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Delaware Small Cap Value Fund Quarterly commentary March 31, 2015

Within the Fund

Delaware Small Cap Value Fund (Institutional Class shares and Class A shares at net asset value) outperformed its benchmark, the Russell 2000® Value Index, in the first quarter of 2015. Stock selection in the technology, basic industry, and consumer services sectors contributed the most to the Fund’s returns. On a relative basis, stock selection led the Fund to underperform in the capital spending, energy, and transportation sectors.

Several stocks within the Fund contributed to the Fund’s outperformance in the first quarter. Within the technology sector, CommScope was a strong contributor. CommScope provides connectivity and infrastructure solutions for wireless, business enterprise, and residential broadband networks worldwide. Shares of CommScope appreciated 25% during the quarter as the company announced a plan to buy TE Connectivity’s Telecom, Enterprise, and Wireless business unit. We believe this is a transformative acquisition for CommScope — it allows the company to enter several new markets while also strengthening its product portfolio. We had been adding to the Fund’s position prior to the announcement and anticipate that the deal should be highly accretive.

Shares of Cinemark Holdings appreciated 27% during the quarter as the theater chain benefited from stronger-than-expected fourth quarter results. In addition, shares moved higher in anticipation of a strong movie slate for both this year and next. We added to the Fund’s position early in the quarter as we like the company’s near-term fundamental outlook and its ability to generate strong free cash flow and return cash to shareholders.

Olin Corporation manufactures and distributes chlor alkali products and owns Winchester ammunition. The stock was up 42% during the quarter amid speculation and the subsequent announcement that the company would merge its chlor alkali chemicals business with Dow Chemicals’ chlor alkali business. This merger further consolidates the industry and should create substantial cost synergies and future cash flows for the combined business. We modestly reduced the Fund’s position mid quarter after the stock ran up on the speculation of a deal with Dow Chemical, which was formally announced on March 27.

Detractors from first quarter performance included shares of Helix Energy Solutions Group, an energy company that specializes in well intervention and remotely operated vehicles (ROVs). The stock declined 31% during the quarter as the company announced earnings below expectations as well as a renegotiation of a long-term contract from BP that resulted in lower revenue expectations. We maintained the Fund’s position in Helix — we believe the company is attractively valued relative to the energy sector. The company has a strong balance sheet which should provide it with the ability to withstand the difficult market conditions that we expect to be present during the next several quarters.

Primoris Services is a specialty engineering and construction company serving the industrial, energy, power, and water markets. The stock declined 26% during the quarter. We believe this was due, in part, to declining energy prices since the company performs construction services at petrochemical plants and constructs midstream pipelines, though the company also had a weak fourth quarter 2014 earnings report. We added to the Fund’s position late in the quarter as we felt the relative valuation was attractive and the company seems to have good fundamentals and business prospects.

Saia, a trucking company, fell 20% during the quarter after performing nicely in 2014. Saia was hurt by fears of a decelerating rate environment driven by weakness in the industrial sector. Additionally, freight growth decelerated through the fourth quarter of 2014 and into January. We trimmed the Fund’s position during the quarter as we looked to rotate into names with what we saw as having more upside potential. Over the long term, we like Saia’s potential to improve margins and generate cash flow.

Outlook

Six years into the economic recovery, the U.S. economy continues to recover at a moderate pace. While the negative effect of weather often receives attention in the first quarter, we believe that the U.S. economy is on decent footing to continue its growth trajectory. Solid employment trends, signs of a more robust recovery in the housing market, generally improving consumer confidence, and an accommodative monetary policy are all supportive of continued moderate economic growth. We believe that the ongoing headwinds from low oil prices to the energy and capital goods sectors may be more than offset by benefits to the U.S. consumer.

While recent retail sales and personal consumption data has been somewhat muted, consumer confidence levels continue to generally move in a positive direction, which should support higher spending levels going forward. Savings rates have ticked higher as evidenced by the recently reported 5.8% savings rate in February. While consumers do not appear to be in a hurry to spend their savings from lower fuel prices, anecdotally we continue to see evidence of an improved consumer environment from publicly traded companies, with many restaurant and retail chains reporting an improving sales environment. The housing market, while slow in 2014, has shown early signs of life in 2015. We believe this is another important factor underpinning the health not only of the consumer, but the U.S. economy as a whole. Additionally, we expect solid earnings growth for small-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, basic industries, and technology 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)3.01%3.01%5.49%13.57%13.90%8.44%11.65%06/24/1987
Class A (at offer)-2.91%-2.91%-0.59%11.35%12.55%7.80%11.41%
Institutional Class shares3.07%3.07%5.76%13.86%14.18%8.72%11.17%11/09/1992
Russell 2000 Value Index1.98%1.98%4.43%14.79%12.54%7.53%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 2000® Value Index (view definition)

Expense ratio
Class A (Gross)1.22%
Class A (Net)1.22%
Institutional Class shares (Gross)0.97%
Institutional Class shares (Net)0.97%
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.2.6%
iShares Russell 2000 Value ETF2.6%
Synopsys Inc.1.8%
ITT Corp.1.7%
Webster Financial Corp.1.6%
Qorvo Inc.1.4%
Cytec Industries Inc.1.4%
Berry Plastics Group Inc.1.4%
STERIS Corp.1.4%
Bank of Hawaii Corp.1.4%
Total % Portfolio in Top 10 holdings17.3%

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