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Delaware International Value Equity Fund Quarterly commentary June 30, 2014 Class A (DEGIX)

Within the Fund

For the second quarter of 2014, Delaware International Value Equity Fund (Class A shares at net asset value) posted a return that led its benchmark, the MSCI EAFE Index.

The primary source of outperformance was strong stock selection, which was positive in four of the five regions included in the benchmark — particularly Japan, Europe ex–euro zone, the euro zone, and Asia Pacific — offsetting adverse stock selection in the United Kingdom. Overall regional allocation was also positive, largely due to positioning in emerging markets as well as Canada.

Stock selection was strong in 7 out of 10 sectors, especially in consumer discretionary, information technology, and telecommunication services, which more than offset adverse stock selection in financials. Overall sector allocation was slightly positive, primarily due to favorable relative exposure to financials and energy that offset an adverse underweight exposure to utilities.

Net currency effect was negative, with an adverse underweight exposure to the British pound and Australian dollar more than offsetting the positive effect from exposure to the Canadian dollar.

General outlook

Our view of market prospects is defined by three types of analysis: first, by an understanding of company managements’ ability to exploit market demand; second, by the constraints on that demand created by the macroeconomic cycles of the markets within which those companies operate, and finally, by a view on the market’s confidence that this pattern can be sustained — largely a question of valuation.

Aggregating the second and third sets of issues, the euro zone displays attractive prospects assuming the current recovery endures. Cyclical recovery there is still in a relatively early phase, while low cyclically adjusted earnings valuations suggest the market implicitly expects either a weak and short-lived cycle or a lack of confidence in companies’ ability to achieve past levels of profitability. In either case, there appears to be a significant amount of negative sentiment already discounted into today’s stock prices.

Japan offers a more complex picture in that the change being sought by the government has more of a secular than a cyclical objective. The market appears inexpensive on the net book value of corporate assets, yet the historical returns on those assets, if they are a guide to the future, have been so far below global norms as to undermine confidence in a revaluation. Should Japan succeed in at least some of its structural reforms, it may, in the process, build not just a strong base of corporate fundamentals, but a source of confidence for expansion of valuations as well.

The scale of the U.S. economy and its accompanying markets makes it a key element in determining prospects elsewhere. Unlike other regions, the U.S. economy has grown unabated since the end of the global financial crisis in 2009, making it appear cyclically extended, at least chronologically. Against this concern, however, optimists can point out the solid leading indicators, low credit spreads, ample slack in the labor markets, and very low inflation. Valuations appear well above historical median levels, but are still well below prior peaks and may reflect the greater stability and secular growth prospects this country enjoys versus many other developed markets.

Providing as they do the common ground for all market participants, macro-level issues receive intensive attention from a multitude of analysts, strategists, and commentators. Broad cycles encompass an enormously complex array of contributing factors that can derail expectations. The analysis above provides merely a brief overview of some of these salient factors. We believe they remain generally supportive of market prospects.  As bottom-up stock pickers focused on individual company strengths and valuations, however, we do not rely on these macro measures as the key determinants of our decisions, important as they may be. As global equity managers taking a contrarian approach to bottom-up stock selection, we aim to use the uncertainty of macroeconomic and valuation cycles to bring to light opportunities at the company level, because it is there that analytical differentiation has the potential to pay the most handsome and consistent rewards.

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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 (06/30/2014)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)5.58%4.98%23.60%4.78%11.84%6.16%6.91%10/31/1991
Class A (at offer)-0.47%-1.06%16.46%2.73%10.52%5.53%6.63%
Institutional Class shares5.63%5.11%23.87%5.06%12.15%6.46%7.21%11/09/1992
MSCI EAFE Index (Gross)4.34%5.14%24.09%8.59%12.26%7.42%n/a
MSCI EAFE Index (Net)4.09%4.78%23.57%8.10%11.77%6.93%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 EAFE (Europe, Australasia, Far East) Index (view)

Expense ratio
Class A (Gross)1.47%
Class A (Net)1.46%
Institutional Class shares (Gross)1.22%
Institutional Class shares (Net)1.21%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursements from March 28, 2014 to March 30, 2015. Please see the fee table in the Fund’s prospectus for more information.

Top 10 holdings as of 06/30/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Toyota Motor Corp.4.1%
CGI Group Inc.4.1%
Teva Pharmaceutical Industries Ltd.4.0%
Novartis AG3.7%
Nordea Bank AB3.6%
Nippon Telegraph & Telephone Corp.3.4%
Mitsubishi UFJ Financial Group Inc.3.3%
Sanofi3.3%
ARYZTA AG3.3%
AXA S.A.3.2%
Total % Portfolio in Top 10 holdings36.0%

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.

Not FDIC Insured | No Bank Guarantee | May Lose Value