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Delaware Healthcare Fund Quarterly commentary June 30, 2017

Market review

Healthcare stocks continued to experience strong returns during the second quarter of 2017 while plans to repeal the Affordable Care Act (ACA) in both the House of Representatives and the Senate dominated the headlines. Despite continued uncertainty surrounding the prospect of a repeal of the ACA, investors have largely viewed the Senate’s proposed plan with excitement. Returns were positive across all industries within the healthcare sector.

Within the Fund

Among sectors, the Fund’s holdings during the second quarter in small- and mid-cap medical products contributed the most to relative performance due to favorable stock selection. The Fund’s large overweight position in MorphoSys outperformed. MorphoSys is one of the few remaining antibody technology platforms that has not been acquired by a large pharmaceutical company, and shares have performed well due to continued progress on the company’s proprietary cancer pipeline. Further, its psoriasis drug guselkumab is waiting for FDA approval. If approved, it would be the first antibody drug to be released to the market, validating the company’s technology platform. Additionally, the Fund’s overweight stance in Perrigo was positive in terms of asset allocation. Shares of the company recovered after becoming oversold. We continue to believe that the company is fundamentally undervalued and hold a sizeable position in the Fund.

Elsewhere, in the blue-chip medical products sector, the Fund’s lack of exposure to Merck was positive in terms of asset allocation. Although the company has made progress with its immunotherapy drug for cancer, we believe it is fairly valued and continue to hold an underweight position. The Fund’s underweight position in Pfizer also contributed to relative outperformance as its pipeline indicates a lack of growth opportunities. Additionally, the Fund’s overweight position in Sanofi was positive. The company remains one of the strongest blue-chip medical companies and is undervalued.

Other stocks that contributed to performance include Chinese Internet companies, SINA, Changyou.com, and Sohu.com. SINA, Weibo’s controlling shareholder, benefited from Weibo’s outperformance. Weibo reported first quarter revenue and margins that exceeded expectations, demonstrating the social media platform’s monetization potential. Sohu.com’s gaming subsidiary, Changyou, received a nonbinding offer from its chairman to take the company private at a premium to the stock’s market price. The subsequent boost in Changyou’s stock price also benefited shares of Sohu.com.

On the negative side, the Fund’s underweight positions in the healthcare services and pharmaceutical contract research & healthcare information technology sectors were unfavorable in terms of asset allocation.

In the biotechnology sector, shares of Coherus Biosciences underperformed after the company announced in June that the US Food and Drug Administration issued a complete response letter for its biologics license application, delaying the release of its leading drug. Shares of Seattle Genetics also underperformed after the company ended its relationship with Immunomedics following a shareholder revolt at Immunomedics that resulted in both its founder and CEO resigning. That underperformance was mitigated by the Fund’s position in ImmunoGen, which outperformed as a result of significant news about progress on the company’s pipeline.

Outlook

For global healthcare investors, there are risks that short-term legislative and judicial action could overshadow the positive long-term fundamentals of the sector and of specific companies. Nevertheless, we continue to see tremendous long-term opportunities in the global healthcare asset class. The baby-boom generation in the United States is aging, implying expanding demand for healthcare products and services for decades to come. At the same time, the middle class in countries with emerging economies (notably India and China) are growing rapidly, creating significant interest in Western-style medicine. We remain positive on the sector and its growth opportunities.

Looking ahead, we believe that healthcare remains one of the few growth sectors in the economy. With Donald Trump’s presidential victory and Republicans in control of Congress, we expect that there will be changes to or a repeal of the ACA at some point in the future. We believe the market will view this deregulation as a positive for the healthcare sector.

We believe that the underperformance in healthcare last year was a cyclical rotation and that healthcare stocks, particularly biotechnology companies, have corrected and repriced following their bull run that took place well before the rest of the US market began to recover. We believe the correction is largely done and continue to see many attractive opportunities.

We continue putting a premium on disciplined, intensive research when analyzing investment opportunities for the Fund. We favor companies that exhibit such traits as:

  • proven competitiveness
  • seasoned management teams
  • stock valuations that are discounted meaningfully from our estimates of intrinsic value.

These characteristics are part of our daily considerations as we follow our conservative, stock-by-stock approach to portfolio management.

The Russell 3000® Healthcare Index measures the performance of all healthcare holdings included in the Russell 3000 Index, which represents the 3,000 largest US companies based on total market capitalization.

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.

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

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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 delawarefunds.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.

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.

Prior to Jan. 28, 2010, the Fund had not engaged in a broad distribution effort of its shares and had been subject to limited redemption requests. The returns reflect expense limitations that were in effect during certain periods and which may have been lower than the Fund's current expenses. The returns would have been lower without expense limitations.

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 3000® Healthcare Index (view definition)

Top 10 holdings as of 09/30/2017

Holdings are as of the date indicated and subject to change.

List may exclude cash, cash equivalents, and exchanged-traded funds (ETFs) that are used for cash management purposes. Please see the Fund’s complete list of holdings for more information.

Holdings based by issuer.

Holding% of portfolio
MorphoSys AG8.09%
Sanofi7.92%
Chugai Pharmaceutical Co. Ltd.6.01%
Amgen Inc.4.86%
Eli Lilly & Co.4.75%
Pfizer Inc.3.70%
Sohu.com Inc.3.68%
Boston Scientific Corp.3.52%
Gilead Sciences Inc.3.09%
AbbVie Inc.2.79%
Total % Portfolio in Top 10 holdings48.41%

Institutional Class shares available 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 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.

Investing involves risk, including the possible loss of principal.

Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors.

Healthcare companies are subject to extensive government regulation and their profitability can be affected by restrictions on government reimbursement for medical expenses, rising costs of medical products and services, pricing pressure, and malpractice or other litigation.

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

International investments entail risks not ordinarily associated with US 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.

“Nondiversified” funds may allocate more of their net assets to investments in single securities than “diversified” funds. Resulting adverse effects may subject these funds to greater risks and volatility.

Not FDIC Insured | No Bank Guarantee | May Lose Value