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Delaware International Value Equity Fund Quarterly commentary September 30, 2014

Within the Fund

Delaware International Value Equity Fund (Class A and Institutional Class shares at net asset value) lagged its benchmark, the MSCI EAFE Index, for the quarter ended Sept. 30, 2014.

The Fund’s relative underperformance during the quarter was attributable primarily to adverse stock selection, partially offset by favorable currency exposures.

On a sector basis, strong stock selection in consumer discretionary, financials, and industrials was offset by weak stock selection in consumer staples, materials, and energy. Overall sector allocation was positive, with favorable overweight exposures to healthcare and information technology more than offsetting the adverse effects of an overweight exposure to consumer discretionary and an underweight position in financials.

From a regional perspective, strong stock selection in the euro zone and Japan was offset by weak stock selection in the United Kingdom, Asia Pacific ex-Japan, and Europe ex–euro zone. The positive effects of being underweight in the U.K. and Asia Pacific ex-Japan were more than offset by an adverse exposure to emerging markets (which are not in the MSCI EAFE benchmark).

Net currency effect was strong due to favorable exposures to the U.S., Canadian, and Hong Kong dollars more than offsetting the negative effect from an underweight exposure to the British pound.

General outlook

We believe that successful value investing requires both a sharp attention to developing valuation disparities across industries and regions and a clear-eyed view of the varying levels of secular growth and cyclical mean reversion that may justify those disparities. In our last quarterly update, we pointed out the attractive valuations to be found in both Europe and Japan, but with the caveats that European cyclical recovery and Japanese structural improvements would likely be needed to support the expansion of those valuation metrics. The United States, by contrast, after enjoying a longer and stronger market up-cycle, appeared among the most richly valued of the world’s major markets (source: MSCI). While this general pattern remains intact, the market’s performance in the interim has been far from uniform, and has been complicated significantly by shifts in currency exchange rates.

The euro zone’s weak overall returns in U.S. dollars mask considerable variation across the region, and though returns in the two largest markets, France and Germany, were down, local investors were spared most of the decline, and thus valuations changed little. Japan’s returns in yen put that country at the top of major market rankings for local-currency performance, up more than 5%, with a corresponding increase in underlying valuations. In the U.S., the slight index-level gain was actually outpaced by improvements in underlying fundamentals, which brought valuation levels down slightly.

For U.S. optimists, though these valuations appear well above historical median levels, they are still well below prior peaks and may reflect the greater stability and secular growth prospects this country enjoys versus many other developed as well as emerging markets. Perhaps they are right. As global stock pickers, what we find intriguing is this: In an interconnected global market, domicile does not limit opportunity. If a European multinational trades at a recessionary valuation multiple but has competitive positions in the world’s best growth markets, that company’s investors enjoy the benefits of both valuation and strong fundamentals. 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, we believe, that close analysis can potentially provide the most consistent long-term 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 (09/30/2014)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)-6.68%-2.04%3.57%12.81%6.19%5.16%6.51%10/31/1991
Class A (at offer)-12.04%n/a-2.38%10.60%4.93%4.54%6.24%
Institutional Class shares-6.66%-1.89%3.79%13.10%6.48%5.46%6.81%11/09/1992
MSCI EAFE Index (Gross)-5.83%-0.99%4.70%14.16%7.04%6.80%n/a
MSCI EAFE Index (Net)-5.88%-1.38%4.26%13.65%6.56%6.32%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 11/30/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Teva Pharmaceutical Industries Ltd.4.7%
CGI Group Inc.4.6%
Novartis AG4.3%
AXA S.A.3.5%
Nordea Bank AB3.4%
Mitsubishi UFJ Financial Group Inc.3.4%
Toyota Motor Corp.3.3%
Sanofi3.3%
Teleperformance3.2%
ARYZTA AG3.0%
Total % Portfolio in Top 10 holdings36.7%

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