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Delaware Emerging Markets Fund Quarterly commentary September 30, 2014

Within the Fund

For the third quarter of 2014, Delaware Emerging Markets Fund (Class A and Institutional Class shares at net asset value) outperformed its benchmark, the MSCI Emerging Markets Index, when compared to the index’s net return, but trailed the index’s gross return.

Among countries, South Korea contributed the most to relative performance due to favorable stock selection. Shares of telecommunications operators SK Telecom, LG Uplus, and KT rose as competition within the industry is expected to become more rational after new regulatory restrictions on handset subsidies take effect. With these limitations on subsidies, the industry’s profitability is expected to improve. Shares of KCC Corporation rose as the company’s building materials business continues to benefit from recovery in the domestic housing market. Shares of Lotte Chilsung Beverage and Lotte Confectionery outperformed due to speculation about restructuring within the Lotte group. Potential restructuring of Korean conglomerate groups such as Lotte has been an important topic this year in Korea. To the extent that ownership structures become simplified and more transparent, dividend payout ratios and equity valuations may increase.

In China, the Fund’s large overweight in Baidu contributed significantly to performance as the company has maintained its dominance in the search market and demonstrated strong growth in its mobile search business. Despite slowing economic growth in China, the internet sector continues to show robust growth with the benefit of new services and increased smartphone adoption. Not all internet stocks have performed well, however. The Fund’s investments in SINA,, and Youku Tudou detracted from performance in the third quarter, negating much of the positive impact from Baidu. SINA has faced some regulatory challenges regarding content on its video site, while Sohu’s gaming business has slowed down as key games have reached maturity. Shares of Youku Tudou declined after reporting margin pressure from its investments in content and platforms and providing weaker-than-expected revenue guidance. In the consumer staples sector, shares of Uni-President China Holdings recovered somewhat from their recent stretch of underperformance as the company seeks to focus more on product innovation and brand enhancement. This strategy marks a step toward alleviating the intense price competition that has plagued the instant noodle and beverage industries over the past year.

In Brazil, positive stock selection outweighed the negative effects of asset allocation. Shares of electronics retailer B2W Cia Digital rose on the back of strong sales and positive investor sentiment toward the e-commerce sector. The Fund’s underweight position in Vale also contributed positively, with the stock declining in sympathy with iron ore prices.

Elsewhere, in Mexico, America Movil’s strong performance benefited the Fund’s portfolio, which held an overweight position in the stock. The Fund’s overweight position overall in Mexico was favorable in terms of asset allocation. In South Africa, the Fund’s significant underweight position worked well, as that market underperformed the benchmark. In Israel, Teva Pharmaceutical Industries outperformed as its relatively defensive business provided stability amid volatility in broader emerging markets.

On the negative side, India detracted the most from the Fund’s performance due to the negative effects of unfavorable stock selection. Shares of Reliance Industries, the Fund’s largest position in India, declined in part due to repeated delays by the government in raising gas prices. More importantly, the stock lacks near-term positive catalysts as the contributions from petrochemical capacity expansions and nonenergy businesses are not yet on the horizon. In the telecommunications sector, shares of Reliance Communications declined as the company’s core mobile business remains lackluster in terms of subscriber and revenue growth, while the company’s efforts to reduce debt have not yet materialized. In the technology services sector, the Fund’s lack of exposure to Infosys and Tata Consultancy Services detracted from performance as these companies are benefiting from robust demand in developed economies.

In Russia, the Fund’s overweight position was unfavorable. The announcement of further economic sanctions from the United States and European Union not only affected the share prices of companies specifically named, including Sberbank and Rosneft, but also contributed more broadly to fund outflows from Russia. As a result, the Fund’s investments in Yandex and QIWI also underperformed despite their strong fundamental business performance.

Other detractors from performance included Indonesia, the United Arab Emirates, Qatar, the Philippines, and Egypt. These markets all outperformed the index during the quarter, and the Fund has no exposure due to a lack of stocks that fulfill its investment criteria. At an individual stock level, the Fund’s investment in Arcos Dorados Holdings, a McDonald’s franchisor, detracted the most from performance. Within the company’s main markets of Brazil, Argentina, and Venezuela, the combination of weak consumption and currency depreciation has adversely impacted growth and profitability, although we remain constructive on the franchise over the long term.

Among sectors, materials, industrials, telecommunications, and consumer staples contributed positively to the Fund’s relative performance. In contrast, financials, energy, and technology detracted from performance.


We retain a positive outlook on emerging market economies over the long term. We believe that urbanization, technological advances, and policy reforms represent the critical drivers for income and consumption growth, and we expect economic growth in emerging markets to exceed growth in developed markets. Furthermore, we believe that valuations for emerging market equities are inexpensive in the context of these economies’ long-term growth potential.

Over the short term, we believe that equity markets may remain volatile. Key factors to monitor include the following:

  • policy reforms in China, India, and Brazil that may stimulate growth
  • economic conditions in China, including the health of the property and banking sectors
  • geopolitical tensions in the Middle East, Russia, and China
  • movements in U.S. interest rates, which may affect fund flows and currencies.

We recognize that emerging markets consist of many different countries at different stages of development, each with its own unique set of circumstances. Moreover, we believe that individual company fundamentals and valuations matter more than macroeconomics and politics in determining long-term investment performance. In this vein, our strategy is to construct a portfolio on a stock-by-stock basis with the objective of investing in companies with sustainable franchises that are trading at significant discounts to their intrinsic value.

Given our market outlook, we believe that the Fund’s portfolio should have substantial exposure to companies with secular growth opportunities, pricing power, the ability to gain market share, and key assets that are unlikely to be replicated or to be made obsolete. We believe that our investments in the consumer, telecommunications, and technology sectors represent these attributes well. For more-cyclical companies, we believe that it is important to invest in market leaders with favorable cost structures, sound balance sheets, and secular growth prospects. We also believe that the right time to consider investing in these companies is when the cycle is in a downturn, as stock valuations frequently become excessively discounted.

In light of our positive long-term view on economic growth in emerging markets, we believe that our investments in these companies could have the potential to outperform when the growth outlook turns more favorable. Finally, given our cautious view on China in the near term, we believe that the Fund’s portfolio should be underweight toward banks and property companies in China, as we believe there are risks to asset quality. The Fund is also underweight in companies with high exposure to fixed asset investment in China, as we believe that overcapacity persists in many areas.


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.


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

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 (09/30/2014)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)-3.43%2.60%6.24%13.26%6.70%11.56%8.64%06/10/1996
Class A (at offer)-8.99%n/a0.13%11.05%5.45%10.91%8.29%
Institutional Class shares-3.41%2.77%6.44%13.52%6.96%11.84%8.93%06/10/1996
MSCI Emerging Markets Index (Gross)-3.36%2.75%4.66%7.56%4.76%11.03%n/a
MSCI Emerging Markets Index (Net)-3.50%2.43%4.30%7.19%4.42%10.68%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)

Expense ratio
Class A (Gross)1.71%
Class A (Net)1.71%
Institutional Class shares (Gross)1.46%
Institutional Class shares (Net)1.46%
Top 10 holdings as of 11/30/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holdings based by issuer.
Holding% of portfolio
Samsung Electronics Co Ltd5.6%
Reliance Industries Ltd4.8%
Baidu Inc4.7%
China Mobile Ltd3.1%
SK Telecom Co Ltd2.9%
Petroleo Brasileiro SA2.8% Inc2.5%
Grupo Televisa SAB2.5%
Teva Pharmaceutical Industries2.4%
iShares MSCI Emerging Markets2.3%
Total % Portfolio in Top 10 holdings33.6%

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.

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.

Diversification may not protect against market risk.

Not FDIC Insured | No Bank Guarantee | May Lose Value