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Delaware Emerging Markets Fund Quarterly commentary March 31, 2017

Market review

The MSCI Emerging Markets Index rose 11.4% during the first quarter of 2017, significantly outpacing developed market returns. Fund flows into emerging markets were strong, supported by stabilizing economic data, rising earnings expectations, modest US dollar weakness, and easing concerns about the Trump administration’s policy agenda. Among regions, Asia outperformed the most, followed closely by Latin America. The EMEA (Europe, Middle East, and Africa) region lagged.

In Asia, India posted the highest quarterly returns. Both India’s equity market and currency have rebounded strongly from the November selloff that was triggered by the government’s surprise demonetization of high-value currency notes. After an initial disruption caused by this move, business activity appeared to have stabilized. In March, the Bharatiya Janata Party (BJP) resoundingly won state elections in Uttar Pradesh. The BJP’s victory appeared to signify popular support for Prime Minister Modi’s reform agenda and seemed to bode well for his re-election prospects in 2019. Sectors geared toward domestic investment performed particularly well, including materials, financials, and industrials.

South Korea nearly matched India’s returns in US dollar terms. Equities rallied in March as the Constitutional Court upheld the impeachment of President Park Geun-hye, averting a prolonged leadership void and setting the stage for presidential elections in May. In addition, robust earnings from Samsung Electronics drove gains in the technology sector.

In China, outperformance was driven by improving economic data and corporate free cash flow, diminished concern about currency depreciation, and strong capital inflows from mainland China into the Hong Kong stock market. Cyclical sectors generally outperformed, including consumer discretionary and materials, while defensive sectors such as consumer staples and telecommunications lagged.

Taiwan performed in line with the broader emerging markets index, aided by currency appreciation against the US dollar. The technology sector outperformed due to growing optimism for Apple’s iPhone 8, expected to be launched later this year. Markets in Southeast Asia posted positive returns, but were relative laggards within Asia.

In Latin America, Mexico led the region’s performance. Equities broadly rebounded as initial fear stemming from Trump’s presidency subsided, while the peso recovered to pre-Trump levels. Chile also outperformed due to optimism surrounding the presidential election in November and rising copper prices. In Brazil, interest rate cuts and currency appreciation drove positive equity returns. The industrials, telecommunications, and financials sectors performed well, while energy underperformed due to muted oil prices. Peru and Colombia lagged. In Peru, corruption scandals related to infrastructure projects weighed on investor sentiment. In Colombia, soft economic data provided a headwind to equities.

EMEA significantly trailed broader emerging markets this quarter. Russian equities declined by 4.6% as oil prices retreated in response to inventory data, adversely affecting energy stocks. Furthermore, ongoing tension between the United States and Russia suggests that economic sanctions are unlikely to be lifted in the near term. In South Africa, an equity rally was derailed when President Jacob Zuma dismissed several cabinet members, reviving political concerns and triggering steep depreciation of the rand. On the positive side, Poland was among the best-performing emerging markets, the result of positive gross domestic product (GDP) data and currency appreciation. Turkish stocks staged a strong rally in January, although further depreciation of the lira blunted these gains.

Among sectors, technology and industrials outperformed the most, while energy and healthcare underperformed.

Within the Fund

China was the main contributor to the Fund’s performance during the quarter, driven by favorable stock selection. Shares of Chinese Internet company SINA rose as its microblogging subsidiary Weibo grew advertising revenue. Shares of Sohu.com also rose as its search subsidiary Sogou may seek an initial public offering.

In Brazil, performance was positive overall. Shares of mobile operator TIM Participacoes rose after the company reported strong fourth-quarter earnings. Shares of Gol Linhas Aereas Inteligentes outperformed due to better-than-expected earnings results. Shares of e-commerce retailer B2W Cia Digital rebounded from a selloff in the fourth quarter, while shares of Itau Unibanco rallied in sympathy with the Brazilian market.

Elsewhere, in India, stock selection was favorable. The Fund’s position in Reliance Industries outperformed as the mobile telecommunications business is retaining more subscribers than expected despite the company ending its free trial offer. In Argentina, shares of Arcos Dorados rose due to robust fourth-quarter sales data and its expansion plans.

In Korea, favorable stock selection drove performance. Shares of LG Electronics rose due to optimism surrounding its latest G6 smartphone. Additionally, shares of telecommunications operators including SK Telecom and LG Uplus outperformed as they are less exposed to rising geopolitical tensions between China and Korea.

On the negative side, Russia detracted the most from performance. The Fund’s overweight position was unfavorable in terms of asset allocation. Moderating oil prices dampened investor sentiment toward the energy sector. Shares of Rosneft, Gazprom, and Transneft declined. Shares of Sberbank of Russia succumbed to profit-taking following a strong rally. In addition, stocks fell as the news and investigations related to Russia and the US election dimmed optimism that US-imposed economic sanctions would be lifted in the near term.

Among sectors, telecommunications contributed to performance due to the Fund’s holdings in TIM Participacoes, SK Telecom, and LG UPlus. In the consumer discretionary sector, the Fund’s holdings in Arcos Dorados, LG Electronics, and B2W Cia Digital boosted performance. In contrast, the Fund’s consumer staples holdings detracted the most from performance due to the Fund’s position in Brasil Foods. Shares of the company declined due to disappointing fourth-quarter results, management changes, and an investigation into meat safety in Brazil. In the utilities sector, shares of Electrobras sold off because of potential risk that a large payment would not materialize.

Outlook

Our positive long-term view on emerging markets remains intact. Despite ongoing political concerns in many parts of the world, we believe that monetary and fiscal policies, coupled with government reform measures, will provide support for emerging economies. We continue to believe that the Chinese economy will muddle through, supported by structural growth in consumption, improvement in living standards, and targeted policies from the government.

Considering the varied macroeconomic backdrop that we see across emerging markets, we believe there are selective 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. Among countries, we currently hold overweight positions in Russia, Brazil, and Mexico. Sectors we currently favor include technology, consumer staples, and telecommunications.

The MSCI Emerging Markets Index measures equity market performance across emerging market countries worldwide. Index "gross" return approximates the maximum possible dividend reinvestment. Index "net" return approximates the minimum possible dividend reinvestment, after deduction of withholding tax at the highest possible rate.

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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.

Average annual total return as of quarter-end (03/31/2017)
Current
quarter
YTD1 year3 year5 year10 yearLifetimeInception
date
Class A (NAV)14.38%14.38%27.53%2.46%4.60%4.65%7.73%06/10/1996
Class A (at offer)7.82%7.82%20.17%0.46%3.37%4.03%7.42%
Institutional Class shares14.50%14.50%27.90%2.73%4.87%4.92%8.02%06/10/1996
MSCI Emerging Markets Index (Gross)11.49%11.49%17.65%1.55%1.17%3.05%n/a
MSCI Emerging Markets Index (Net)11.44%11.44%17.21%1.18%0.81%2.72%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)1.78%
Class A (Net)1.70%
Institutional Class shares (Gross)1.53%
Institutional Class shares (Net)1.45%

Net expense ratio reflects a contractual waiver of certain fees and/or expense reimbursements from March 28, 2017 through March 28, 2018. 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 04/30/2017
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 Ltd7.0%
Samsung Electronics Co Ltd4.8%
SINA Corp/China4.3%
SK Telecom Co Ltd3.5%
Coca-Cola Femsa SAB de CV3.2%
Alibaba Group Holding Ltd3.1%
Tencent Holdings Ltd2.8%
Baidu Inc2.5%
Sohu.com Inc2.3%
Taiwan Semiconductor Manufactu2.1%
Total % Portfolio in Top 10 holdings35.6%

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 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.

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