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Delaware Emerging Markets Fund Quarterly commentary — December 31, 2016

Market review

The MSCI Emerging Markets index declined 4.2% during the fourth quarter of 2016. The U.S. presidential election in November, which resulted in a surprise victory for Donald Trump, triggered a rise in U.S. bond yields and appreciation of the dollar. These in turn negatively affected emerging markets equities and currencies. Oil prices rose in the wake of an Organization of the Petroleum Exporting Countries (OPEC) agreement to cut production.

Among regions, EMEA (Europe, Middle East, and Africa) posted positive returns for the fourth quarter, although performance varied significantly across countries. Russia was the strongest performing market as rising oil prices supported the energy sector, while the financials and utilities sectors also performed well. Elsewhere, equities in Greece rose after the country received additional bailout funding from the euro zone. In contrast, South African equities declined as U.S. dollar strength pressured the mining sector. In Turkey, the lira depreciated sharply due to concerns about rising U.S. bond yields and geopolitical tensions.

In Latin America, Peru, Chile, and Brazil outperformed. In Peru, positive economic data, rising business confidence, and a rally in copper prices bolstered equities. In Chile, performance was mixed as the positive effects from rising consumer confidence were somewhat offset by currency depreciation. In Brazil, rising prices for oil and iron ore contributed to outperformance in the energy and materials sectors, although lackluster economic data weighed on the consumer sector. Mexico was the weakest performing market in the region as equities and the peso sold off following Donald Trump’s victory in the U.S. presidential election.

Asia lagged the emerging markets index during the fourth quarter. In China, currency depreciation, decreasing foreign exchange reserves, and policy tightening in the property sector dampened investor sentiment. Shares of index heavyweights including China Mobile, Tencent Holdings, and Alibaba Group Holding all declined more than 10%. Indian equities also underperformed following Prime Minister Modi’s surprise announcement to replace certain denominations of currency notes. This policy may impinge on short-term economic activity. In Korea, the currency depreciated in the wake of a scandal engulfing President Park and concerns about political tensions with China. In Southeast Asia, currency depreciation and rising U.S. bond yields weighed on equities in Malaysia and Indonesia. The Philippines was the weakest performing market in the region as the relationship between the Philippines and the United States may change somewhat under both countries’ new presidents. On the positive side, Taiwan and Thailand relatively outperformed. In Taiwan, rising U.S. bond yields supported the financials sector, while rising oil prices benefited the Thai energy sector.

Among sectors, energy and materials outperformed the most, while consumer staples, real estate, consumer discretionary, and healthcare underperformed.

Within the Fund

For the fourth quarter of 2016, Delaware Emerging Markets Fund (Institutional Class shares and Class A shares at net asset value) underperformed its benchmark, the MSCI Emerging Markets Index.

Russia was the main contributor to performance. The Fund’s overweight position was favorable, particularly in stocks such as Rosneft Oil,Transneft, and Gazprom, which rose in sympathy with oil prices. In addition, the market responded positively to the partial sale of the Russian government’s stake in Rosneft to Glencore and the Qatari government. Sberbank of Russia rallied with improving sentiment toward Russia.

In India, stock selection was favorable. The Fund’s position in Reliance Industries relatively outperformed the Indian market as the company is less affected by Prime Minister Modi’s currency-note replacement initiative. The Fund’s underweight to the financials and healthcare sectors also contributed to relative performance.

In Korea, performance was positive overall. The Fund’s underweight in cosmetics stocks supported relative performance as political tensions with China may temper demand from Chinese tourists. However, shares of telecommunications stocks including SK Telecom and LG Uplus lagged as investors rotated into cyclical sectors.

Performance in Brazil was mixed. Shares of Braskem rose as the company reached a financial settlement in a bribery scandal pertaining to the so-called Car Wash investigations. Shares of Eletrobras outperformed due to expectations for a more favorable regulatory environment. However, these gains were offset by B2W Cia Digital’s underperformance where concern about the company’s funding needs persists.

China detracted the most from performance largely due to the Fund’s overweight position in the Internet sector. In particular, SINA and Weibo succumbed to profit-taking following a strong rally. We believe that both companies remain well-positioned for long-term growth in online advertising. Shares of Sohu.com declined after the company disclosed further losses and funding requirements in its online video business. Despite these concerns, we believe that the company’s overall portfolio of assets, particularly its search business, is undervalued. Baidu underperformed as the company’s search advertising business remains subdued amid tighter regulations. We believe this slowdown is temporary, and we remain optimistic about the company’s long-term growth prospects.

In Taiwan, the Fund’s underweight position was unfavorable in terms of asset allocation. We find relatively few attractive stocks in this market. In addition, the Fund’s holding in MediaTek underperformed due to concerns about competitive pressures and margin compression. We believe that MediaTek is increasingly more competitive in smartphone communication chips and that the shares are inexpensive.

In Turkey, the Fund’s overweight position was unfavorable due to the lira’s depreciation versus the dollar. Shares of Akbank declined as the Turkish economy may face near-term headwinds from rising bond yields, political uncertainty, and higher oil prices.

Among sectors, energy and consumer staples contributed the most to performance, while technology detracted the most.

Outlook

We expect emerging markets to remain volatile, yet our long-term positive view remains intact. While economic growth may continue to face near-term headwinds, we believe that monetary and fiscal policies, coupled with government reform measures, will provide support. With respect to China, we continue to believe that the economy will muddle through, supported by structural growth in consumption, improvement in living standards, and selective policy support from the government.

Despite a challenging macroeconomic backdrop, we believe that there are pockets of opportunities for long-term stock appreciation driven by structural demographic shifts, technology adoption, implementation of government policy, improvement in corporate governance, and industry consolidation. Our investment approach remains centered on identifying individual companies that we believe possess sustainable franchises and favorable long-term growth prospects and that trade at significant discounts to their intrinsic value. We are particularly focused on companies that we expect to benefit from long-term changes in how people in emerging markets live and work. Sectors we currently favor include technology and telecom.

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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 (12/31/2016)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)-4.87%17.62%17.62%-2.51%4.16%3.57%7.12%06/10/1996
Class A (at offer)-10.32%10.82%10.82%-4.42%2.93%2.96%6.82%
Institutional Class shares-4.80%17.89%17.89%-2.27%4.43%3.83%7.41%06/10/1996
MSCI Emerging Markets Index (Gross)-4.08%11.60%11.60%-2.19%1.64%2.17%n/a
MSCI Emerging Markets Index (Net)-4.16%11.19%11.19%-2.55%1.28%1.84%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.

Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.

MSCI Emerging Markets Index (view definition)

Expense ratio
Class A (Gross)1.73%
Class A (Net)1.70%
Institutional Class shares (Gross)1.48%
Institutional Class shares (Net)1.45%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursements from May 2, 2016 through May 2, 2017. Please see the fee table in the Fund’s prospectus for more information.

Share class ticker symbols
Institutional ClassDEMIX
Class ADEMAX
Class CDEMCX
Class RDEMRX
Class R6DEMZX
Top 10 holdings as of 01/31/2017
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holdings based by issuer.
Holding% of portfolio
Reliance Industries Ltd5.7%
Samsung Electronics Co Ltd5.2%
SINA Corp/China4.5%
Alibaba Group Holding Ltd3.2%
SK Telecom Co Ltd3.0%
Baidu Inc3.0%
Tencent Holdings Ltd2.9%
Sohu.com Inc2.9%
Coca-Cola Femsa SAB de CV2.8%
Itau Unibanco Holding SA2.3%
Total % Portfolio in Top 10 holdings35.5%

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.

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.

Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies.

All third-party marks cited are the property of their respective owners.

Not FDIC Insured | No Bank Guarantee | May Lose Value