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Delaware Smid Cap Growth Fund** Quarterly commentary June 30, 2014 Class A (DFCIX)

Within the Fund

For the second quarter of 2014, Delaware Smid Cap Growth Fund (Class A shares at net asset value) underperformed its benchmark, the Russell 2500Growth Index. Strong relative performance in the producer durables sector was unable to overcome weak relative performance in the energy and technology sectors.

Coupons.com, a leader in digital coupons, was a strong contributor to performance during the quarter. The stock rose as the company reported financial results that were relatively in-line and increased forward looking guidance. Additionally, the company continues to benefit from the secular growth of wireless technologies, which make accessing its services even easier for consumers. We believe the company should see continued growth as its products continue to deliver an attractive return on investment by increasing customer traffic for its clients.

SBA Communications was also a contributor to the Fund’s performance during the quarter.  The stock rose as the company reported financial results that beat consensus expectations, driven primarily by organic growth and increased forward looking guidance. We believe the proliferation of wireless devices (smartphones and tablets) are in strong secular demand and the company continues to play an important role in the industry as an owner of wireless towers in North America.

Blackbaud, a software and related services provider for the non-profit sector, was also a contributor to performance during the quarter. The stock rose as the company reported better-than-expected financial results, driven, in part, by strong organic growth from new and existing clients. Increased capital deployment — which initially caused investor concern and a resulting stock decline during the tail end of 2013 and early 2014 — appears to be generating strong top-line growth. We feel Blackbaud has a competitive advantage — it is one of the few companies that offer products and services specifically tailored to the non-profit sector. We believe the company should see continued growth as its products deliver an attractive return on investment by optimizing a nonprofit’s effectiveness and efficiency.

Core Laboratories detracted 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 Core 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.

Logitech was also a detractor from performance during the quarter. Despite reporting strong financial results that beat consensus expectations, the stock fell as investors were concerned about how the declining desktop PC business and continued weak market conditions, especially in Europe, would affect the company’s future growth prospects. The company is currently in a restructuring phase to divest its less profitable assets in order to reduce costs and focus on what it views as more profitable product lines. As the PC market is in secular decline, the company is looking to increase its focus on tablets and smartphone accessories. We believe the company continues to make meaningful progress in its restructuring efforts, as evidenced by strong financial results. In addition, its focus on a higher growth area should help the company create additional shareholder value. We believe relatively new management at the company is energized and incentivized to push transformation of Logitech with the urgency and focus needed for meaningful positive change in the company.

Finally, NIC, a provider of eGovernment services that assists government’s use of the Internet, detracted from performance during the quarter. While the company reported financial results that were relatively in-line, the stock lagged because of concerns about slowing government spending and local government budgetary issues. We continue to believe NIC is in a good position to potentially benefit from the secular growth opportunities of bringing expertise and operational efficiencies enhanced by the Internet to government agencies, which are increasingly suffering budget and employee cuts.

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 across the portfolios we manage 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 across the portfolios we manage 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 (06/30/2014)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)0.17%-4.22%17.54%10.86%22.13%10.01%13.64%03/27/1986
Class A (at offer)-5.59%-9.72%10.77%8.69%20.69%9.36%13.41%
Institutional Class shares0.23%-4.11%17.81%11.15%22.47%10.32%13.90%11/09/1992
Russell 2500 Growth Index2.90%3.97%26.26%14.88%21.65%9.94%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)

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 06/30/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
MSCI Inc.6.0%
j2 Global Inc.5.3%
TECHNE Corp.5.3%
VeriFone Systems Inc.5.2%
DineEquity Inc.5.2%
Graco Inc.5.1%
Heartland Payment Systems Inc.4.9%
Affiliated Managers Group Inc.4.9%
Core Laboratories NV4.6%
CommonWealth REIT4.6%
Total % Portfolio in Top 10 holdings51.1%

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.

**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 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.

Not FDIC Insured | No Bank Guarantee | May Lose Value