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Delaware Mid Cap Value Fund Quarterly commentary March 31, 2014 Class A (DLMAX)

Within the Fund

Delaware Mid Cap Value Fund (Class A shares at net asset value) posted a positive return but underperformed its benchmark, the Russell Midcap® Value Index, during the first quarter of 2014.

Stock selection in consumer staples, energy, and financial services contributed the most to relative performance. The Fund underperformed the index in technology, real estate investments trusts (REITs), and transportation. The transportation sector posted the highest absolute return in the index driven by airlines, an area in which the Fund's portfolio is underweight. The REIT sector posted the next highest absolute return in the index. The Fund's returns were strong in the REIT sector, but failed to keep pace with those of the index; in addition, an underweight allocation to REITs detracted from relative performance.

The Fund had several individual contributors to performance during the quarter. Oil and gas exploration and production company Newfield Exploration increased more than 25% during the quarter. Production guidance improved and the company announced that two recent asset plays are on track to potentially add significant value. Monetization of noncore assets continues; we maintained the Fund's position as Newfield continues to sell at a discount to the group.

Edison International is an electric utility in Southern California. The stock increased more than 20% during the quarter — the company reported fourth quarter 2013 earnings above expectations on good cost controls at the regulated utility and provided constructive 2014 guidance. Two events during the quarter also removed an overhang on the stock that has lingered for quite some time: The first event was the resolution of the Edison Mission Energy bankruptcy (its separate unregulated power entity) and the unit's subsequent approval of sale to NRG Energy. The second event was an agreed upon settlement with key parties in the utility commission's investigation into the San Onofre Nuclear Generating System (SONGS) shutdown.

Premium spirits company Beam appreciated more than 20% during the quarter as it announced that it would sell to Suntory Holdings Limited, a leading Japanese beverage company. We sold the Fund's shares in Beam during the quarter as we believed that the price offered was fair and other bidders will not emerge.

Several stocks detracted from Fund performance during the quarter, including office supply retailer Staples. Staples was down nearly 30% during the quarter due primarily to a weak fourth quarter earnings report and first quarter outlook. A recovering white collar job market has not been enough to offset a decline in sales of office products. We continue to hold shares of Staples as the company is aggressively downsizing its store base and cutting costs. In addition, we believe the company has an attractive free cash flow yield and dividend yield.

KBR is a construction and engineering firm with significant energy end market exposure. Lower-than-expected fourth quarter 2013 earnings, as well as 2014 guidance, pushed the stock down more than 15% during the quarter. Large liquefied natural gas projects that the company was bidding for ended up being awarded to competitors, leaving KBR unlikely to win any large project awards in 2014. KBR also continues to struggle with some execution and utilization issues that are burdening costs. The company recently announced a new CEO and stock repurchase program. We continue to think that the company is well positioned in attractive growth end markets and that new management will be an additional catalyst.

Symantec provides security, storage, and systems management solutions. On March 20, Symantec announced that President and CEO, Steve Bennett, had been terminated. Though it was clear that operational improvements were necessary at the company, the changes and plan that Bennett had put in place reflected a rate of change that was likely too aggressive for the Board. Although the company remains committed to previously set financial goals, the stock declined 15% during the quarter. We continue to hold shares of Symantec as we believe the company's longer-term positioning in the industry and the current valuation still support the potential for share price improvement and cash flow growth.

Outlook

We continue to believe that the outlook for mid-cap equities is favorable. We believe that the U.S. economy should continue to grow at a moderate pace as employment trends, consumer spending, and bank lending continue to improve. Additionally, the Federal Reserve appears to be committed to accommodative monetary policy going forward.

We have begun to see some signs that investor sentiment is shifting from lower-quality equities to higher-quality equities. In this type of environment, we believe that stocks with strong free cash flow have the potential to outperform the more speculative areas of the market, where valuations remain stretched. The Fund's positioning remains largely the same with overweights in basic industries, capital spending, and consumer services, with corresponding underweights in utilities and REITs.

We will continue to seek what we view as higher-quality stocks, with a particular emphasis on companies that, in our opinion, generate strong free-cash flow and are in a position to raise or initiate a dividend or buyback shares. Also in accordance with our long-held preferences, we continue to underweight companies that, in our view, are excessively levered.

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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)3.23%3.23%19.43%9.67%21.47%n/a7.63%02/01/2008
Class A (at offer)-2.72%-2.72%12.57%7.52%20.02%n/a6.60%
Institutional Class shares3.23%3.23%19.79%9.96%21.79%n/a7.89%02/01/2008
Russell Midcap Value Index5.22%5.22%22.95%15.17%26.35%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 03/31/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
East West Bancorp Inc.2.5%
United Rentals Inc.2.4%
American Financial Group Inc.2.3%
Whiting Petroleum Corp.2.3%
Comerica Inc.2.3%
Torchmark Corp.2.0%
Celanese Corp.2.0%
Cytec Industries Inc.1.8%
Raymond James Financial Inc.1.8%
WR Grace & Co.1.8%
Total % Portfolio in Top 10 holdings21.2%

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.

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