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Delaware Emerging Markets Fund Quarterly commentary September 30, 2017

Overview

The MSCI Emerging Markets Index rose 7.9% (net) during the third quarter of 2017, outpacing developed market equities. Fund flows into emerging markets remained robust, supported by stabilizing economic data, rising earnings expectations, and modest US dollar weakness. Among regions, Latin America significantly outpaced Europe, the Middle East, and Africa (EMEA) and Asia. All sectors delivered positive returns, with real estate, energy, and technology outperforming the most, while telecommunications, industrials, and consumer staples lagged.

Within Latin America, Brazil was the strongest-performing market, rising 22% in US dollar terms. Improving economic data, rising commodity prices, and currency appreciation outweighed political concerns stemming from corruption allegations against President Temer. The consumer discretionary sector performed particularly well. In Peru, equities outperformed as political tensions between the government and the opposition appeared to ease, while growth expectations recovered. In contrast, Mexico underperformed as a major earthquake and North American Free Trade Agreement (NAFTA) negotiations weighed on sentiment despite improving consumer confidence and subsiding inflationary pressures. The industrials sector declined the most, while financials fared relatively well.

Within the EMEA region, performance varied significantly. Russia, Czech Republic, Hungary, and Poland were among the strongest-performing markets, supported by improving economic data and currency appreciation. Russia also benefited from rising energy prices. Greece’s performance was the weakest in the region due to renewed concern about asset quality in the banking sector. Equities in Qatar continued to experience weakness amid ongoing political tension with Saudi Arabia. In Turkey, equities corrected in September following strong year-to-date performance.

China and Thailand were the strongest-performing markets within Asia. China showed continued strength in corporate earnings as well as manufacturing activities. China’s property sector posted the largest gains, with investors becoming increasingly confident in prospects for earnings growth. Meanwhile, the technology sector continued to forge ahead as growth exceeded expectations. Thailand, which had been a laggard, outperformed as its gross domestic product (GDP) forecast was revised upward, driven by improving exports and strength within tourism-related industries. In India, the implementation of a goods and services tax (GST) is expected to provide long-term economic benefits, but in the short-term, corporate earnings have been somewhat disappointing. In South Korea, equities underperformed the region due to political tensions with North Korea and China, as well as policy proposals from President Moon that may adversely affect corporate earnings. There were pockets of outperformance, however, in the energy, healthcare, and materials sectors.

Within the Fund

During the third quarter, China was the main driver of outperformance due to favorable stock selection in the technology sector as several Chinese Internet stocks performed well. SINA posted strong financial results, led by strong user growth in Weibo. Weibo continues to demonstrate the social media platform’s monetization potential. SINA is Weibo’s controlling shareholder. Shares of Sohu.com rose in light of improving performance in its gaming and search businesses. Baidu also performed well as it reported better-than-expected earnings driven by improving margins. We believe that these companies remain well-positioned over the long term to benefit from rising consumption and Internet engagement in China.

Brazil contributed to performance due to favorable asset allocation and stock selection. Shares of B2W Cia Digital appreciated due to optimism arising from the company’s shift in sales strategy and Brazil’s improving economic outlook. We continue to believe that the company is well-positioned for structural growth in Brazil’s e-commerce industry, which is still in its early stages of development.

In Taiwan, the Fund’s underweight allocation along with positive stock selection contributed to performance. MediaTek outperformed as the company has developed lower-cost smartphone chips that are expected to bolster profit margins. Shares of FIT Hon Teng, a recently listed company, rose in sympathy with positive sentiment in the communications sector.

In India, shares of Reliance Industries rose as its core oil and petrochemical business is performing well, while its mobile telecom business continues to gain subscriber market share. We believe that Reliance Industries is among the most cost-competitive refiners and petrochemicals manufacturers globally. We expect the company’s earnings to grow through capacity expansion in these businesses, while we also hold a favorable view of the company’s ventures in telecom and retail.

On the negative side, Mexico was the main detractor from performance driven by unfavorable asset allocation and stock selection. In particular, shares of Coca-Cola FEMSA declined following two earthquakes in the region and several months of stock appreciation. While the recent natural disasters may have a short-term effect on the company’s operations, we retain an optimistic view of the company’s long-term growth prospects in Latin America and Southeast Asia.

South Korea also detracted from performance. The Fund’s investments in the telecommunications sector, namely SK Telecom and LG Uplus, were adversely affected by President Moon’s proposals to lower prices to consumers. In addition, with the Lotte Group in the shadows of the political rift between South Korea and China, shares of Lotte Chilsung Beverage and Lotte Confectionery remain under pressure. Despite these concerns, we believe that the decision to restructure ownership within the group is a positive step toward improving corporate transparency.

On a sector basis, technology was the largest contributor to performance led by several Chinese Internet stocks, noted above, as well as SK Hynix, a South Korean semiconductor manufacturer. SK Hynix benefited from strength in memory chip demand, particularly dynamic random-access memory (DRAM). Real estate was the largest detractor from relative performance due to the Fund’s underweight stance to Chinese property companies, as well as the Fund’s overweight position in Cresud, an Argentinian agricultural company. Telecom also detracted from performance, primarily in South Korea.

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, should 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 South Korea, Brazil, Mexico, and Russia. Conversely, we are currently underweight Taiwan and South Africa. Sectors we currently favor include technology, telecommunications, and consumer staples. We are underweight financials.

Past performance is not an indicator of future results.

Index returns do not reflect 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.

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)

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.

Top 10 holdings as of 09/30/2017
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holdings based by issuer.
Holding% of portfolio
TOTAL37.0%
Reliance Industries Ltd.5.8%
SINA Corp. China4.7%
SK Telecom Co. Ltd.4.4%
Samsung Electronics Co. Ltd.4.3%
Alibaba Group Holding Ltd.3.7%
Tencent Holdings Ltd.3.7%
SK Hynix Inc.3.1%
Sohu.com Inc.2.6%
Coca-Cola Femsa SAB de CV2.4%
JD.com Inc.2.4%
Total % Portfolio in Top 10 holdings74.0%

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.

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.

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