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  • Adverse macro conditions cloud the Federal Reserve's policy decision
    weakness in commodity export Data Bloomberg Usually foreign exchange reserves are invested in the government debts of the major countries in which liquidity and sovereign credit rating are more favorable The foreign holding of U S Treasurys actually didn t decline since global foreign exchange reserves peaked in June 2014 Foreign official holdings only dropped 70 billion while foreign private entities holding increased 196 billion The disparity between officials and private entities also was different from the last interest rate hiking cycle in 2004 Data Bloomberg Many economists believe that the U S economy is least dependent on external trades among the developed countries The current slow growth and low inflation environment in the U S may still be justified for the Fed to move its policy rate before the next economic downturn arrives However the U S financial market has become more globalized than it was prior to 2007 Using the Barclays Global Aggregate Index U S dollar denominated debts have increased to 45 or 24 trillion from 38 or 15 trillion in 2007 This is another adverse macro condition that the Fed needs to consider before making its policy decision The views expressed represent the Manager s assessment of the market environment as of September 2015 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 Views are subject to change without notice and may not reflect the Manager s views Carefully consider the Funds investment objectives risk factors charges and expenses before investing This and other information can be found in the Funds prospectuses and their summary prospectuses which may be obtained by visiting the fund literature page or calling 800 523 1918 Investors should read the prospectus and the summary prospectus carefully before investing IMPORTANT RISK CONSIDERATIONS Investing involves risk including the possible loss of principal Past performance does not guarantee future results Fixed income securities and bond funds can lose value and investors can lose principal as interest rates rise They also may be affected by economic conditions that hinder an issuer s ability to make interest and principal payments on its debt Bond funds may also be subject to prepayment risk the risk that the principal of a fixed income security that is held by the Fund may be prepaid prior to maturity potentially forcing the Fund to reinvest that money at a lower interest rate 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 The Thomson Reuters CoreCommodity CRB Index is a widely recognized measure of global commodities markets It is made up of 19 components considered to be significant commodities including silver sugar wheat aluminum and soy beans The Barclays Global Aggregate Index provides a broad based

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  • Supportive conditions for value equities in Europe
    targets Attractively low valuations are prevalent as well as higher dividend yields especially versus the United States and Asia Lower multiples are particularly evident for value equities as shown in the chart below View chart Value equities appear attractive to us Close chart Value equities appear attractive to us Generally speaking European growth equities have outperformed value stocks during the past 12 months according to returns posted within the MSCI EAFE Value Index and the MSCI EAFE Growth Index When viewed in relative terms valuations for value equities are therefore attractive Have they reached an inflection point Chart is for comparison purposes only Delaware Investments analysis Monthly observations Note that relative performance is plotted on a cumulative sum basis reflecting excess performance of value equities over growth equities reaching back to a base year of 1983 Index returns are calculated net of taxes this rate of return assumes the minimum possible dividend reinvestment after deduction of withholding tax at the highest possible rate Past performance does not guarantee future results Even in a supportive environment research makes the difference We believe the circumstances listed above are contributing to company specific investment opportunities within the euro zone As bottom up stock pickers we highlight them not because of their lowered costs and improved revenues but because of their nuanced effects on the overall investment landscape These factors carry dramatically different implications at the company level depending on variations in each company s industry positioning and global footprint As global equity managers taking a contrarian approach to bottom up stock selection we use the uncertainty of macroeconomic and valuation cycles to bring to light opportunities at the company level because it is there that we believe careful analysis has the potential to provide positive and relatively consistent returns over the long term The views expressed represent the Manager s assessment of the market environment as of September 2015 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 Views are subject to change without notice and may not reflect the Manager s views Carefully consider the Funds investment objectives risk factors charges and expenses before investing This and other information can be found in the Funds prospectuses and their summary prospectuses which may be obtained by visiting the fund literature page or calling 800 523 1918 Investors should read the prospectus and the summary prospectus carefully before investing IMPORTANT RISK CONSIDERATIONS Investing involves risk including the possible loss of principal Past performance does not guarantee future results The MSCI EAFE Value Index is a subset of the MSCI EAFE Index which measures equity market performance across developed market countries in Europe Australasia and the Far East The MSCI EAFE Value Index consists of those securities classified by MSCI as most representing the value style The MSCI EAFE Growth Index is a subset of the MSCI EAFE Index which measures equity market performance across developed market countries in

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2015/supportive-conditions-for-value-equities (2016-04-26)
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  • The painful path of global debt
    conducted by American economists Carmen Reinhart and Kenneth Rogoff in which they discuss the drag that debt can have on economic growth I believe that we are living the proof of their thesis After expanding moderately in 2014 the world economy has slowed again in 2015 The Bloomberg World Growth Index shown in Chart 4 is reading below 2 It s worth keeping in mind that in the past a world GDP level below 2 has been associated with significant negative economic events This data point assumes Chinese growth of 7 and if the country s economy is actually growing much more slowly as many people suspect the index level could be significantly lower With global monetary policy currently providing significant stimulus countries appear to be able to temporarily cope with elevated levels of debt However the Fed has removed stimulus with the partial wind down of quantitative easing measures It is also attempting to increase short term rates despite slow economic progress here in the United States Due to world debt effects this phenomenon is already causing significant moves in both the commodities and currency markets Small idiosyncratic events seem to be foretelling further issues to come Consider that Greece has been in serial economic crises during the past four years with the severity of the economic situation coming to light this year Several layers of Greek bank debt will be written down in order to absorb the latest bailout monies Puerto Rico has engaged in debt workout talks with creditors Ukraine has just negotiated a partial write down of its outstanding debt and will attempt to receive further debt relief from Russia an important creditor Many energy exploration companies particularly smaller ones are engaged in Chapter 11 workouts or are desperately trying to raise capital to deal with bloated balance sheets in a low oil price environment View chart Chart 4 Global economic growth tapering Chart 4 Global economic growth tapering Close chart Data Bloomberg Analytics Accessed in September 2015 Amid market fragility sensitivity toward risk Moving forward we believe that global markets will experience more idiosyncratic credit events as the global economy continues to slow In light of this we think the following key questions are worthy of consideration when investing Where do I stand in the borrower s capital structure Am I invested in companies that may succumb to growth issues Is my position collateralized or supported by some other credit enhancement We believe that careful assessment of risks such as these is an essential element of active portfolio management amid today s fragile and reactionary markets As such they are key to our portfolio construction process Unconventional central bank policy has fueled volatility and we argue that markets have yet to feel the effects it can have on corporate balance sheets We believe that a fixed income team that is aware of precarious conditions around the world and is ready to manage risks associated with these conditions can be an important partner for fixed income

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  • Still no sign of wage inflation — only a broken link
    unemployment gap and core inflation y 0 1824x 2 21 where y core inflation and x unemployment gap core inflation should have been north of 2 However the actual inflation data show that core personal consumption expenditures PCE has been missing the Fed s 2 target for 38 months and counting see Chart 4 View chart Chart 4 Core inflation remains well below the Fed s long term target Close chart Chart 4 Core inflation remains well below the Fed s long term target Source Bureau of Economic Analysis September 2015 Turning to measures of wage growth there is no indication of imminent upward pressure as implied by a traditional unemployment gap framework In fact wage data also seem to be turning weaker Chart 5 shows average hourly earnings for nonsupervisory workers AHE the Employment Cost Index ECI which measures salaries and benefits and the Bureau of National Affairs Wage Trend Indicator a broad measure of private industry wage trends Note that wages are currently 1 0 1 5 below average levels that existed prior to the global financial crisis Looking at wage trends while the Wage Trend Indicator has been improving it remains below levels consistent with 3 wage growth View chart Chart 5 Wages remain below their long term trend Close chart Chart 5 Wages remain below their long term trend Sources Bureau of Labor Statistics and Bureau of National Affairs September 2015 Finally we want to highlight the changing correlation between wages and inflation The breakdown fits with the decline in union power and the globalization theme Visually inflation and wages were closely moving together prior to the emergence of China and globalization prior to the emergence of China and globalization prior to the emergence of China and globalization which followed the end of the Cold War Chart 6 first panel In the early 1990s the relationship between wages and inflation became noisier This breakdown in correlation is nicely captured in the periodic correlation study shown in the table below the graphs Prior to 1990 the correlation was 0 72 between average hourly earnings and core PCE Between 1990 and 2007 the correlation dropped to 0 07 This period also coincides with the significant divergence between wages and corporate profits as a share of gross domestic product Chart 6 second panel Following the global financial crisis the divergence widened further while the correlation changed sign to a negative 0 61 This supports our view that labor slack remains and negotiating power for higher wages is relatively weak View chart Chart 6 Wages and inflation Close chart Chart 6 Wages and inflation Divergence between wages and corporate profits AHE YOY correlation vs 1965 1990 1990 1990 2007 2009 PCE YOY 0 75 0 17 0 00 0 56 Core PCE YOY 0 72 0 17 0 07 0 61 Data Bureau of Labor Statistics Federal Reserve Bank of St Louis September 2015 Given this backdrop we go back to the July 2015 Federal Open Market Committee FOMC statement

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  • Even after many successes, challenges loom in Japan
    has fallen from 4 3 at the end of 2012 to 3 4 as of June 30 2015 250 000 women were added to the Japanese workforce in June Female employment is now at an all time high Housing starts have increased more than 16 for the year ended June 30 2015 helped by low mortgage rates and increased incomes Return on equity for Japanese companies has steadily increased since 2012 Increasing share buyback programs dividend payments and merger and acquisition activity by Japanese companies indicate management s attention to shareholder returns More outside directors have been appointed to corporate boards The 1 1 trillion Government Pension Investment Fund GPIF had more than 10 times as much money in the JPX Nikkei Index 400 at the end of March than it did a year earlier The GPIF raised allocations to domestic and foreign equities substantially away from domestic bonds For the period ended June 30 2015 the Nikkei 400 returned 14 9 in U S dollar terms through June 30 2015 Since Prime Minister Abe was elected on Dec 12 2012 the Nikkei 225 index has increased by 49 in U S dollar terms for the period ended June 30 2015 The estimated number of international visitors to Japan in June 2015 increased 51 8 from the previous year Data sources ISI Japan Cabinet Office Bloomberg The Wall Street Journal and Japan National Tourist Organization Risks causes for concern Weak global demand and sluggish growth in China could slow Japan s recovery Japanese manufacturing activity contracted slightly in June indicating the economy may have lost some momentum Japan s national debt exceeds 8 6 trillion which is more than 55 of GDP If interest rates rise it could be very difficult to pay down the debt Powerful interest groups representing farmers physicians civil service employees and corporations may continue to oppose Abe s plans Abe s approval rating plunged below 40 in polls taken in July after he presented bills to Japan s Diet to strengthen the country s military Depreciation of the yen has increased exports but raised the price of imports oil which dampens consumer spending However other countries also may weaken their currencies weaken their currencies weaken their currencies as China has recently done A potential currency war could make the competitive environment very difficult for export oriented companies in Japan Last year labor unions voted to reject Abe s proposals designed to make it easier to fire employees Data sources Bloomberg As these reforms are successfully passed into law the government will still need to work with long established cultural traditions that often make change difficult to achieve Although many of the initiatives are ambitious they offer Japan a chance to revive its lackluster economy and become globally competitive once again A key challenge to forecasting performance in today s environment lies in anticipating the interaction of economic activity policy action and market participants perceptions of both We embrace buying opportunities in out of favor names

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  • Recent market volatility has implications from Shanghai to D.C.
    The slowdown in China is real and we expect there to be continued volatility as China s economy adjusts from investment to consumption While the stock market has been a roller coaster the actual economy continues to struggle We have been worried about the emerging markets and China specifically for quite some time so we are overweight the developed markets specifically the U S and underweight emerging markets While this trade was unpopular during the first few months of the year we have started to see it reverse as investors accept lower global growth and search for stable income The United States offers stable income at a discount relative to the globe and as such we remain overweight the U S real estate investment trusts REITs Despite worries about China and a global growth slowdown debt markets continue to operate functionally with liquid access to low cost capital for public real estate companies in developed markets Again we favor these markets in this environment Additionally we note that chasing yield given the performance of REITs utilities and master limited partnerships year to date has underperformed in a down market They were just too expensive and now we are seeing the downside Small Mid Cap Value Equity By Christopher S Beck Situations similar to the one we are currently experiencing do give opportunities to reshuffle some names and high grade the portfolios We do not envision any wholesale dramatic change in sector positioning unless the valuations are favorable to do so We would expect the volatility to continue both up and down until the global financial markets become more stable We believe the current situation most likely rules out any Fed rate increase in September The U S continues to look like the most stable economy and in our view will likely outperform global economies This should be a positive for small caps as they derive more of their revenues from domestic sales than do large caps and mid caps We do not intend to be heroes by trying to pick off bottoms but we will be active in buying higher quality names as they often decline as much as lower quality names due to their having better liquidity The Russell 1000 Value Index measures the performance of the large cap value segment of the U S equity universe It includes those Russell 1000 companies with lower price to book ratios and lower forecasted growth values The S P 500 Index measures the performance of 500 mostly large cap stocks weighted by market value and is often used to represent performance of the U S stock market Carefully consider the Funds investment objectives risk factors charges and expenses before investing This and other information can be found in the Funds prospectuses and their summary prospectuses which may be obtained by visiting the fund literature page or calling 800 523 1918 Investors should read the prospectus and the summary prospectus carefully before investing IMPORTANT RISK CONSIDERATIONS Investing involves risk including the possible loss of principal Past performance does not guarantee future results Investments in small and or medium sized companies typically exhibit greater risk and higher volatility than larger more established companies 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 Fixed income securities and bond funds can lose value and investors can lose principal as interest rates rise They also may be affected by economic conditions that hinder an issuer s ability to make interest and principal payments on its debt The Funds may also be subject to prepayment risk the risk that the principal of a fixed income security that is held by the Funds may be prepaid prior to maturity potentially forcing the Funds to reinvest that money at a lower interest rate Substantially all dividend income derived from tax free funds is exempt from federal income tax Some income may be subject to the federal alternative minimum tax AMT that applies to certain investors Capital gains if any are taxable Diversification may not protect against market risk Information is as of the date indicated and subject to change All third party marks cited are the property of their respective owners J David Hillmeyer Senior Portfolio Manager View bio See all from this author See all from this team J David Hillmeyer biography J David Hillmeyer CFA Senior Vice President Senior Portfolio Manager J David Hillmeyer is a member of the firm s taxable fixed income portfolio management team He is responsible for portfolio construction and asset allocation of the diversified floating rate strategy and serves as co portfolio manager for the fixed rate multisector core plus and investment grade corporate bond strategies Prior to joining Delaware Investments in August 2007 as a vice president and corporate bond trader he worked for more than 11 years in various roles at Hartford Investment Management Company including senior corporate bond trader high yield portfolio manager trader and quantitative analyst He began his career as an investment advisor in January 1989 at Shawmut Bank leaving the firm as an investment officer in November 1995 Hillmeyer earned his bachelor s degree from Colorado State University and he is a member of the CFA Society of Philadelphia and the Philadelphia Council for Business Economics Francis X Morris CIO Core Equity View bio More from Francis X Morris Small cap companies remain fundamentally healthy Mergers and acquisitions More volume on the horizon Valuation and correlation See all from this author See all from this team Francis X Morris biography Francis X Morris Senior Vice President Chief Investment Officer Core Equity Francis X Morris joined Delaware Investments in 1997 as a vice president and portfolio manager and is currently the chief investment officer for Core Equity investments He is also a member of the firm s

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2015/recent-market-volatility-has-implications-from-shanghai-to-dc (2016-04-26)
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  • Housing recovery in closer view
    observations Mortgages are slightly easier to obtain Mortgage availability remains fairly tight but it has shown some signs of loosening The Mortgage Bankers Association s Mortgage Credit Availability Index improved to 122 in June 2015 from a baseline of 100 in March 2012 That said one notable obstacle to mortgage issuance is in play in the form of student loan debt Since 2004 outstanding student loan debt has swollen from slightly more than 300 billion to more than 1 trillion data U S Federal Reserve This has created challenges for potential home buyers who may be precluded from receiving mortgages due to heavy student loan obligations While it is not easy to see what will change the trajectory of student loan balances we believe that an improving employment market together with easing lending standards will mitigate some of the headwinds related to student debt Positive indications from employment and first time buyers While improvements in the overall U S unemployment rate get a lot of attention we are seeing positive signs in the key 25 to 34 year old demographic The unemployment rate for this age group declined from 6 5 in June 2014 to 5 6 in June 2015 data Bureau of Labor Statistics While there still may be a trend toward underemployment in this demographic healthier employment levels and wage growth may build this cohort s confidence in taking the plunge toward homeownership We have seen evidence that the first time buyer is coming back to the market perhaps spurred by some of the aforementioned factors According to the National Association of Realtors NAR the percentage of first time buyers of existing homes has remained at or above 30 for four consecutive months which is a positive trend not seen since 2012 These levels remain below the long term average of 40 but sales are moving in the right direction An improving rate of first time home buyers will be necessary to help housing sales and homeownership rates move back toward long term averages Cautious optimism as we move ahead The U S housing market is not without its share of complications but we believe that on the whole it is becoming more constructive As discussed above relevant indicators are showing positive readings Taken together these factors could likely lend a measure of support to the housing markets in coming quarters As it relates to the overall economy residential construction represents a relatively small yet important portion of gross domestic product GDP According to the U S Bureau of Economic Analysis residential construction currently represents 3 1 of GDP well below the longer term average of roughly 4 3 If housing demand continues to rebound as we expect we believe construction levels will slowly make their way back toward their long term averages providing a tailwind to the U S economy and helping sustain today s recovery At this writing the Delaware Investments Small Cap Value Mid Cap Value Equity team believes that shares of U S homebuilders

    Original URL path: http://www.delawareinvestments.com/individual-investors/literature/insights/2015/housing-recovery-in-closer-view (2016-04-26)
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  • Corporate spending tilted toward shareholder-friendly activities
    up much faster than earnings That can be the unexpected tailwind for stocks over the next couple of years People are looking for what may make stocks go in what is probably going to be a very modest economic growth environment Dividend growth that s well in excess of earnings would be a positive for the market and certainly for those individual stocks The views expressed represent the Manager s assessment of the market environment as of August 2015 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 Views are subject to change without notice and may not reflect the Manager s current views The views expressed are general in nature and do not relate to a particular mutual fund Information is as of the date indicated and subject to change Carefully consider the Funds investment objectives risk factors charges and expenses before investing This and other information can be found in the Funds prospectuses and their summary prospectuses which may be obtained by visiting the fund literature page or calling 800 523 1918 Investors should read the prospectus and the summary prospectus carefully before investing IMPORTANT RISK CONSIDERATIONS Investing involves risk including the possible loss of principal Past performance does not guarantee future results Investments in small and or medium sized companies typically exhibit greater risk and higher volatility than larger more established companies Kelley A McKee Portfolio Manager Equity Analyst View bio More from Kelley A McKee Optimism amid slower growth in manufacturing Capital spending In search of momentum Active investing in the small cap space See all from this author See all from this team Kelley A McKee biography Kelley A McKee CFA Vice President Portfolio Manager Equity Analyst Kelley A McKee is a portfolio manager for the Small Cap Value Mid Cap Value Equity team she joined the team in July 2005 as an equity analyst She is responsible for the analysis purchase and sale recommendations of basic industry capital spending and utilities securities for the firm s Small Cap Value Mid Cap Value portfolios Prior to joining Delaware Investments she participated in Lincoln Financial Group s rotational Professional Development Program for three years McKee earned a bachelor s degree in finance from Georgetown University and an MBA from The Wharton School of the University of Pennsylvania Christopher S Beck CIO Small Cap Value Mid Cap Value Equity View bio More from Christopher S Beck M A activity s record year Reasons for continued optimism Recent market volatility has implications from Shanghai to D C Earnings point to continued modest growth See all from this author See all from this team Christopher S Beck biography Christopher S Beck CFA Senior Vice President Chief Investment Officer Small Cap Value Mid Cap Value Equity Christopher S Beck leads the firm s Small Cap Value Mid Cap Value Equity team Prior to joining Delaware Investments in 1997 as a vice president and senior

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