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Delaware Mid Cap Value Fund Quarterly commentary September 30, 2014

Within the Fund

Delaware Mid Cap Value Fund (Class A and Institutional Class shares at net asset value) posted a negative return and underperformed its benchmark, the Russell Midcap® Value Index, during the third quarter of 2014. Stock selection in the technology, financial services, and transportation sectors had a positive effect on relative performance, while stock selection in the basic industry, capital spending, and energy sectors detracted the most from the Fund’s returns.

Among the stocks that outperformed during the quarter was Raymond James Financial, a financial services company involved in asset management, wealth management, and capital markets. The stock appreciated 6% as individual and institutional activity increased from very low levels. We anticipate that synergies from the recent acquisition of Morgan Keegan assets could lead to an increase in earnings power. We maintained the Fund’s position as we believe merger and acquisition activity could increase along with strong initial public offering volumes.

Citrix Systems provides desktop virtualization solutions, data center technologies, and application delivery infrastructure. Citrix reported solid results with revenue and earnings above expectations, which helped contribute to the stock’s 14% gain during the quarter. The company has aggressively returned cash to shareholders and is working on cost optimization. We maintained the Fund’s position in Citrix as we believe the company has the potential to improve operating margins and, in our view, there is a chance for additional cost reductions.

Shares of TRW Automotive Holdings, an automotive parts supplier, rose 13% during the quarter as the company announced it was being acquired by German automotive company ZF Friedrichshafen for $105.60 in cash. The combined company will be one of the largest auto parts suppliers in the world. We view the acquisition price as fair and we do not expect another bidder to emerge. We maintained the Fund’s position in TRW throughout the quarter as we feel there is a high probability that the deal will close.

On the negative side, Ensco (an offshore driller with operations in the Gulf of Mexico, North Sea, and offshore Africa, among other areas) declined 24%. Day rates for rigs have recently declined in anticipation of the supply of rigs increasing, which put pressure on the stock. In our view, the company has a strong balance sheet and is committed to maintaining a high dividend. With the stock trading at a very low multiple of cash flow and enterprise value, we maintained the Fund’s position.

Owens-Illinois manufactures and distributes glass container products to food and beverage manufacturers globally. Weakening beer sales in North America and the Asia Pacific region have presented the most trouble for the company’s volumes. Late in the third quarter, the company reported manufacturing issues at two major North American plants that could cause third quarter earnings to come in below expectations. These issues pushed the stock down 25% during the quarter. We believe the company’s free cash flow should continue to be strong and the stock’s valuation is attractive to us — for these reasons we continue hold the company in the Fund.

ManpowerGroup is the world’s third-largest provider of staffing and recruiting services. After performing well in the second quarter, the stock has been weak in the third quarter and was down 17%. In July, the company reported second quarter revenue and earnings above expectations. However, the stock was affected in the third quarter by fears of slowing European growth, in part due to economic sanctions on Russia. We maintained the Fund’s position in ManpowerGroup — we believe improved efficiencies have positioned the company for better operating leverage as demand improves.


We believe that the outlook for the economy and equities is favorable. While mid-cap stocks did not perform well in the third quarter, they are still positive for the year. We believe that the economy should continue to grow at a moderate pace as employment trends, manufacturing data, consumer confidence levels, and bank lending continue to improve. Additionally, we continue to believe that U.S. Federal Reserve policy may present a favorable backdrop for equities.

Through the third quarter, we have seen additional signs that investor sentiment is shifting from lower-quality equities to higher-quality equities. We believe that in this type of environment, stocks with strong free cash flow and solid balance sheets may have the potential to outperform more speculative areas of the market. The Fund’s positioning remains largely the same with overweights in capital spending, energy, and financial services. We remain underweight traditionally defensive sectors including real estate investment trusts (REITs) and utilities, where we do not view valuations as attractive.

We will continue to focus on finding what we view as high-quality stocks with an emphasis on companies that have the potential to generate strong free cash flow, have a strong balance sheet, and are likely to deploy their cash in shareholder-friendly ways such as dividends or share repurchases.


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.


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

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)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)-3.94%3.57%13.54%20.08%13.71%n/a7.10%02/01/2008
Class A (at offer)-9.51%n/a6.99%17.72%12.36%n/a6.15%
Institutional Class shares-3.78%3.74%13.98%20.40%14.02%n/a7.36%02/01/2008
Russell Midcap Value Index-2.65%8.20%17.46%24.72%17.24%n/an/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.

Prior to July 31, 2008, the Fund had not engaged in a broad distribution of its shares and had been subject to limited redemption requests. The returns reflect expense limitations that were in effect during certain periods and which may have been lower than the Fund’s current expenses. The returns would have been lower without expense limitations.

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 Midcap® Value Index (view)

Expense ratio
Class A (Gross)2.22%
Class A (Net)1.25%
Institutional Class shares (Gross)1.97%
Institutional Class shares (Net)1.00%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursements from Feb. 27, 2014 through Feb. 27, 2015. Please see the fee table in the Fund’s prospectus for more information.

Top 10 holdings as of 11/30/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
iShares Russell Mid-Cap Value ETF3.1%
United Rentals Inc.2.7%
East West Bancorp Inc.2.6%
American Financial Group Inc.2.5%
Celanese Corp.2.2%
Torchmark Corp.2.1%
Comerica Inc.2.1%
Fiserv Inc.2.0%
Raymond James Financial Inc.1.9%
Cytec Industries Inc.1.9%
Total % Portfolio in Top 10 holdings23.1%

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.

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.

Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors.

REIT investments are subject to many of the risks associated with direct real estate ownership, including changes in economic conditions, credit risk, and interest rate fluctuations.

Not FDIC Insured | No Bank Guarantee | May Lose Value