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Delaware U.S. Growth Fund Quarterly commentary September 30, 2014

Within the Fund

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

L Brands, which operates Victoria’s Secret and Bath & Body Works stores, was a strong contributor to the Fund’s performance during the quarter. The company reported stronger-than-expected financial results, which led management to raise its full-year earnings projection. The company’s focus on effectively managing costs and inventory, and the speed at which they bring new initiatives and products to market have been important factors 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, continued to see strong sales volume growth.

Celgene contributed to performance during the quarter. The stock appreciated, in part, because the United Kingdom’s cost agency reversed course and gave positive draft guidance for use of one of Celgene’s drugs that was rejected the prior year. 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.

eBay was also a contributor to performance during the quarter. There were several events during the period that helped drive stock performance. The stock initially rose during July after reporting relatively strong financial results. Additionally, investors seemed to move past what we believed to be certain transitory issues that affected eBay (including a data breach and changes to Google’s search engine that decreased customer traffic). The big news for the quarter, however, was eBay’s announcement that the company will spin-out its mobile payments service business, PayPal, forming two independently traded companies beginning in 2015. While we feel this is the first step toward a positive development, there are still many iterations to come in terms of how eBay executes the split, who ultimately manages the eBay and PayPal entities, and how the market values each as a standalone company.

Walgreen was a large detractor from performance during the quarter. The stock fell sharply after the company announced it would not pursue a corporate tax inversion through its acquisition of Alliance Boots, but rather will combine and form a holding company based in the United States. Despite the news of no tax inversion — which we had assigned a low probability — the partnership with Alliance Boots is already creating synergies and leading to upside in certain financial metrics.  Additionally, we believe recent activist activity surrounding the company should ensure management’s focus and urgency in unlocking additional value for shareholders.

EOG Resources was another detractor from performance during the quarter. After the stock price reached an all-time high during the prior quarter, the stock experienced some weakness as oil prices also fell off from recent highs. Additionally, many investors may have continued to lock in gains after strong stock appreciation over the past year. 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.

Finally, Discovery Communications, a recent addition to the Fund’s portfolio, also detracted from performance during the quarter. The company is a global media and entertainment company that provides programming across multiple distribution platforms worldwide.  Most notably, the company operates its namesake channel, the Discovery Channel, as well as TLC, Animal Planet, Velocity, and the Oprah Winfrey Network, to name a few. The stock declined over concerns related to recent weakness in industry wide ratings trends and the effect it could have on advertising revenue growth. We feel these concerns are likely transitory in nature. We continue to believe that, similar to the historical industry dynamics that have played out in the U.S. cable industry, the proliferation of cable services within a growing middle class outside the U.S. is in strong secular growth and that Discovery Communications should be a key participant in that trend as it continues to acquire non-U.S. brands and increase its global presence.

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. 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 (09/30/2014)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)0.53%5.57%17.07%22.22%17.32%8.98%7.61%12/03/1993
Class A (at offer)-5.27%n/a10.35%19.83%15.94%8.34%7.31%
Institutional Class shares0.57%5.73%17.34%22.52%17.60%9.27%7.71%02/03/1994
Russell 1000 Growth Index1.49%7.89%19.15%22.45%16.50%8.94%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 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 10/31/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Celgene Corp.6.5%
Microsoft Corp.5.7%
Allergan Inc.5.5%
Visa Inc.5.2%
QUALCOMM Inc.4.8%
MasterCard Inc.4.8%
eBay Inc.4.5%
Crown Castle International Corp.4.4%
EOG Resources Inc.4.3%
Walgreen Co.4.3%
Total % Portfolio in Top 10 holdings50.0%

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 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.

Not FDIC Insured | No Bank Guarantee | May Lose Value