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Delaware Dividend Income Fund Quarterly commentary December 31, 2014

Within the Fund

For the fourth quarter of 2014, Delaware Dividend Income Fund (Class A and Institutional Class shares at net asset value) underperformed its benchmark, the S&P 500® Index.

Within the large-cap value equity portion of the Fund, sector allocations detracted from relative performance while stock selection was additive. However, stock selection in the energy sector had a large negative effect on returns. The Fund’s five energy sector holdings, which are broadly exposed to oil exploration and production, lagged by a wide margin in the fourth quarter. The Fund’s modest overweight in the sector also hurt performance. Services provider Halliburton, down -38.8% in the fourth quarter, had the largest decline of any stock in the Fund. Healthcare investments were also a notable source of negative attribution for the quarter. The Fund’s stock selection did not keep pace with the sector. Shares of pharmaceutical maker Merck underperformed the most in the quarter, falling -3.5%.

Investments in the consumer discretionary sector made the largest contribution to relative performance within the large-cap value equity portion of the Fund, led by home improvement retailer Lowe’s, up 30.6%. In November, Lowe’s reported solid results for its most recent quarter and raised its estimates for full-year earnings per share and operating margin. Stock selection in the industrials sector was another meaningful contributor to the fourth quarter’s relative returns. Northrop Grumman (up 12.4%) continued to perform well despite downward pressure on defense spending, and benefited from several sell-side analyst upgrades during the quarter.

Within the equity real estate investment trust (REIT) portion of the Fund, allocations to the office, specialty, and freestanding sectors detracted from Fund performance during the quarter. In the freestanding sector, American Realty Capital Properties (which we exited during the quarter) revealed an accounting problem in late October, and the stock declined more than 20%. Accounting irregularities involving a small amount of deferred expenses triggered the selloff, but investor sentiment was already waning given the company’s aggressive acquisition program and ongoing corporate-governance issues.

Stock selection in the industrial, healthcare, and mixed REIT sectors aided Fund performance. Health Care REIT gained more than 20% and Healthcare Trust of America, a medical office REIT, gained more than 15%. The healthcare sector has continued to benefit from lower yields.

Within the Fund’s high yield bond portion, the top sector contributors were media, leisure, and consumer goods, while the leading individual contributors were DS Services (mineral water), Cablevision Systems (cable TV), and The Pantry (convenience stores). DS Services gained on the closing of its acquisition by Cott Corporation, Cablevision Systems gained on strong third-quarter cash flow generation, and The Pantry gained on news of its acquisition by Couche-Tard.

Sectors that detracted on a relative basis during the fourth quarter were energy, healthcare, and telecommunications. Bottom individual names were Midstates Petroleum (energy exploration and production), Key Energy (oilfield services), and SandRidge Energy (energy E&P). Midstates, Key Energy, and SandRidge all declined due to the nearly 50% drop in oil prices since mid-June.

Outlook

Moving into the first quarter of 2015, several notable themes, possibilities, and developments bear monitoring. These include the following:

In light of these circumstances, we believe there is a strong argument for seeking companies that, in our view, have most or all of the following characteristics: they (1) appear undervalued, (2) have strong cash flows, (3) maintain manageable debt levels, (4) operate diversified businesses, and (5) have a history of delivering consistent dividends.

Book value is the net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.

Diversification may not protect against market risk.

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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 877 693-3546 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 (12/31/2014)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)1.50%7.88%7.88%13.64%11.20%6.33%8.33%12/02/1996
Class A (at offer)-4.31%1.68%1.68%11.43%9.89%5.71%7.98%
Institutional Class shares1.63%8.22%8.22%13.95%11.50%6.61%8.51%12/02/1996
S&P 500 Index4.93%13.69%13.69%20.41%15.45%7.67%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.

S&P 500® Index (view)

Expense ratio
Class A (Gross)1.12%
Class A (Net)1.12%
Institutional Class shares (Gross)0.87%
Institutional Class shares (Net)0.87%
Top 10 holdings as of 01/31/2015
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Northrop Grumman Corp.1.6%
Lowe's Cos. Inc.1.6%
CVS Health Corp.1.6%
Kraft Foods Group Inc.1.5%
Quest Diagnostics Inc.1.5%
Merck & Co. Inc.1.5%
Cardinal Health Inc.1.5%
Waste Management Inc.1.4%
Edison International1.4%
Broadcom Corp.1.4%
Total % Portfolio in Top 10 holdings15.0%

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 877 693-3546. Investors should read the prospectus and the summary prospectus carefully before investing.

Investing involves risk, including the possible loss of principal.

The Fund may invest up to 45% of its net assets in high yield, higher-risk corporate bonds.

Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt.

The Fund may also be subject to prepayment risk, the risk that the principal of a fixed income security that is held by the Fund may be prepaid prior to maturity, potentially forcing the Fund to reinvest that money at a lower interest rate.

High yielding, noninvestment grade bonds (junk bonds) involve higher risk than investment grade bonds.

International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations.

Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

Not FDIC Insured | No Bank Guarantee | May Lose Value