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Delaware Select Growth Fund* Quarterly commentary June 30, 2014 Class A (DVEAX)

Within the Fund

For the second quarter of 2014, Delaware Select Growth Fund (Class A shares at net asset value) posted a positive return but underperformed its benchmark, the Russell 3000® Growth Index. Strong relative performance in the healthcare and consumer discretionary sectors was unable to overcome weak relative performance in the technology sector, exacerbated by the portfolio’s underweight of Apple.

Allergan was a strong contributor to the Fund’s performance during the quarter. The stock appreciated sharply as a Canadian pharmaceutical company, Valeant Pharmaceuticals International, made an offer to acquire Allergan that was rejected. Since its initial offer, Valeant has increased its bid and­ it remains to be seen how aggressively Valeant will pursue an acquisition of Allergan. Currently, our discussions are focused on both what we believe to be fair value for Allergan as a stand-alone business and the potential value of a combined Valeant-Allergan entity. 

Celgene was also a contributor to performance during the quarter. While the company reported financial results that were relatively in-line, the stock appreciated as the company affirmed forward guidance, continued to buy back shares, and had a 2-for-1 stock split during the quarter. Celgene continues to be a leading player in the treatment of blood cancers with a growing product pipeline in breast, lung, and pancreatic cancer treatments. Additionally, the company continues to benefit from large growth prospects driven by additional indications of its drugs, by increased usage of existing drugs, and by international growth opportunities. 

EOG Resources also contributed to performance during the quarter.  The company reported financial results that exceeded consensus estimates driven, in part, by increased oil production in Eagle Ford Shale and complemented by solid positions in the Bakken Shale and Permian Basin. We continue to believe that the company is well positioned to provide exposure to the North American shale oil and gas industry which, in our view, is an attractive secular growth area in energy. 

Teradata detracted from performance during the quarter. Despite reporting solid financial results, the stock declined as Teradata gave forward revenue guidance at the low end of its previous estimate. Additionally, there are growing concerns related to increased competition and the company’s ability to further expand margins in the face of continued competitive pricing pressure. We believe the database warehousing market is large and growing and can likely accommodate several competitors; however, the company may experience some competitor headwinds going forward. We trimmed the Fund’s position during the quarter to account for the higher risk profile.

Core Laboratories was a detractor from performance during the quarter. The stock fell as the company reduced its second quarter and full-year revenue and earnings forward guidance downward as the company expects less use of its services by North American clients in the near term. We are willing to live with a certain degree of cyclicality in the energy cycle given that this company’s solutions of site analysis are valuable in various parts of the cycle.  In our view, this is a well-owned stock with little historical controversy and volatility and therefore believe that investors may have overreacted to a reasonable conservative assessment to industry conditions.

Finally, Sally Beauty Holdings also detracted from performance during the quarter. The stock fell as the company reported financial results that missed consensus estimates, driven, in part, by severe winter weather that negatively affected sales growth and customer traffic in its stores. While the retail business has struggled more than we would have expected (outside of the transitory weather effects), we are encouraged by recent senior management changes that should increase the focus on better execution in this segment.   

Outlook

Despite positive absolute returns in the equity market during the past few years, we believe the relatively tepid market sentiment demonstrates that there are more than just fundamental factors affecting stock prices.  A lack of significant bull market sentiment suggests to us that many investors appear to be struggling with accurately predicting the pace of global economic recovery and are assessing factors that threaten economic fundamentals (for example, central bank actions and fiscal policy debates across the globe). While some fundamentals in various geographies may be trending in a positive direction (from a very low base during the global financial crisis in 2008-2009), we don’t believe we are entering into a typical post-recessionary global boom cycle.  Rather, we believe the lingering effects of the credit crisis years ago could lead to moderate growth, at best, for the intermediate term.

Our conversations with senior management of companies we hold in the portfolio show a general sense that conditions are improving slightly but not yet strong enough to meaningfully change strategic plans for capital and investment spending. An increasing number of companies in the Fund’s portfolio are considering merger and acquisition or tax inversion strategies (or these strategies have been forced upon them in response to merger overtures by other companies). This is consistent in today’s market environment where many companies — often influenced by large or aggressive shareholders — are seeking value-creating or growth opportunities as they are not always available under current economic conditions. The Fund’s portfolio holdings are often the type of businesses that can be targets for such potential value-creating opportunities. In such an uncertain macroeconomic environment, we believe the quality of a company’s business model, competitive position, and management may prove to be of utmost importance.

Regardless of the economic outcome, we remain consistent in our long-term investment philosophy: We want to own what we view as strong secular-growth companies with solid business models and competitive positions that we believe can grow market share and have the potential to deliver shareholder value in a variety of market environments.

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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)-3.16%-1.06%7.74%17.41%17.44%10.14%10.54%05/16/1994
Class A (at offer)-8.73%n/a1.55%15.12%16.06%9.49%10.22%
Institutional Class shares-3.10%-0.86%8.02%17.71%17.73%10.42%10.78%08/28/1997
Russell 3000 Growth Index0.88%6.91%17.87%22.41%16.43%8.95%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.

Russell 3000® Growth Index (view)

Expense ratio
Class A (Gross)1.25%
Class A (Net)1.25%
Institutional Class shares (Gross)1.00%
Institutional Class shares (Net)1.00%
Top 10 holdings as of 09/30/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Microsoft Corp.6.3%
Celgene Corp.4.3%
Equity Commonwealth4.3%
DineEquity Inc.3.7%
Zebra Technologies Corp.3.5%
EOG Resources Inc.3.2%
Allergan Inc.3.1%
QUALCOMM Inc.3.1%
eBay Inc.3.1%
Crown Castle International Corp.2.8%
Total % Portfolio in Top 10 holdings37.4%

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.

*Effective after the close of business on June 8, 2012, Delaware Select Growth Fund was closed to new investors. Existing shareholders of the Fund; certain retirement plans and IRA transfers and rollovers from these plans; and certain advisory or fee-based programs sponsored by and/or controlled by financial intermediaries where the financial intermediary has entered into an arrangement with the Fund’s Distributor or transfer agent (mutual fund wrap accounts) may continue to purchase shares. Please read the latest prospectus and the summary prospectus for more information concerning this event.

Jackson Square Partners, LLC (JSP) is the sub-advisor to the Fund. As sub-advisor, JSP is responsible for day-to-day management of the Fund’s assets. Although JSP serves as sub-advisor, the investment manager, Delaware Management Company, a series of Delaware Management Business Trust, has ultimate responsibility for all investment advisory services with JSP.

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.

Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies.

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.

Because the Fund expects to hold a concentrated portfolio of a limited number of securities, the Fund's risk is increased because each investment has a greater effect on the Fund's overall performance.

Not FDIC Insured | No Bank Guarantee | May Lose Value