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Delaware International Value Equity Fund Quarterly commentary March 31, 2015

Within the Fund

Delaware International Value Equity Fund (Institutional Class shares and Class A shares at net asset value) outperformed its benchmark, the MSCI EAFE Index, for the quarter ended March 31, 2015 due to strong stock selection and favorable regional and sector allocation.

Positive stock selection in financials, information technology, and telecommunications more than offset weakness in consumer staples and industrials. Sector allocation was positive primarily due to a favorable underweight exposure to utilities.

On a regional basis, strong stock selection in Japan and the United Kingdom more than offset weakness in continental Europe. Regional allocation was positive primarily due to an underweight exposure to the U.K. and strong performance by emerging market holdings. Net currency effect was negative primarily due to an adverse exposure to the Canadian dollar.

Prospective global market drivers and general outlook

Equity market strength was nearly universal in the first quarter. Every developed market in the MSCI World Index produced positive local-currency returns, with the United States, in low single digits, bringing up the rear. Given the subdued and inconsistent nature of global economic growth, however, the market’s strength has come in part through expanding valuations. With most major markets now selling above their long-term mean valuations on both earnings and book value, what could drive further upside? In Europe, high earnings valuations reflect in part the cyclical weakness that still prevails. Normalization of profitability under a scenario of economic recovery could support stock prices even without further expansion of valuations.

In Japan, a steep valuation discount to global norms on book value suggests there is room for further gains if the gap were to close, but a structural caveat stands in the way — Japanese returns on equity have historically lagged those of other regions. Though progress on this front is among the targets of the government reform plans, success is not assured.

The United States does not appear to share the cyclical recovery potential of Europe or the structural potential of Japan. U.S. stocks are already among the most profitable and highly valued in the world. However, the U.S. does have certain qualities going for it, including the strength of its underlying secular growth and the security of a relatively business-friendly regulatory regime. Assuming these conditions persist, low prevailing interest rates could justify further expansion of valuations.

Beyond these market-level considerations, we find that two other major factors that transcend national borders deserve particular attention due to their potential to affect the operating performance of individual companies worldwide. The first of these is the appreciation of the U.S. dollar versus most other currencies, a pattern that has been in effect for the better part of a year. The second factor, related to the first to some degree, is the collapse of the price of oil. As bottom-up stock pickers, we bring these to your attention not because of their relatively obvious direct effects — translational adjustments to revenues of multi-national companies or costs shifts depending on energy intensiveness — but because of the power of their more nuanced and subtle impacts on the global competitive landscape. Even the relatively discrete regional observations cited above carry dramatically different implications at the company level, depending on variations in companies’ industry positioning and global footprint. In an interconnected global market, domicile does not limit opportunity. As global equity managers taking a contrarian approach to bottom-up stock selection, we use the uncertainty of macroeconomic and valuation cycles to bring to light exceptional opportunities at the company level, because it is there that close analysis can provide the best and most consistent returns.

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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 (03/31/2015)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)5.74%5.74%-3.04%6.81%4.55%3.60%6.30%10/31/1991
Class A (at offer)-0.37%-0.37%-8.59%4.74%3.31%2.99%6.03%
Institutional Class shares5.80%5.80%-2.77%7.08%4.85%3.90%7.12%11/09/1992
MSCI EAFE Index (Gross)5.00%5.00%-0.48%9.52%6.64%5.43%n/a
MSCI EAFE Index (Net)4.88%4.88%-0.92%9.02%6.16%4.95%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 definition)

Expense ratio
Class A (Gross)1.42%
Class A (Net)1.42%
Institutional Class shares (Gross)1.17%
Institutional Class shares (Net)1.17%
Top 10 holdings as of 05/31/2015
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Teva Pharmaceutical Industries Ltd.4.2%
Mitsubishi UFJ Financial Group Inc.4.1%
Novartis AG3.6%
Toyota Motor Corp.3.5%
AXA S.A.3.5%
Nordea Bank AB3.4%
ARYZTA AG3.4%
Nippon Telegraph & Telephone Corp.3.2%
Nitori Holdings Co. Ltd.3.2%
Sanofi3.2%
Total % Portfolio in Top 10 holdings35.3%

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