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Delaware U.S. Growth Fund Quarterly commentary December 31, 2014

Within the Fund

For the fourth quarter of 2014, Delaware U.S. Growth Fund (Class A and Institutional Class shares at net asset value) outperformed its benchmark, the Russell 1000® Growth Index. Strong relative performance in the consumer staples and financial services sectors was partially offset by weak relative performance in the technology sector as well as lack of exposure to the producer durables sector.

Walgreens Boots Alliance was a strong contributor to the Fund’s performance during the fourth quarter of 2014. The stock recovered from relative weakness during the prior quarter due to mixed operating results and the announcement that the company would not be pursuing a corporate tax inversion through its acquisition of Alliance Boots. During this period, the company reported stronger-than-expected financial results driven, in part, by the expansion of healthcare coverage under the Affordable Care Act. We believe the recent partnership with Alliance Boots is already creating value with executive management appointments and merger synergies that could lead to upside in certain financial metrics. Additionally, we believe recent activist activity surrounding the company should help with management’s focus and urgency in unlocking additional value for shareholders.

L Brands was a contributor to performance during the quarter. The stock rose, in part, as the company reported stronger-than-expected financial results and strong sales through November’s holiday season. The company’s focus on effectively managing costs, inventory, and the speed at which it brings new initiatives and products to market has been an important factor during a relatively soft consumer spending environment. Additionally, the company’s international business — which we believe should become a material source of long term growth for the company — continues to experience attractive progress.

Celgene also contributed to performance during the quarter. The company reported financial results that beat consensus expectations and increased future guidance. The company also reported strong phase-2 trial results for a Crohn’s disease drug that supported Celgene’s strategy of diversifying its product offerings — in this case, diseases affecting the immune system. Celgene remains 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.

Williams Companies was a significant detractor from performance during the quarter. The stock, along with others within the oil and natural gas industry, experienced weakness resulting from falling oil and natural gas prices and the Organization of Petroleum Exporting Countries (OPEC)’s decision not to cut production. We are willing to live with a certain degree of cyclicality in the energy cycle given that this company operates as an energy infrastructure provider through its natural gas pipeline system, processing facilities, and storage facilities throughout the United States — therefore it should be somewhat buffered by swings in industry spending patterns. We believe natural gas distribution is a gating factor to the increased potential use of natural gas in the North American energy grid and Williams Companies seems to have an attractive competitive position in which to take advantage of this industry structure.

Novo Nordisk was a detractor from performance during the quarter. The stock experienced weakness after the company lowered forward sales guidance due, in part, to lower growth expectations in China and continued pressure from generic competition. Despite the latest stock weakness, we continue to believe the company should continue to see a growing need for its products. Unfortunately, diabetes is increasing globally due to rising obesity rates in developing markets and the growth of a middle class in emerging markets that tends to result in a more protein-based diet.

Finally, EOG Resources was also a detractor from performance during the quarter. Similar to Williams Companies, the stock experienced weakness resulting from falling oil and natural gas prices. 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. 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 EOG's management team has a unique capital allocation discipline relative to other energy companies that could increase the company's potential to perform and add value through a variety of commodity prices and economic environments.

Outlook

Despite positive absolute returns in the equity market during the past few years, we believe the relatively tepid market sentiment demonstrates to us 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 (12/31/2014)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)6.51%12.44%12.44%20.30%16.41%8.57%7.84%12/03/1993
Class A (at offer)0.40%5.99%5.99%17.94%15.05%7.93%7.54%
Institutional Class shares6.58%12.69%12.69%20.60%16.70%8.85%7.94%02/03/1994
Russell 1000 Growth Index4.78%13.05%13.05%20.26%15.81%8.49%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)1.06%
Class A (Net)1.06%
Institutional Class shares (Gross)0.81%
Institutional Class shares (Net)0.81%
Top 10 holdings as of 01/31/2015
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Celgene Corp.6.2%
Allergan Inc.5.6%
Visa Inc.5.2%
Walgreens Boots Alliance Inc.4.7%
eBay Inc.4.6%
Microsoft Corp.4.4%
MasterCard Inc.4.3%
QUALCOMM Inc.4.3%
Crown Castle International Corp.4.3%
Liberty Interactive Corp.4.0%
Total % Portfolio in Top 10 holdings47.6%

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.

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.

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