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Delaware Small Cap Value Fund Quarterly commentary June 30, 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 second quarter of 2014. Stock selection in the basic industry, technology, and energy sectors contributed the most to the Fund’s outperformance. While the Fund’s return in the real estate investment trusts (REITs) sector outpaced that of the Index, underexposure to that sector that was the only detractor from performance.

Several stocks within the Fund contributed to outperformance during the quarter. Whiting Petroleum is an oil and natural gas exploration and production company with primary operations in the Bakken Shale and Rocky Mountain regions. The stock rose nearly 16% as daily production exceeded expectations and the company showed success in a new area of development, the Niobrara fields in Colorado. While the Fund maintains a significant position in Whiting Petroleum, we slightly reduced its weighting late in the quarter. In our view, the company remains attractively valued versus its peers.

Within the technology sector, stock selection in semiconductors continued to drive performance. RF Micro Devices designs and develops proprietary radio frequency integrated circuits. Shares of RF Micro Devices increased 22% during the quarter. The company reported a solid first quarter as it seemed to be executing well on both revenue and margins. We continue to own the stock and believe the company should continue to realize the benefits from the increased complexity of mobile phones.

Berry Plastics is a producer of plastic consumer packaging and engineered materials. The stock advanced 11% during the quarter after the company provided a positive business outlook, which included flat or declining key raw material prices, and named a high-profile customer that is testing its new drink cup. We continued to favor the company because of its strong free cash flow generation and attractive valuation.

Among the individual stocks that detracted from performance was MasTec, a specialty engineering and construction company with a focus on serving the telecommunication, utility, and energy sectors. After posting a strong gain in the first quarter, the stock declined 29% during the second quarter. The company pre-announced a negative earnings report in early June due to lower-than-expected wireless revenues and project delays in the oil and gas segment. We added to the Fund’s position as we believe these issues should be short-term in nature. In our view, the company’s fundamentals remain strong and the stock is attractively priced.

Another detractor in the Fund was Brocade Communications Systems. The company provides switching solutions for storage area networks and Ethernet switching. After a strong first quarter, shares of Brocade declined in April and early May due to concerns over weak U.S. federal government spending, and the possible sale of part of the IBM server business to Lenovo (as that sale may cause a change in the original equipment manufacturer relationship). The Fund continues to hold shares of Brocade as the company remains committed to its capital allocation strategy of returning 60% of free cash flow to shareholders.

Finally, Stage Stores, a department store chain, declined 23% during the quarter as unseasonable weather and a promotional environment across retail weighed on the company’s gross margins during the quarter. As a result, the company lowered its full-year earnings expectations. While we reduced the Fund’s position in Stage Stores earlier in the year, we maintained its position after the second quarter sell-off based on our view of the company’s valuation and strong free cash flow profile.

Outlook

We continue to believe that the outlook for the economy and domestic equities is favorable. We believe that the U.S. economy should 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 technology sectors. We continue to maintain underweights in the traditionally defensive sectors of the market: REITs, utilities, and consumer staples. 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)3.67%6.67%24.85%14.46%22.00%9.71%11.92%06/24/1987
Class A (at offer)-2.30%0.54%17.66%12.22%20.56%9.07%11.67%
Institutional Class shares3.73%6.80%25.16%14.75%22.30%10.00%12.17%11/09/1992
Russell 2000 Value Index2.38%4.20%22.54%14.65%19.88%8.23%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 07/31/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Whiting Petroleum Corp.2.5%
East West Bancorp Inc.2.4%
ITT Corp.2.1%
Helix Energy Solutions Group Inc.1.7%
Patterson-UTI Energy Inc.1.7%
Chemtura Corp.1.7%
Synopsys Inc.1.6%
HB Fuller Co.1.5%
Stone Energy Corp.1.5%
Platinum Underwriters Holdings Ltd.1.5%
Total % Portfolio in Top 10 holdings18.2%

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