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Delaware Value® Fund Quarterly commentary June 30, 2015

Within the Fund

For the second quarter of 2015, Delaware Value Fund (Institutional Class shares and Class A shares at net asset value) posted a negative return and underperformed its benchmark, the Russell 1000® Value Index. At the portfolio level, stock selection accounted for all of the shortfall.

Investments in industrials and healthcare caused the largest drags on relative returns. In industrials, Waste Management fared the worst with a decline of -13.9%. The company reported lower-than-expected revenue for the first quarter of 2015 (primarily because of lower prices for recycling commodities) and lowered its earnings-per-share guidance for the year. We continue to believe that Waste Management has an attractive risk/reward profile. In healthcare, drug and medical products distributor Cardinal Health was the laggard in the group, falling -6.9%. Given the stock’s strong performance over the past several quarters, the decline was likely due, in part, to profit taking. Also, recent merger speculation involving several large health insurers seems to have created some uncertainty around potential winners and losers in related industries. Elsewhere in the portfolio, shares of document technology and services provider Xerox dropped -16.7%. In late April, the company announced disappointing quarterly results and reduced its outlook for revenue and earnings for the year. Despite recent execution challenges, Xerox remains an attractive, long-term investment opportunity, in our view.

The Fund’s investments in consumer staples and energy contributed the most to relative performance. Global snack and beverage maker Mondelez International was the Fund’s strongest performer in the sector, up 14.4%. The company’s most recent quarterly results came in ahead of expectations, owing to higher prices and better expense management. In energy, exploration and production company Occidental Petroleum led the way, advancing 7.6%. The company’s shares appeared to benefit from positive comments from several analysts, the relative strength of its assets and balance sheet, and the rise in oil prices during the quarter. The strongest performer among all the Fund’s portfolio holdings was semiconductor manufacturer Broadcom, up 19.2%.

In June, we sold the Fund’s position in Broadcom. We first added Broadcom to the portfolio in July 2013. The shares had been underperforming because of weakness in enterprise technology spending, an investment-related earnings drag, stiff competition in Broadcom’s baseband chip business, and concerns about a slowdown in mobile handset sales. The company’s valuation and balance sheet attributes were attractive, in our view. Broadcom was the Fund’s strongest-performing technology stock during our two-year holding period, and it outpaced the return of the technology sector and benchmark, overall. Share gains were helped, in part, by Broadcom’s decision to wind down its faltering baseband chip business and its agreement to be acquired by Avago Technologies in a deal valued at $37 billion in cash and stock (Broadcom’s shares rose 21% on the day of the announcement). We voted to sell Broadcom because it was near our price target, had a low-single-digit free cash flow yield, and would soon be domiciled outside the United States.

The proceeds from the Broadcom sale were used to buy a target weight position in Express Scripts, the largest pharmacy benefits manager (PBM) in the U.S. The company’s clients include health plans, employers, and government health programs. PBMs play an important role in the healthcare system, delivering cost savings while simultaneously improving health outcomes. PBMs can achieve client savings through a variety of means including purchasing scale, formulary management, improved drug regimen adherence, and promotion of lower cost solutions (including generic drugs and mail delivery). Express Scripts had a history of strong growth. However, following its 2012 acquisition of rival Medco Health Solutions, it experienced a period of weak client retention due to integration-related disruptions. In 2013, following these disruptions, the stock began consistently qualifying in our opportunity screen. It had a BBB+ credit rating from Standard & Poor’s, an improving debt position, relatively low capital intensity, and consistent free cash flow. The team believed there were a number of important trends that could help drive its business, including: rising demand for prescription drugs based on an aging U.S. population, increasing use of prescription medications to treat chronic diseases, growing generic usage (more profitable for PBMs) and a strong generic pipeline through 2020, and the pervasive focus on cost containment in healthcare.

Outlook

It wouldn’t surprise us if the U.S. stock market traded in a broad range in the coming years. A number of countervailing forces could keep market levels in check. On the positive side, U.S. capital markets continue to offer relative stability and the domestic economy appears on track to continue its modest expansion. Corporate balance sheets remain strong, supporting the return of capital to shareholders through buybacks and dividends. Furthermore, a boom in mergers-and-acquisitions activity appears to be underway as companies look to deploy idle cash and access new sources of growth. We believe some of the challenges facing the stock market include the prospect of higher short-term interest rates in the U.S.; slowing global gross domestic product (GDP) growth and the weaker overall demand that comes with it; high levels of indebtedness, globally; falling productivity in the U.S. and evidence of higher wage growth (a negative for profit margins); and, foremost in our minds, its rich valuation.

Our belief is that annualized equity market returns will likely be below average, in the mid-single-digit range, looking out five to seven years. Because of this, we’re maintaining a somewhat defensive posture in the Fund’s portfolio, emphasizing companies that, in our view, appear to have more predictable cash flows and earnings, sound balance sheets, and less potential downside volatility. Healthcare still has the largest target weighting in the portfolio, now 21% with the addition of Express Scripts. We are continually striving to cheapen the portfolio, seeking what we see as undervalued stocks to replace more fully-valued holdings. Currently, we’re looking at ideas in the consumer discretionary, consumer staples, and information technology sectors.

Document must be used in its entirety.

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 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 (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
Russell 1000 Value Index0.11%-0.61%4.13%17.34%16.50%7.05%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.

The Russell 1000 Value Index measures the performance of the large-cap segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

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 877 693-3546. 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