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Delaware Global Real Estate Opportunities Fund Quarterly commentary June 30, 2014 Class A (DGRPX)

Within the Fund

For the second quarter of 2014, Delaware Global Real Estate Opportunities Fund (Class A shares at net asset value) posted a positive return but underperformed its benchmark, the FTSE EPRA/NAREIT Developed Index.

The Fund’s underperformance was relatively mild and predominantly driven by weak stock selection. The Fund’s allocation across countries helped offset some of this bad selection.

One particular area of weakness was the Fund’s investment in Spain. The one stock represented in the index from Spain, Inmobiliaria Colonial, was up 24%. This company benefited from a recapitalization during the quarter that brought it out of bankruptcy, and also from investors aggressively trying to get exposure for a hopeful rebound in Spanish property values. Interestingly, the stock trades at a 45% premium to net asset value, as the capital raise diluted share value, but investors still bid the stock up. Unfortunately, the Fund’s one position in Spain, Lar Espana Real Estate Socimi, is not included in the index and it retreated 5% for the quarter. Lar Espana was penalized for showing slow progress investing the money from its initial public offering in the first quarter. We sold the Fund’s investment in the company during the quarter.

Another area of weakness for the Fund during the quarter was its exposure to Hong Kong real estate companies. Fundamentally, Hong Kong is more stable than China, but the Fund remains underweight because we are concerned about growth prospects and political actions that could negatively affect real estate. The Fund’s underweight hurt performance as Hong Kong returned 11% for the quarter.

The Fund’s U.S. investments offset some of the negative pressure. We favored U.S. companies that are early in their cycle in realizing benefits of a U.S. recovery. Strategic Hotels & Resorts was up 15% for the quarter. Its high-end resort hotels have seen greater demand and realized pricing power so far this year as consumers and business customers have been more willing to spend on higher-end hotels. UDR, an apartment company with high-end apartments in major urban markets, has seen similar demand and pricing strength in its assets as job growth has accelerated in many of its markets.

Stock selection in the United Kingdom helped the Fund’s relative performance in the second quarter, although the country was an underperformer. The Fund was helped by not owning Grainger or Big Yellow, which underperformed with returns of -10% and -5%, respectively. Investors were concerned about overpricing and unsustainable growth in the single-family housing market in which these two companies operate. In addition, the Fund benefited from its investment in British Land, a more-diversified landlord that has realized benefits of recent acquisitions and an accretive development pipeline.

Outlook

Global real estate securities’ heady run rate this year underscores the optimistic view that many investors have toward the current real estate environment. The apparent success of the U.S. Federal Reserve in navigating the financial crisis with quantitative easing, and its effect on real estate, has driven investor demand. Low interest rates, accessible debt capital, loan extensions, and minimal development have contributed to real estate’s rebound in the United States, and many view this as a new standard. The European Central Bank (ECB) and Bank of Japan, for example, are now following the U.S. model. Investors have been quick to catch the next wave of returns in the equity markets in response to these central banks’ actions and promises, creating demand for the real estate stocks in these regions. However, we question how successful all this intervention really is or will be in the long run. The U.S. has yet to fully unwind its quantitative easing and someday soon will be charged with reversing interest rates in an upward trend. Europe has a different set of structural issues and a greater risk of deflation, while Japan has demographic concerns working against it.

For now, we believe the glass is half full, and we are willing to participate in the positive sentiment, though we are keenly aware that the glass can also be seen as half empty. Worse yet, the glass could tip over and break. At present, we approach the Fund’s investments with a sense of skepticism until we get a better sense of how the various economic situations across the globe could play out. We do have great confidence in the investments we make. What keep us alert are the factors that are out of our control, or the management teams of the companies in which the Fund invests. As an example, the ECB’s bank stress tests are coming due in Europe this fall. Many of these banks remain loaded with bad debt and underperforming real estate assets. These assets somehow need to be cleared; when they do, the process could be problematic for the real estate sector. In every region, we choose the Fund’s investments with an eye toward minimizing downside risk should negative events develop.

We still have reservations in Europe, owing to structural issues surrounding monetary and fiscal policies, and social regimes that are not always favorable to economic (and real estate) growth. That said, European markets have stopped their decline and the ECB has taken lessons from the U.S., which leads us to believe that future change should be for the better. As we consider real estate investing across Europe, we are acutely focused on balancing risk and reward; there could be great investment opportunities, but several value traps exist. Ultimately, we believe Europe is close to a turning point, but it should be approached with caution.

[12953]

The views expressed represent the Manager's assessment of the Fund and market environment as of the date indicated, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Information is as of the date indicated and subject to change.

Document must be used in its entirety.

Performance

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.

Performance data current to the most recent month end may be obtained by calling 800 523-1918 or visiting delawareinvestments.com/performance.

Total returns may reflect waivers and/or expense reimbursements by the manager and/or distributor for some or all of the periods shown. Performance would have been lower without such waivers and reimbursements.

Average annual total return as of quarter-end (06/30/2014)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)7.06%12.01%13.82%10.50%16.75%n/a1.58%01/10/2007
Class A (at offer)0.94%5.50%7.26%8.36%15.36%n/a0.78%
Institutional Class shares7.13%12.16%14.12%10.71%17.02%n/a1.81%01/10/2007
FTSE EPRA/NAREIT Developed Index7.88%12.21%14.38%10.19%17.41%n/an/a

Returns for less than one year are not annualized.

Class A shares have a maximum up-front sales charge of 5.75% and are subject to an annual distribution fee.

The Delaware Global Real Estate Opportunities Fund's performance information for periods prior to Sept. 28, 2012, reflects the performance of The Global Real Estate Securities Portfolio (the “Portfolio”) of Delaware Pooled® Trust, which merged into Delaware Global Real Estate Opportunities Fund (the “Fund”) as of that date. The performance information for Class A shares at offer has been adjusted to reflect the Fund’s current maximum sales charge. The Fund also has higher expenses than the Portfolio, including a Rule 12b-1 fee to which the Institutional Class of the Portfolio was not subject. Historical performance results at net asset value and offer prior to Sept. 28, 2012 have not been recalculated to reflect these expenses, but future results will be affected by them. The historical performance of the Portfolio would have been lower had it been subject to the Fund’s expense ratio.

Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.

FTSE EPRA/NAREIT Developed Index (view)

Expense ratio
Class A (Gross)1.66%
Class A (Net)1.40%
Institutional Class shares (Gross)1.41%
Institutional Class shares (Net)1.15%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursements from Feb. 27, 2014 through Feb. 27, 2015. Please see the fee table in the Fund's prospectus for more information.

Top 10 holdings as of 07/31/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Simon Property Group Inc.5.0%
Sun Hung Kai Properties Ltd.3.5%
Mitsui Fudosan Co. Ltd.3.0%
British Land Co. PLC/The2.5%
Scentre Group2.2%
UDR Inc.2.0%
Equity Residential1.9%
Host Hotels & Resorts Inc.1.9%
Boston Properties Inc.1.8%
Dexus Property Group1.8%
Total % Portfolio in Top 10 holdings25.6%

Institutional Class shares are only available to certain investors. See the prospectus for more information. 

All third-party marks cited are the property of their respective owners.

Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Fund’s prospectus and its summary prospectus, which may be obtained by clicking the prospectus link located in the right-hand sidebar or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.

Investing involves risk, including the possible loss of principal.

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.

A REIT fund's tax status as a regulated investment company could be jeopardized if it holds real estate directly, as a result of defaults, or receives rental income from real estate holdings.

“Nondiversified” funds may allocate more of their net assets to investments in single securities than “diversified” Funds. Resulting adverse effects may subject these Funds to greater risks and volatility.

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.

Not FDIC Insured | No Bank Guarantee | May Lose Value