification may not protect against market risk.
Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an 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, noninvestment grade bonds (junk bonds) involve higher risk than investment grade bonds.
Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors.
REIT investments are subject to many of the risks associated with direct real estate ownership, including changes in economic conditions, credit risk, and interest rate fluctuations.
The Funds may invest in derivatives, which may involve additional expenses and are subject to risk, including the risk that an underlying security or securities index moves in the opposite direction from what the portfolio manager anticipated. A derivative transaction depends upon the counterparties’ ability to fulfill their contractual obligations.
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 volatility and lower trading volume.
If and when the Fund invests in forward foreign currency contracts or uses other investments to hedge against currency risks, the Fund will be subject to special risks, including counterparty risk.
The Fund may experience portfolio turnover that approaches or exceeds 100%, which could result in higher transaction costs and tax liability.
The “Fund performance” table and the “Performance of a $10,000 investment” graph do not reflect the deduction of taxes the shareholder would pay on Fund distributions or redemptions of Fund shares.
Returns reflect the reinvestment of all distributions. Dividends and distributions, if any, are assumed, for the purpose of this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment policy. Shares of the Fund were initially offered with a sales charge of 4.50%. Performance since inception does not include the sales charge or any other brokerage commission for purchases made since inception. Past performance is not a guarantee of future results.
Fund basics
As of November 30, 2014
| Fund objectives | Fund start date | |
| The Fund’s primary investment objective is to seek current income. Capital appreciation is a secondary objective.
|
June 29, 2007 | |
| Total Fund net assets | NYSE symbol | |
| $209 million
|
DEX | |
| Number of holdings | ||
| 781 | ||
| (continues) | 3 |
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Performance summary
Delaware Enhanced Global Dividend and Income Fund
Market price versus net asset value (see notes below)
November 30, 2013 through November 30, 2014
| Starting value (Nov. 30, 2013) | Ending value (Nov. 30, 2014) | |||
|
|
$13.52 | $13.19 | ||
|
|
$12.25 | $11.96 | ||
Delaware Enhanced Global Dividend and Income Fund @ NAV
Delaware Enhanced Global Dividend and Income Fund @ market pricePast performance is not a guarantee of future results.
Performance of a $10,000 investment
Average annual total returns from June 29, 2007 (Fund’s inception) through November 30, 2014
| Starting value (June 29, 2007) | Ending value (Nov. 30, 2014) | |||
|
|
$10,000 | $14,966 | ||
|
|
$10,000 | $13,571 | ||
|
|
$10,000 | $12,518 | ||
|
|
$10,000 | $11,178 | ||
Delaware Enhanced Global Dividend and Income Fund @ NAV
Delaware Enhanced Global Dividend and Income Fund @ market price
Lipper Closed-end Global Funds Average @ market price
Lipper Closed-end Global Funds Average @ NAVThe “Performance of a $10,000 investment” graph assumes $10,000 invested in the Fund on June 29, 2007, and includes the reinvestment of all distributions at market value. The graph assumes $10,000 invested in the Lipper Closed-end Global Funds Average at market price and at NAV. Performance of the Fund and the Lipper class at market value is based on market performance during the period. Performance of the Fund and Lipper class at NAV is based on the fluctuations in NAV during the period. Delaware Enhanced Global Dividend and Income Fund was
4
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initially offered with a sales charge of 4.50%. The Fund is currently traded on the secondary market without a sales load. Performance shown in both graphs above does not include fees, the initial sales charge, or any brokerage commissions for purchases. Investments in the Fund are not available at NAV.
The Lipper Closed-end Global Funds Average represents the average return of closed-end funds that invest at least 25% of their portfolio in securities traded outside of the United States and that may own U.S. securities as well (source: Lipper).
The S&P 500 Index, mentioned on page 1, measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of the U.S. stock market.
The FTSE EPRA/NAREIT Developed Index, mentioned on page 1, tracks the performance of listed real estate companies and real estate investment trusts (REITs) worldwide, based in U.S. dollars.
The BofA Merrill Lynch U.S. High Yield Constrained Index, mentioned on page 1, tracks the performance of U.S. dollar-denominated high yield corporate debt publicly issued in the U.S. domestic market, but caps individual issuer exposure at 2% of the benchmark. Qualifying securities must have, among other things, a below-investment-grade rating (based on an average of Moody’s, Standard & Poor’s, and Fitch), an investment grade issuing country (based on an average of Moody’s, Standard & Poor’s, and Fitch foreign currency long-term sovereign debt ratings), and maturities of one year or more.
Market price is the price an investor would pay for shares of the Fund on the secondary market. NAV is the total value of one fund share, generally equal to a fund’s net assets divided by the number of shares outstanding.
Past performance is not a guarantee of future results.
| (continues) | 5 |
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Security type / sector and country allocations
Delaware Enhanced Global Dividend and Income Fund
As of November 30, 2014 (Unaudited)
Sector designations may be different than the sector designations presented in other fund materials. The sector designations may represent the investment manager’s internal sector classifications, which may result in the sector designations for one fund being different than another fund’s sector designations.
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Delaware Enhanced Global Dividend and Income Fund
November 30, 2014
8
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Schedule of investments
Delaware Enhanced Global Dividend and Income Fund
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Schedule of investments
Delaware Enhanced Global Dividend and Income Fund
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Schedule of investments
Delaware Enhanced Global Dividend and Income Fund
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Schedule of investments
Delaware Enhanced Global Dividend and Income Fund
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Schedule of investments
Delaware Enhanced Global Dividend and Income Fund
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Schedule of investments
Delaware Enhanced Global Dividend and Income Fund
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Schedule of investments
Delaware Enhanced Global Dividend and Income Fund
22
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Schedule of investments
Delaware Enhanced Global Dividend and Income Fund
24
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| 25 |
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Statement of assets and liabilities
Delaware Enhanced Global Dividend and Income Fund
November 30, 2014
| Assets: |
||||
| Investments, at value1, 2 |
$ | 294,887,922 | ||
| Short-term investments held as collateral for loaned securities, at value3 |
14,496,291 | |||
| Short-term investments, at value4 |
185,616 | |||
| Cash |
290,806 | |||
| Foreign currencies, at value5 |
37,728 | |||
| Dividend and interest receivable |
2,657,121 | |||
| Receivable for securities sold |
783,977 | |||
| Securities lending income receivable |
8,091 | |||
|
|
|
|||
| Total assets |
313,347,552 | |||
|
|
|
|||
| Liabilities: |
||||
| Borrowing under line of credit |
87,000,000 | |||
| Obligation to return securities lending collateral |
14,496,291 | |||
| Payable for securities purchased |
2,096,133 | |||
| Interest payable for leverage |
81,973 | |||
| Variation margin due to broker on futures contracts |
3,453 | |||
| Investment management fees payable |
231,527 | |||
| Other accrued expenses |
146,760 | |||
| Other affiliates payable |
7,781 | |||
| Trustees’ fees and expenses payable |
1,214 | |||
| Other liabilities |
2,484 | |||
|
|
|
|||
| Total liabilities |
104,067,616 | |||
|
|
|
|||
| Total Net Assets |
$ | 209,279,936 | ||
|
|
|
|||
| Net Assets Consist of: |
||||
| Paid-in capital |
$ | 229,384,577 | ||
| Distributions in excess of net investment income |
(850,797 | ) | ||
| Accumulated net realized loss on investments |
(39,363,811 | ) | ||
| Net unrealized appreciation of investments, foreign currencies, and derivatives |
20,109,967 | |||
|
|
|
|||
| Total Net Assets |
$ | 209,279,936 | ||
|
|
|
|||
| Net Asset Value |
||||
| Common Shares |
||||
| Net assets |
$ | 209,279,936 | ||
| Shares of beneficial interest outstanding |
15,863,616 | |||
| Net asset value per share |
$ | 13.19 | ||
|
1 Investments, at cost |
$ | 274,735,291 | ||
| 2 Including securities on loan |
17,326,237 | |||
| 3 Short-term investments held as collateral for loaned securities, at cost |
14,496,291 | |||
| 4 Short-term investments, at cost |
185,613 | |||
| 5 Foreign currencies, at cost |
39,202 | |||
See accompanying notes, which are an integral part of the financial statements.
26
Table of Contents
Delaware Enhanced Global Dividend and Income Fund
Year ended November 30, 2014
| Investment Income: |
||||
| Interest |
$ | 7,569,756 | ||
| Dividends |
5,994,388 | |||
| Securities lending income |
108,657 | |||
| Foreign tax withheld |
(254,009 | ) | ||
|
|
|
|||
| 13,418,792 | ||||
|
|
|
|||
| Expenses: |
||||
| Management fees |
2,765,315 | |||
| Interest expense |
793,732 | |||
| Reports to shareholders |
145,321 | |||
| Accounting and administration expenses |
97,757 | |||
| Legal fees |
62,883 | |||
| Dividend disbursing and transfer agent fees and expenses |
51,862 | |||
| Custodian fees |
44,898 | |||
| Audit and tax |
39,476 | |||
| Trustees’ fees and expenses |
10,142 | |||
| Registration fees |
905 | |||
| Other expenses |
62,737 | |||
|
|
|
|||
| Total operating expenses |
4,075,028 | |||
|
|
|
|||
| Net Investment Income |
9,343,764 | |||
|
|
|
|||
| Net Realized and Unrealized Gain (Loss): |
||||
| Net realized gain (loss) on: |
||||
| Investments |
10,981,873 | |||
| Foreign currencies |
(1,711,203 | ) | ||
| Foreign currency exchange contracts |
(120,050 | ) | ||
| Futures contracts |
(44,646 | ) | ||
| Options written |
80,710 | |||
| Swap contracts |
(376 | ) | ||
|
|
|
|||
| Net realized gain |
9,186,308 | |||
|
|
|
|||
| Net change in unrealized appreciation (depreciation) of: |
||||
| Investments* |
(9,376,752 | ) | ||
| Foreign currencies |
(17,435 | ) | ||
| Futures contracts |
(8,814 | ) | ||
| Options written |
1,452 | |||
|
|
|
|||
| Net change in unrealized appreciation (depreciation) |
(9,401,549 | ) | ||
|
|
|
|||
| Net Realized and Unrealized Loss |
(215,241 | ) | ||
|
|
|
|||
| Net Increase in Net Assets Resulting from Operations |
$ | 9,128,523 | ||
|
|
|
|||
*Includes $2,454 capital gain taxes accrued.
See accompanying notes, which are an integral part of the financial statements.
| 27 |
Table of Contents
Statements of changes in net assets
Delaware Enhanced Global Dividend and Income Fund
| Year ended | ||||||||
| 11/30/14 | 11/30/13 | |||||||
| Increase (Decrease) in Net Assets from Operations: |
||||||||
| Net investment income |
$ | 9,343,764 | $ | 9,148,614 | ||||
| Net realized gain |
9,186,308 | 11,761,213 | ||||||
| Net change in unrealized appreciation (depreciation) |
(9,401,549 | ) | 17,193,617 | |||||
|
|
|
|
|
|||||
| Net increase in net assets resulting from operations |
9,128,523 | 38,103,444 | ||||||
|
|
|
|
|
|||||
| Dividends and Distributions to Shareholders from: |
||||||||
| Net investment income |
(14,277,254 | ) | (14,277,254 | ) | ||||
|
|
|
|
|
|||||
| (14,277,254 | ) | (14,277,254 | ) | |||||
|
|
|
|
|
|||||
|
Net Increase (Decrease) in Net Assets |
(5,148,731 | ) | 23,826,190 | |||||
| Net Assets: |
||||||||
| Beginning of year |
214,428,667 | 190,602,477 | ||||||
|
|
|
|
|
|||||
| End of year |
$ | 209,279,936 | $ | 214,428,667 | ||||
|
|
|
|
|
|||||
| Distributions in excess of net investment income |
$ | (850,797 | ) | $ | (1,261,955 | ) | ||
|
|
|
|
|
|||||
See accompanying notes, which are an integral part of the financial statements.
28
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Delaware Enhanced Global Dividend and Income Fund
Year ended November 30, 2014
| Net Cash (including Foreign Currency) Provided by (Used for) Operating Activities: |
||||
| Net increase in net assets resulting from operations |
$ | 9,128,523 | ||
|
|
|
|||
| Adjustments to reconcile net increase in net assets from operations to cash provided by (used for) operating activities: |
||||
| Amortization of premium and accretion of discount on investments, net |
114,814 | |||
| Purchase of investment securities |
(183,949,858 | ) | ||
| Proceeds from disposition of investment securities |
160,620,295 | |||
| Proceeds from disposition of short-term investment securities, net |
9,241,135 | |||
| Premiums received on options written |
133,302 | |||
| Options expired/exercised and terminated in closing purchase transactions |
(143,242 | ) | ||
| Net realized gain on investments |
(9,214,171 | ) | ||
| Net change in unrealized appreciation (depreciation) |
9,392,735 | |||
| Increase in securities lending collateral |
3,531,716 | |||
| Increase in receivable for investments sold |
(370,098 | ) | ||
| Increase in dividends and interest receivable and other assets |
(274,263 | ) | ||
| Increase in variation margin due to broker on futures contracts |
3,453 | |||
| Decrease in payable for investments purchased |
(462,903 | ) | ||
| Increase in investment management fees payable |
13,412 | |||
| Decrease in Trustees’ fees and expenses payable |
(286 | ) | ||
| Decrease in other affiliates payable |
(2,282 | ) | ||
| Increase in interest expense payable |
20,611 | |||
| Increase in other accrued expenses and other liabilities |
21,598 | |||
|
|
|
|||
| Total adjustments |
(11,324,032 | ) | ||
|
|
|
|||
| Net cash provided by operating activities |
(2,195,509 | ) | ||
|
|
|
|||
| Cash Flows Provided by (Used for) Financing Activities: |
||||
| Increase in borrowing under line of credit |
21,275,000 | |||
| Cash dividends and distributions paid to shareholders |
(14,277,254 | ) | ||
| Increase in obligation to return securities lending collateral |
(3,531,716 | ) | ||
|
|
|
|||
| Net cash used for financing activities |
3,466,030 | |||
|
|
|
|||
| Effect of exchange rates on cash |
(17,435 | ) | ||
|
|
|
|||
| Net increase in cash |
1,253,086 | |||
| Cash at beginning of year* |
(924,552 | ) | ||
|
|
|
|||
| Cash at end of year* |
$ | 328,534 | ||
|
|
|
|||
| Cash paid for interest expense on leverage |
$ | 773,121 | ||
|
|
|
|||
*Includes foreign currencies, at value as shown on the “Statement of assets and liabilities.”
See accompanying notes, which are an integral part of the financial statements.
29
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Delaware Enhanced Global Dividend and Income Fund
Selected data for each share of the Fund outstanding throughout each period were as follows:
| Year ended | ||||||||||||||||||||
| 11/30/14 | 11/30/13 | 11/30/12 | 11/30/11 | 11/30/10 | ||||||||||||||||
|
|
||||||||||||||||||||
| Net asset value, beginning of period |
$ | 13.520 | $ | 12.020 | $ | 11.350 | $ | 12.320 | $ | 12.060 | ||||||||||
| Income (loss) from investment operations: |
||||||||||||||||||||
| Net investment income1 |
0.589 | 0.577 | 0.557 | 0.587 | 0.568 | |||||||||||||||
| Net realized and unrealized gain (loss) |
(0.019 | ) | 1.823 | 1.261 | (0.327 | ) | 0.922 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total from investment operations |
0.570 | 2.400 | 1.818 | 0.260 | 1.490 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Less dividends and distributions from: |
||||||||||||||||||||
| Net investment income |
(0.900 | ) | (0.900 | ) | (0.627 | ) | (0.750 | ) | (0.918 | ) | ||||||||||
| Return of capital |
— | — | (0.521 | ) | (0.480 | ) | (0.312 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total dividends and distributions |
(0.900 | ) | (0.900 | ) | (1.148 | ) | (1.230 | ) | (1.230 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net asset value, end of period |
$ | 13.190 | $ | 13.520 | $ | 12.020 | $ | 11.350 | $ | 12.320 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Market value, end of period |
$ | 11.960 | $ | 12.250 | $ | 11.100 | $ | 10.920 | $ | 12.310 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total return based on:2 |
||||||||||||||||||||
| Net asset value |
4.94% | 21.19% | 16.85% | 1.77% | 13.13% | |||||||||||||||
| Market value |
5.02% | 18.91% | 12.15% | (2.01% | ) | 10.92% | ||||||||||||||
| Ratios and supplemental data: |
||||||||||||||||||||
| Net assets, end of period (000 omitted) |
$ | 209,280 | $ | 214,429 | $ | 190,602 | $ | 179,414 | $ | 160,465 | ||||||||||
| Ratio of expenses to average net assets3,4 |
1.88% | 1.88% | 2.15% | 1.98% | 1.95% | |||||||||||||||
| Ratio of net investment income to average net assets5 |
4.31% | 4.47% | 4.74% | 4.68% | 4.68% | |||||||||||||||
| Portfolio turnover |
56% | 56% | 53% | 72% | 83% | |||||||||||||||
| Leverage analysis: |
||||||||||||||||||||
| Debt outstanding at end of period at par (000 omitted) |
$ | 87,000 | $ | 65,725 | $ | 65,725 | $ | 50,725 | $ | 40,000 | ||||||||||
| Asset coverage per $1,000 of debt outstanding at end of period |
$ | 3,406 | $ | 4,263 | $ | 3,900 | $ | 4,537 | $ | 5,012 | ||||||||||
|
|
||||||||||||||||||||
| 1 | The average shares outstanding method has been applied for per share information. |
| 2 | Total investment return is calculated assuming a purchase of common stock on the opening of the first day and a sale on the closing of the last day of each period reported. Dividends and distributions, if any, are assumed for the purpose of this calculation, to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Generally, total investment return based on net asset value will be higher than total investment return based on market value in periods where there is an increase in the discount or decrease in the premium of the market value to the net asset value from the beginning to the end of such periods. Conversely, total investment return based on net asset value will be lower than total investment return based on market value in periods where there is a decrease in the discount or an increase in the premium of the market value to the net asset value from the beginning to the end of such periods. |
| 3 | The ratio of interest expense to adjusted average net assets (excluding debt outstanding) for the years ended Nov. 30, 2014, 2013, 2012, 2011, and 2010 were 0.27%, 0.27%, 0.42%, 0.31%, and 0.33%, respectively. |
| 4 | The ratio of expenses before interest expense to adjusted average net assets (excluding debt outstanding) for the years ended Nov. 30, 2014, 2013, 2012, 2011, and 2010 were 1.13%, 1.15%, 1.19%, 1.28%, and 1.22%, respectively. |
| 5 | The ratio of net investment income to adjusted average net assets (excluding debt outstanding) for the years ended Nov. 30, 2014, 2013, 2012, 2011, and 2010 were 3.21%, 3.38%, 3.57%, 3.76%, and 3.73%, respectively. |
See accompanying notes, which are an integral part of the financial statements.
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Delaware Enhanced Global Dividend and Income Fund
November 30, 2014
Delaware Enhanced Global Dividend and Income Fund (Fund) is organized as a Delaware statutory trust, and is a diversified closed-end management investment company under the Investment Company Act of 1940, as amended. The Fund’s shares trade on the New York Stock Exchange (NYSE) under the symbol DEX.
The primary investment objective of the Fund is to seek current income, with a secondary objective of capital appreciation.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and are consistently followed by the Fund.
Security Valuation — Equity securities and exchange-traded funds (ETFs), except those traded on the Nasdaq Stock Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time of the regular close of the NYSE on the valuation date. Securities and ETFs traded on the Nasdaq are valued in accordance with the Nasdaq Official Closing Price, which may not be the last sales price. If, on a particular day, an equity security or ETF does not trade, then the mean between the bid and ask prices will be used, which approximates fair value. Securities listed on a foreign exchange are normally valued at the last quoted sales price on the valuation date. Open-end investment company securities are valued at net asset value per share, as reported by the underlying investment company. U.S. government and agency securities are valued at the mean between the bid and ask prices, which approximates fair value. Other debt securities and credit default swap (CDS) contracts are valued based upon valuations provided by an independent pricing service or broker/counterparty and reviewed by management. To the extent current market prices are not available, the pricing service may take into account developments related to the specific security, as well as transactions in comparable securities. Valuations for fixed income securities utilize matrix systems, which reflect such factors as security prices, yields, maturities, and ratings, and are supplemented by dealer and exchange quotations. For asset-backed securities, collateralized mortgage obligations, commercial mortgage securities and U.S. government agency mortgage securities, pricing vendors utilize matrix pricing which considers prepayment speed, attributes of the collateral, yield or price of bonds of comparable quality, coupon, maturity, and type as well as broker/dealer-supplied prices. Swap prices are derived using daily swap curves and models that incorporate a number of market data factors, such as discounted cash flows, trades, and values of the underlying reference instruments. Foreign currency exchange contracts and foreign cross currency exchange contracts are valued at the mean between the bid and ask prices, which approximates fair value. Interpolated values are derived when the settlement date of the contract is an interim date for which quotations are not available. Futures contracts are valued at the daily quoted settlement prices. Exchange-traded options are valued at the last reported sale price or, if no sales are reported, at the mean between the last reported bid and ask prices, which approximates fair value. Generally, other securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith under the direction of the Fund’s Board of Trustees (Board). In determining whether market quotations are readily available or fair valuation will be used, various factors will be taken into consideration, such as market closures or suspension of trading in a security. The Fund may use fair value pricing more frequently for securities traded primarily in non-U.S. markets because, among other things, most foreign markets close well before the Fund values its securities, generally as of 4:00 p.m. Eastern time. The earlier close of these foreign markets gives rise to the possibility that significant events, including broad market moves, government actions or pronouncements, aftermarket trading, or news events may have occurred in the interim. Whenever such a significant event occurs, the Fund may value foreign securities using fair value prices based on third-party vendor modeling tools (international fair value pricing).
Federal and Foreign Income Taxes — No provision for federal income taxes has been made as the Fund intends to continue to qualify for federal income tax purposes as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, and make the requisite distributions to shareholders. The Fund evaluates tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the “more-likely-than-not” threshold are recorded as a tax benefit or expense in the current year. Management has analyzed the Fund’s tax positions taken for all open federal income tax years (Nov. 30, 2011–Nov. 30, 2014), and has concluded that no provision for federal income tax is required in the Fund’s financial statements. In regard to foreign taxes only, the Fund has open tax years in certain foreign countries in which it invests that may date back to the inception of the Fund.
Distributions — The Fund has implemented a managed distribution policy. Under the policy, the Fund is managed with a goal of generating as much of the distribution as possible from net investment income and short-term capital gains. The balance of the distribution will then come from long-term capital gains to the extent permitted, and if necessary, a return of capital. Even though the Fund may realize current year capital gains, such gains may be offset, in whole or in part, by the Fund’s capital loss carryovers from prior years. For federal income tax purposes, the effect of such capital loss carryovers may be to convert (to the extent of such current year gains) what would otherwise be non-taxable returns
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Table of Contents
Notes to financial statements
Delaware Enhanced Global Dividend and Income Fund
1. Significant Accounting Policies (continued)
of capital into distributions taxable as ordinary income. The use of such capital loss carryovers in this circumstance will produce no tax benefit for shareholders, and the capital loss carryovers available to offset future capital gains of the Fund will be reduced. Under the Regulated Investment Company Modernization Act of 2010 (Act), this tax effect attributable to the Fund’s capital loss carryovers (the conversion of returns of capital into distributions taxable as ordinary income) will no longer apply to net capital losses of the Fund arising in Fund tax years beginning after Nov. 30, 2011. The actual determination of the source of the Fund’s distributions can be made only at year end. Shareholders should receive written notification regarding the actual components and tax treatments of all Fund distributions for the calendar year 2014 in early 2015.
Repurchase Agreements — The Fund may purchase certain U.S. government securities subject to the counterparty’s agreement to repurchase them at an agreed upon date and price. The counterparty will be required on a daily basis to maintain the value of the collateral subject to the agreement at not less than the repurchase price (including accrued interest). The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system with the Fund’s custodian or a third-party sub-custodian. In the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. All open repurchase agreements as of the date of this report were entered into on Nov. 28, 2014.
To Be Announced Trades (TBA) — The Fund may contract to purchase or sell securities for a fixed price at a transaction date beyond the customary settlement period (examples: when issued, delayed delivery, forward commitment, or TBA transactions) consistent with the Fund’s ability to manage its investment portfolio and meet redemption requests. These transactions involve a commitment by the Fund to purchase or sell securities for a predetermined price or yield with payment and delivery taking place more than three days in the future, or after a period longer than the customary settlement period for that type of security. No interest will be earned by the Fund on such purchases until the securities are delivered or the transaction is completed; however, the market value may change prior to delivery.
Foreign Currency Transactions — Transactions denominated in foreign currencies are recorded at the prevailing exchange rates on the valuation date in accordance with the Fund’s prospectus. The value of all assets and liabilities denominated in foreign currencies is translated daily into U.S. dollars at the exchange rate of such currencies against the U.S. dollar. Transaction gains or losses resulting from changes in exchange rates during the reporting period or upon settlement of the foreign currency transaction are reported in operations for the current period. The Fund generally bifurcates that portion of realized gains and losses on investments in debt securities which is due to changes in foreign exchange rates from that which is due to changes in market prices of debt securities. That portion of gains (losses) is included on the “Statement of operations” under “Net realized gain (loss) on foreign currencies.” For foreign equity securities, these changes are included in net realized and unrealized gain or loss on investments. The Fund reports certain foreign currency related transactions as components of realized gains (losses) for financial reporting purposes, whereas such components are treated as ordinary income (loss) for federal income tax purposes.
Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments, the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the differences could be material.
Other — Expenses directly attributable to the Fund are charged directly to the Fund. Other expenses common to various funds within the Delaware Investments® Family of Funds are generally allocated among such funds on the basis of average net assets. Management fees and some other expenses are paid monthly. Security transactions are recorded on the date the securities are purchased or sold (trade date) for financial reporting purposes. Costs used in calculating realized gains and losses on the sale of investment securities are those of the specific securities sold. Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis. Discounts and premiums on debt securities are amortized to interest income over the lives of the respective securities using the effective interest method. Realized gains (losses) on paydowns of asset- and mortgage-backed securities are classified as interest income. Distributions received from investments in real estate investment trusts (REITs) are recorded as dividend income on the ex-dividend date, subject to reclassification upon notice of the character of such distributions by the issuer. Foreign dividends are also recorded on the ex-dividend date or as soon after the ex-dividend date that the Fund is aware of such dividends, net of all tax withholdings, a portion of which may be reclaimable. Withholding taxes and reclaims on foreign dividends have been recorded in accordance with the Fund’s understanding of the applicable country’s tax rules and rates. The Fund may pay foreign capital gain taxes on certain foreign securities held, which are reported as components of realized losses for financial reporting purposes, whereas such components are treated as ordinary loss for federal income tax purposes.
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The Fund may receive earnings credits from its custodian when positive cash balances are maintained, which may be used to offset custody fees. There were no earnings credits for the year ended Nov. 30, 2014.
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Fund pays Delaware Management Company (DMC), a series of Delaware Management Business Trust, and the investment manager, an annual fee of 0.95%, of the adjusted average daily net assets of the Fund. For purposes of the calculation of investment management fees, adjusted average daily net assets excludes the line of credit liability.
Effective Nov. 1, 2014, Delaware Investments Fund Services Company (DIFSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to the Fund. Prior to this time, Delaware Service Company, Inc. (DSC), an affiliate of DMC, provided fund accounting and financial administration oversight services to the Fund. For these services, the Fund pays DIFSC fees based on the aggregate daily net assets (excluding the line of credit liability) of the Delaware Investments® Family of Funds at the following annual rate: 0.0050% of the first $30 billion; and 0.0045% of the next $10 billion; 0.0040% of the next $10 billion; and 0.0025% of aggregate average daily net assets in excess of $50 billion. The fees payable to DIFSC under the service agreement described above are allocated among all Funds in the Delaware Investments Family of Funds on a relative net asset value basis. For the year ended Nov. 30, 2014, the Fund was charged $13,954 for these services. This amount is included on the “Statement of operations” under “Accounting and administration expenses.”
As provided in the investment management agreement, the Fund bears a portion of the cost of resources shared with DMC, including the cost of internal personnel of DMC and its affiliates that provide legal, tax, and regulatory reporting services to the Fund. For the year ended Nov. 30, 2014, the Fund was charged $34,612 for internal legal, tax, and regulatory reporting services provided by DMC and/or its affiliates’ employees. This amount is included on the “Statement of operations” under “Legal fees.”
Trustees’ fees include expenses accrued by the Fund for each Trustee’s retainer and meeting fees. Certain officers of DMC and DIFSC are Officers and/or Trustees of the Fund. These Officers and Trustees are paid no compensation by the Fund.
3. Investments
For the year ended Nov. 30, 2014, the Fund made purchases and sales of investment securities other than short-term investments as follows:
| Purchases other than U.S. government securities |
$ | 178,277,791 | ||
| Purchases of U.S. government securities |
5,672,067 | |||
| Sales other than U.S. government securities |
155,202,758 | |||
| Sales of U.S. government securities |
5,417,537 |
At Nov. 30, 2014, the cost of investments and unrealized appreciation (depreciation) for federal income tax purposes were as follows:
| Cost of investments |
$ | 291,435,629 | ||
|
|
|
|||
| Aggregate unrealized appreciation |
$ | 40,064,690 | ||
| Aggregate unrealized depreciation |
(21,930,490 | ) | ||
|
|
|
|||
| Net unrealized appreciation |
$ | 18,134,200 | ||
|
|
|
U.S. GAAP defines fair value as the price that the Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. A three-level hierarchy for fair value measurements has been established based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability based on the best information available under the circumstances. The Fund’s investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-level hierarchy of inputs is summarized below.
| Level 1 – | Inputs are quoted prices in active markets for identical investments. (Examples: equity securities, open-end investment companies, futures contracts, exchange-traded options contracts) |
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Table of Contents
Notes to financial statements
Delaware Enhanced Global Dividend and Income Fund
3. Investments (continued)
| Level 2 – | Other observable inputs, including, but not limited to: quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks, and default rates) or other market-corroborated inputs. (Examples: debt securities, government securities, swap contracts, foreign currency exchange contracts, foreign securities utilizing international fair value pricing, broker-quoted securities, fair valued securities)
| |
| Level 3 – | Significant unobservable inputs, including the Fund’s own assumptions used to determine the fair value of investments. (Examples: broker-quoted securities, fair valued securities) |
Level 3 investments are valued using significant unobservable inputs. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Valuations may also be based upon current market prices of securities that are comparable in coupon, rating, maturity, and industry. The derived value of a Level 3 investment may not represent the value which is received upon disposition and this could impact the results of operations.
The following table summarizes the valuation of the Fund’s investments by fair value hierarchy levels as of Nov. 30, 2014:
| Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
| Agency, Asset-Backed & |
$ | — | $ | 1,470,311 | $ | — | $ | 1,470,311 | ||||||||
| Corporate Debt |
— | 122,325,336 | — | 122,325,336 | ||||||||||||
| Foreign Debt |
— | 7,380,588 | — | 7,380,588 | ||||||||||||
| Senior Secured Loans1 |
— | 4,022,206 | 1,078,919 | 5,101,125 | ||||||||||||
| Common Stock |
146,676,140 | — | — | 146,676,140 | ||||||||||||
| Convertible Preferred Stock1 |
5,737,801 | 2,735,986 | 35,473 | 8,509,260 | ||||||||||||
| Exchange-Traded Note |
171,187 | — | — | 171,187 | ||||||||||||
| Limited Partnership |
369,900 | — | — | 369,900 | ||||||||||||
| Preferred Stock1 |
845,681 | 937,825 | — | 1,783,506 | ||||||||||||
| Warrant |
4,201 | — | — | 4,201 | ||||||||||||
| U.S. Treasury Obligations |
— | 1,096,368 | — | 1,096,368 | ||||||||||||
| Short-Term Investments |
— | 185,616 | — | 185,616 | ||||||||||||
| Securities Lending Collateral |
— | 14,496,291 | — | 14,496,291 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 153,804,910 | $ | 154,650,527 | $ | 1,114,392 | $ | 309,569,829 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Futures Contracts |
$ | (8,814 | ) | $ | — | $ | — | $ | (8,814 | ) | ||||||
1Security type is valued across multiple levels. Level 1 investments represent exchange-traded investments, Level 2 investments represent investments with observable inputs or matrix-priced investments, and Level 3 investments represent investments without observable inputs. The amounts attributed to Level 1 investments, Level 2 investments, and Level 3 investments represent the following percentages of the total market value of these security types:
| Level 1 |
Level 2 |
Level 3 |
Total |
|||||||||||||
| Convertible Preferred Stock |
67.43 | % | 32.15 | % | 0.42 | % | 100.00 | % | ||||||||
| Senior Secured Loans |
— | 78.85 | % | 21.15 | % | 100.00 | % | |||||||||
| Preferred Stock |
47.42 | % | 52.58 | % | — | 100.00 | % | |||||||||
The securities that have been deemed worthless on the “Schedule of investments” are considered to be Level 3 investments in these tables.
During the year ended Nov. 30, 2014, there were no transfers between Level 1 investments, Level 2 investments, or Level 3 investments that had a significant impact to the Fund. This does not include transfers between Level 1 investments and Level 2 investments due to the Fund utilizing international fair value pricing during the year. In accordance with the fair valuation procedures described in Note 1, international fair value pricing of securities in the Fund occurs when market volatility exceeds an established rolling threshold. If the threshold is exceeded on a given date, then prices of international securities (those that traded on exchanges that close at a different time than the time that the Fund’s
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net asset value is determined) will be established using a separate pricing feed from a third-party vendor designed to establish a price for each such security as of the time that the Fund’s net asset value is determined. Further, international fair value pricing uses other observable market-based inputs in place of the closing exchange price due to the events occurring after the close of the exchange or market on which the investment is principally traded, causing a change in classification between levels. The Fund’s policy is to recognize transfers between levels at the beginning of the reporting period.
A reconciliation of Level 3 investments is presented when the Fund has a significant amount of Level 3 investments at the beginning, interim, or end of the period in relation to the Fund’s net assets. Management has determined not to provide additional disclosure on Level 3 inputs under ASU No. 2011-04 since the Level 3 investments are not considered significant to the Fund’s net assets at the end of the year.
4. Dividend and Distribution Information
Income and long-term capital gain distributions are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. Additionally, distributions from net gains on foreign currency transactions and net short-term gains on sales of investment securities are treated as ordinary income for federal income tax purposes. The tax character of dividends and distributions paid during the years ended Nov. 30, 2014 and 2013 was as follows:
| Year ended | ||||||||
| 11/30/14 | 11/30/13 | |||||||
| Ordinary income |
$ | 14,277,254 | $ | 14,277,254 | ||||
5. Components of Net Assets on a Tax Basis
As of Nov. 30, 2014, the components of net assets on a tax basis were as follows:
| Shares of beneficial interest |
$ | 229,384,577 | ||
| Capital loss carryforwards |
(38,187,667 | ) | ||
| Other temporary differences |
(17,321 | ) | ||
| Unrealized appreciation |
18,100,347 | |||
|
|
|
|||
| Net assets |
$ | 209,279,936 | ||
|
|
|
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales, mark-to-market on futures contracts, contingent payment debt instruments, partnership income, trust preferred securities, tax deferral of losses on straddles, market discount and premium on debt instruments, and unrealized gain on passive foreign investment companies.
For financial reporting purposes, capital accounts are adjusted to reflect the tax character of permanent book/tax differences. Reclassifications are primarily due to tax treatment of gain (loss) on foreign currency transactions, dividends and distributions, contingent payment debt instruments, CDS contracts, partnership income, market discount and premium on certain debt instruments, paydowns of asset- and mortgage-backed securities, and passive foreign investment companies. Results of operations and net assets were not affected by these reclassifications. For the year ended Nov. 30, 2014, the Fund recorded the following reclassifications:
| Distributions in excess of net investment income |
$ | 5,344,648 | ||
| Accumulated net realized loss |
945,477 | |||
| Paid-in capital |
(6,290,125 | ) |
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. $9,985,255 was utilized in 2014. Capital loss carryforwards remaining at Nov. 30, 2014, will expire as follows: $15,939,445 expires in 2016 and $22,248,222 expires in 2017.
On Dec. 22, 2010, the Act was enacted, which changed various technical rules governing the tax treatment of regulated investment companies. The changes are generally effective for taxable years beginning after the date of enactment. Under the Act, the Fund is permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being
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Table of Contents
Notes to financial statements
Delaware Enhanced Global Dividend and Income Fund
5. Components of Net Assets on a Tax Basis (continued)
considered all short-term as permitted under previous regulation. At Nov. 30, 2014, there were no capital loss carryforwards incurred that will be carried forward under the Act.
6. Capital Stock
Shares obtained under the Fund’s dividend reinvestment plan are purchased by the Fund’s transfer agent, Computershare, Inc. (Computershare), in the open market, if the shares of the Fund are trading at a discount to the Fund’s net asset value on the dividend payment date. However, the dividend reinvestment plan provides that if the shares of the Fund are trading at a premium to the Fund’s net asset value on the dividend payment date, the Fund will issue shares to shareholders of record at net asset value. During the years ended Nov. 30, 2014 and 2013, the Fund did not issue any shares under the Fund’s dividend reinvestment plan.
7. Line of Credit
For the year ended Nov. 30, 2014, the Fund borrowed a portion of the money available to it pursuant to a $67,000,000 Credit Agreement with The Bank of New York Mellon (BNY Mellon) that expired on June 25, 2014. Effective June 25, 2014, the Credit agreement was renewed through June 24, 2015 for $87,000,000. Depending on market conditions, the amount borrowed by the Fund pursuant to the Credit Agreement may be reduced or possibly increased in the future.
At Nov. 30, 2014, the par value of loans outstanding was $87,000,000, at a variable interest rate of 1.03%. During the year ended Nov. 30, 2014, the average daily balance of loans outstanding was $74,235,000, at a weighted average interest rate of approximately 1.05%.
Interest on borrowings is based on a variable short-term rate plus an applicable margin. Prior to June 25, 2014, the commitment fee under the Credit Agreement was computed at a rate of 0.15% per annum on the unused balance. On June 25, 2014, the commitment fee was changed to a rate of 0.10% per annum on the unused balance. The loan is collateralized by the Fund’s portfolio.
8. Derivatives
U.S. GAAP requires disclosures that enable investors to understand: (1) how and why an entity uses derivatives; (2) how they are accounted for; and (3) how they affect an entity’s results of operations and financial position.
Foreign Currency Exchange Contracts — The Fund may enter into foreign currency exchange contracts and foreign cross currency exchange contracts as a way of managing foreign exchange rate risk. The Fund may enter into these contracts to fix the U.S. dollar value of a security that it has agreed to buy or sell for the period between the date the trade was entered into and the date the security is delivered and paid for. The Fund may also use these contracts to hedge the U.S. dollar value of securities it already owns that are denominated in foreign currencies. In addition, the Fund may enter into these contracts to facilitate or expedite the settlement of portfolio transactions. The change in value is recorded as an unrealized gain or loss. When the contract is closed, a realized gain or loss is recorded equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
The use of foreign currency exchange contracts and foreign cross currency exchange contracts does not eliminate fluctuations in the underlying prices of the securities, but does establish a rate of exchange that can be achieved in the future. Although foreign currency exchange contracts and foreign cross currency exchange contracts limit the risk of loss due to an unfavorable change in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency change favorably. In addition, the Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts. The Fund’s maximum risk of loss from counterparty credit risk is the value of its currency exchanged with the counterparty. The risk is generally mitigated by having a netting arrangement between the Fund and the counterparty and by the posting of collateral by the counterparty to the Fund to cover the Fund’s exposure to the counterparty. No foreign currency exchange contracts were outstanding at Nov. 30, 2014.
During the year ended Nov. 30, 2014, the Fund entered into foreign currency exchange contracts to fix the U.S. dollar value of a security between trade date and settlement date, and hedge the U.S dollar value of securities it already owns that are denominated in foreign currencies.
Futures Contracts — A futures contract is an agreement in which the writer (or seller) of the contract agrees to deliver to the buyer an amount of cash or securities equal to a specific dollar amount times the difference between the value of a specific security or index at the close of the last trading day of the contract and the price at which the agreement is made. The Fund may use futures in the normal course of pursuing
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its investment objectives. The Fund may invest in futures contracts to hedge its existing portfolio securities against fluctuations in fair value caused by changes in interest rates or market conditions. Upon entering into a futures contract, the Fund deposits cash or pledges U.S. government securities to a broker, equal to the minimum “initial margin” requirements of the exchange on which the contract is traded. Subsequent payments are received from the broker or paid to the broker each day, based on the daily fluctuation in the market value of the contract. These receipts or payments are known as “variation margin” and are recorded daily by the Fund as unrealized gains or losses until the contracts are closed. When the contracts are closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. Risks of entering into futures contracts include potential imperfect correlation between the futures contracts and the underlying securities and the possibility of an illiquid secondary market for these instruments. When investing in futures, there is reduced counterparty credit risk to the Fund because futures are exchange-traded and the exchange’s clearinghouse, as counterparty to all exchange-traded futures, guarantees against default. The Fund posted $20,000 in securities collateral for open futures contracts, which is presented on the “Schedule of investments.”
During the year ended Nov. 30, 2014, the Fund used futures contracts to hedge the Fund’s existing portfolio securities against fluctuations in value caused by changes in interest rates or market conditions, and to hedge currency risks associated with the Fund’s investments.
Options Contracts — The Fund may enter into options contracts in the normal course of pursuing its investment objectives. The Fund may buy or write options contracts for any number of reasons, including without limitation: to manage the Fund’s exposure to changes in securities prices caused by interest rates or market conditions and foreign currencies; to earn income; as an efficient means of adjusting the Fund’s overall exposure to certain markets; to protect the value of portfolio securities; and as a cash management tool. The Fund may buy or write call or put options on securities, futures, swaps, swaptions, financial indices, and foreign currencies. When the Fund buys an option, a premium is paid and an asset is recorded and adjusted on a daily basis to reflect the current market value of the option purchased. When the Fund writes an option, a premium is received and a liability is recorded and adjusted on a daily basis to reflect the current market value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains. The difference between the premium received and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is treated as realized gain or loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Fund has a realized gain or loss. If a put option is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund, as writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. When writing options, the Fund is subject to minimal counterparty risk because the counterparty is only obligated to pay premiums and does not bear the market risk of an unfavorable market change.
Transactions in options written during the year ended Nov. 30, 2014 for the Fund were as follows:
| Number of contracts |
Premiums | |||||||||
| Options outstanding at Nov. 30, 2013 |
89 | $ | 9,940 | |||||||
| Options written |
1,137 | 133,302 | ||||||||
| Options terminated in closing purchase transactions |
(89 | ) | (6,111 | ) | ||||||
| Options expired |
(613 | ) | (74,599 | ) | ||||||
| Options exercised |
(524 | ) | (62,532 | ) | ||||||
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|
|
|
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| Options outstanding at Nov. 30, 2014 |
— | $ | — | |||||||
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|
|
|
|
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During the year ended Nov. 30, 2014, the Fund used options contracts to receive premiums for writing options.
Swap Contracts — The Fund may enter into CDS contracts in the normal course of pursuing its investment objectives. The Fund may enter into CDS contracts in order to hedge against a credit event, to enhance total return or to gain exposure to certain securities or markets. The Fund will not be permitted to enter into any swap transactions unless, at the time of entering into such transactions, the unsecured long-term debt of the actual counterparty combined with any credit enhancements, is rated at least BBB- by Standard & Poor’s Financial Services LLC. (S&P) or Baa3 by Moody’s Investors Service, Inc. (Moody’s) or is determined to be of equivalent credit quality by DMC.
Credit Default Swaps. A CDS contract is a risk-transfer instrument through which one party (purchaser of protection) transfers to another party (seller of protection) the financial risk of a credit event (as defined in the CDS agreement), as it relates to a particular reference security or basket of securities (such as an index). In exchange for the protection offered by the seller of protection, the purchaser of protection agrees to pay the seller of protection a periodic amount at a stated rate that is applied to the notional amount of the CDS contract. In addition, an upfront payment may be made or received by the Fund in connection with an unwinding or assignment of a CDS contract. Upon the occurrence
| (continues) | 37 |
Table of Contents
Notes to financial statements
Delaware Enhanced Global Dividend and Income Fund
8. Derivatives (continued)
of a credit event, the seller of protection would pay the par (or other agreed-upon) value of the reference security (or basket of securities) to the counterparty. Credit events generally include, among others, bankruptcy, failure to pay, and obligation default.
During the year ended Nov. 30, 2014, the Fund entered into CDS contracts as a purchaser of protection. Periodic payments (receipts) on such contracts are accrued daily and recorded as unrealized losses (gains) on swap contracts. Upon payment (receipt), such amounts are recorded as realized losses (gains) on swap contracts. Upfront payments made or received in connection with CDS contracts are amortized over the expected life of the CDS contracts as unrealized losses (gains) on swap contracts. The change in value of CDS contracts is recorded daily as unrealized appreciation or depreciation. A realized gain or loss is recorded upon a credit event (as defined in the CDS agreement) or the maturity or termination of the agreement. Initial margin and variation margin are posted to central counterparties for CDS basket trades, as determined by the applicable central counterparty. During the year ended Nov. 30, 2014, the Fund did not enter into any CDS contracts as a seller of protection.
CDS contracts may involve greater risks than if the Fund had invested in the reference obligation directly. CDS contracts are subject to general market risk, liquidity risk, counterparty risk and credit risk. The Fund’s maximum risk of loss from counterparty credit risk, either as the seller of protection or the buyer of protection, is the fair value of the contract. This risk is mitigated by (1) for bilateral swap contracts, having a netting arrangement between the Fund and the counterparty and by the posting of collateral by the counterparty to the Fund to cover the Fund’s exposure to the counterparty or (2) for cleared swaps, trading these instruments through a central counterparty.
During the year ended Nov. 30, 2014, the Fund used CDS contracts to hedge against a credit event, and to enhance total return.
Swaps Generally. The value of open swaps may differ from that which would be realized in the event the Fund terminated its position in the contract on a given day. Risks of entering into these contracts include the potential inability of the counterparty to meet the terms of the contracts. This type of risk is generally limited to the amount of favorable movement in the value of the underlying security, instrument, or basket of instruments, if any, at the day of default. Risks also arise from potential losses from adverse market movements and such losses could exceed the unrealized amounts. No swap contracts were outstanding at Nov. 30, 2014.
The effect of derivative instruments on the “Statement of operations” for the year ended Nov. 30, 2014 was as follows:
| Net Realized Gain (Loss) on: | |||||||||||||||||||||||||
| Foreign |
Futures |
Options |
Swap |
Total | |||||||||||||||||||||
| Foreign currency exchange contracts |
$ | (120,050 | ) | $ | — | $ | — | $ | — | $ | (120,050 | ) | |||||||||||||
| Equity contracts |
— | — | 80,710 | — | 80,710 | ||||||||||||||||||||
| Interest rate contracts |
— | (44,646 | ) | — | — | (44,646 | ) | ||||||||||||||||||
| Credit contracts |
— | — | — | (376 | ) | (376 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
| Total |
$ | (120,050 | ) | $ | (44,646 | ) | $ | 80,710 | $ | (376 | ) | $ | (84,362 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
| Net Change in Unrealized Appreciation (Depreciation) of: | |||||||||||||||||||||
| Futures Contracts |
Options Written |
Total |
|||||||||||||||||||
| Equity contracts |
$ | — | $ | 1,452 | $ | 1,452 | |||||||||||||||
| Interest rate contracts |
(8,814 | ) | — | (8,814 | ) | ||||||||||||||||
|
|
|
|
|
|
|
||||||||||||||||
| Total |
$ | (8,814 | ) | $ | 1,452 | $ | (7,362 | ) | |||||||||||||
|
|
|
|
|
|
|
||||||||||||||||
Derivatives Generally. The table below summarizes the average balance of derivative holdings by the Fund during the year ended Nov. 30, 2014:
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Table of Contents
| Long Derivative Volume |
Short Derivative Volume |
|||||||||||||||
| Foreign currency exchange contracts (average cost) |
USD | 235,955 | USD | 338,718 | ||||||||||||
| Futures contracts (average notional value) |
— | 1,359,790 | ||||||||||||||
| Options contracts (average notional value) |
— | 7,841 | ||||||||||||||
| Swap contracts (average notional value)* |
EUR | 714 | — | |||||||||||||
*Long represents buying protection and short represents selling protection.
9. Offsetting
In December 2011, the Financial Accounting Standards Board (FASB) issued guidance that expands current disclosure requirements on the offsetting of certain assets and liabilities. The disclosures are required for investments and derivative financial instruments subject to master netting or similar agreements which are eligible for offset on the “Statement of assets and liabilities” and require an entity to disclose both gross and net information about such inves