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Delaware U.S. Growth Fund Quarterly commentary March 31, 2014 Class A (DUGAX)

Within the Fund

For the first quarter of 2014, Delaware U.S. Growth Fund (Class A shares at net asset value) posted a negative return and underperformed its benchmark, the Russell 1000® Growth Index. Strong relative performance in the consumer staples and technology sectors was unable to overcome weak relative performance in the financial services and healthcare sectors.

EOG Resources was a strong contributor to performance during the quarter. In our view, the company is well positioned to provide exposure to the North American shale oil and gas industry, which we believe is an attractive secular growth area in energy. While the stock benefited from natural gas prices rising to a four-year high during the period, it's important to note that although the stock can, at times, be affected by fluctuations in the price of oil and natural gas, we don't believe that the company's long-term intrinsic business value is dependent solely on commodity prices. Rather, we believe that the company's management team has a unique capital allocation discipline relative to other energy companies that increases its potential to perform and add value through a variety of commodity prices and economic environments.

Novo Nordisk also contributed to performance during the quarter. The company is a leading developer, manufacturer, and marketer of diabetes drug care. The stock performed well during the quarter as the company reported fourth quarter financial results that beat consensus expectations. We believe the company could continue to see a growing need for its products — diabetes is growing globally due to rising obesity rates in developing markets and a growing middle class in the emerging markets, which tends to result in a more protein-based diet.

Walgreens was a contributor to the Fund’s performance during the quarter. The company benefited from signs of improving customer traffic and evidence that a significant international acquisition and strategic partnership has led to a tighter supply chain and increased profit margins. Additionally, the company has taken strategic steps to benefit from the Affordable Care Act in an effort to further increase customer traffic and brand loyalty, which we believe may help strengthen its competitive advantage and long-term growth prospects.

Celgene detracted from the Fund’s performance during the quarter. The company is a leading player in the treatment of blood cancers, and has a growing product pipeline in breast, lung, and pancreatic cancer. The stock experienced weakness as investors may have looked to lock in gains after the company reported somewhat underwhelming fourth quarter financial results and forward guidance. Additionally, the company received an unfavorable preliminary decision from British regulators for expanded use of one of the company’s drug products as well as the prospect of an early patent expiration on that same drug. We feel investors may have overreacted to recent developments — we continue to believe Celgene has the potential to benefit from large growth prospects driven by additional indications of its drugs, by increased usage of existing drugs, and by international growth opportunities.

MasterCard also detracted from performance during the quarter. As one of the leaders in the electronic payment network, the stock has recently experienced some weakness over concerns about whether consumer spending habits will be affected by several high-profile credit card “hacking” incidents. While we feel these concerns are not likely to subside anytime soon, we don’t believe they will affect the company materially. MasterCard has shown in recent years that despite a more difficult consumer spending environment, the company’s flexible business model is somewhat buffered against swings in economic cycles and can grow its profitability even in difficult periods. We believe MasterCard is well positioned to continue benefiting from the secular global trend of payment transactions moving from paper-based currency to electronic transactions.

Finally, Kinder Morgan detracted from performance during the quarter. The stock declined after some slightly disappointing financial metrics were released in its earnings report. Additionally, a bearish high-profile research report that was released several months prior was rehashed in a major U.S. publication. We acknowledge there are headline risks associated with this high-profile controversy that question the company’s long term profitability. While we believe the company still enjoys a strong competitive position and could benefit from the secular growth of natural gas usage in the North America energy grid, we trimmed the Fund’s position during the period to account for the higher risk profile.

Outlook

Despite positive absolute returns in the equity market during the past few years, we believe the many short-term swings in market sentiment demonstrate that there are more than just fundamental factors affecting stock prices. Rather, recent equity market volatility 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. 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 (03/31/2014)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)-0.09%-0.09%21.57%16.32%22.33%7.55%7.51%12/03/1993
Class A (at offer)-5.81%-5.81%14.58%14.05%20.89%6.92%7.20%
Institutional Class shares-0.04%-0.04%21.88%16.61%22.63%7.84%7.61%02/03/1994
Russell 1000 Growth Index1.12%1.12%23.22%14.62%21.68%7.86%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 1000® Growth Index (view)

Expense ratio
Class A (Gross)1.09%
Class A (Net)1.09%
Institutional Class shares (Gross)0.84%
Institutional Class shares (Net)0.84%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursements from Feb. 28, 2013 to Feb. 28, 2014. Please see the fee table in the Fund's prospectus for more information.

Top 10 holdings as of 03/31/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Visa Inc.5.7%
EOG Resources Inc.5.5%
MasterCard Inc.5.3%
Microsoft Corp.5.2%
QUALCOMM Inc.4.8%
Walgreen Co.4.7%
Google Inc.4.6%
Crown Castle International Corp.4.6%
Liberty Interactive Corp.4.2%
Adobe Systems Inc.4.2%
Total % Portfolio in Top 10 holdings48.8%

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.

Not FDIC Insured | No Bank Guarantee | May Lose Value