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Delaware Small Cap Value Fund Quarterly commentary June 30, 2015

Within the Fund

Delaware Small Cap Value Fund (Institutional Class shares and Class A shares at net asset value) posted a negative return but outperformed its benchmark, the Russell 2000® Value Index, for the second quarter of 2015. Stock selection in the technology and basic industry sectors contributed the most to the Fund’s outperformance. The portfolio’s underweight allocation to real estate investment trusts (REITs) and utilities provided a positive benefit to relative performance as these were two of the weakest-performing sectors in the Index during the quarter. On a relative basis, stock selection led the Fund to underperform in the energy, transportation, and healthcare sectors.

Several stocks contributed to outperformance during the second quarter. Shares of funeral home operator, Service Corporation International, rose 13% during the quarter as the stock benefited from a stronger-than-anticipated earnings report. In addition, pre-need sales of funeral services and cemetery plots remained strong. We maintained the Fund’s position during the quarter as we continue to favor the company’s intermediate-term fundamental outlook and free cash flow profile. The company continues to be active in returning cash to shareholders through dividends and share repurchases.

Primoris Services is a specialty engineering and construction company serving the industrial, energy, power, and water markets. Its shares appreciated 16% during the quarter after the company reported an increased backlog and healthy book-to-bill ratio above 1. In addition, the company increased its dividend rate despite a weak fourth quarter 2014 earnings report that was primarily due to weather-related issues. We maintained the Fund’s position as we believe the company should benefit from higher utilization rates and strengthening end markets.

PTC is a software and services company focused on product and service lifecycle management. The company’s technology is used to design, operate, and maintain complex products. PTC’s offerings are also used to connect products to the internet for the purpose of capturing and analyzing data, also referred to as the Internet of Things (IoT). Shares of PTC appreciated 13% during the quarter — the company reported earnings that exceeded consensus estimates and the IoT business continued to grow as the company added 62 new customers during the quarter. We slightly decreased the Fund’s position during the quarter in order to take advantage of the stock’s appreciation; however we remain positive on the longer-term opportunity for PTC.

Detractors from the Fund’s performance included shares of H&E Equipment Services. H&E is an equipment rental company with operations concentrated around the Gulf Coast and Intermountain regions. The company’s shares declined 19% after weak demand from the oil & gas market caused the company to report a decline in rental revenue. We maintained the Fund’s position in the company as we believe the stock has an attractive valuation and may be in a good market position to capitalize on increasing nonresidential construction demand.

Bonanza Creek Energy is an independent exploration and production company with primary operations in the Wattenberg Field in Colorado. Shares of Bonanza Creek declined 26% during the quarter as production growth estimates remained modest due to the company’s reduction in capital spending. The company reduced capital spending in order to concentrate on its core areas of drilling and maximize efficiencies. We added to the Fund’s position throughout the quarter — the company has been disciplined with its cash flow and capital spending projections. In addition, we believe the company could be a beneficiary of the low valuation that the market is assigning to its assets.

Brandywine Realty Trust is an office REIT with primary operations in the Mid-Atlantic. The rise in longer-term interest rates negatively affected the overall valuation of Brandywine and other companies in the REIT sector; consequently, the company’s stock declined 16% during the quarter. We maintained the Fund’s position in Brandywine as we view the company’s relative valuation to be attractive compared to other REITs. We believe that the company should be able to substantially increase its dividend during the next year as a result of improvements in its funds from operations and funds available for distribution.


Halfway through the year, we continue to believe that the outlook for the economy and equities is favorable. Despite first quarter data indicating sluggish growth, we feel the economy could strengthen into 2015 and continue to grow at a moderate pace. We expect solid earnings growth for small-cap companies in 2015, which should help to support equities. Additionally, the merger and acquisition (M&A) environment remains favorable for equities, as M&A deal value is on track for a strong year. While we have not yet had any acquisitions in the small-cap portfolio this year, we believe that the strong M&A environment is supportive of equity valuations.

We have recently seen an uptick in market volatility resulting from events in Europe. During periods of greater uncertainty in the market, higher-quality equities may outperform their lower-quality peers. Additionally, if volatility remains, we believe that stocks with strong free cash flow and solid balance sheets have the potential to outperform more speculative areas of the market.

Our view of the economy has remained relatively consistent over the past several years: We believe that the economy should continue to grow at a moderate pace. As a result of our positive economic outlook and the relatively attractive valuations in some of the more cyclical sectors, we are generally overweight those cyclical sectors. The Fund’s largest overweights remain in basic industries and capital spending followed by healthcare and technology. In general, defensive sectors — which have been bid up partly due to investors searching for yields in REITs and utilities — remain unattractive to us on a valuation basis. As a result, we remain underweight these sectors. We would look to add to the Fund’s weight in these defensive sectors if we see valuations contract; this would most likely come as a result of an increase in interest rates, which could cause interest rate sensitive stocks to decline.

Our team’s philosophy remains unchanged. We will continue to focus on finding what we view as attractively valued stocks that generate robust free cash flow, have strong balance sheets, and are likely to deploy their cash in shareholder-friendly ways such as share repurchases or increasing dividends.


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.


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

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 (06/30/2015)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)-1.13%1.85%0.61%14.83%15.42%7.95%11.49%06/24/1987
Class A (at offer)-6.81%-4.01%-5.19%12.59%14.07%7.31%11.26%
Institutional Class shares-1.08%1.96%0.85%15.11%15.71%8.22%10.99%11/09/1992
Russell 2000 Value Index-1.20%0.76%0.78%15.50%14.81%6.87%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 06/30/2015
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%
ITT Corp.1.8%
Synopsys Inc.1.8%
Webster Financial Corp.1.7%
Cytec Industries Inc.1.7%
Bank of Hawaii Corp.1.5%
Kaiser Aluminum Corp.1.5%
Service Corp. International/US1.4%
Hancock Holding Co.1.4%
MasTec Inc.1.4%
Total % Portfolio in Top 10 holdings17.2%

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.

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