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Delaware Emerging Markets Fund Quarterly commentary December 31, 2015

Within the Fund

Delaware Emerging Markets Fund (Institutional Class shares and Class A shares at net asset value) outperformed its benchmark, the MSCI Emerging Markets Index, during the fourth quarter.

Among countries, China contributed the most to performance due to our investments in the Internet sector. Many stocks that underperformed in the third quarter rebounded. Shares of Baidu rose as the company reported encouraging operating performance in its core business. In addition, Baidu was included in the MSCI Emerging Markets Index. Furthermore, the merger between Ctrip.com and Qunar will allow Baidu to deconsolidate Qunar’s losses from its income statement. Among other Internet stocks, shares of Sohu.com rallied after the company reported strong results in its search business. In addition, the company’s chairman proposed to increase his stake in the company. SINA outperformed due to robust operating performance in its Weibo business and speculation that the company may be a candidate for privatization or acquisition. Finally, shares of Youku Tudou jumped after Alibaba offered to acquire at a premium the remaining Youku Tudou shares it does not own.

Elsewhere, India, Russia, and Brazil contributed positively to performance. In India, shares of Reliance Industries outperformed due to a favorable outlook for refining margins. In addition, the launch of the company’s 4G telecom service is approaching. In Russia, shares of Yandex rose sharply after the company reported strong quarterly results and guidance. In Brazil, shares of Hypermarcas benefited from the company’s announced sale of certain beauty and personal care brands. Braskem outperformed as the company reported strong third-quarter results boosted by currency depreciation and robust chemical spreads.

On the negative side, Korea detracted the most from performance primarily due to the telecom sector. Several concerns adversely affected the shares of SK Telecom. First, the company purchased shares of cable operator CJ Hellovision at a premium valuation. Second, the value of SK Telecom’s investment in SK Hynix declined due to weak demand for memory chips. Third, the ownership structure of the broader SK group may be affected by the chairman’s divorce proceedings. We believe that the operating fundamentals of the company remain unchanged and that the stock’s valuations are notable. Besides SK Telecom, shares of LG Uplus declined due to concerns that the company’s growth momentum from 4G has peaked.

Other detractors from performance included Indonesia and Malaysia. Our underweight stance in both markets was unfavorable in terms of asset allocation. We find few stocks in these markets that meet our investment criteria. In China, shares of Uni-President China Holdings fell in sympathy with broad-based weakness in the consumer staples sector. We believe that the company’s brands and distribution remain strong and that the company can leverage these assets to introduce new products.

Among sectors, technology contributed the most to performance due largely to the Chinese Internet sector. Energy also outperformed due to Reliance Industries. In contrast, telecom detracted the most from performance as SK Telecom, LG Uplus, and Tim Participacoes underperformed. Shares of Tim Participacoes declined due to persistent economic weakness and stalled efforts to consolidate the industry.

Outlook

Many of the issues that plagued emerging market equities in 2015 are likely to continue into 2016, including slowing economic growth in China, weak commodity prices, and further interest rate hikes in the United States. With respect to China, we believe that the economy will muddle through, supported by structural growth in consumption, improvement in living standards, and selective policy support from the government. While the path may not be smooth, any evidence of stabilization in growth could serve as a positive catalyst. Regarding U.S. interest rates, we expect monetary policy to remain accommodative overall in light of lingering global growth concerns.

Amid this challenging macroeconomic backdrop, we believe that there are pockets of opportunities for stock appreciation driven by structural demographic shifts, technology adoption, implementation of government policy, improvement in corporate governance, and industry consolidation. Our investment approach remains centered on identifying individual companies that we believe possess sustainable franchises and favorable long-term growth prospects and that trade at significant discounts to their intrinsic value. We are particularly focused on companies that we expect to benefit from long-term changes in how people in emerging markets live and work. Sectors we currently favor include technology and telecom. In the short term, global growth concerns are eclipsing fundamental valuation merits. However, we remain patient with our investments and expect companies with sound fundamentals to outperform over the long term.

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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 (12/31/2015)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)9.29%-13.93%-13.93%-3.60%-3.76%4.38%6.61%06/10/1996
Class A (at offer)3.03%-18.89%-18.89%-5.47%-4.90%3.77%6.29%
Institutional Class shares9.34%-13.75%-13.75%-3.35%-3.52%4.64%6.90%06/10/1996
MSCI Emerging Markets Index (Gross)0.73%-14.60%-14.60%-6.42%-4.47%3.95%n/a
MSCI Emerging Markets Index (Net)0.66%-14.92%-14.92%-6.76%-4.81%3.61%n/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.

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

MSCI Emerging Markets Index (view definition)

Expense ratio
Class A (Gross)1.69%
Class A (Net)1.69%
Institutional Class shares (Gross)1.44%
Institutional Class shares (Net)1.44%
Top 10 holdings as of 01/31/2016
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holdings based by issuer.
Holding% of portfolio
Reliance Industries Ltd7.0%
Sohu.com Inc6.1%
SINA Corp/China5.7%
Samsung Electronics Co Ltd5.2%
Baidu Inc4.4%
SK Telecom Co Ltd3.6%
Youku Tudou Inc3.2%
Tencent Holdings Ltd2.9%
Taiwan Semiconductor Manufactu2.4%
Grupo Televisa SAB2.3%
Total % Portfolio in Top 10 holdings42.8%

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.

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.

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

Not FDIC Insured | No Bank Guarantee | May Lose Value