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Delaware Mid Cap Value Fund Quarterly commentary March 31, 2015

Within the Fund

Delaware Mid Cap Value Fund (Institutional Class shares and Class A shares at net asset value) outperformed its benchmark, the Russell Midcap® Value Index, during the first quarter of 2015. Stock selection in the technology and energy sectors were the top contributors to relative performance. The Fund’s underweight allocation to the lagging utilities sector contributed to performance. On the negative side, stock selection in the capital spending, consumer services, and healthcare sectors had a negative effect on relative performance.

Several companies contributed to the Fund’s outperformance during the quarter. Newfield Exploration is an independent producer of oil and natural gas with primary operations in the Rocky Mountain region and Texas. The stock returned 29% during the quarter —  earnings were strong and production guidance was essentially maintained while capital spending projections were reduced to be more in-line with cash flow. We added to the Fund’s position early in the quarter based on its valuation and the strong hedging position that could protect cash flow during 2015.

ManpowerGroup provides employment services around the world. The company’s main operations include temporary staffing services, contract services, and the training of temporary and permanent workers. The stock rose 26% during the quarter as developed labor markets are recovering and European temporary staffing is beginning to recover. We maintained the Fund’s position as ManpowerGroup should benefit from the labor recovery in Europe and has the potential to be positioned for margin expansion following cost cutting efforts over the past year.

Shares of funeral home and cemetery operator Service Corporation International rose 15% during the quarter. The company’s shares rose partly due to a solid outlook for 2015. In addition, investors were generally pleased that the company raised its dividend for the second time in less than a year and continued to actively buy back shares with its strong free cash flow. We maintained the Fund’s position in the company during the quarter as we continue to like the business model and strong cash flow generation.

Among the laggards in the Fund were shares of United Rentals, the largest North American equipment rental company. During the quarter, the stock fell 11% amid concerns that declining energy prices would significantly affect equipment rental demand despite a good fourth quarter 2014 earnings report and a positive 2015 outlook. We maintained the Fund’s position given the company’s solid 2015 outlook, attractive valuation, and strong free cash flow generation.

Ensco PLC is an offshore driller with primary operations in the Gulf of Mexico, Brazil, and the Asia-Pacific rim. The stock fell 27% during the quarter as utilization rates declined due to contract terminations (oil companies significantly reduced capital spending projections for 2015). We sold the Fund’s shares late in the quarter to redeploy assets into other names in the portfolio which we believe could offer more attractive opportunities.

One of the weaker-performing stocks in the consumer services sector were shares of Tiffany & Co., which declined 17% during the quarter. The jewelry retailer was hurt by a soft holiday sales environment, particularly at its flagship New York City store which typically generates very high volume. A strong dollar, which affected tourist spending at this store, was partially to blame for the softer sales. We had trimmed the Fund’s position last quarter as we thought the company’s valuation had become fairly full. We continue to like Tiffany’s over the longer term — we believe its strong brand name should enable the company to successfully navigate a changing retail landscape. Furthermore, we like the company’s strong free cash flow generation and consistent dividend increases.

Outlook

We believe that the overall outlook for both the U.S. economy and equities remains favorable. Despite some recent data suggesting sluggish growth, we believe the economy should continue to grow at a moderate pace in 2015. Employment trends continue to improve and the apparent strengthening of the housing market should act as an important tailwind if it continues through the year. Additionally, we anticipate solid earnings growth for mid-cap companies in 2015 which should help to support equities.

The U.S. Federal Reserve ended its quantitative easing program late last year and there is a chance that it will finally raise the fed funds rate in 2015. As a result, monetary policy has become slightly less accommodative. In this type of environment, we believe that higher-quality equities may outperform lower-quality companies. We believe that stocks with strong free cash flow and solid balance sheets have the potential to outperform the more speculative areas of the market. Our positioning remains largely the same, with overweights in the capital spending, technology, and basic industries sectors. We continue to remain underweight traditionally defensive sectors including real estate investment trusts (REITs) and utilities where we do not view valuations as attractive.

Our team will continue to focus on finding what we view as high-quality stocks. Our emphasis is on finding companies that generate strong free cash flow, have strong balance sheets, and are likely to deploy their cash in shareholder-friendly ways such as share repurchases, increases in dividends, or debt paydowns.

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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 (03/31/2015)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)2.57%2.57%6.03%12.60%11.97%n/a7.41%02/01/2008
Class A (at offer)-3.36%-3.36%-0.06%10.39%10.64%n/a6.52%
Institutional Class shares2.57%2.57%6.31%12.90%12.28%n/a7.67%02/01/2008
Russell Midcap Value Index2.42%2.42%11.70%18.61%15.84%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 definition)

Expense ratio
Class A (Gross)4.34%
Class A (Net)1.25%
Institutional Class shares (Gross)4.09%
Institutional Class shares (Net)1.00%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursements from Feb. 27, 2015 through Feb. 29, 2016. Please see the fee table in the Fund’s prospectus for more information.

Top 10 holdings as of 03/31/2015
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
East West Bancorp Inc.3.0%
American Financial Group Inc.2.7%
United Rentals Inc.2.2%
Torchmark Corp.2.2%
Fiserv Inc.2.1%
Comerica Inc.2.1%
Cytec Industries Inc.2.0%
Reinsurance Group of America Inc.2.0%
HCC Insurance Holdings Inc.2.0%
Raymond James Financial Inc.1.9%
Total % Portfolio in Top 10 holdings22.2%

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.

Russell Investment Group is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.

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