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Delaware U.S. Growth Fund Quarterly commentary March 31, 2015

Within the Fund

For the first quarter of 2015, Delaware U.S. Growth Fund (Institutional Class shares and Class A shares at net asset value) underperformed its benchmark, the Russell 1000® Growth Index. Strong relative performance in the healthcare and consumer staples sectors was unable to overcome weak relative performance in the technology and consumer discretionary sectors.

Novo Nordisk contributed to performance during the quarter. The stock reported financial results that were relatively in-line and experienced several positive regulatory developments during the quarter. The company reported positive clinical trial developments for several drugs used in the treatment of diabetes and obesity and European approval to begin marketing a drug to help in the treatment of obesity. We believe the company should continue to see a growing need for its products; unfortunately, diabetes is increasing globally due to rising obesity rates in developing markets and a growing middle class in emerging markets.

Electronic Arts, a more recent addition to the Fund’s portfolio, was a contributor to performance during the quarter. The stock rose after the company reported better-than-expected financial results driven, in part, by strong holiday season console video game sales. Additionally, the company benefited from growth within the digital downloads and mobile phone gaming channels, which we believe should be increasingly important for the company's growth moving forward.

Allergan also contributed to performance during the quarter. The stock appreciated as Actavis, a generic and specialty drug manufacturer, completed its acquisition of Allergan at a premium to its stock price. We continue to believe Allergan operates at a high level driven by the core ophthalmology franchise and by the broader use of Botox in both cosmetic and other medical indications. While we currently hold Actavis as a result of the completed acquisition, we are assessing the investment merits of a combined Actavis/Allergan entity.

QUALCOMM detracted from performance during the quarter. While the company reported better-than-expected earnings results, it lowered its full-year revenue and earnings forecasts. This is due, in part, to one of its largest customers switching to internally developed processors and downward pricing pressure from increased competition and lower handset costs. During the quarter, QUALCOMM was able to settle its anti-monopoly suit with the Chinese government that had added to downward pressure on the security. We believe that despite these concerns, QUALCOMM continues to benefit from its unique intellectual property and patent position in the semiconductor industry and its technology applications to the significant growth and proliferation of wireless devices.

Discovery Communications also detracted from performance during the quarter. The stock experienced weakness as the company reported financial results that missed consensus estimates; this was driven, in part, by weakness in U.S. advertising and the negative currency effect on revenues. While there are ongoing concerns related to weakness in U.S. TV advertising and rating trends, we continue to believe that the proliferation of pay-TV services within a growing middle class outside the United States is in strong secular growth (this is similar to the historical industry dynamics that have played out in the U.S. pay-TV industry). We believe Discovery Communications could be a key participant in that trend as the company continues to acquire non-U.S. brands and increase its global presence.

Finally, Baidu was a detractor from performance during the quarter after reporting financial results and future guidance that were below expectations. While Baidu’s heavy capital investments in its mobile-related services is already providing growth for the company, its transition has affected margins and revenue, as mobile monetizes at a lower rate than its legacy desktop services. We agree with the heavy investment spending strategy and continue to believe the company stands to benefit widely from the proliferation of wireless and streaming technologies in China, which makes Baidu’s services even more accessible. We feel the company has upside potential given the sheer size of the Chinese market population and with ancillary businesses that are becoming significant drivers of growth including social media, multi-media sharing services, and mobile search.

Outlook

Despite positive absolute returns in the equity market during the past few years, we believe the relatively tepid market sentiment demonstrate that there are more than just fundamental factors affecting stock prices. A lack of significant bull market sentiment suggests to us that many investors appear to be struggling with accurately predicting the pace of global economic recovery and are assessing factors that threaten economic fundamentals (for example, central bank actions and fiscal policy debates across the globe). While some fundamentals in various geographies may be trending in a positive direction (from a very low base during the global financial crisis in 2008-2009), we don’t believe we are entering into a typical post-recessionary global boom cycle. Rather, we believe the lingering effects of the credit crisis years ago could lead to moderate growth, at best, for the intermediate term. In such a tenuous environment, we believe the quality of a company’s business model, competitive position, and management may prove to be of utmost importance.

Regardless of the economic outcome, we remain consistent in our long-term investment philosophy: We want to own what we view as strong secular-growth companies with solid business models and competitive positions that we believe can grow market share and have the potential to deliver shareholder value in a variety of market environments.

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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 (03/31/2015)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)2.73%2.73%15.60%15.59%16.48%9.31%7.88%12/03/1993
Class A (at offer)-3.19%-3.19%8.97%13.34%15.11%8.67%7.58%
Institutional Class shares2.78%2.78%15.88%15.85%16.78%9.60%7.99%02/03/1994
Russell 1000 Growth Index3.84%3.84%16.09%16.34%15.63%9.36%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 1000® Growth Index (view definition)

Expense ratio
Class A (Gross)1.06%
Class A (Net)1.06%
Institutional Class shares (Gross)0.81%
Institutional Class shares (Net)0.81%
Top 10 holdings as of 03/31/2015
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
QUALCOMM Inc.5.7%
Celgene Corp.5.6%
Visa Inc.5.0%
eBay Inc.4.7%
Walgreens Boots Alliance Inc.4.5%
MasterCard Inc.4.3%
Equinix Inc.4.1%
Liberty Interactive Corp.4.0%
Crown Castle International Corp.3.6%
Actavis plc3.6%
Total % Portfolio in Top 10 holdings45.1%

Institutional Class shares are only available to certain investors. See the prospectus for more information. 

Jackson Square Partners, LLC (JSP) is the sub-advisor to the Fund. As sub-advisor, JSP is responsible for day-to-day management of the Fund’s assets. Although JSP serves as sub-advisor, the investment manager, Delaware Management Company, a series of Delaware Management Business Trust, has ultimate responsibility for all investment advisory services.

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

Investing involves risk, including the possible loss of principal.

Not FDIC Insured | No Bank Guarantee | May Lose Value