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Delaware Value® Fund Quarterly commentary March 31, 2015

Within the Fund

For the first quarter of 2015, Delaware Value Fund (Institutional Class shares and Class A shares at net asset value) posted positive returns and outperformed its benchmark, the Russell 1000® Value Index. At the portfolio level, both stock selection and sector allocation were positives with selection effect accounting for approximately 80% of excess return.

The Fund’s investments in consumer staples and industrials contributed most to relative performance, primarily because of stock selection. The big story in consumer staples was Kraft Foods Group. In late March, the company agreed to merge with H.J. Heinz in a deal led by 3G Capital and Berkshire Hathaway. Kraft shares rose 35% on the day of the announcement and were up 39% for the quarter. At quarter end, we were digesting the details of the transaction and starting to think about the potential merits of the combination. We’ll want to get a better idea of the valuation of the new company to see if there’s a compelling reason to own the shares over the long term.

In industrials, each of the three stocks outperformed, led by defense contractor Northrop Grumman, up 9.7%. The company reported solid quarterly results and raised its full-year guidance for both sales and per-share earnings. Moreover, the 2016 federal budget currently being debated in Congress is more constructive on defense spending — a plus for Northrop and other defense companies.

Elsewhere in the portfolio, diagnostic testing provider Quest Diagnostics was a notable performer, gaining 15.2%. The company appears to be benefiting from improving healthcare utilization trends as its most recent quarterly results surpassed analysts’ expectations for both revenues and earnings. Quest gave an upbeat outlook for the year ahead and raised its dividend 15%.

The Fund’s investments in materials and healthcare caused the largest drags on relative returns. In both sectors, stock selection was the main driver of underperformance. The one materials sector holding, specialty chemical company DuPont, trailed the broader sector, -2.7% versus 0.5%. The company, which generates more than 60% of its revenue outside the United States, gave a cautious outlook for 2015 and stated that a stronger dollar would negatively affect earnings.

Among the healthcare holdings, medical products maker Baxter International, down -5.8%, fared worst. In its most recent quarterly earnings release, Baxter reduced sales and earnings guidance for the first quarter of 2015, citing foreign exchange impacts, increased generic competition, and higher manufacturing and operational costs. Later this year, Baxter will be splitting into two independent companies, one focused on biopharmaceuticals, the other on medical devices and products.

The weakest performer in the Fund’s portfolio was semi-conductor maker Intel, which fell -13.2%. The shares took a hit following Microsoft’s weaker-than-expected revenue guidance issued in late January. Intel’s stock came under renewed pressure in mid-March when the company cut its first quarter revenue outlook because of weaker PC demand and challenging economic and currency conditions. Late in the quarter, the shares partially rebounded after Intel announced it would be acquiring Altera, a leading provider of programmable logic devices (PLDs), which are used in a broad array of electronic systems.

We added a new, 3% target weight position in CA, a leading provider of IT management software and solutions. Primarily serving large enterprises, CA develops tools for managing networks, databases, cloud applications, storage, security, and other systems. Previously known as Computer Associates, CA struggled from the late 1990s through the mid-2000s because of its aggressive pace of acquisitions (including a failed hostile takeover), accounting irregularities, SEC investigations, executive turnover and, the eventual indictment of an ex-CEO. More recently, CA had been remaking itself to gain credibility and compete more effectively. The company brought in a new CEO in 2012 (its third in 10 years) and had refreshed its senior management team in recent years.

We believed CA had solid balance sheet and cash flow attributes. Additionally, CA had a BBB+ credit rating from Standard & Poor’s. Capital management policies had been favorable as CA materially increased its dividend several years earlier and repurchased $2 billion in stock over the trailing three fiscal years (ending March 2015). In our view, the opportunity for CA lay in using cash flows from its legacy, high margin mainframe solutions business to fund initiatives with higher growth potential. In our view, this will require smart execution, disciplined expense management, and a more optimal approach to capital allocation.

Outlook

Despite its modest return in the first quarter of 2015, the broad U.S. market has made substantial gains since bottoming in March 2009. The annualized total return for the S&P 500® Index for the six years ended March 31, 2015 has been 19.7%, a cumulative gain of 194% (the cumulative total return since the March 9, 2009 bottom is actually 247%). Given our belief that higher starting valuations lead to lower long-term returns, we’re anticipating mid-single-digit annualized returns over the next five-plus years.

Near term, the market environment appears more uncertain to us. Will investors retain their interest in U.S. stocks because of the relative strength of the economy, or will the prospect of higher interest rates and weaker earnings growth in the U.S., along with highly accommodative central bank policies in other regions, draw more investors to other markets and asset classes? We can’t say, for sure. In any event, we think owning what we view as higher-quality U.S. stocks with attractive valuations and favorable risk/reward profiles gives us a better chance to deliver competitive returns. In the portfolio, we expect to maintain a large overweight in healthcare and large underweight in financials. Our research has been focused on new ideas in the consumer discretionary, healthcare, industrial, and technology sectors, while the bear market in oil has led to some investigation in the energy sector.

Document must be used in its entirety.

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.

Bond ratings are determined by a nationally recognized statistical rating organization (NRSRO).

Per Standard & Poor’s credit rating agency, bonds rated below AAA are more susceptible to the adverse effects of changes in circumstances and economic conditions than those in higher-rated categories, but the obligor’s capacity to meet its financial commitment on the obligation is still strong. Bonds rated BBB exhibit adequate protection parameters, although adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments. Bonds rated BB, B, and CCC are regarded as having significant speculative characteristics, with BB indicating the least degree of speculation of the three.

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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.

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 (06/30/2015)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)-1.79%0.01%4.65%16.96%18.33%7.82%7.46%09/15/1998
Class A (at offer)-7.44%-5.74%-1.36%14.66%16.93%7.18%7.08%
Institutional Class shares-1.67%0.13%4.97%17.28%18.63%8.09%7.67%09/15/1998

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 definition)

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)0.98%
Class A (Net)0.98%
Institutional Class shares (Gross)0.74%
Institutional Class shares (Net)0.74%
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
Baxter International Inc.3.2%
Mondelez International Inc.3.2%
CVS Health Corp.3.2%
AT&T Inc.3.1%
Quest Diagnostics Inc.3.1%
BB&T Corp.3.1%
Kraft Foods Group Inc.3.1%
Edison International3.1%
Occidental Petroleum Corp.3.1%
Johnson & Johnson3.0%
Total % Portfolio in Top 10 holdings31.2%

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.

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.

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