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Delaware Value® Fund Quarterly commentary September 30, 2014

Within the Fund

For the third quarter of 2014, Delaware Value Fund (Class A and Institutional Class shares at net asset value) posted a positive return and outperformed its benchmark, the Russell 1000® Value Index. Relative performance was driven by stock selection, which accounted for approximately 90% of positive attribution.

The largest contributions to relative performance came from investments in industrials and information technology. Stock selection in both sectors, as well as an overweight in technology, had positive effects. As a group, the portfolio’s three industrial stocks rose 9.6%, led by defense contractors Northrop Grumman (up 10.8%) and Raytheon (up 10.7%), compared to a return of -2.9% for the sector in the benchmark. In general, defense stocks benefited from expanding military activity in the Middle East, and from a rotation out of more-cyclical industrial companies, whose revenues have come under pressure because of slowing global growth. In technology, semiconductor manufacturer Intel led with a 13.5% increase. In July, the company reported second-quarter results that were ahead of levels it preannounced in June, which had also lifted the shares. Elsewhere in the portfolio, grain processing and servicing company Archer-Daniels-Midland was the top performer, up 16.4%. The company has been benefiting from abundant crop supplies as well as restructuring and cost-saving initiatives.

The largest drag on relative returns came from investments in financials. Shares of regional bank BB&T dropped -5.0% after the company announced second-quarter results that missed expectations. Loan growth was better than expected but net interest income remained under pressure and the bank’s progress on expense reductions has been slow. Energy was the next-weakest sector from an attribution standpoint. Each of the Fund’s holdings had a negative return owing to a stronger U.S. dollar, rising supply in the United States, and concerns about softening global demand. Exploration and production company ConocoPhillips fared the worst, declining -10.0%. Other weak performers in the portfolio included Johnson Controls (down -­11.5%), a manufacturer of automotive interiors, batteries, and building control systems, and snack food maker Mondelez International (down -8.5%). Both companies have been contending with slowing product demand, primarily in emerging markets, where each has meaningful exposure.

In late August, we completed the sale of Motorola Solutions (MSI), a manufacturer of two-way radios, mobile computers, barcode scanners, and mobile broadband devices for government and public safety agencies as well as businesses. The Fund’s holding in MSI dated back to early January 2011 when Motorola was split into two companies: Motorola Solutions and Motorola Mobility (MMI). MMI retained Motorola’s mobile device and home set-top box businesses. The Fund’s position in the parent company was first initiated in 2007.

Following the split, we decided to sell MMI and round up MSI to a full 3% position. We viewed MSI as a more attractive, long-term investment opportunity given its potential for steady revenue growth; sustainable cash flow generation and attractive free cash flow yield; favorable capital management prospects, which could lead to dividend payments and share repurchases; and market leadership. The company initiated a dividend in mid-2011. Shares outstanding were reduced by approximately 20% during our holding period.

Our sale of MSI began in early May 2014. At the time, the stock was at its price target, scored in the fifth-cheapest decile in our opportunity screen, and was trading at elevated levels across several valuation measures. Beyond valuation, there were several other developments at MSI, related more to company quality, which led us to believe a sale was the right course of action. The company had been benefiting from an artificially low tax rate, which was set to rise. Sales were falling and earnings-per-share targets were missed. The more stable government segment (approximately three-quarters of the overall business) was experiencing margin declines. In April 2014, management announced the sale of the smaller enterprise business, despite having indicated in late 2013 its intention to keep the company whole. And, after the sale of the enterprise segment, the remaining business would be more leveraged and MSI’s market cap would be reduced to approximately $10 billion.

Outlook

The fourth quarter, especially the latter part, has historically been a good one for equities. Given the improving trajectory of the U.S. economy and lack of favorable investment alternatives, we believe stocks could gain strength and move higher from here. Seasonality aside, some of the risks currently facing the market could continue to dampen investor enthusiasm and keep stock prices in check. These risks include the end of quantitative-easing stimulus, the likelihood that the U.S. Federal Reserve moves short-term interest rates up from zero next year, slowing economic activity in some key regions outside the U.S., and rising geopolitical conflicts. Also, it’s worth noting that economic activity and stock market performance have the potential to take divergent paths over shorter time frames.

Longer term, it’s hard for us to envision robust returns for stocks because of the broad market’s extraordinary rise over the last five years or so and, more importantly, its full valuation. Given the importance of starting valuation to long-term equity returns, we foresee mid-single-digit annualized total returns looking out 5 to 10 years — a level below historical averages, but still potentially attractive given the current low-interest-rate environment around much of the globe. Our concerns about equity valuations and potential market risks mean that we remain defensively oriented with a focus on what we view as higher-quality businesses with relatively low price multiples and attractive risk-return profiles.

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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 (09/30/2014)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)1.62%10.13%20.54%24.12%17.68%8.61%7.63%09/15/1998
Class A (at offer)-4.23%n/a13.62%21.69%16.29%7.97%7.23%
Institutional Class shares1.74%10.33%20.83%24.40%17.96%8.88%7.83%09/15/1998
Russell 1000 Value Index-0.19%8.07%18.89%23.93%15.26%7.84%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 11/30/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Lowe's Cos. Inc.3.2%
Johnson Controls Inc.3.2%
Intel Corp.3.2%
Archer-Daniels-Midland Co.3.2%
Mondelez International Inc.3.1%
Cisco Systems Inc.3.1%
Broadcom Corp.3.1%
Johnson & Johnson3.1%
Allstate Corp.3.0%
Baxter International Inc.3.0%
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.

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