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Delaware Foundation® Growth Allocation Fund Quarterly commentary December 31, 2014

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Economic overview

During the fourth quarter of 2014, business confidence across the developed world rose modestly, while consumer confidence was unchanged. The Organization for Economic Cooperation and Development (OECD) compiles composite leading indicators to reflect business and consumer confidence for individual member countries and for the whole organization. The most recently available data indicate that during the quarter, business confidence rose in most developed economies. The United States saw a substantial increase in consumer confidence, whereas consumer confidence declined slightly in the United Kingdom and the euro zone, so that the net result was approximately flat.

The International Monetary Fund (IMF) maintains and regularly updates a set of short-term forecasts covering the global economy and individual countries and regions. As of the date of this commentary, the most recent IMF projections were those issued in October 2014, and updated estimates are likely to be released in late January 2015. The IMF continues to believe that in many developed countries, inflation is low, output gaps are large, and monetary authorities need to continue providing support until economic recovery is fully secure. The IMF noted that while the U.S. has started to grow again, it is still being held back by a slow pace of investment. The IMF also cut sharply its estimates for near-term economic growth in Russia, as a result of what the IMF called “geopolitical tensions.”

Projected economic growth rate 2014 estimate 2015 estimate
Apr 2014 Oct 2014 Apr 2014 Oct 2014
World 3.6% 3.3% 3.9% 3.8%
Advanced economies 2.2% 1.8% 2.3% 2.3%
United States 2.8% 2.2% 3.0% 3.1%
Euro area 1.2% 0.8% 1.5% 1.3%
Japan 1.4% 0.9% 1.0% 0.8%
United Kingdom 2.9% 3.2% 2.5% 2.7%
Emerging and developing economies 4.9% 4.4% 5.3% 5.0%
Brazil 1.8% 0.3% 2.7% 1.4%
China 7.5% 7.4% 7.3% 7.1%
India 5.4% 5.6% 6.4% 6.4%
Russia 1.3% 0.2% 2.3% 0.5%

Source: International Monetary Fund, World Economic Outlook, April 2014 and October 2014

The currency markets experienced considerable fluctuations during the fourth quarter of 2014. The Funds generally focus on trade-weighted currencies, which represent a composite value relative to each country’s major trading partners. There was a striking increase in the value of the trade-weighted dollar, and an equally noteworthy decline in the value of the trade-weighted yen. In general, an economy’s competitiveness tends to be enhanced by currency depreciation, and tends to be impaired by currency appreciation. The strengthening of the U.S. dollar has the potential to make imports less expensive for U.S. consumers, but may impair the ability of U.S. exporters to win contracts abroad.

Trade-weighted currency Source 9/30/14 12/31/14 Change
U.S. dollar (USD) U.S. Treasury via Bloomberg 85.9 90.3 +5.0%
Euro (EUR) Bank of England via Bloomberg 92.7 92.9 +0.3%
Sterling (GBP) Bank of England via Bloomberg 87.8 87.7 -0.0%
Japanese yen (JPY) Bank of England via Bloomberg 131.6 123.6 -6.4%

Source: Bloomberg, January 2015

The prices of many commodities dropped during the fourth quarter of 2014. There were dramatic declines in the Thomson Reuters/CoreCommodity CRB Index and the S&P GSCI® Index, which are both broad commodity indices, and a plunge in the spot price of crude oil. All else equal, we believe a fall in commodity prices is likely to mean better margins for manufacturers, but lower profits for energy producers and companies involved in raw materials.

Category Benchmark 9/30/14 12/31/14 Change
Broad commodities S&P GSCI 574.3 418.1 -27.2%
Broad commodities Thomson Reuters/CoreCommodity CRB Index 278.6 230.0 -17.4%
Crude oil West Texas Intermediate spot 91.16 53.27 -41.6%
Gold New York spot price 1208.16 1184.86 -1.9%

Source: Bloomberg, January 2015

The statistical data currently available suggest that the U.S. economy continued to expand during the quarter. The Federal Reserve’s “beige book” from early December, covering the period ending November 2014, reported that consumer spending and manufacturing had again increased in most districts. The Fed also reported that conditions were improving in both residential and commercial real estate. The Bureau of Labor Statistics (BLS) of the U.S. Commerce Department estimated that the seasonally adjusted U.S. unemployment rate in December 2014 was 5.6%, down from the 5.9% level of September 2014.

Market overview

During the fourth quarter of 2014, there was a bifurcation between the performance of U.S. and non-U.S. financial markets. U.S. equities and fixed-income securities showed strong gains, but most other major equity and fixed-income indices generated negative total returns. Among the benchmarks that we regularly follow, developed-market value equities delivered the weakest total return, closely followed by emerging-market equities. Global fixed income investment grade securities underperformed their U.S. peers during the quarter.

Style Benchmark Index return for 4Q14 (in USD)
U.S. large-cap growth Russell 1000® Growth Index +4.8%
U.S. large-cap value Russell 1000® Value Index +5.0%
U.S. small-cap  Russell 2000® Index  +9.7%
International growth MSCI EAFE Growth Index (gross) -2.3%
International value MSCI EAFE Value Index (gross) -4.8%
Emerging markets MSCI Emerging Markets Index (gross) -4.4%
U.S. fixed income Barclays U.S. Aggregate Index
+1.8%
Global fixed income Barclays Global Aggregate Index
-1.0%

Sources: Bloomberg, Barclays, MSCI, and Russell, January 2015

Within the Funds

The Asset Allocation Committee’s decisions are taken collectively, and the weightings assigned to individual asset classes reflect the consensus of opinion across all members. The Committee’s outlook for both developed-market and emerging-market equities continued to decline during the fourth quarter, and the Committee decided to reduce slightly the Funds’ active exposure to these two asset classes. Conversely, the Committee made a tactical decision to move from roughly equal weight to slightly overweight position in U.S. small-cap equities. In addition, the Committee chose to reduce its hedging of exposure to global equity markets, by halving its short position in equity index futures. The portfolios remain overweight in fixed income securities, underweight in international growth and international value, and slightly overweight neutral in U.S. equities, with a greater allocation to the concentrated large-cap value and small-cap sleeves.

Relative to strategic policy weights
Asset class Comment Underweight Neutral Overweight
U.S. large-cap core Remain broadly diversified
U.S. large-cap growth Underweight energy, industrials
U.S. large-cap value Underweight financials
U.S. small-cap core Remain broadly diversified
International growth Low active weights by sector and region
International value Underweight financials
Emerging markets Underweight financials
Diversified fixed income Focusing on corporates and selective opportunities in high yield
Cash and cash equivalents Yields continue to be quite low

Notes: The graphic above is based on tactical positions of Delaware Foundation Funds relative to the strategic policy weights for each Fund, with tactical and strategic weights adjusted by total assets under management (AUM) in each Fund, and breakpoints at 0.5%, 1%, and 3%; weights reflect tactical positioning as of Dec. 31, 2014; actual sleeve weights may deviate from tactical weights due to different rates of asset appreciation and other factors; tactical weights may vary from time to time, and Delaware Investments makes no commitment to update this information in a timely manner; tactical weights are provided for information purposes only and should not be construed as asset allocation advice.

The Funds also continued to be underweight in cash, reflecting the low yields currently available for cash-like instruments. Within the equity sleeves, most of the investment teams remained underweight in financial sector stocks during the quarter, reflecting their continued concern about the risks associated with these securities. Conversely, the majority of the equity investment teams continued to be overweight in technology and healthcare during the quarter.

Outlook

As noted above, business sentiment in many developed economies generally improved during the fourth quarter of 2014. The Committee continues to believe that global economic recovery will likely require consumers to begin spending more freely, and the Fed’s beige book indicates continuing evidence that this is occurring in the U.S. economy. There is still good reason to be apprehensive about the economic outlook for Europe, where austerity-based policies have generally been associated with deteriorating conditions. There is also some justification for mild concern about the current political situation in the U.S., where some senior figures in the legislative branch appear decreasingly willing to maintain the historical commitment to compromise among the different branches of government. However, the Committee continues to believe that the global economy is gradually moving toward more normal conditions.

As described above, the Funds continue to have a slightly defensive position relative to their strategic policy weights. Nevertheless, the Committee continues to believe that the global macroeconomic environment may continue to improve, though probably at a rather slow pace. The market fluctuations of the past few years have tended to confirm the Committee’s view that over the medium term, the Funds’ commitment to global diversification may prove beneficial, as participating in a large number of different markets may help reduce the risk that any single market might deliver disappointing performance during any particular period.

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Diversification may not protect against market risk.

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.

Definitions

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

The Barclays Global Aggregate Index provides a broad-based measure of the global investment grade fixed-rate debt markets.

The Barclays U.S. Aggregate Index is a broad composite that tracks the investment grade domestic bond market.

The MSCI EAFE Growth Index is a subset of the MSCI EAFE Index, which measures equity market performance across developed market countries in Europe, Australasia, and the Far East, and consists of those securities classified by MSCI as most representing the growth style.

The MSCI EAFE Value Index is a subset of the MSCI EAFE Index, which measures equity market performance across developed market countries in Europe, Australasia, and the Far East, and consists of those securities classified by MSCI as most representing the value style.

The MSCI Emerging Markets Index measures equity market performance across emerging market countries worldwide.

Index “net” return approximates minimum possible dividend reinvestment, after deduction of withholding tax at the highest possible rate. Index “gross” return approximates the maximum possible dividend reinvestment.

The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe, and includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe, and includes those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe.

The S&P GSCI Index, formerly Goldman Sachs Commodity Index, is a world production-weighted index composed of the principal physical commodities that are the subject of active, liquid futures markets.

The Thomson Reuters/CoreCommodity CRB Index is a widely recognized measure of global commodities markets that is designed to provide a representation of long-only, broadly diversified investments in commodities.

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 (12/31/2014)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)0.73%4.04%4.04%11.75%8.87%5.71%4.97%12/31/1997
Class A (at offer)-5.06%-1.97%-1.97%9.58%7.58%5.08%4.60%
Institutional Class shares0.80%4.36%4.36%12.02%9.13%5.97%5.23%12/31/1997
S&P 500 Index4.93%13.69%13.69%20.41%15.45%7.67%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.

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of the U.S. stock market.

Expense ratio
Class A (Gross)1.44%
Class A (Net)1.15%
Institutional Class shares (Gross)1.19%
Institutional Class shares (Net)0.90%

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

Top 10 holdings as of 12/31/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Novartis AG1.0%
Teva Pharmaceutical Industries Ltd.0.9%
Celgene Corp.0.9%
Baidu Inc.0.8%
Microsoft Corp.0.8%
Allergan Inc.0.8%
QUALCOMM Inc.0.8%
Visa Inc.0.8%
Walgreens Boots Alliance Inc.0.7%
Toyota Motor Corp.0.7%
Total % Portfolio in Top 10 holdings8.2%

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.

This Fund is subject to the same risks as the underlying styles in which it invests.

Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt.

The Fund may also be subject to prepayment risk, the risk that the principal of a fixed income security that is held by the Fund may be prepaid prior to maturity, potentially forcing the Fund to reinvest that money at a lower interest rate.

High yielding, noninvestment grade bonds (junk bonds) involve higher risk than investment grade bonds.

If and when the Fund invests in forward foreign currency contracts or uses other investments to hedge against currency risks, the Fund will be subject to special risks, including counterparty risk.

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.

Risk controls and asset allocation models do not promise any level of performance or guarantee against loss of principal. Each Fund has a different level of risk.

Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors.

REIT investments are subject to many of the risks associated with direct real estate ownership, including changes in economic conditions, credit risk, and interest rate fluctuations.

The Fund may experience portfolio turnover in excess of 100%, which could result in higher transaction costs and tax liability.

Not FDIC Insured | No Bank Guarantee | May Lose Value