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Delaware Mid Cap Value Fund Quarterly commentary June 30, 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 second quarter of 2014.

Stock selection in the energy, consumer cyclical, and basic industry sectors contributed the most to the Fund’s performance. While all of the sectors in the Fund posted positive returns for the quarter, stock selection lagged that of the Index in the technology, utilities, and financial services sectors.

Among the stocks that outperformed during the quarter was Newfield Exploration, an energy company with primary operations in the Rocky Mountain and Texas regions. The stock increased more than 40% during the quarter as production increased above expectations and the company’s newer discoveries delivered solid results. We maintained the Fund’s position as the company continues to trade at a valuation discount to its peers.

In the basic industry sector, Celanese, a chemical and specialty materials company, was a top contributor to Fund performance. The stock appreciated more than 15% during the quarter after the company’s first quarter earnings report showed solid operational performance and progress towards cost reduction goals. The company also experienced volume improvement in its automotive and industrial end markets.

Shares of D.R. Horton, the nation’s largest homebuilder, advanced more than 10% during the quarter. The company reported solid earnings as well as strong order growth, which contributed to the Fund’s gains. In addition, after a period of sluggish industry volumes, there are signs that overall homebuilding sales are starting to accelerate. We maintained the Fund’s position in D.R. Horton as we continue to like the company’s valuation and future business prospects.

On the negative side, shares of Raymond James Financial declined nearly 10% during the quarter as commissions were flat and mergers-and-acquisition activity had a negative comparison. We maintained the Fund’s position as we believe the stock is reasonably priced and we anticipate that the environment for capital markets activity is likely to improve.

Avnet is a distributor of computer products, semiconductors, and electromechanical components. The stock declined nearly 5% during the quarter as the company reported sales and earnings at the low end of company guidance. This weak performance was due to a decline in the company’s Technology Solutions services sales. Given the solid performance in the prior quarter for Avnet Technology Solutions and a product refresh in storage, we believe the shortfall is a temporary issue and therefore we continue to hold shares of Avnet.

In the capital spending sector, Chicago Bridge and Iron, an engineering and construction firm focused primarily on the energy sector, declined more than 20% during the quarter. The company reported an earnings miss from underutilized assets and higher selling, general, and administrative expenses. The company also had some negative press later in the quarter. We maintained the Fund’s position as we believe the company is reasonably priced and it continues to grow backlog with large energy project wins capitalizing on the strong U.S. energy cycle.

Outlook

We continue to believe that the outlook for the economy and domestic equities is favorable. We believe that the U.S. economy will continue to grow at a moderate pace as employment trends, manufacturing data, consumer confidence levels, and bank lending gradually improve. Additionally, we continue to see the benefits of an accommodative Federal Reserve policy on equities.

The Fund’s positioning remains largely the same with overweights in the capital spending, basic industry, and consumer services sectors. We continue to maintain our underweights in the traditionally defensive sectors of the market: real estate investment trusts (REITs) and utilities.

So far this year, we have seen some signs that investor sentiment is shifting from lower-quality equities to higher-quality equities. We believe that this type of environment offers the potential for outperformance from the types of stocks that we focus our efforts on — those that have the potential to generate strong free cash flow, have a healthy balance sheet, and are likely to deploy their cash in shareholder-friendly ways such as dividends or share repurchases.

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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 (06/30/2014)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)4.45%7.82%25.09%11.91%18.56%n/a8.06%02/01/2008
Class A (at offer)-1.55%1.60%17.89%9.72%17.17%n/a7.06%
Institutional Class shares4.44%7.81%25.46%12.20%18.88%n/a8.31%02/01/2008
Russell Midcap Value Index5.63%11.14%27.76%17.56%22.97%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 08/31/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Whiting Petroleum Corp.2.8%
United Rentals Inc.2.7%
East West Bancorp Inc.2.4%
American Financial Group Inc.2.3%
Comerica Inc.2.2%
Celanese Corp.2.2%
Torchmark Corp.2.1%
Newfield Exploration Co.2.0%
Cytec Industries Inc.1.8%
Superior Energy Services Inc.1.7%
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.

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