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Delaware Value® Fund Quarterly commentary June 30, 2014 Class A (DDVAX)

Within the Fund

For the second quarter of 2014, Delaware Value Fund (Class A shares at net asset value) posted a positive return and modestly outperformed its benchmark, the Russell 1000® Value Index. Relative performance benefited from stock selection and, to a larger extent, positive sector allocation results.

The largest contributions to relative performance came from investments in information technology and financials. The portfolio benefited from stock selection in both sectors, as well as an overweight in technology and an underweight in financials. Semiconductor manufacturers Intel and Broadcom were the Fund’s top contributors, advancing 20.7% and 18.4%, respectively. In mid-June, Intel raised its forecast for both revenue and profit margin for the current quarter and year. Earlier in the month, Broadcom announced that it was exploring strategic alternatives for its cellular baseband business, an area that had dragged down overall earnings per share by approximately 25% as recently as last year. In financials, Bank of New York Mellon led the way, up 6.7%. Its shares got a boost when activist investor Nelson Peltz announced that his investment partnership, Trian Fund Management, had amassed a 2.5% stake in the company. Elsewhere in the portfolio, energy exploration and production company ConocoPhillips was a top performer, gaining 22.9%. Sales and profits for last quarter came in ahead of expectations as the company benefited from increased production, higher prices, and expanding margins.

The largest drags on relative returns came in the healthcare and industrials sectors. Stock selection was the main source of negative attribution in each. The Fund’s six healthcare holdings had a combined return of 0.5% versus 3.4% for those in the benchmark. Shares of pharmaceutical maker Pfizer fared worst with a drop of -6.8%. In addition to reporting weaker-than-expected revenue for last quarter, Pfizer’s failed bid for U.K.-based AstraZeneca created some uncertainty around its long-range strategic plans. In industrials, defense contractors Raytheon and Northrop Grumman posted disappointing returns (-6.0% and -2.5%, respectively). Concerns about the effect of Pentagon budget constraints on several large programs put pressure on defense stocks, generally. Also, Raytheon reported a modest decrease in sales and did not raise its full-year guidance, which the market viewed as disappointing. Another weak performer in the portfolio was diversified specialty chemical company DuPont, which declined -1.8%. Near the end of the quarter, DuPont reduced earnings guidance for the year citing lower expected sales in its agricultural segment.

There were no full-position sales or purchases in the portfolio during the second quarter.

Outlook

After a period of notable resilience for stocks, our three- to five-year view is for below-average market gains. That’s not to say we’re bearish on equities. For long-term investors, we think stocks of higher-quality U.S. companies, trading at reasonable prices, have the potential to provide attractive returns relative to other investments. Near-term, things appear more uncertain to us. The U.S. market looks fully valued across numerous measures including book value, cash flow, earnings, and sales, but valuations are not at extreme levels. It’s been more than 1,000 days since the S&P 500® Index has had a correction of at least 10%, the 5th longest stretch on record (source: Leuthold Group). However, inflation and interest rates remain very low, as does market volatility, while profit margins and investor sentiment are near peak levels. It occurs to us that all of these things (inflation, interest rates, volatility, profits, and investor sentiment) tend to move back toward their averages over time. The question is when. The economy appears to be improving, albeit slowly. As this continues, companies may increase their outlays for capital expenditures and wages, which could put a dent in profit margins and stock buybacks — two strong supports in the current market.

Our more cautious near-term view is reflected in the Fund’s positioning — overweights in traditionally defensive sectors (where valuations remain attractive) and a greater-than-usual emphasis on quality (that is, balance sheet strength, diversified sources of revenue, more predictable cash flows, and attractive dividends). In a stock market that’s risen a cumulative 224% from the March 2009 bottom (S&P 500 Index total return through the second quarter of 2014), finding stocks that meet our criteria for quality and cheapness has become increasingly difficult. This is where all of our energies are focused right now as we continually strive to maintain a “margin of safety” in the portfolio. 

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of the U.S. stock market.

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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)5.51%8.38%23.86%17.86%19.85%8.54%7.64%09/15/1998
Class A (at offer)-0.57%2.18%16.71%15.55%18.45%7.89%7.24%
Institutional Class shares5.51%8.45%24.08%18.12%20.14%8.80%7.85%09/15/1998
Russell 1000 Value Index5.10%8.28%23.81%16.92%19.23%8.03%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.

Russell 1000® Value Index (view)

Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.

Expense ratio
Class A (Gross)1.02%
Class A (Net)1.02%
Institutional Class shares (Gross)0.77%
Institutional Class shares (Net)0.77%
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
Intel Corp.3.4%
Broadcom Corp.3.3%
Lowe's Cos. Inc.3.1%
Xerox Corp.3.1%
Kraft Foods Group Inc.3.1%
Raytheon Co.3.0%
Marathon Oil Corp.3.0%
Allstate Corp.3.0%
Halliburton Co.3.0%
Edison International3.0%
Total % Portfolio in Top 10 holdings31.0%

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.

Holding a relatively concentrated portfolio of a limited number of securities may increase risk because each investment has a greater effect on the Fund’s overall performance than would be the case for a more diversified fund.

Not FDIC Insured | No Bank Guarantee | May Lose Value