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Delaware Small Cap Value Fund Quarterly commentary March 31, 2014 Class A (DEVLX)

Within the Fund

Delaware Small Cap Value Fund (Class A shares at net asset value) posted a positive return and outperformed its benchmark, the Russell 2000® Value Index, in the first quarter of 2014.

Stock selection in technology, capital spending, and energy contributed to the Fund's outperformance. The Fund underperformed the Index in the basic industry, real estate investment trusts (REITs), and consumer services sectors. REITs posted the highest absolute return in the Index during the quarter. The Fund's return in the REIT sector kept pace with the Index; however, the portfolio's underweight allocation to REITs detracted from relative performance.

The Fund had several stocks that contributed to the portfolio's outperformance in the quarter. Within the technology sector, stock selection in semiconductors drove performance. RF Micro Devices designs and develops proprietary radio frequency integrated circuits. In February, RF Micro Devices announced a merger agreement with Triquint Semiconductor under which the companies will combine in an all stock transaction. RF Micro Devices appreciated as a result of the news and advanced 50% during the quarter. We maintained the Fund's position as the merger should give the combined company critical mass in the industry, generate cost savings, and create the potential to bring to market products with higher levels of system integration.

Patterson-UTI Energy is an oil service company involved in drilling and pressure pumping operations. The stock advanced more than 25% during the quarter — the outlook for rig pricing and pressure pumping became favorable due to the resilience of the price of oil and the decline of natural gas inventories, given the cold winter. With the company generating significant cash flow, we maintained the Fund's position as valuation remains reasonable to us and the company continues to allocate significant capital to shareholders.

Engineering and construction firm, MasTec gained more than 30% during the quarter as the company continues to see growth in its wireless and oil and gas pipeline businesses. Incremental contract awards from AT&T and Sprint to continue supporting their network build-out was a positive for the company. We view the company's position in the wireless space positively as wireless providers will likely continue needing improved infrastructure to support increasing data usage. With respect to the company's oil and gas pipeline business, the revenue growth outlook for 2014 will moderate relative to a strong 2013; however, bidding activity remains high as pipeline infrastructure continues to grow in the United States.

Performance detractors for the Fund included Thermon Group Holdings. The company, a provider of thermal solutions (heat tracing) to process industries, fell 15% during the quarter. The stock showed weakness after releasing its fiscal third quarter earnings in February. While earnings per share results beat consensus estimates, management trimmed organic revenue guidance for fiscal year 2014 from mid-single digits to roughly flat due to delays in some large projects. Both gross and operating margins remain strong, giving us confidence to continue owning the stock.

Selective Insurance Group is a property and casualty insurance company with primary operations in New England, the Mid-Atlantic, and the Southeast. The stock declined more than 10% during the quarter as price increases on premiums may be peaking and winter storms will likely lead to above average losses and claims from policy holders. We maintained the Fund's position in the stock as the overall property and casualty market remains firm and the stock is priced at slightly above book value.

Shares of Rent-A-Center were down more than 25% during the quarter as the rent-to-own chain reported a disappointing quarter and gave a disappointing earnings outlook due to a subpar holiday season and increased competition. We sold the Fund's shares of the company during the quarter as we saw both deteriorating fundamentals and cash flow.

Outlook

We continue to believe that the outlook for small-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 technology, and corresponding underweights in utilities, REITs, and consumer staples.

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.

Price-to-book ratio is used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.

[12375]

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)2.89%2.89%21.50%12.36%24.93%9.29%11.88%06/24/1987
Class A (at offer)-3.01%-3.01%14.51%10.17%23.45%8.64%11.64%
Institutional Class shares2.95%2.95%21.77%12.64%25.23%9.58%12.14%11/09/1992
Russell 2000 Value Index1.78%1.78%22.65%12.74%23.33%8.07%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)

Expense ratio
Class A (Gross)1.25%
Class A (Net)1.25%
Institutional Class shares (Gross)1.00%
Institutional Class shares (Net)1.00%
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
United Rentals Inc.2.7%
Whiting Petroleum Corp.2.6%
East West Bancorp Inc.2.5%
ITT Corp.1.9%
Chemtura Corp.1.8%
HB Fuller Co.1.7%
Hancock Holding Co.1.6%
Patterson-UTI Energy Inc.1.6%
Helix Energy Solutions Group Inc.1.6%
Platinum Underwriters Holdings Ltd.1.5%
Total % Portfolio in Top 10 holdings19.5%

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