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Delaware International Value Equity Fund Quarterly commentary December 31, 2017

Economic developments / market drivers

The global equity markets’ final quarter of 2017 completed a year of remarkable continuity. Confidence inspired by the steady progress of economic developments across most regions overwhelmed an assortment of political uncertainties, producing the strongest yearly global market returns since 2009. Even the weakest regions produced double-digit returns in US dollar terms for the year. Each of the year’s four quarters produced a return well above the long-term median, while the global MSCI All-Country World Index (ACWI) has not seen a negative monthly return since October 2016. The sector performance mix extended the pattern from the third quarter, as positive reversals helped commodity-linked names in the energy and materials sectors join technology shares among the period’s winners, while defensive names in utilities, telecommunications, and healthcare lagged. (Source: MSCI.)

  • Notable developments for the US market included the ongoing transition of Federal Reserve policy toward normalization, including rate increases as well as discussion of balance sheet reduction after years of quantitative easing. Neither bond yields nor the US dollar exhibited notable volatility or a clear directional trend during the fourth quarter, though yields rose and the currency depreciated moderately toward the end of 2017. Underlying economic indicators remained strong, but there was little sign of acceleration in these measures. Interestingly, the passage of tax reform legislation did not correspond to a meaningful deviation of US equity returns versus the market averages, either in absolute terms or in the mix of sectoral leads and lags.
  • The strength of Europe’s economic indicators continued to stand out during the quarter, expanding a divergence that was well established in the first half of the year. Business and consumer sentiment continued to improve as surveys showed ongoing acceleration. Bond yields, however, remained very low. Appreciation of the euro slowed relative to the prior two quarters, and with the European Central Bank expected to pursue a less accommodative monetary policy in future periods, equity market leadership shifted elsewhere, leaving continental European stocks as the world’s laggards, with only modestly positive returns.
  • While producing economic data not quite as robust as Europe’s, Japan’s economy has nevertheless continued to show steady progress against relatively modest expectations. Economic survey data, consumer confidence, labor employment and participation, and gross domestic product (GDP) growth all moved in a more positive direction. Following a relatively muted performance in the third quarter, and with no significant currency contribution, these tailwinds helped propel Japan to global leadership among major regions in the fourth quarter.
  • Emerging markets finished a strong year on a strong note. Placing second or third among major regions in each quarter of the year, the emerging group of countries led the world for the year overall. This strength masked considerable divergence across countries, however, as Mexico and Brazil produced significant negative returns while South Africa, India, and South Korea produced double-digit gains for the quarter in US dollar terms.

Within the Fund

The Fund’s underperformance was primarily due to adverse stock selection. On a sector basis, strong stock selection in consumer discretionary and telecommunications was more than offset by weak stock selection in healthcare, information technology, and financials. Sector allocation was negative, with the favorable effect of an underweight exposure to utilities more than offset by the adverse effect of an underweight exposure to materials. On a regional basis, strong stock selection in Asia Pacific ex Japan was more than offset by weak stock selection in the euro zone, the United Kingdom, and Europe ex euro zone. Regional allocation was positive, with the favorable effect of exposure to emerging markets more than offsetting the adverse effect of an underweight exposure to Asia Pacific ex Japan. Net currency effect was positive primarily due to exposure to the South Korean won.

The Fund’s trading activity during the quarter included trimming positions and redeploying the proceeds at what we viewed as attractive valuations. This activity involved positions across a variety of sectors and regions, but did not result in material changes to the portfolio’s positioning with respect to those measures.

Prospective global market drivers and general outlook

Returning to the theme of continuity, the pattern of economic developments, corporate performance, and equity markets’ responses bears striking similarities to those of the year’s earlier quarters. Consequently, the factors that we monitor in assessing prospective returns were similar to past quarters. With strong equity market gains behind us and market indices setting new highs, we think the durability of the underlying cycles bears examination. As in prior quarters, the most recent period’s strong equity performance took place against an improving economic backdrop. Corporate performance generally kept pace with the year’s strong stock price gains. And in most countries included in MSCI’s developed market indices (the United States was a notable exception), once again quarter-end valuations were lower than they were at both the start of 2017 and the start of the fourth quarter. Price-to-earnings ratios declined over this period in countries as diverse as Australia, France, Spain, Japan, and the UK as underlying earnings performance exceeded gains in share prices (source: MSCI data via FactSet).

While we find aggregate valuation data provide a poor timing tool by themselves, they help define the bounds of probability for prospective performance. These valuation measures suggest greater scope for improvement outside the US, places where valuations are lower and the economic cycle is in a less advanced stage than in this country. According to MSCI data, US stocks as of Dec. 31, 2017 traded at a more expensive valuation on trailing earnings than in all but 12% of the months going back to 1974. By contrast, markets such as Japan or the euro zone still have valuations low enough to support additional price gains before reaching historical norms, while retaining cyclical recovery potential for further market appreciation.

As with the previous quarter, a dearth of potential warning signs from the debt markets is buttressing a positive outlook. Sovereign yield spreads across Europe are generally subdued and tight credit spreads more broadly indicate to us that there is little cause for alarm. Against these positives, we are monitoring the possible sources of cyclical slowdowns in various markets, such as the potential for the appreciating euro to dampen earnings for European exporters, or the effect of lower fiscal stimulus in Japan.

As always, while being mindful of the potential of macro drivers to steer markets both up and down, as managers of concentrated, active portfolios, we remain focused on the power of individual companies to transcend the speculative prospects of the countries in which they happen to be domiciled. We believe the success of strong managements and strong franchises can transcend cyclical noise, and we believe that the qualities that drive this success can be recognized and, when accompanied by attractive valuations, can potentially lead to strong and sustained outperformance.

The MSCI ACWI Index is a free float-adjusted market capitalization weighted index that is designed to measure equity market performance across developed and emerging markets 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.

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

[373044] 01/18

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 EAFE (Europe, Australasia, Far East) Index (view definition)

Top 10 holdings as of 01/31/2018
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
TOTAL33.1%
ITOCHU Corp.3.9%
Vinci S.A.3.7%
Mitsubishi UFJ Financial Group Inc.3.7%
Yue Yuen Industrial Holdings Ltd.3.7%
Toyota Motor Corp.3.2%
Deutsche Post AG3.1%
AXA S.A.3.0%
Novartis AG3.0%
Nordea Bank AB3.0%
Samsung Electronics Co. Ltd.2.8%
Total % Portfolio in Top 10 holdings66.3%

Institutional Class shares available only available to certain investors. See the prospectus for more information.

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.

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

Not FDIC Insured | No Bank Guarantee | May Lose Value