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Delaware Smid Cap Growth Fund* Quarterly commentary March 31, 2015

Within the Fund

For the first quarter of 2015, Delaware Smid Cap Growth Fund (Institutional Class shares and Class A shares at net asset value) lagged its benchmark, the Russell 2500™ Growth Index. Strong relative performance in the consumer discretionary sector was unable to overcome weak relative performance in the technology and energy sectors.

ABIOMED was a strong contributor to performance during the quarter. The stock experienced several positive events which led to significant stock appreciation. The company reported strong financial results and gained positive regulatory approval for two separate heart devices (Impella RP® catheter and Impella 2.5). Regulatory approval for its heart pump device, Impella 2.5, allows for broader access to the market and lowers regulatory restrictions on the marketing of the device. We believe these developments should further enhance the company’s ability to increase shareholder value, in part, by the increased usage of its heart pump devices.

MSCI was a contributor to performance during the quarter. The stock rose, in part, as investors had an overall favorable view of ValueAct Capital (an activist hedge fund and large shareholder of MSCI) being given a board seat. ValueAct has a well-respected reputation within the industry, and we believe its involvement should help with management’s focus and urgency in unlocking additional value for shareholders. We continue to believe the company has a sustainable competitive advantage and compelling brand equity as a premier index and financial services provider.

Ellie Mae, a provider of business automation software for the mortgage industry in the United States, was also a contributor to performance during the quarter. Despite a relatively choppy mortgage market, the company reported financial results that beat consensus estimates driven, in part, by an uptick in the volume of loan applications during the quarter. While the housing market has cyclical characteristics, we believe the company has an opportunity to grow significant market share within its business segment that should offset the cyclical headwinds with higher growth in its revenues and earnings.

Heartland Payment Systems detracted from performance during the quarter. The stock experienced weakness after the company reported weaker-than-expected financial results and lowered guidance due, in part, to acquisition and R&D related costs. We feel these recent acquisitions should be accretive to shareholder value over the long term. We continue to believe the company should be well-positioned to benefit from the secular global trend of payment transactions moving from paper-based currency to electronic transactions.

Graco, a maker of industrial fluid and lubrication systems, was a detractor from performance during the quarter. While the company reported relatively solid financial results, it lowered its future guidance to reflect increasing headwinds from a strengthening dollar. While currency fluctuations may negatively affect top-line results (more than half of the company’s revenues come from outside the U.S.) we feel the company’s diverse product offering and acquisition strategy should allow the company to continue to experience strong organic growth and should help offset foreign currency headwinds.

Core Laboratories also detracted from performance during the quarter. The fall in oil and natural gas prices continued to lead to stock weakness (along with others within the oil and natural gas industry). Despite reporting better-than-expected earnings, the company lowered future guidance due to anticipated weaker North American activity. We are willing to live with a certain degree of cyclicality in the energy cycle given that this company’s solutions to site analysis seem to be valuable in various parts of the cycle. While this current industry cycle might be more volatile and challenging than in recent years, we believe its competitive position and business model should hold up better than its peer group.

Outlook

Despite positive absolute returns in the equity market during the past few years, we believe the relatively tepid market sentiment demonstrate 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. In such a tenuous 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 (03/31/2015)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)5.91%5.91%13.87%13.12%18.69%10.85%13.77%03/27/1986
Class A (at offer)-0.17%-0.17%7.32%10.90%17.30%10.20%13.54%
Institutional Class shares5.94%5.94%14.14%13.40%19.00%11.16%10.55%11/09/1992
Russell 2500 Growth Index7.44%7.44%13.83%17.91%16.97%10.64%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 2500 Growth Index (view definition)

Expense ratio
Class A (Gross)1.19%
Class A (Net)1.19%
Institutional Class shares (Gross)0.94%
Institutional Class shares (Net)0.94%
Top 10 holdings as of 04/30/2015
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
j2 Global Inc.5.6%
Zebra Technologies Corp.5.3%
DineEquity Inc.5.2%
Heartland Payment Systems Inc.5.1%
MSCI Inc.5.1%
Sally Beauty Holdings Inc.5.1%
Bio-Techne Corp.4.8%
Graco Inc.4.3%
Blackbaud Inc.4.3%
Equity Commonwealth4.0%
Total % Portfolio in Top 10 holdings48.8%

Institutional Class shares are only available to certain investors. See the prospectus for more information. 

*As of Feb. 24, 2012, Delaware Smid Cap Growth Fund is 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 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.

All third-party marks cited are the property of their respective owners.

Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.

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.

Not FDIC Insured | No Bank Guarantee | May Lose Value