Subject to seeking best execution, the Fund may direct certain security trades to brokers who have agreed to rebate a portion of the related brokerage commission to the Fund in cash. Such commission rebates are included in realized gain on investments in the accompanying financial statements and totaled $12,491 for the six months ended October 31, 2009. In general, best execution refers to many factors, including the price paid or received for a security, the commission charged, the promptness and reliability of execution, the confidentiality and placement accorded the order, and other factors affecting the overall benefit obtained by the Fund on the transaction.
The Fund receives earnings credits from its custodian when positive cash balances are maintained, which are used to offset custody fees. There were no earnings credits for the six months ended October 31, 2009.
On July 1, 2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting Standards Codification (the Codification). The Codification became the single source of authoritative nongovernmental U.S. GAAP, superseding existing literature of the FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other sources. The Codification is effective for interim and annual periods ending after September 15, 2009. The Fund adopted the Codification for the six months ended October 31, 2009. There was no impact to financial statements as the codification requirements are disclosure-only in nature.
Management has evaluated whether any transactions or events occurred subsequent to October 31, 2009 through December 25, 2009, the date of issuance of the Fund’s financial statements, and determined that there were no material events or transactions that would require recognition or disclosure in the Fund’s financial statements.
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Fund pays Delaware Management Company (DMC), a series of Delaware Management Business Trust and the investment manager, an annual fee which is calculated daily at the rate of 0.75% on the first $500 million of average daily net assets of the Fund, 0.70% on the next $500 million, 0.65% on the next $1.5 billion, and 0.60% on average daily net assets in excess of $2.5 billion.
Effective September 1, 2009, DMC has voluntarily agreed to waive that portion, if any, of its management fee and reimburse the Fund to the extent necessary to ensure that total annual operating expenses (excluding any 12b-1 plan expenses, taxes, interest, inverse floater program expenses, short sale and dividend interest expenses, brokerage fees, certain insurance costs, and nonroutine expenses or costs including, but not limited to, those relating to reorganizations, litigation, conducting shareholder meetings, and liquidations do not exceed 1.25% of average daily net assets of the Fund until such time as the waiver is discontinued. This expense waiver and reimbursement applies only to expenses paid directly by the Fund, and may be discontinued at any time because it is voluntary. Prior to September 1, 2009, DMC had contractually agreed to waive its management fee to the extent necessary to ensure that total annual operating expenses did not exceed 1.25% of the Fund’s average daily net assets.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to the Fund. For these services, the Fund pays DSC fees based on the aggregate daily net assets of the Delaware Investments® Family of Funds at the following annual rate: 0.0050% of the first $30 billion; 0.0045% of the next $10 billion; 0.0040% of the next $10 billion; and 0.0025% of aggregate average daily net assets in excess of $50 billion. The fees payable to DSC under the service agreement described above are allocated among all Funds in the Delaware Investments Family of Funds on a relative net asset value basis. For the six months ended October 31, 2009, the Fund was charged $5,914 for these services.
DSC also provides dividend disbursing and transfer agency services. The Fund pays DSC a monthly fee based on the number of shareholder accounts for dividend disbursing and transfer agent services.
Pursuant to a distribution agreement and distribution plan, the Fund pays DDLP, the distributor and an affiliate of DMC, an annual distribution and service fee not to exceed 0.25% of the average daily net assets of the Class A shares, 1.00% of the average daily net assets of the Class B and C shares and 0.60% of the average daily net assets of the Class R shares. Institutional Class shares pay no distribution and service expenses. DDLP has contracted to limit the Class R shares 12b-1 fees through August 31, 2010 to no more than 0.50% of average daily net assets.
27
Notes to financial statements
Delaware Select Growth Fund
2. Investment Management, Administration Agreements and Other Transactions with Affiliates (continued)
At October 31, 2009, the Fund had liabilities payable to affiliates as follows:
| Investment management fee payable to DMC | $ | 99,042 |
| Dividend disbursing, transfer agent and fund accounting | | |
| oversight fees and other expenses payable to DSC | | 109,023 |
| Distribution fees payable to DDLP | | 66,111 |
| Other expenses payable to DMC and affiliates* | | 6,729 |
*DMC, as part of its administrative services, pays operating expenses on behalf of the Fund and is reimbursed on a periodic basis. Such expenses include items such as printing of shareholder reports, fees for audit, legal and tax services, registration fees and trustees’ fees.
As provided in the investment management agreement, the Fund bears the cost of certain legal and tax services, including internal legal and tax services provided to the Fund by DMC and/or its affiliates’ employees. For the six months ended October 31, 2009, the Fund was charged $8,418 for internal legal and tax services provided by DMC and/or its affiliates’ employees.
For the six months ended October 31, 2009, DDLP earned $8,403 for commissions on sales of the Fund’s Class A shares. For the six months ended October 31, 2009, DDLP received gross CDSC commissions of $-, $6,375 and $806 on redemption of the Fund’s Class A, Class B and Class C shares, respectively, and these commissions were entirely used to offset up-front commissions previously paid by DDLP to broker/dealers on sales of those shares.
Trustees’ fees include expenses accrued by the Fund for each Trustee’s retainer and meeting fees. Certain officers of DMC, DSC and DDLP are officers and/or Trustees of the Trust. These officers and trustees are paid no compensation by the Fund.
3. Investments
For the six months ended October 31, 2009, the Fund made purchases of $52,878,294 and sales of $37,174,747 of investment securities other than short-term investments.
At October 31, 2009, the cost of investments for federal income tax purposes has been estimated since final tax characteristics cannot be determined until fiscal year end. At October 31, 2009, the cost of investments was $274,830,808. At October 31, 2009, the net unrealized appreciation was $26,707,483, of which $42,452,671 related to unrealized appreciation of investments and $15,745,188 related to unrealized depreciation of investments.
The Fund applies the provisions, as amended to date, of Accounting Standards Codification 820 (ASC 820), Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that the Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. ASC 820 also establishes a framework for measuring fair value, and a three level hierarchy for fair value
28
measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The Fund’s investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-tier hierarchy of inputs is summarized below.
Level 1 – inputs are quoted prices in active markets
Level 2 – inputs are observable, directly or indirectly
Level 3 – inputs are unobservable and reflect assumptions on the part of the reporting entity
The following table summarizes the valuation of the Fund’s investments by the ASC 820 fair value hierarchy levels as of October 31, 2009:
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Common Stock | $ | 247,187,936 | | $ | 7,560,027 | | $ | — | | $ | 254,747,963 |
| Short-Term | | — | | | 9,976,015 | | | — | | | 9,976,015 |
| Securities Lending Collateral | | 21,447,237 | | | 15,366,977 | | | 99 | | | 36,814,313 |
| Total | $ | 268,635,173 | | $ | 32,903,019 | | $ | 99 | | $ | 301,538,291 |
| Derivatives | $ | — | | $ | 2,896 | | $ | — | | $ | 2,896 |
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:
| | | Securities Lending |
| | | Collateral |
| Balance as of 4/30/09 | | | $99 | |
| Balance as of 10/31/09 | | | $99 | |
4. Dividend and Distribution Information
Income and long-term capital gain distributions are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. Additionally, distributions from net gains on foreign currency transactions and net short-term gains on sales of investment securities are treated as ordinary income for federal income tax purposes. There were no dividends and distributions paid for the six months ended October 31, 2009 and the year ended April 30, 2009.
29
Notes to financial statements
Delaware Select Growth Fund
5. Components of Net Assets on a Tax Basis
The components of net assets are estimated since final tax characteristics cannot be determined until fiscal year end. As of October 31, 2009, the estimated components of net assets on a tax basis were as follows:
| Shares of beneficial interest | $ | 859,417,039 | |
| Realized losses 5/1/09 – 10/31/09 | | (39,743,503 | ) |
| *Capital loss carryforwards as 4/30/09 | | (583,734,939 | ) |
| Unrealized appreciation of investments | | | |
| and foreign currencies | | 26,680,226 | |
| Net assets | $ | 262,618,823 | |
*The amount of this loss which can be utilized in subsequent years may be subject to an annual limitation in accordance with the Internal Revenue Code due to the Fund merger with Delaware Technology and Innovation Fund in March 2004.
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales and mark-to-market of forward foreign currency contracts.
For financial reporting purposes, capital accounts are adjusted to reflect the tax character of permanent book/tax differences. Reclassifications are primarily due to tax treatment of net operating losses and gain (loss) on foreign currency transactions. Results of operations and net assets were not affected by these reclassifications. For the six months ended October 31, 2009, the Fund recorded an estimate of these differences since final tax characteristics cannot be determined until fiscal year end.
| Paid-in capital | $ | (1,357,039 | ) |
| Accumulated net realized gain | | 97,251 | |
| Accumulated net investment loss | | 1,259,788 | |
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. Capital loss carry forwards remaining at April 30, 2009 will expire as follows: $357,796,276 expires in 2010, $185,917,705 expires in 2011, $18,530,411 expires in 2012, and $21,490,547 expires in 2017.
For the six months ended October 31, 2009, the Fund had capital losses of $39,743,503, which may increase the capital loss carryforwards.
30
6. Capital Shares
Transactions in capital shares were as follows:
| Six Months | | Year |
| Ended | | Ended |
| 10/31/09 | | 4/30/09 |
| Shares sold: | | | | | |
| Class A | 450,540 | | | 1,557,580 | |
| Class B | 5,626 | | | 17,122 | |
| Class C | 43,573 | | | 111,377 | |
| Class R | 1,946 | | | 4,546 | |
| Institutional Class | 2,153,259 | | | 1,968,498 | |
| 2,654,944 | | | 3,659,123 | |
| |
| Shares repurchased: | | | | | |
| Class A | (549,446 | ) | | (1,651,316 | ) |
| Class B | (337,353 | ) | | (1,618,162 | ) |
| Class C | (145,288 | ) | | (579,812 | ) |
| Class R | (3,575 | ) | | (15,373 | ) |
| Institutional Class | (751,114 | ) | | (575,418 | ) |
| (1,786,776 | ) | | (4,440,081 | ) |
| Net increase (decrease) | 868,168 | | | (780,958 | ) |
For the six months ended October 31, 2009 and the year ended April 30, 2009, 222,393 Class B shares were converted to 198,166 Class A shares valued at $4,260,583 and 1,015,729 Class B shares were converted to 910,682 Class A shares valued at $20,207,902, respectively. The respective amounts are included in Class B redemptions and Class A subscriptions in the table above and the statements of changes in net assets.
7. Line of Credit
The Fund, along with certain other funds in the Delaware Investments® Family of Funds (Participants), participates in a $35,000,000 revolving line of credit with The Bank of New York Mellon (BNY Mellon) to be used for temporary or emergency purposes as an additional source of liquidity to fund redemptions of investor shares. Under the agreement, the Participants are charged an annual commitment fee, which is allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants may borrow up to a maximum of one third of their net assets under the agreement. The agreement expires on November 16, 2010. The Fund had no amounts outstanding as of October 31, 2009 or at any time during the period then ended.
31
Notes to financial statements
Delaware Select Growth Fund
8. Foreign Currency Exchange Contracts
The Fund may enter into foreign currency exchange contracts as a way of managing foreign exchange rate risk. The Fund may enter into these contracts to fix the U.S. dollar value of a security that it has agreed to buy or sell for the period between the date the trade was entered into and the date the security is delivered and paid for. The Fund may also use these contracts to hedge the U.S. dollar value of securities it already owns that are denominated in foreign currencies. The change in value is recorded as an unrealized gain or loss. When the contract is closed, a realized gain or loss is recorded equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed.
The use of foreign currency exchange contracts does not eliminate fluctuations in the underlying prices of the securities, but does establish a rate of exchange that can be achieved in the future. Although foreign currency exchange contracts limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency increase. In addition, the Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts. The Fund’s maximum risk of loss from counterparty credit risk is the value of its currency exchanged with the counterparty. The risk is generally mitigated by having a netting arrangement between the Fund and the counterparty and by the posting of collateral by the counterparty to the Fund to cover the Fund’s exposure to the counterparty.
9. Securities Lending
The Fund, along with other funds in the Delaware Investments® Family of Funds, may lend its securities pursuant to a security lending agreement (Lending Agreement) with BNY Mellon. With respect to each loan, if the aggregate market value of securities collateral held plus cash collateral received on any business day is less than the aggregate market value of the securities which are the subject of such loan, the borrower will be notified to provide additional collateral not less than the applicable collateral requirements. Cash collateral received is generally invested in the Mellon GSL DBT II Collateral Fund (Collective Trust) established by BNY Mellon for the purpose of investment on behalf of clients participating in its securities lending programs. The Collective Trust may invest in fixed income securities, with a weighted average maturity not to exceed 90 days, rated in one of the top three tiers by Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc. or repurchase agreements collateralized by such securities. The Collective Trust seeks to maintain a net asset value per unit of $1.00, but there can be no assurance that it will always be able to do so. At October 31, 2009, the Collective Trust held only cash and assets with a maturity of one business day or less (Cash/Overnight Assets). The Fund may incur investment losses as a result of investing securities lending collateral in the Collective Trust. This could occur if an investment in the Collective Trust defaulted or if it were necessary to liquidate assets in the Collective Trust to meet returns on outstanding security loans at a time when the Collective Trust’s net asset value per unit was less than $1.00. Under those circumstances, the Fund may not receive an amount from the Collective Trust that is equal in amount to the collateral the Fund would be required to return to the borrower of the securities and the Fund
32
would be required to make up for this shortfall. Effective April 20, 2009, BNY Mellon transferred the assets of the Collective Trust other than the Cash/Overnight Assets to the BNY Mellon SL DBT II Liquidating Fund (Liquidating Fund), effectively bifurcating the collateral investment pool. The Fund’s exposure to the Liquidating Fund is expected to decrease as the Liquidating Fund’s assets mature or are sold. In October 2008, BNY Mellon transferred certain distressed securities from the Collective Trust into the Mellon GSL Reinvestment Trust II. The Fund can also accept U.S. government securities and letters of credit (non-cash collateral) in connection with securities loans. In the event of default or bankruptcy by the lending agent, realization and/or retention of the collateral may be subject to legal proceedings. In the event the borrower fails to return loaned securities and the collateral received is insufficient to cover the value of the loaned securities and provided such collateral shortfall is not the result of investment losses, the lending agent has agreed to pay the amount of the shortfall to the Fund, or at the discretion of the lending agent, replace the loaned securities. The Fund continues to record dividends or interest, as applicable, on the securities loaned and is subject to change in value of the securities loaned that may occur during the term of the loan. The Fund has the right under the Lending Agreement to recover the securities from the borrower on demand. With respect to security loans collateralized by non-cash collateral, the Fund receives loan premiums paid by the borrower. With respect to security loans collateralized by cash collateral, the earnings from the collateral investments are shared among the Fund, the security lending agent and the borrower. The Fund records security lending income net of allocations to the security lending agent and the borrower.
At October 31, 2009, the value of the securities on loan was $37,021,319, for which cash collateral was received and invested in accordance with the Lending Agreement. Such investments are presented on the statement of net assets under the caption “Securities Lending Collateral.”
10. Credit and Market Risk
The Fund invests a significant portion of its assets in small- and mid-sized companies and may be subject to certain risks associated with ownership of securities of such companies. Investments in small- or mid-sized companies may be more volatile than investments in larger companies for a number of reasons, which include more limited financial resources or a dependence on narrow product lines.
Some countries in which the Fund may invest require governmental approval for the repatriation of investment income, capital or the proceeds of sales of securities by foreign investors. In addition, if there is deterioration in a country’s balance of payments or for other reasons, a country may impose temporary restrictions on foreign capital remittances abroad.
The securities exchanges of certain foreign markets are substantially smaller, less liquid and more volatile than the major securities markets in the United States. Consequently, acquisition and disposition of securities by the Fund may be inhibited. In addition, a significant portion of the aggregate market value of equity securities listed on the major securities exchanges in emerging markets is held by a smaller number of investors. This may limit the number of shares available for acquisition or disposition by the Fund.
33
Notes to financial statements
Delaware Select Growth Fund
10. Credit and Market Risk (continued)
The Fund may invest up to 15% of its net assets in illiquid securities, which may include securities with contractual restrictions on resale, securities exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and other securities which may not be readily marketable. The relative illiquidity of these securities may impair the Fund from disposing of them in a timely manner and at a fair price when it is necessary or desirable to do so. While maintaining oversight, the Fund’s Board has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of the Fund’s limitation on investments in illiquid assets. Securities eligible for resale pursuant to Rule 144A, which are determined to be liquid, are not subject to the Fund’s 15% limit on investments in illiquid securities. As of October 31, 2009, there were no Rule 144A securities. Illiquid securities have been identified on the statement of net assets.
11. Contractual Obligations
The Fund enters into contracts in the normal course of business that contain a variety of indemnifications. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts. Management has reviewed the Fund’s existing contracts and expects the risk of loss to be remote.
12. Sale of Delaware Investments to Macquarie Group
On August 18, 2009, Lincoln National Corporation (parent company of Delaware Investments) and Macquarie Group (Macquarie) entered into an agreement pursuant to which Delaware Investments, including DMC, DDLP, and DSC, will be acquired by Macquarie, an Australia-based global provider of banking, financial, advisory, investment and funds management services (Transaction). Upon completion of the Transaction, DMC, DDLP and DSC will be wholly-owned subsidiaries of Macquarie.
The Transaction will result in a change of control of DMC which, in turn, will cause the termination of the investment advisory agreement between DMC and the Fund. As a result, a Special Meeting of Shareholders (Meeting) of the Fund has been scheduled for the purpose of asking shareholders to approve a new investment advisory agreement between DMC and the Fund (New Agreement). If approved by shareholders, the New Agreement will take effect upon the closing of the Transaction, which is currently anticipated to occur on or about December 31, 2009. Shareholders of the Fund will receive proxy materials including more detailed information about the Meeting, the Transaction and the proposed New Agreement.
34
Other Fund information
(Unaudited)
Delaware Select Growth Fund
Board Consideration of Delaware Select Growth Fund Investment Advisory Agreement
At a meeting held on May 19-21, 2009 (the “Annual Meeting”), the Board of Trustees (the “Board”), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreement for the Delaware Select Growth Fund (the “Fund”). In making its decision, the Board considered information furnished specifically in connection with the renewal of the Investment Advisory Agreement with Delaware Management Company (“DMC”), which included materials provided by DMC and its affiliates (“Delaware Investments”) concerning, among other things, the nature, extent and quality of services provided to the Fund, the costs of such services to the Fund, economies of scale and the financial condition and profitability of Delaware Investments. Reference was made to information furnished at regular quarterly Board meetings, including reports detailing Fund performance, investment strategies and expenses, as well as information prepared specifically in connection with the renewal of the investment advisory and sub-advisory contracts. In addition, in connection with the Annual Meeting, reports were provided in February 2009 and included independent historical and comparative reports prepared by Lipper Inc. (“Lipper”), an independent statistical compilation organization. The Lipper reports compared the Fund’s investment performance and expenses with those of other comparable mutual funds. The independent Trustees reviewed and discussed the Lipper reports with counsel to the independent Trustees. The Board requested and received information regarding DMC’s policy with respect to advisory fee levels and its breakpoint philosophy; the structure of portfolio manager compensation; the investment manager’s profitability; and any constraints or limitations on the availability of securities in certain investment styles which had in the past year inhibited, or which were likely in the future to inhibit, DMC’s ability to invest fully in accordance with Fund policies.
In considering information relating to the approval of the Fund’s advisory agreement, the independent Trustees received assistance and advice from and met separately with counsel to the independent Trustees. Although the Board gave attention to all information furnished, the following discussion identifies, under separate headings, the primary factors taken into account by the Board during its contract renewal considerations.
Nature, Extent and Quality of Service. The Board considered the services provided by Delaware Investments to the Fund and its shareholders. In reviewing the nature, extent and quality of services, the Board considered reports furnished to it throughout the year, which covered matters such as the relative performance of the Fund, compliance of portfolio managers with the investment policies, strategies and restrictions for the Fund, compliance by DMC and Delaware Distributors, L.P. (together, “Management”) personnel with the Code of Ethics adopted throughout the Delaware Investments Family of Funds complex and adherence to fair value pricing procedures as established by the Board. The Board was pleased with the current staffing of the Fund’s investment advisor and the emphasis placed on research in the investment process. The Board gave favorable consideration to DMC’s efforts to control expenditures while maintaining service levels committed to fund matters. The Board also considered the transfer agent and shareholder services provided to Fund shareholders by DMC’s affiliate, Delaware Service
35
Other Fund information
(Unaudited)
Delaware Select Growth Fund
Board Consideration of Delaware Select Growth Fund Investment Advisory Agreement (continued)
Company, Inc. (“DSC”), noting DSC’s high level of service. The Board noted that Management finished upgrading investment accounting functions through outsourcing to improve the quality and lower the cost of delivering investment accounting services to the Fund. The Board once again noted the benefits provided to Fund shareholders through each shareholder’s ability to exchange an investment in one Delaware Investments fund for the same class of shares in another Delaware Investments fund without a sales charge, to reinvest Fund dividends into additional shares of the Fund or into additional shares of other Delaware Investments funds and the privilege to combine holdings in other Delaware Investments funds to obtain a reduced sales charge. The Board was satisfied with the nature, extent and quality of the overall services provided by Delaware Investments.
Investment Performance. The Board placed significant emphasis on the investment performance of the Fund in view of its importance to shareholders. Although the Board gave appropriate consideration to performance reports and discussions with portfolio managers at Board meetings throughout the year, the Board gave particular weight to the Lipper reports furnished for the Annual Meeting. The Lipper reports prepared for the Fund showed the investment performance of its Class A shares in comparison to a group of similar funds as selected by Lipper (the “Performance Universe”). A fund with the best performance ranked first, and a fund with the poorest performance ranked last. The highest/best performing 25% of funds in the Performance Universe make up the first quartile; the next 25%, the second quartile; the next 25%, the third quartile; and the poorest/worst performing 25% of funds in the Performance Universe make up the fourth quartile. Comparative annualized performance for the Fund was shown for the past one-, three-, five- and ten-year periods ended December 31, 2008. The Board’s objective is that the Fund’s performance for the periods considered be at or above the median of its Performance Universe. The following paragraph summarizes the performance results for the Fund and the Board’s view of such performance.
The Performance Universe for the Fund consisted of the Fund and all retail and institutional multi-cap growth funds as selected by Lipper. The Lipper report comparison showed that the Fund’s total return for the one- and ten-year periods was in the third quartile of its Performance Universe. The report further showed that the Fund’s total return for the three- and five-year periods was in the fourth quartile. The Fund’s performance results were not in line with the Board’s objective. However, in evaluating the Fund, the Board considered improvements in relative performance in 2008 and early 2009 as well as Management’s efforts to increase portfolio management depth. The Board was satisfied that Management was taking action to improve Fund performance and to meet the Board’s performance objective.
Comparative Expenses. The Board considered expense comparison data for the Delaware Investments Family of Funds. Management provided the Board with information on pricing levels and fee structures for the Fund as of October 31, 2008 and, for comparative funds, information
36
as of their respective fiscal year end occurring on or before August 31, 2008. The Board also focused on the comparative analysis of effective management fees and total expense ratios of the Fund versus effective management fees and expense ratios of a group of similar funds as selected by Lipper (the “Expense Group”). In reviewing comparative costs, the Fund’s contractual management fee and the actual management fee incurred by the Fund were compared with the contractual management fees (assuming all funds in the Expense Group were similar in size to the Fund) and actual management fees (as reported by each fund) within the Expense Group, taking into account any applicable breakpoints and fee waivers. The Fund’s total expenses were also compared with those of its Expense Group. The Lipper total expenses, for comparative consistency, were shown by Lipper for Class A shares and comparative total expenses including 12b-1 and non 12b-1 service fees. The Board considered fees paid to Delaware Investments for nonmanagement services. The Board’s objective is to limit the Fund’s total expense ratio to be competitive with that of the Expense Group. The following paragraph summarizes the expense results for the Fund and the Board’s view of such expenses.
The expense comparisons for the Fund showed that its actual management fee was in the quartile with the lowest expenses of its Expense Group and its total expenses were in the quartile with the highest expenses of its Expense Group. The Board gave favorable consideration to the Fund’s management fee, but noted that the Fund’s total expenses were not in line with the Board’s objective. In evaluating the total expenses, the Board considered fee waivers in place through August 2009 and various initiatives implemented by Management, such as the outsourcing of certain transfer agency and investment accounting services, creating an opportunity for a reduction in expenses. The Board was satisfied with Management’s efforts to improve the Fund’s total expense ratio and bring it in line with the Board’s objective.
Management Profitability. The Board considered the level of profits realized by Delaware Investments in connection with the operation of the Fund. In this respect, the Board reviewed the Investment Management Profitability Analysis that addressed the overall profitability of Delaware Investments’ business in providing management and other services to each of the individual funds and the Delaware Investments Family of Funds as a whole. Specific attention was given to the methodology followed in allocating costs for the purpose of determining profitability. Management stated that the level of profits of Delaware Investments, to a certain extent, reflect recent operational cost savings and efficiencies initiated by Delaware Investments. The Board considered Delaware Investments’ efforts to improve services provided to fund shareholders and to meet additional regulatory and compliance requirements resulting from recent industry-wide Securities and Exchange Commission initiatives. The Board also considered the extent to which Delaware Investments might derive ancillary benefits from fund operations, including the potential for procuring additional business as a result of the prestige and visibility associated with its role as service provider to the Delaware Investments Family of Funds and the benefits from allocation of fund brokerage to improve trading efficiencies. The Board found that the management fees were reasonable in light of the services rendered and the level of profitability of Delaware Investments.
37
Other Fund information
(Unaudited)
Delaware Select Growth Fund
Board Consideration of Delaware Select Growth Fund Investment Advisory Agreement (continued)
Economies of Scale. The Trustees considered whether economies of scale are realized by Delaware Investments as the Fund’s assets increase and the extent to which any economies of scale are reflected in the level of management fees charged. The Trustees reviewed the standardized advisory fee pricing and structure, approved by the Board and shareholders, which includes breakpoints. Breakpoints in the advisory fee occur when the advisory fee rate is reduced on assets in excess of specified levels. Breakpoints result in a lower advisory fee than would otherwise be the case on all assets when the asset levels specified are exceeded. The Board noted that the fee under the Fund’s management contract fell within the standard structure. Although the Fund has not reached a size at which it can take advantage of breakpoints, the Board recognized that the fee was structured so that when the Fund grows, economies of scale may be shared.
It is currently anticipated that Lincoln National Corporation will complete its sale of Delaware Management Holdings, Inc. and its subsidiaries (also known by the marketing name of Delaware Investments) to Macquarie Group on or about December 31, 2009. Please see your Fund’s prospectus and any supplements thereto for more complete information.
Investments in Delaware Select Growth Fund are not and will not be deposits with or liabilities of Macquarie Bank Limited ABN 46 008 583 542 and its holding companies, including subsidiaries or related companies (the “Macquarie Group”), and are subject to investment risk, including possible delays in repayment and loss of income and capital invested. No Macquarie Group company guarantees or will guarantee the performance of the Fund, the repayment of capital from the Fund, or any particular rate of return.
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About the organization
Board of trustees |
| |
Patrick P. Coyne
Chairman, President, and
Chief Executive Officer
Delaware Investments®
Family of Funds
Philadelphia, PA Thomas L. Bennett
Private Investor
Rosemont, PA John A. Fry
President
Franklin & Marshall
College
Lancaster, PA | | Anthony D. Knerr
Founder and Managing
Director
Anthony Knerr &
Associates
New York, NY Lucinda S. Landreth
Former Chief Investment
Officer
Assurant, Inc.
Philadelphia, PA | | Ann R. Leven
Consultant
ARL Associates
New York, NY Thomas F. Madison
President and
Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN | | Janet L. Yeomans
Vice President and
Treasurer
3M Corporation
St. Paul, MN J. Richard Zecher
Founder
Investor Analytics
Scottsdale, AZ |
| | | | | | | |
Affiliated officers | | | | | | |
| | | | | | | |
David F. Connor
Vice President, Deputy
General Counsel, and
Secretary
Delaware Investments
Family of Funds
Philadelphia, PA | | Daniel V. Geatens
Vice President and
Treasurer
Delaware Investments
Family of Funds
Philadelphia, PA | | David P. O’Connor
Senior Vice President,
General Counsel,
and Chief Legal Officer
Delaware Investments
Family of Funds
Philadelphia, PA | | Richard Salus
Senior Vice President and
Chief Financial Officer
Delaware Investments
Family of Funds
Philadelphia, PA |
This semiannual report is for the information of Delaware Select Growth Fund shareholders, but it may be used with prospective investors when preceded or accompanied by a current prospectus for Delaware Select Growth Fund and the Delaware Investments Fund profile for the most recently completed calendar quarter. These documents are available at www.delawareinvestments.com.
The prospectus sets forth details about charges, expenses, investment objectives, and operating policies of the investment company. You should read the prospectus carefully before you invest. The figures in this report represent past results that are not a guarantee of future results. The return and principal value of an investment in the investment company will fluctuate so that shares, when redeemed, may be worth more or less than their original cost.
Delaware Investments is the marketing name of Delaware Management Holdings, Inc. and its subsidiaries.The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities are available without charge (i) upon request, by calling 800 523-1918; and (ii) on the Commission’s Web site at www.sec.gov. In addition, a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities and the Fund’s Schedule of Investments are available without charge on the Fund’s Web site at www.delawareinvestments.com. The Fund’s Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C.; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the Fund’s Web site at www.delawareinvestments.com; and (ii) on the Commission’s Web site at www.sec.gov.
39
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Semiannual report Delaware Large Cap Core Fund October 31, 2009 Core equity mutual fund |
This semiannual report is for the information of Delaware Large Cap Core Fund shareholders, but it may be used with prospective investors when preceded or accompanied by a current prospectus for Delaware Large Cap Core Fund. The figures in the semiannual report for Delaware Large Cap Core Fund represent past results, which are not a guarantee of future results. The return and principal value of an investment in the investment company will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted. This Fund is available only to certain residents of certain states. You should consider the investment objectives, risks, charges, and expenses of the investment company carefully before investing. The Delaware Large Cap Core Fund prospectus contains this and other important information about the investment company. Prospectuses for all open-end funds in the Delaware Investments® Family of Funds are available from your financial advisor, online at www.delawareinvestments.com, or by phone at 800 523-1918. Please read the prospectus carefully before you invest or send money. |
You can obtain shareholder reports and prospectuses online instead of in the mail.
Visit www.delawareinvestments.com/edelivery. |
Experience Delaware Investments
Delaware Investments is committed to the pursuit of consistently superior asset management and unparalleled client service. We believe in our investment processes, which seek to deliver consistent results, and in convenient services that help add value for our clients.
If you are interested in learning more about creating an investment plan, contact your financial advisor.
You can learn more about Delaware Investments or obtain a prospectus for Delaware Large Cap Core Fund at www.delawareinvestments.com.
Manage your investments online |
- 24-hour access to your account information
- Obtain share prices
- Check your account balance and recent transactions
- Request statements or literature
- Make purchases and redemptions
|
Contact information
Investment manager
Delaware Management Company, a series of Delaware Management Business Trust
National distributor
Delaware Distributors, L.P.
Financial intermediary wholesaler
Lincoln Financial Distributors, L.P.
Shareholder servicing, dividend disbursing, and transfer agent
Delaware Service Company, Inc.
Mailing address
2005 Market Street
Philadelphia, PA 19103-7094
Shareholder assistance by phone
800 523-1918, weekdays from 8 a.m. to 7 p.m. Eastern time
For securities dealers and financial institutions representatives only
800 362-7500
| Table of contents | |
| Disclosure of Fund expenses | 1 |
| Sector allocation and Top 10 Holdings | 3 |
| Statement of net assets | 4 |
| Statement of operations | 8 |
| Statements of changes in net assets | 9 |
| Financial highlights | 10 |
| Notes to financial statements | 14 |
| Other Fund information | 22 |
| About the organization | 26 |
Views expressed herein are current as of Oct. 31, 2009, and are subject to change.
Funds are not FDIC insured and are not guaranteed. It is possible to lose the principal amount invested.
Mutual fund advisory services provided by Delaware Management Company, a series of Delaware Management Business Trust, which is a registered investment advisor. Delaware Investments is the marketing name of Delaware Management Holdings, Inc. and its subsidiaries. Lincoln Financial Group is the marketing name for Lincoln National Corporation and its affiliates.
© 2009 Delaware Distributors, L.P.
All third-party trademarks cited are the property of their respective owners.
Disclosure of Fund expenses
For the period May 1, 2009 to October 31, 2009
As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchase payments, reinvested dividends, or other distributions; redemption fees; and exchange fees; and (2) ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period May 1, 2009 to October 31, 2009.
Actual expenses
The first section of the table shown, “Actual Fund Return,” provides information about actual account values and actual expenses. You may use the information in this section of the table, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first section under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical example for comparison purposes
The second section of the table shown, “Hypothetical 5% Return,” provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads), redemption fees, or exchange fees. Therefore, the second section of the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher. The Fund’s expenses shown in the table reflect fee waivers in effect. The expenses shown in the table assume reinvestment of all dividends and distributions.
1
Disclosure of Fund expenses
Delaware Large Cap Core Fund
Delaware Large Cap Core Fund
Expense analysis of an investment of $1,000
| Beginning | | Ending | | | | Expenses |
| Account | | Account Value | | Annualized | | Paid During Period |
| 5/1/09 | | 10/31/2009 | | Expense Ratio | | 5/1/09 to 10/31/09* |
| Actual Fund return | | | | | | | | | | | | |
| Class A | $ | 1,000.00 | | $ | 1,189.40 | | | 0.95% | | $ | 5.24 | |
| Institutional Class | | 1,000.00 | | | 1,189.40 | | | 0.95% | | | 5.24 | |
| Hypothetical 5% return (5% return before expenses) | | | | | | | |
| Class A | $ | 1,000.00 | | $ | 1,020.42 | | | 0.95% | | $ | 4.84 | |
| Institutional Class | | 1,000.00 | | | 1,020.42 | | | 0.95% | | | 4.84 | |
*Expenses are equal to the Fund’s annualized expense ratio, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period).
2
Sector allocation and top 10 holdings |
Delaware Large Cap Core Fund | As of October 31, 2009 |
Sector designations may be different than the sector designations presented in other Fund materials. The sector designations may represent the investment manager’s internal sector classifications, which may result in the sector designations for one fund being different than another fund’s sector designations.
| Sector | Percentage of net assets |
| Common Stock | 99.77 | % |
| Basic Materials | 5.08 | % |
| Business Services | 0.59 | % |
| Capital Goods | 7.89 | % |
| Communication Services | 1.72 | % |
| Consumer Discretionary | 5.37 | % |
| Consumer Services | 4.19 | % |
| Consumer Staples | 6.28 | % |
| Energy | 15.82 | % |
| Financials | 12.90 | % |
| Health Care | 12.85 | % |
| Media | 2.67 | % |
| Technology | 20.91 | % |
| Transportation | 1.51 | % |
| Utilities | 1.99 | % |
| Discount Note | 0.34 | % |
| Total Value of Securities | 100.11 | % |
| Liabilities Net of Receivables and Other Assets | (0.11 | %) |
| Total Net Assets | 100.00 | % |
Holdings are for informational purposes only and are subject to change at any time. They are not a recommendation to buy, sell, or hold any security.
| Top 10 holdings | Percentage of net assets |
| Exxon Mobil | 4.06 | % |
| Microsoft | 3.52 | % |
| Procter & Gamble | 2.76 | % |
| Google Class A | 2.59 | % |
| Hewlett-Packard | 2.59 | % |
| Apple | 2.47 | % |
| Occidental Petroleum | 2.46 | % |
| JPMorgan Chase | 2.45 | % |
| United Technologies | 2.29 | % |
| Pfizer | 2.26 | % |
3
Statement of net assets |
| Delaware Large Cap Core Fund | October 31, 2009 (Unaudited) |
| | | Number of shares | | Value |
| Common Stock – 99.77% |
| Basic Materials – 5.08% | | | | | | |
| Alcoa | | 1,350 | | | $ | 16,767 |
| Dow Chemical | | 1,160 | | | | 27,237 |
| † | Owens-Illinois | | 580 | | | | 18,490 |
| United States Steel | | 320 | | | | 11,037 |
| | | | | | | 73,531 |
| Business Services – 0.59% | | | | | | |
| † | FTI Consulting | | 210 | | | | 8,570 |
| | | | | | | 8,570 |
| Capital Goods – 7.89% | | | | | | |
| Fluor | | 290 | | | | 12,882 |
| Goodrich | | 380 | | | | 20,653 |
| Honeywell International | | 570 | | | | 20,457 |
| Lockheed Martin | | 230 | | | | 15,822 |
| United Technologies | | 540 | | | | 33,183 |
| † | URS | | 290 | | | | 11,269 |
| | | | | | | 114,266 |
| Communication Services – 1.72% | | | | | | |
| Verizon Communications | | 840 | | | | 24,856 |
| | | | | | | 24,856 |
| Consumer Discretionary – 5.37% | | | | | | |
| † | Aeropostale | | 370 | | | | 13,886 |
| American Eagle Outfitters | | 1,240 | | | | 21,688 |
| Family Dollar Stores | | 720 | | | | 20,376 |
| † | Urban Outfitters | | 695 | | | | 21,809 |
| | | | | | | 77,759 |
| Consumer Services – 4.19% | | | | | | |
| Burger King Holdings | | 1,240 | | | | 21,279 |
| McDonald’s | | 330 | | | | 19,341 |
| † | WMS Industries | | 500 | | | | 19,990 |
| | | | | | | 60,610 |
| Consumer Staples – 6.28% | | | | | | |
| CVS Caremark | | 790 | | | | 27,887 |
| Jarden | | 840 | | | | 23,008 |
| Procter & Gamble | | 690 | | | | 40,020 |
| | | | | | | 90,915 |
4
| | | Number of shares | | Value |
| Common Stock (continued) |
| Energy – 15.82% | | | | | | |
| Anadarko Petroleum | | 170 | | | $ | 10,358 |
| Chesapeake Energy | | 300 | | | | 7,350 |
| Chevron | | 240 | | | | 18,370 |
| ConocoPhillips | | 300 | | | | 15,054 |
| Devon Energy | | 110 | | | | 7,118 |
| EOG Resources | | 180 | | | | 14,699 |
| EQT | | 270 | | | | 11,302 |
| Exxon Mobil | | 820 | | | | 58,769 |
| † | National Oilwell Varco | | 260 | | | | 10,657 |
| Noble | | 350 | | | | 14,259 |
| Occidental Petroleum | | 470 | | | | 35,664 |
| Schlumberger | | 410 | | | | 25,502 |
| | | | | | | 229,102 |
| Financials – 12.90% | | | | | | |
| AFLAC | | 340 | | | | 14,107 |
| Bank of New York Mellon | | 580 | | | | 15,463 |
| Berkley (W.R.) | | 610 | | | | 15,079 |
| Capital One Financial | | 380 | | | | 13,908 |
| Goldman Sachs Group | | 180 | | | | 30,630 |
| JPMorgan Chase | | 850 | | | | 35,504 |
| † | Nasdaq OMX Group | | 510 | | | | 9,211 |
| Prudential Financial | | 370 | | | | 16,735 |
| TCF Financial | | 540 | | | | 6,388 |
| Wells Fargo | | 1,080 | | | | 29,722 |
| | | | | | | 186,747 |
| Health Care – 12.85% | | | | | | |
| Abbott Laboratories | | 540 | | | | 27,308 |
| † | Amgen | | 340 | | | | 18,268 |
| † | Celgene | | 230 | | | | 11,742 |
| † | Express Scripts Class A | | 380 | | | | 30,370 |
| † | Gen-Probe | | 190 | | | | 7,927 |
| † | Gilead Sciences | | 490 | | | | 20,850 |
| Merck | | 670 | | | | 20,723 |
| Pfizer | | 1,924 | | | | 32,767 |
| UnitedHealth Group | | 620 | | | | 16,089 |
| | | | | | | 186,044 |
5
Statement of net assets
Delaware Large Cap Core Fund
| | | Number of shares | | Value | |
| Common Stock (continued) | | | | | | | | |
| Media – 2.67% | | | | | | | | |
| Time Warner Cable | | | 490 | | | $ | 19,326 | |
| † | Viacom Class B | | | 700 | | | | 19,313 | |
| | | | | | | | 38,639 | |
| Technology – 20.91% | | | | | | | | |
| † | Apple | | | 190 | | | | 35,815 | |
| † | Cisco Systems | | | 1,090 | | | | 24,907 | |
| † | EMC | | | 1,220 | | | | 20,093 | |
| † | Expedia | | | 310 | | | | 7,028 | |
| † | Google Class A | | | 70 | | | | 37,528 | |
| Hewlett-Packard | | | 790 | | | | 37,493 | |
| Intel | | | 1,490 | | | | 28,474 | |
| † | McAfee | | | 460 | | | | 19,265 | |
| Microsoft | | | 1,840 | | | | 51,023 | |
| † | NetApp | | | 600 | | | | 16,230 | |
| QUALCOMM | | | 600 | | | | 24,846 | |
| | | | | | | | 302,702 | |
| Transportation – 1.51% | | | | | | | | |
| Norfolk Southern | | | 470 | | | | 21,911 | |
| | | | | | | | 21,911 | |
| Utilities – 1.99% | | | | | | | | |
| Sempra Energy | | | 400 | | | | 20,580 | |
| Wisconsin Energy | | | 190 | | | | 8,297 | |
| | | | | | | | 28,877 | |
| Total Common Stock (cost $1,376,098) | | | | | | | 1,444,529 | |
| | | | | | | | | | |
| | Principal amount | | | | |
| ¹Discount Note – 0.34% | | | | | | | | |
| | Federal Home Loan Bank 0.02% 11/2/09 | | $ | 5,000 | | | | 5,000 | |
| Total Discount Note (cost $5,000) | | | | | | | 5,000 | |
| | | | | | | | | |
| Total Value of Securities – 100.11% | | | | | | | | |
| (cost $1,381,098) | | | | | | | 1,449,529 | |
| Liabilities Net of Receivables | | | | | | | | |
| and Other Assets – (0.11%) | | | | | | | (1,642 | ) |
| Net Assets Applicable to 216,750 | | | | | | | | |
| Shares Outstanding – 100.00% | | | | | | $ | 1,447,887 | |
| | | | | | | | | | |
| Net Asset Value – Delaware Large Cap Core Fund | | | | | | | | |
| Class A ($10,297 / 1,541 Shares) | | | | | | | | $6.68 | |
| Net Asset Value – Delaware Large Cap Core Fund | | | | | | | | |
| Institutional Class ($1,437,590 / 215,209 Shares) | | | | | | | | $6.68 | |
6
| | |
| Components of Net Assets at October 31, 2009: | | | |
| Shares of beneficial interest (unlimited authorization - no par) | $ | 1,919,265 | |
| Undistributed net investment income | | 4,780 | |
| Accumulated net realized loss on investments | | (544,571 | ) |
| Net unrealized appreciation of investments | | 68,413 | |
| Total net assets | $ | 1,447,887 | |
| † | Non income producing security. |
| ¹ | The rate shown is the effective yield at the time of purchase. |
| Net Asset Value and Offering Price Per Share – | |
| Delaware Large Cap Core Fund | |
| Net asset value Class A (A) | $6.68 |
| Sales charge (5.75% of offering price) (B) | 0.41 |
| Offering price | $7.09 |
| (A) | Net asset value per share, as illustrated, is the amount which would be paid upon redemption or repurchase of shares. |
| (B) | See the current prospectus for purchases of $50,000 or more. |
See accompanying notes
7
| Statement of operations |
| Delaware Large Cap Core Fund | Six Months Ended October 31, 2009 (Unaudited) |
| Investment Income: | | | | | | |
| Dividends | $ | 12,364 | | | | |
| Interest | | 16 | | $ | 12,380 | |
| |
| Expenses: | | | | | | |
| Management fees | | 5,042 | | | | |
| Audit and tax fees | | 3,999 | | | | |
| Dividend disbursing and transfer agent fees and expenses | | 2,756 | | | | |
| Registration fees | | 1,885 | | | | |
| Reports and statements to shareholders | | 1,348 | | | | |
| Dues and services | | 861 | | | | |
| Pricing fees | | 683 | | | | |
| Legal fees | | 578 | | | | |
| Accounting and administration expenses | | 310 | | | | |
| Custodian fees | | 251 | | | | |
| Trustees’ fees | | 49 | | | | |
| Insurance fees | | 23 | | | | |
| Distribution expenses — Class A | | 13 | | | | |
| Consulting fees | | 11 | | | | |
| Trustees’ expenses | | 6 | | | 17,815 | |
| Less fees waived | | | | | (10,431 | ) |
| Less waived distribution expenses — Class A | | | | | (13 | ) |
| Total operating expenses | | | | | 7,371 | |
| Net Investment Income | | | | | 5,009 | |
| |
| Net Realized and Unrealized Gain (loss) on Investments: | | | | | | |
| Net realized loss on investments | | | | | (125,350 | ) |
| Net change in unrealized appreciation/depreciation of investments | | | | | 391,486 | |
| Net Realized and Unrealized Gain on Investments | | | | | 266,136 | |
| |
| Net Increase in Net Assets Resulting from Operations | | | | $ | 271,145 | |
See accompanying notes
8
Statements of changes in net assets
Delaware Large Cap Core Fund
| Six Months | | Year |
| Ended | | Ended |
| 10/31/09 | | 4/30/09 |
| (Unaudited) | | | | |
| Increase (Decrease) in Net Assets from Operations: | | | | | | | |
| Net investment income | $ | 5,009 | | | $ | 20,377 | |
| Net realized loss on investments | | (125,350 | ) | | | (354,223 | ) |
| Net change in unrealized appreciation/depreciation of investments | | 391,486 | | | | (472,102 | ) |
| Net increase (decrease) in net assets resulting from operations | | 271,145 | | | | (805,948 | ) |
| |
| Dividends and Distributions to Shareholders from: | | | | | | | |
| Net investment income: | | | | | | | |
| Class A | | (24 | ) | | | (148 | ) |
| Institutional Class | | (3,529 | ) | | | (21,906 | ) |
| | (3,553 | ) | | | (22,054 | ) |
| Capital Share Transactions: | | | | | | | |
| Proceeds from shares sold: | | | | | | | |
| Class A | | — | | | | 163 | |
| Institutional Class | | — | | | | 87 | |
| |
| Net asset value of shares issued upon | | | | | | | |
| reinvestment of dividends and distributions: | | | | | | | |
| Class A | | 24 | | | | 148 | |
| Institutional Class | | 3,529 | | | | 21,906 | |
| | | 3,553 | | | | 22,304 | |
| Cost of shares repurchased: | | | | | | | |
| Class A | | (964 | ) | | | (17,473 | ) |
| Institutional Class | | (250,000 | ) | | | — | |
| | | (250,964 | ) | | | (17,473 | ) |
| Increase (decrease) in net assets derived from | | | | | | | |
| capital share transactions | | (247,411 | ) | | | 4,831 | |
| Net Increase (Decrease) in Net Assets | | 20,181 | | | | (823,171 | ) |
| |
| Net Assets: | | | | | | | |
| Beginning of period | | 1,427,706 | | | | 2,250,877 | |
| End of period (including undistributed net investment | | | | | | | |
| income of $4,780 and $3,324, respectively) | $ | 1,447,887 | | | $ | 1,427,706 | |
See accompanying notes
9
Financial highlights
Delaware Large Cap Core Fund Class A
Selected data for each share of the Fund outstanding throughout each period were as follows:
| Net asset value, beginning of period |
| |
| Income (loss) from investment operations: |
| Net investment income3 |
| Net realized and unrealized gain (loss) on investments |
| Total from investment operations |
| |
| Less dividends and distributions from: |
| Net investment income |
| Net realized gain on investments |
| Total dividends and distributions |
| |
| Net asset value, end of period |
| |
| Total return4 |
| |
| Ratios and supplemental data: |
| Net assets, end of period (000 omitted) |
| Ratio of expenses to average net assets |
| Ratio of expenses to average net assets |
| prior to fees waived and expense paid indirectly |
| Ratio of net investment income to average net assets |
| Ratio of net investment income (loss) to average net assets |
| prior to fees waived and expense paid indirectly |
| Portfolio turnover |
1 Ratios and portfolio turnover have been annualized and total return has not been annualized. |
| 2 Date of commencement of operations; ratios and portfolio turnover have been annualized and total return has not been annualized. |
3 The average shares outstanding method has been applied for per share information. |
4 Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value and does not reflect the impact of a sales charge. Total investment return reflects waivers by the manager and distributor. Performance would have been lower had the waivers not been in effect. |
See accompanying notes
10
| Six months ended | | | | | | | | 8/31/062 | |
| 10/31/091 | | Year Ended | | to | |
| (Unaudited) | | 4/30/09 | | 4/30/08 | | 4/30/07 | |
| | $5.630 | | | $8.930 | | | $9.700 | | | $8.500 | | |
| | | |
| | | |
| | 0.021 | | | 0.081 | | | 0.073 | | | 0.039 | | |
| | 1.043 | | | (3.293 | ) | | (0.368 | ) | | 1.216 | | |
| | 1.064 | | | (3.212 | ) | | (0.295 | ) | | 1.255 | | |
| | | |
| | | |
| | (0.014 | ) | | (0.088 | ) | | (0.067 | ) | | (0.025 | ) | |
| | — | | | — | | | (0.408 | ) | | (0.030 | ) | |
| | (0.014 | ) | | (0.088 | ) | | (0.475 | ) | | (0.055 | ) | |
| | |
| | $6.680 | | | $5.630 | | | $8.930 | | | $9.700 | | |
| | | |
| | 18.94% | | | (36.04% | ) | | (3.36% | ) | | 14.81% | | |
| | | |
| | | |
| | $10 | | | $10 | | | $32 | | | $14 | | |
| | 0.95% | | | 0.95% | | | 0.95% | | | 0.96% | | |
| | | |
| | 2.55% | | | 1.87% | | | 3.03% | | | 5.27% | | |
| | 0.65% | | | 1.20% | | | 0.77% | | | 0.64% | | |
| | |
| | (0.95% | ) | | 0.28% | | | (1.31% | ) | | (3.67% | ) | |
| | 72% | | | 38% | | | 30% | | | 30% | | |
11
Financial highlights
Delaware Large Cap Core Fund Institutional Class
Selected data for each share of the Fund outstanding throughout each period were as follows:
| Net asset value, beginning of period |
| |
| Income (loss) from investment operations: |
| Net investment income3 |
| Net realized and unrealized gain (loss) on investments |
| Total from investment operations |
| |
| Less dividends and distributions from: |
| Net investment income |
| Net realized gain on investments |
| Total dividends and distributions |
| |
| Net asset value, end of period |
| |
| Total return4 |
| |
| Ratios and supplemental data: |
| Net assets, end of period (000 omitted) |
| Ratio of expenses to average net assets |
| Ratio of expenses to average net assets |
| prior to fees waived and expense paid indirectly |
| Ratio of net investment income to average net assets |
| Ratio of net investment income (loss) to average net assets |
| prior to fees waived and expense paid indirectly |
| Portfolio turnover |
1 Ratios and portfolio turnover have been annualized and total return has not been annualized. |
| 2 Date of commencement of operations; ratios and portfolio turnover have been annualized and total return has not been annualized. |
3 The average shares outstanding method has been applied for per share information. |
4 Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of dividends and distributions at net asset value. Total investment return reflects a waiver by the manager. Performance would have been lower had the waiver not been in effect. |
See accompanying notes
12
| | Six months ended | | | | | | | | 8/31/062 | |
| 10/31/091 | | Year Ended | | to | |
| (Unaudited) | | 4/30/09 | | 4/30/08 | | 4/30/07 | |
| | | $5.630 | | | $8.930 | | | $9.700 | | | $8.500 | | |
| | |
| | |
| | 0.021 | | | 0.081 | | | 0.073 | | | 0.039 | | |
| | 1.043 | | | (3.293 | ) | | (0.368 | ) | | 1.216 | | |
| | 1.064 | | | (3.212 | ) | | (0.295 | ) | | 1.255 | | |
| | |
| | |
| | (0.014 | ) | | (0.088 | ) | | (0.067 | ) | | (0.025 | ) | |
| | — | | | — | | | (0.408 | ) | | (0.030 | ) | |
| | (0.014 | ) | | (0.088 | ) | | (0.475 | ) | | (0.055 | ) | |
| | |
| | $6.680 | | | $5.630 | | | $8.930 | | | $9.700 | | |
| | |
| | 18.94% | | | (36.04% | ) | | (3.36% | ) | | 14.81% | | |
| | |
| | |
| | $1,438 | | | $1,418 | | | $2,219 | | | $2,296 | | |
| | 0.95% | | | 0.95% | | | 0.95% | | | 0.96% | | |
| | |
| | 2.30% | | | 1.62% | | | 2.78% | | | 5.02% | | |
| | 0.65% | | | 1.20% | | | 0.77% | | | 0.64% | | |
| | |
| | (0.70% | ) | | 0.53% | | | (1.06% | ) | | (3.42% | ) | |
| | 72% | | | 38% | | | 30% | | | 30% | | |
13
| Notes to financial statements | |
| Delaware Large Cap Core Fund | October 31, 2009 (Unaudited) |
Voyageur Mutual Funds III (Trust) is organized as a Delaware statutory trust and offers two series, Delaware Large Cap Core Fund and Delaware Select Growth Fund. These financial statements and the related notes pertain to Delaware Large Cap Core Fund (Fund). The Trust is an open-end investment company. The Fund is considered diversified under the Investment Company Act of 1940, as amended, and offers Class A, Class C, Class R and Institutional Class shares. Class A shares are sold with a maximum front-end sales charge of up to 5.75%. Class A share purchases of $1,000,000 or more will incur a contingent deferred sales charge (CDSC) of 1% if redeemed during the first year and 0.50% during the second year, provided that Delaware Distributors, L.P. (DDLP) paid a financial advisor a commission on the purchase of those shares. Class C shares are sold with a CDSC of 1%, if redeemed during the first 12 months. Class R and Institutional Class shares are not subject to a sales charge and are offered for sale only to certain eligible investors. As of October 31, 2009, Class C and Class R have not commenced operations.
The investment objective of the Fund is to seek long-term capital appreciation.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted accounting principles (GAAP) and are consistently followed by the Fund.
Security Valuation — Equity securities, except those traded on the Nasdaq Stock Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time of the regular close of the New York Stock Exchange (NYSE) on the valuation date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq Official Closing Price, which may not be the last sales price. If on a particular day an equity security does not trade, then the mean between the bid and ask prices will be used. Investment companies are valued at net asset value per share. Generally, other securities and assets for which market quotations are not readily available are valued at fair value as determined in good faith under the direction of the Fund’s Board of Trustees (Board). In determining whether market quotations are readily available or fair valuation will be used, various factors will be taken into consideration, such as market closures or suspension of trading in a security. The Fund may use fair value pricing more frequently for securities traded primarily in non-U.S. markets because, among other things, most foreign markets close well before the Fund values its securities at 4:00 p.m. Eastern time. The earlier close of these foreign markets gives rise to the possibility that significant events, including broad market moves, government actions or pronouncements, aftermarket trading, or news events may have occurred in the interim. To account for this, the Fund may frequently value foreign securities using fair value prices based on third-party vendor modeling tools (international fair value pricing).
Federal Income Taxes — No provision for federal income taxes has been made as the Fund intends to continue to qualify for federal income tax purposes as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended, and make the requisite distributions to shareholders. The Fund evaluates tax positions taken or expected to be taken in the course of preparing the Fund’s tax return to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. Management has
14
analyzed the Fund’s tax positions taken on federal income tax returns for all open tax years (tax years ended April 30, 2007 – April 30, 2009), and has concluded that no provision for federal income tax is required for the Fund’s financial statements.
Class Accounting — Investment income, common expenses and realized and unrealized gain (loss) on investments are allocated to the various classes of the Fund on the basis of daily net assets of each class. Distribution expenses relating to a specific class are charged directly to that class.
Repurchase Agreements — The Fund may invest in a pooled cash account along with other members of the Delaware Investments Family of Funds pursuant to an exemptive order issued by the Securities and Exchange Commission. The aggregate daily balance of the pooled cash account is invested in repurchase agreements secured by obligations of the U.S. government. The respective collateral is held by the Fund’s custodian bank until the maturity of the respective repurchase agreements. Each repurchase agreement is at least 102% collateralized. However, in the event of default or bankruptcy by the counterparty to the agreement, realization of the collateral may be subject to legal proceedings. At October 31, 2009, the Fund held no investments in repurchase agreements.
Use of Estimates — The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Other — Expenses directly attributable to the Fund are charged directly to the Fund. Other expenses common to various funds within the Delaware Investments Family of Funds are generally allocated amongst such funds on the basis of average net assets. Management fees and some other expenses are paid monthly. Security transactions are recorded on the date the securities are purchased or sold (trade date) for financial reporting purposes. Costs used in calculating realized gains and losses on the sale of investment securities are those of the specific securities sold. Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis. The Fund declares and pays dividends from net investment income and distributions from net realized gain on investments, if any, annually.
The Fund may receive earnings credits from its custodian when positive cash balances are maintained, which are used to offset custody fees. There were no earnings credits for the period ended October 31, 2009.
On July 1, 2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting Standards Codification (Codification). The Codification became the single source of authoritative nongovernmental U.S. GAAP, superseding existing literature of the FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force and other sources. The Codification is effective for interim and annual periods ending after September 15, 2009. The Fund adopted the Codification for the period ended October 31, 2009. There was no impact to financial statements as the Codification requirements are disclosure-only in nature.
15
Notes to financial statements
Delaware Large Cap Core Fund
1. Significant Accounting Policies (continued)
Management has evaluated whether any transactions or events occurred subsequent to October 31, 2009 through December 22, 2009, the date of issuance of the Fund’s financial statements, and determined that there were no material events or transactions that would require recognition or disclosure in the Fund’s financial statements.
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Fund pays Delaware Management Company (DMC), a series of Delaware Management Business Trust and the investment manager, an annual fee which is calculated daily at the rate of 0.65% on the first $500 million of average daily net assets of the Fund, 0.60% on the next $500 million, 0.55% on the next $1.5 billion and 0.50% on average daily net assets in excess of $2.5 billion.
DMC has voluntarily agreed to waive all or a portion, if any, of its management fees and reimburse the Fund to the extent necessary to ensure that total annual operating expenses (excluding any 12b-1 plan expenses, taxes, interest, inverse floater program expenses, short sale and dividend interest expenses brokerage fees, certain insurance costs, and nonroutine expenses or costs, including, but not limited to, those relating to reorganizations, litigation, conducting shareholder meetings, and liquidations, (collectively, nonroutine expenses)) do not exceed 0.95% of the Fund’s average daily net assets. This waiver and expense limitation may be discontinued at any time because they are voluntary. For purposes of these waivers and reimbursements, non-routine expenses may also include such additional costs and expenses, as may be agreed upon from time to time by the Fund’s Board and DMC. These expenses waivers and reimbursements apply only to expenses paid directly by the Fund.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to the Fund. For these services, the Fund pay DSC fees based on the aggregate daily net assets of the Delaware Investments® Family of Funds at the following annual rate: 0.0050% of the first $30 billion; 0.0045% of the next $10 billion; 0.0040% of the next $10 billion; and 0.0025% of aggregate average daily net assets in excess of $50 billion. The fees payable to DSC under the service agreement described above will be allocated among all Funds in the Delaware Investments Family of Funds on a relative net asset value basis. For the six months ended October 31, 2009, the Fund was charged $39 for these services.
DSC also provides dividend disbursing and transfer agency services. The Fund pays DSC a monthly fee based on the number of shareholder accounts for dividend disbursing and transfer agent services.
Pursuant to a distribution agreement and distribution plan, the Fund pays DDLP, the distributor and an affiliate of DMC, an annual distribution and service fee not to exceed 0.25% of the average daily net assets of the Class A shares, 1.00% of the average daily net assets of Class C shares and 0.60% of the average daily net assets of Class R shares. Institutional Class shares pay no distribution and services expenses. DDLP has voluntarily agreed to waive such distribution and service fees until such time as the waivers are discontinued.
16
At October 31, 2009, the Fund had receivables due from or liabilities payable to affiliates as follows:
| Receivable from DMC under limitation agreement | | $ | 2,895 | |
| Dividend disbursing, transfer agent and fund accounting | | | | |
| oversight fees and other expenses payable to DSC | | | (448 | ) |
| Other expenses payable to DMC and affiliates* | | | (53 | ) |
*DMC, as part of its administrative services, pays operating expenses on behalf of the Fund and is reimbursed on a periodic basis. Such expenses include items such as printing of shareholder reports, fees for audit, legal and tax services, registration fees and trustees’ fees.
As provided in the investment management agreement, the Fund bears the cost of certain legal and tax services, including internal legal and tax services provided to the Fund by DMC and/or its affiliates’ employees. For the six months ended October 31 2009, the Fund was charged $55 for internal legal and tax services provided by DMC and/or its affiliates’ employees.
Trustees’ fees include expenses accrued by the Fund for each Trustee’s retainer and meeting fees. Certain officers of DMC, DSC and DDLP are officers and/or Trustees of the Trust. These officers and Trustees are paid no compensation by the Fund.
3. Investments
For the six months ended October 31, 2009, the Fund made purchases of $537,713 and sales of $777,279 of investment securities other than short-term investments.
At October 31, 2009, the cost of investments for federal income tax purposes has been estimated since the final tax characteristics cannot be determined until fiscal year end. At October 31, 2009, the cost of investments was $1,386,546. At October 31, 2009, the net unrealized appreciation was $62,983, of which $139,675 related to unrealized appreciation of investments and $76,692 related to unrealized depreciation of investments.
The Fund applies the provisions, as amended to date, of Accounting Standards Codification 820 (ASC 820), Fair Value Measurements and Disclosures. ASC 820 defines fair value as the price that the Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. ASC 820 also establishes a framework for measuring fair value, and a three level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability. Inputs may be observable or unobservable and refer broadly to the assumptions that market participants would use in pricing the asset or liability. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the reporting entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The Fund’s investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three-tier hierarchy of inputs is summarized below.
17
Notes to financial statements
Delaware Large Cap Core Fund
3. Investments (continued)
Level 1 – inputs are quoted prices in active markets
Level 2 – inputs are observable, directly or indirectly
Level 3 – inputs are unobservable and reflect assumptions on the part of the reporting entity
The following table summarizes the valuation of the Fund’s investments by the ASC 820 fair value hierarchy levels as of October 31, 2009:
| | Level 1 | | Level 2 | | Total |
| Common Stock | | $ | 1,444,529 | | $ | — | | $ | 1,444,529 |
| Short-Term | | | — | | | 5,000 | | | 5,000 |
| Total | | $ | 1,444,529 | | $ | 5,000 | | $ | 1,449,529 |
The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:
| | Securities Lending |
| | Collateral |
| Balance as of 4/30/09 | | | $ | — | |
| Net realized loss | | | | (394 | ) |
| Net change in unrealized appreciation/depreciation | | | | 394 | |
| Balance as of 10/31/09 | | | $ | — | |
| Net change in unrealized appreciation/depreciation from | | | | | |
| investments still held as of 10/31/09 | | | $ | — | |
4. Dividend and Distribution Information
Income and long-term capital gain distributions are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. Additionally, distributions from net short-term gains on sales of investment securities are treated as ordinary income for federal income tax purposes. The tax character of dividends and distributions paid during the six months ended October 31, 2009 and the year ended April 30, 2009 was as follows:
| | Six Months | | Year |
| | Ended | | Ended |
| | | 10/31/09* | | 4/30/09 |
| Ordinary Income | | $ | 3,553 | | $ | 21,947 |
| Long-term capital gain | | | — | | | 107 |
| Total | | $ | 3,553 | | $ | 22,054 |
*Tax information for the period ended October 31, 2009 is an estimate and the tax character of dividends and distributions may be redesignated at fiscal year end.
18
5. Components of Net Assets on a Tax Basis
The components of net assets are estimated since the final tax characteristics cannot be determined until fiscal year end. As of October 31, 2009, the estimated components of net assets on a tax basis were as follows:
| Shares of beneficial interest | | $ | 1,919,265 | |
| Undistributed ordinary income | | | 4,780 | |
| Realized losses 5/1/09 – 10/31/09 | | | (324,841 | ) |
| Capital loss carryforwards as of 4/30/09 | | | (214,282 | ) |
| Unrealized appreciation of investments | | | 62,965 | |
| Net assets | | $ | 1,447,887 | |
The difference between book basis and tax basis components of net assets is primarily attributable to tax deferral of losses on wash sales.
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. Capital loss carryforwards remaining at April 30, 2009 will expire as follows: $214,282 expires in 2017.
For the six months ended October 31, 2009, the Fund had capital losses of $324,841, which may increase the capital loss carryforwards.
6. Capital Shares
| | Six Months | | Year |
| | Ended | | Ended |
| | 10/31/09 | | 4/30/09 |
| Shares sold: | | | | | | |
| Class A | | — | | | 29 | |
| |
| Shares issued upon reinvestment of dividends and distributions: | | | | | | |
| Class A | | 4 | | | 24 | |
| Institutional Class | | 606 | | | 3,594 | |
| | 610 | | | 3,647 | |
| | | | | | | |
| Shares repurchased: | | | | | | |
| Class A | | (168 | ) | | (1,931 | ) |
| Institutional Class | | (37,481 | ) | | — | |
| | (37,649 | ) | | (1,931 | ) |
| Net increase (decrease) | | (37,039 | ) | | 1,716 | |
19
Notes to financial statements
Delaware Large Cap Core Fund
7. Line of Credit
The Fund, along with certain other funds in the Delaware Investments® Family of Funds (Participants), participates in a $35,000,000 revolving line of credit with The Bank of New York Mellon (BNY Mellon) to be used for temporary or emergency purposes as an additional source of liquidity to fund redemptions of investor shares. Under the agreement, the Participants are charged an annual commitment fee, which is allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants may borrow up to a maximum of one third of their net assets under the agreement. The agreement expires on November 16, 2010. The Fund had no amounts outstanding as of October 31, 2009 or at any time during the period then ended.
8. Securities Lending
The Fund, along with other funds in the Delaware Investments Family of Funds, may lend their securities pursuant to a security lending agreement (Lending Agreement) with BNY Mellon. With respect to each loan, if the aggregate market value of securities collateral held plus cash collateral received on any business day is less than the aggregate market value of the securities which are the subject of such loan, the borrower will be notified to provide additional collateral not less than the applicable collateral requirements. Cash collateral received is generally invested in the Mellon GSL DBT II Collateral Fund (Collective Trust) established by BNY Mellon for the purpose of investment on behalf of clients participating in its securities lending programs. The Collective Trust may invest in fixed income securities, with a weighted average maturity not to exceed 90 days, rated in one of the top three tiers by Standard & Poor’s Ratings Group or Moody’s Investors Service, Inc. or repurchase agreements collateralized by such securities. The Collective Trust seeks to maintain a net asset value per unit of $1.00, but there can be no assurance that it will always be able to do so. At October 31, 2009, the Collective Trust held only cash and assets with a maturity of one business day or less (Cash/ Overnight Assets). The Fund may incur investment losses as a result of investing securities lending collateral in the Collective Trust. This could occur if an investment in the Collective Trust defaulted or if it were necessary to liquidate assets in the Collective Trust to meet returns on outstanding security loans at a time when the Collective Trust’s net asset value per unit was less than $1.00. Under those circumstances, the Fund may not receive an amount from the Collective Trust that is equal in amount to the collateral the Fund would be required to return to the borrower of the securities and the Fund would be required to make up for this shortfall. In October 2008, BNY Mellon transferred certain distressed securities from the Collective Trust into the Mellon GSL Reinvestment Trust II. The Fund can also accept U.S. government securities and letters of credit (non-cash collateral) in connection with securities loans. In the event of default or bankruptcy by the lending agent, realization and/or retention of the collateral may be subject to legal proceedings. In the event the borrower fails to return loaned securities and the collateral received is insufficient to cover the value of the loaned securities and provided such collateral shortfall is not the result of investment losses, the lending agent has agreed to pay the amount of the shortfall to the Fund, or at the discretion of the lending agent, replace the loaned securities. The Fund continues to record dividends or interest, as applicable, on the securities loaned and is subject to change in value of the securities loaned that may occur during the term of the loan. The Fund has the right under the Lending Agreement to recover the securities from the borrower on
20
demand. With respect to security loans collateralized by non-cash collateral, the Fund receives loan premiums paid by the borrower. With respect to security loans collateralized by cash collateral, the earnings from the collateral investments are shared among the Fund, the security lending agent and the borrower. The Fund records security lending income net of allocations to the security lending agent and the borrower. The Fund had no securities out on loan as of October 31, 2009.
9. Credit and Market Risk
The Fund may invest up to 15% of its net assets in illiquid securities, which may include securities with contractual restrictions on resale, securities exempt from registration under Rule 144A of the Securities Act of 1933, as amended, and other securities which may not be readily marketable. The relative illiquidity of these securities may impair the Fund from disposing of them in a timely manner and at a fair price when it is necessary or desirable to do so. While maintaining oversight, the Fund’s Board has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of the Fund’s limitation on investments in illiquid assets. Securities eligible for resale pursuant to Rule 144A, which are determined to be liquid, are not subject to the Fund’s 15% limit on investment in illiquid assets. As of October 31, 2009, there were no Rule 144A securities and no securities have been determined to be illiquid under the Fund’s Liquidity Procedures.
10. Contractual Obligations
The Fund enters into contracts in the normal course of business that contain a variety of indemnifications. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts. Management has reviewed the Fund’s existing contracts and expects the risk of loss to be remote.
11. Sale of Delaware Investments to Macquarie Group
On August 18, 2009, Lincoln National Corporation (the parent company of Delaware Investments) and Macquarie Group (Macquarie) entered into an agreement pursuant to which Delaware Investments, including DMC, DDLP, and DSC, will be acquired by Macquarie, an Australia-based global provider of banking, financial, advisory, investment and funds management services (Transaction). Upon completion of the Transaction, DMC, DDLP and DSC will be wholly owned subsidiaries of Macquarie.
The Transaction will result in a change of control of DMC which, in turn, will cause the termination of the investment advisory agreement between DMC and the Fund. As a result, a Special Meeting of Shareholders (Meeting) of the Fund has been scheduled for the purpose of asking shareholders to approve a new investment advisory agreement between DMC and the Fund (New Agreement). If approved by shareholders, the New Agreement will take effect upon the closing of the Transaction, which is currently anticipated to occur on or about December 31, 2009. Shareholders of the Fund will receive proxy materials including more detailed information about the Meeting, the Transaction and the proposed New Agreement.
21
Other Fund information
(Unaudited)
Delaware Large Cap Core Fund
Board Consideration of Delaware Large Cap Core Fund Investment Advisory Agreement
At a meeting held on May 19-21, 2009 (the “Annual Meeting”), the Board of Trustees (the “Board”), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreement for the Delaware Large Cap Core Fund (the “Fund”). In making its decision, the Board considered information furnished specifically in connection with the renewal of the Investment Advisory Agreement with Delaware Management Company (“DMC”), which included materials provided by DMC and its affiliates (“Delaware Investments”) concerning, among other things, the nature, extent and quality of services provided to the Fund, the costs of such services to the Fund, economies of scale and the financial condition and profitability of Delaware Investments. Reference was made to information furnished at regular quarterly Board meetings, including reports detailing Fund performance, investment strategies and expenses, as well as information prepared specifically in connection with the renewal of the investment advisory and sub-advisory contracts. In addition, in connection with the Annual Meeting, reports were provided in February 2009 and included independent historical and comparative reports prepared by Lipper Inc. (“Lipper”), an independent statistical compilation organization. The Lipper reports compared the Fund’s investment performance and expenses with those of other comparable mutual funds. The independent Trustees reviewed and discussed the Lipper reports with counsel to the independent Trustees. The Board requested and received information regarding DMC’s policy with respect to advisory fee levels and its breakpoint philosophy; the structure of portfolio manager compensation; the investment manager’s profitability; and any constraints or limitations on the availability of securities in certain investment styles which had in the past year inhibited, or which were likely in the future to inhibit, DMC’s ability to invest fully in accordance with Fund policies.
In considering information relating to the approval of the Fund’s advisory agreement, the independent Trustees received assistance and advice from and met separately with counsel to the independent Trustees. Although the Board gave attention to all information furnished, the following discussion identifies, under separate headings, the primary factors taken into account by the Board during its contract renewal considerations.
Nature, Extent And Quality of Service. The Board considered the services provided by Delaware Investments to the Fund and its shareholders. In reviewing the nature, extent and quality of services, the Board considered reports furnished to it throughout the year, which covered matters such as the relative performance of the Fund, compliance of portfolio managers with the investment policies, strategies and restrictions for the Fund, compliance by DMC and Delaware Distributors, L.P. (together, “Management”) personnel with the Code of Ethics adopted throughout the Delaware Investments® Family of Funds complex and adherence to fair value pricing procedures as established by the Board. The Board was pleased with the current staffing of the Fund’s investment advisor and the emphasis placed on research in the investment process. The Board gave favorable consideration to DMC’s efforts to control expenditures while maintaining service levels committed to fund matters. The Board also considered the transfer agent and shareholder services provided to Fund shareholders by DMC’s affiliate, Delaware Service Company, Inc. (“DSC”), noting DSC’s high level of service. The Board noted that Management finished upgrading investment accounting functions through outsourcing
22
to improve the quality and lower the cost of delivering investment accounting services to the Fund. The Board once again noted the benefits provided to Fund shareholders through each shareholder’s ability to exchange an investment in one Delaware Investments® fund for the same class of shares in another Delaware Investments fund without a sales charge, to reinvest Fund dividends into additional shares of the Fund or into additional shares of other Delaware Investments funds and the privilege to combine holdings in other Delaware Investments funds to obtain a reduced sales charge. The Board was satisfied with the nature, extent and quality of the overall services provided by Delaware Investments.
Investment Performance. The Board placed significant emphasis on the investment performance of the Fund in view of its importance to shareholders. Although the Board gave appropriate consideration to performance reports and discussions with portfolio managers at Board meetings throughout the year, the Board gave particular weight to the Lipper reports furnished for the Annual Meeting. The Lipper reports prepared for the Fund showed the investment performance of its Class A shares in comparison to a group of similar funds as selected by Lipper (the “Performance Universe”). A fund with the best performance ranked first, and a fund with the poorest performance ranked last. The highest/best performing 25% of funds in the Performance Universe make up the first quartile; the next 25%, the second quartile; the next 25%, the third quartile; and the poorest/worst performing 25% of funds in the Performance Universe make up the fourth quartile. Comparative annualized performance for the Fund was shown for the one-year period ended December 31, 2008. The Board’s objective is that the Fund’s performance for the periods considered be at or above the median of its Performance Universe. The following paragraph summarizes the performance results for the Fund and the Board’s view of such performance.
The Performance Universe for the Fund consisted of the Fund and all institutional large-cap core funds as selected by Lipper. The Lipper report comparison showed that the Fund’s total return for the one-year period was in the second quartile of its Performance Universe. The Board was satisfied with the performance of this new Fund.
Comparative Expenses. The Board considered expense comparison data for the Delaware Investments Family of Funds. Management provided the Board with information on pricing levels and fee structures for the Fund as of October 31, 2008 and, for comparative funds, information as of their respective fiscal year end occurring on or before August 31, 2008. The Board also focused on the comparative analysis of effective management fees and total expense ratios of the Fund versus effective management fees and expense ratios of a group of similar funds as selected by Lipper (the “Expense Group”). In reviewing comparative costs, the Fund’s contractual management fee and the actual management fee incurred by the Fund were compared with the contractual management fees (assuming all funds in the Expense Group were similar in size to the Fund) and actual management fees (as reported by each fund) within the Expense Group, taking into account any applicable breakpoints and fee waivers. The Fund’s total expenses were also compared with those of its Expense Group. The Lipper total expenses, for comparative consistency, were shown by Lipper for Class A shares and comparative total expenses including 12b-1 and non 12b-1 service fees. The Board considered fees paid to Delaware Investments for nonmanagement services. The Board’s objective is
23
Other Fund information
(Unaudited)
Delaware Large Cap Core Fund
to limit the Fund’s total expense ratio to be competitive with that of the Expense Group. The following paragraph summarizes the expense results for the Fund and the Board’s view of such expenses.
The expense comparisons for the Fund showed that its contractual management fee and total expenses were in the quartile with the lowest expenses of its Expense Group. The Board was satisfied with the contractual management fee and total expenses of the Fund in comparison to those of its Expense Group as shown in the Lipper report.
Management Profitability. The Board considered the level of profits realized by Delaware Investments in connection with the operation of the Fund. In this respect, the Board reviewed the Investment Management Profitability Analysis that addressed the overall profitability of Delaware Investments’ business in providing management and other services to each of the individual funds and the Delaware Investments® Family of Funds as a whole. Specific attention was given to the methodology followed in allocating costs for the purpose of determining profitability. Management stated that the level of profits of Delaware Investments, to a certain extent, reflect recent operational cost savings and efficiencies initiated by Delaware Investments. The Board considered Delaware Investments’ efforts to improve services provided to fund shareholders and to meet additional regulatory and compliance requirements resulting from recent industry-wide Securities and Exchange Commission initiatives. The Board also considered the extent to which Delaware Investments might derive ancillary benefits from fund operations, including the potential for procuring additional business as a result of the prestige and visibility associated with its role as service provider to the Delaware Investments Family of Funds and the benefits from allocation of fund brokerage to improve trading efficiencies. The Board found that the management fees were reasonable in light of the services rendered and the level of profitability of Delaware Investments.
Economies of Scale. The Trustees considered whether economies of scale are realized by Delaware Investments as the Fund’s assets increase and the extent to which any economies of scale are reflected in the level of management fees charged. The Trustees reviewed the standardized advisory fee pricing and structure, approved by the Board and shareholders, which includes breakpoints. Breakpoints in the advisory fee occur when the advisory fee rate is reduced on assets in excess of specified levels. Breakpoints result in a lower advisory fee than would otherwise be the case on all assets when the asset levels specified are exceeded. The Board noted that the fee under the Fund’s management contract fell within the standard structure. Although the Fund has not reached a size at which it can take advantage of breakpoints, the Board recognized that the fee was structured so that when the Fund grows, economies of scale may be shared.
24
It is currently anticipated that Lincoln National Corporation will complete its sale of Delaware Management Holdings, Inc. and its subsidiaries (also known by the marketing name of Delaware Investments) to Macquarie Group on or about December 31, 2009. Please see your Fund’s prospectus and any supplements thereto for more complete information.
Investments in Delaware Large Cap Core Fund are not and will not be deposits with or liabilities of Macquarie Bank Limited ABN 46 008 583 542 and its holding companies, including subsidiaries or related companies (the “Macquarie Group”), and are subject to investment risk, including possible delays in repayment and loss of income and capital invested. No Macquarie Group company guarantees or will guarantee the performance of the Fund, the repayment of capital from the Fund, or any particular rate of return.
25
About the organization
Board of trustees |
| |
Patrick P. Coyne
Chairman, President, and
Chief Executive Officer
Delaware Investments®
Family of Funds
Philadelphia, PA Thomas L. Bennett
Private Investor
Rosemont, PA John A. Fry
President
Franklin & Marshall
College
Lancaster, PA | | Anthony D. Knerr
Founder and Managing
Director
Anthony Knerr &
Associates
New York, NY Lucinda S. Landreth
Former Chief Investment
Officer
Assurant, Inc.
Philadelphia, PA | | Ann R. Leven
Consultant
ARL Associates
New York, NY Thomas F. Madison
President and
Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN | | Janet L. Yeomans
Vice President and
Treasurer
3M Corporation
St. Paul, MN J. Richard Zecher
Founder
Investor Analytics
Scottsdale, AZ |
| | | | | | | |
Affiliated officers |
| |
David F. Connor
Vice President, Deputy
General Counsel, and
Secretary
Delaware Investments
Family of Funds
Philadelphia, PA | | Daniel V. Geatens
Vice President and
Treasurer
Delaware Investments
Family of Funds
Philadelphia, PA | | David P. O’Connor
Senior Vice President,
General Counsel,
and Chief Legal Officer
Delaware Investments
Family of Funds
Philadelphia, PA | | Richard Salus
Senior Vice President and
Chief Financial Officer
Delaware Investments
Family of Funds
Philadelphia, PA |
This semiannual report is for the information of Delaware Large Cap Core Fund shareholders, but it may be used with prospective investors when preceded or accompanied by a current prospectus for Delaware Large Cap Core Fund, which is available at www.delawareinvestments.com. The prospectus sets forth details about charges, expenses, investment objectives, and operating policies of the investment company. You should read the prospectus carefully before you invest. The figures in this report represent past results that are not a guarantee of future results. The return and principal value of an investment in the investment company will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For the most recent performance, please call 800 523-1918. |
Delaware Investments is the marketing name of Delaware Management Holdings, Inc. and its subsidiaries. The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q, as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities are available without charge (i) upon request, by calling 800 523-1918; and (ii) on the Commission’s Web site at www.sec.gov. In addition, a description of the policies and procedures that the Fund uses to determine how to vote proxies (if any) relating to portfolio securities and the Fund’s Schedule of Investments are available without charge on the Fund’s Web site at www.delawareinvestments.com. The Fund’s Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, D.C.; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330. Information (if any) regarding how the Fund voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the Fund’s Web site at www.delawareinvestments.com; and (ii) on the Commission’s Web site at www.sec.gov. |
26
Item 2. Code of Ethics
Not applicable.
Item 3. Audit Committee Financial Expert
Not applicable.
Item 4. Principal Accountant Fees and Services
Not applicable.
Item 5. Audit Committee of Listed Registrants
Not applicable.
Item 6. Investments
(a) Included as part of report to shareholders filed under Item 1 of this Form N-CSR.
(b) Divestment of securities in accordance with Section 13(c) of the Investment Company Act of 1940.
Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
The registrant’s principal executive officer and principal financial officer have evaluated the registrant’s disclosure controls and procedures within 90 days of the filing of this report and have concluded that they are effective in providing reasonable assurance that the information required to be disclosed by the registrant in its reports or statements filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.
There were no significant changes in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by the report to stockholders included herein (i.e., the registrant’s second fiscal quarter) that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits
(a) (1) Code of Ethics
Not applicable.
(2) Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Rule 30a-2 under the Investment Company Act of 1940 are attached hereto as Exhibit 99.CERT.
(3) Written solicitations to purchase securities pursuant to Rule 23c-1 under the Securities Exchange Act of 1934.
Not applicable.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are furnished herewith as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf, by the undersigned, thereunto duly authorized.
Name of Registrant: Voyageur Mutual Funds III
| PATRICK P. COYNE | |
| By: | Patrick P. Coyne |
| Title: | Chief Executive Officer |
| Date: | January 6, 2010 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| PATRICK P. COYNE | |
| By: | Patrick P. Coyne |
| Title: | Chief Executive Officer |
| Date: | January 6, 2010 |
| RICHARD SALUS | |
| By: | Richard Salus |
| Title: | Chief Financial Officer |
| Date: | January 6, 2010 |
