UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
| Investment Company Act file number: | | 811-05162 |
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| Exact name of registrant as specified in charter: | | Delaware VIP® Trust |
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| Address of principal executive offices: | | 2005 Market Street |
| | Philadelphia, PA 19103 |
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| Name and address of agent for service: | | David F. Connor, Esq. |
| | 2005 Market Street |
| | Philadelphia, PA 19103 |
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| Registrant’s telephone number, including area code: | | (800) 523-1918 |
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| Date of fiscal year end: | | December 31 |
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| Date of reporting period: | | December 31, 2012 |
Item 1. Reports to Stockholders
| Delaware VIP® Trust |
| Delaware VIP Diversified Income Series |
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| Annual Report |
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| December 31, 2012 |
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Table of contents
| > Portfolio management review | 1 |
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| > Performance summary | 2 |
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| > Disclosure of Series expenses | 4 |
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| > Security type/sector allocation | 5 |
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| > Statement of net assets | 6 |
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| > Statement of operations | 23 |
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| > Statements of changes in net assets | 23 |
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| > Financial highlights | 24 |
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| > Notes to financial statements | 26 |
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| > Report of independent registered public accounting firm | 34 |
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| > Other Series information | 35 |
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| > Board of trustees/directors and officers addendum | 37 |
Investments in Delaware VIP® Diversified Income Series 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 (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 Series, the repayment of capital from the Series, or any particular rate of return.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
The Series is not FDIC insured and is 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 and member of Macquarie Group. Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries, including the Series’ distributor, Delaware Distributors, L.P. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide.
This material may be used in conjunction with the offering of shares in the Delaware VIP Diversified Income Series only if preceded or accompanied by the Series’ current prospectus, and if available, the summary prospectus.
© 2013 Delaware Management Holdings, Inc.
All third-party marks cited are the property of their respective owners.
Delaware VIP® Trust — Delaware VIP Diversified Income Series
Portfolio management review | Jan. 8, 2013 |
For the fiscal year ended Dec. 31, 2012, Delaware VIP Diversified Income Series Standard Class shares returned +7.20% and Service Class shares returned +6.87% (both figures reflect returns with dividends reinvested). The Series’ benchmark, the Barclays U.S. Aggregate Index, returned +4.22% for the same period.
In general, investors had a healthy appetite for risk when the fiscal year began on Jan. 1, 2012. This more optimistic market attitude was supported by several factors, including: the appearance of progress in the euro zone; a shift back to accommodative policies by central banks globally; and better-than-expected economic statistics in the United States. By early spring 2012, however, the rally in risk assets had once again run its course. Indications that economic growth in the U.S. and China, the world’s two largest economies was decelerating, helped re-establish fears that another global recession could occur.
In July, European Central Bank president Mario Draghi proclaimed that it would do “whatever it takes” to preserve Europe’s common currency, and the U.S. Federal Reserve initiated a third round of quantitative easing in September with an open-ended time frame. Despite the swings in risk appetites, market conditions during the Series’ fiscal year were broadly supportive of many fixed income market sectors, as accommodative monetary policy helped exert downward pressure on yields while corporate balance sheets generally remained in solid shape.
In keeping with the Series’ objective of broad diversification, the bulk of its relative performance was generated by returns from four major sectors: U.S. investment grade bonds, U.S. high yield debt, emerging market debt, and non-dollar developed market securities. The Series’ overweight position in U.S. investment-grade corporate bonds was a contributor to relative performance for the fiscal year, as was its emphasis on intermediate-term BBB-rated issues. An allocation to high yield bonds also aided its relative performance. It is important to note, however, that we generally maintained a focus on what we viewed as higher-quality bonds within the high yield market.
Overseas, the Series’ holdings in emerging market bonds (U.S. dollar-based as well as local-currency) helped relative performance, especially late in the fiscal year when global risk appetite spiked and many investors reached for both yields and exposure to non-dollar assets. Positions in non-dollar, developed markets boosted total return as well, though gains made by non-dollar developed markets generally lagged those posted by U.S. fixed income markets. It is important to bear in mind that the three bond sectors discussed thus far — high yield, emerging markets, and non-dollar developed markets — are not included in the Series’ benchmark index, and its positive performances in these sectors therefore contributed notably to outperformance versus the index.
Finally, an allocation to Treasury securities detracted from relative performance for the fiscal year. Yields on Treasury securities remained at or near historic lows (with a few exceptions) as demand for Treasurys remained well supported throughout the fiscal year. Given this environment, the Series’ position in Treasurys modified its return on both a relative and absolute basis.
The Series remains positioned with an emphasis on spread- and credit-based sectors. Specifically, it has an overweight allocation to U.S. investment grade bonds, while close to a quarter of its assets are invested in a combination of domestic high yield and emerging market debt. Among smaller allocations, we enter the Series’ new fiscal year with a modest overweight to commercial mortgage-backed securities and asset-backed securities. Conversely, we are currently maintaining a significant underweight to U.S. Treasury debt, a sector that continues to offer historically low nominal yields that are sometimes negative when inflation is taken into consideration.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
Diversified Income Series-1
Delaware VIP® Trust — Delaware VIP Diversified Income Series
Performance summary
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
Carefully consider the Series’ investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Series’ prospectuses and, if available, their summary prospectuses, which may be obtained by calling 800 523-1918. Investors should read the prospectuses and, if available, the summary prospectuses carefully before investing.
| Delaware VIP Diversified Income Series | | | | | | | | | | |
| Average annual total returns | | | | | | | | | | |
| For periods ended Dec. 31, 2012 | | 1 year | | 3 years | | 5 years | | 10 years | | Lifetime |
| Standard Class shares (commenced operations on May 16, 2003) | | +7.20% | | +7.21% | | +8.35% | | n/a | | +7.30% |
| Service Class shares (commenced operations on May 16, 2003) | | +6.87% | | +6.96% | | +8.07% | | n/a | | +7.01% |
Returns reflect the reinvestment of all distributions and any applicable sales charges as noted in the following paragraphs.
As described in the Series’ most recent prospectus, the net expense ratio for Service Class shares of the Series was 0.93%, while total operating expenses for Standard Class and Service Class shares were 0.68% and 0.98%, respectively. The management fee for Standard Class and Service Class shares was 0.59%.
The Series’ distributor has contracted to limit the 12b-1 fees for Service Class shares to 0.25% of average daily net assets from April 30, 2012 through April 30, 2013.
Earnings from a variable annuity or variable life investment compound tax-free until withdrawal, and as a result, no adjustments were made for income taxes.
Expense limitations were in effect for all classes during certain periods shown in the Series’ performance table above and in the Performance of a $10,000 Investment chart on the next page.
Performance data do not reflect other costs incurred by beneficial owners such as insurance company separate account fees and variable annuity or variable life contract charges or deferred sales charges. Performance shown here would have been reduced if such fees were included and the expense limitation removed. For more information about fees, consult your variable annuity or variable life prospectus.
Investments in variable products involve risk.
Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt.
The Series may also be subject to prepayment risk, the risk that the principal of a fixed income security that is held by the Series may be prepaid prior to maturity, potentially forcing the Series to reinvest that money at a lower interest rate.
High yielding, noninvestment grade bonds (junk bonds) involve higher risk than investment grade bonds. The high yield secondary market is particularly susceptible to liquidity problems when institutional investors, such as mutual funds and certain other financial institutions, temporarily stop buying bonds for regulatory, financial, or other reasons. In addition, a less liquid secondary market makes it more difficult for the Series to obtain precise valuations of the high yield securities in its portfolio.
The Series may invest in derivatives, which may involve additional expenses and are subject to risk, including the risk that an underlying security or securities index moves in the opposite direction from what the portfolio manager anticipated. A derivative transaction depends upon the counterparties’ ability to fulfill their contractual obligations.
Per Standard & Poor’s credit rating agency, bonds rated AA and A are more susceptible to the adverse effects of changes in circumstances and economic conditions than those in the higher-rated AAA category, but the obligor’s capacity to meet its financial commitment on the obligation is still strong. Bonds rated BBB exhibit adequate protection parameters, although adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments. Bonds rated BB, B, and CCC are regarded as having significant speculative characteristics with BB indicating the least degree of speculation of the three.
Bond ratings are determined by a nationally recognized statistical rating organization (NRSRO).
The Series may experience portfolio turnover in excess of 100%, which could result in higher transaction costs and tax liability.
International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.
If and when the Series invests in forward foreign currency contracts or uses other investments to hedge against currency risks, the Series will be subject to special risks, including counterparty risk.
Please read both the contract and underlying prospectus for specific details regarding the product’s risk profile.
Diversified Income Series-2
Delaware VIP® Diversified Income Series
Performance summary (continued)
| For period beginning May 16, 2003 (Series’ inception), through Dec. 31, 2012 | | Starting value | | Ending value |
| –– | Delaware VIP Diversified Income Series (Standard Class shares) | | $10,000 | | $19,703 |
| – – | Barclays U.S. Aggregate Index | | $10,000 | | $15,980 |
The chart shows a $10,000 investment in the Delaware VIP Diversified Income Series Standard Class shares for the period from May 16, 2003 through Dec. 31, 2012.
The chart also shows $10,000 invested in the Barclays U.S. Aggregate Index for the period from May 16, 2003 through Dec. 31, 2012. The Barclays U.S. Aggregate Index is a broad composite that tracks the investment grade domestic bond market.
Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
Performance of Service Class shares will vary due to different charges and expenses.
Past performance is not a guarantee of future results.
Diversified Income Series-3
Delaware VIP® Trust — Delaware VIP Diversified Income Series
Disclosure of Series Expenses
For the Six-Month Period from July 1, 2012 to December 31, 2012 (Unaudited)
As a shareholder of the Series, you incur ongoing costs, which may include management fees; distribution and/or service (12b-1) fees; and other Series expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Series 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 six-month period from July 1, 2012 to December 31, 2012.
Actual Expenses
The first section of the table shown, “Actual Series 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 the 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 Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ 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 Series and other funds. To do so, compare the 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. As a shareholder of the Series, you do not incur any transaction costs, such as sales charges (loads), redemption fees or exchange fees, but shareholders of other funds may incur such costs. Also, the fees related to the variable annuity investment or the deferred sales charge that could apply have not been included. 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. The Series’ actual expenses shown in the table reflect fee waivers in effect for Service Class shares. The expenses shown in the table assume reinvestment of all dividends and distributions.
Expense Analysis of an Investment of $1,000
| | | | | | | | | | | | | Expenses |
| Beginning | | Ending | | | | Paid During |
| Account | | Account | | Annualized | | Period |
| Value | | Value | | Expense | | 7/1/12 to |
| 7/1/12 | | 12/31/12 | | Ratio | | 12/31/12* |
| Actual Series Return† | | | | | | | | | | | | | | | | |
| Standard Class | | $ | 1,000.00 | | | | $ | 1,032.70 | | | 0.68% | | | $ | 3.47 | |
| Service Class | | | 1,000.00 | | | | | 1,030.90 | | | 0.93% | | | | 4.75 | |
| Hypothetical 5% Return (5% return before expenses) | | | | | | | | |
| Standard Class | | $ | 1,000.00 | | | | $ | 1,021.72 | | | 0.68% | | | $ | 3.46 | |
| Service Class | | | 1,000.00 | | | | | 1,020.46 | | | 0.93% | | | | 4.72 | |
*“Expenses Paid During Period” are equal to the Series’ annualized expense ratio, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period).
†Because actual returns reflect only the most recent six-month period, the returns shown may differ significantly from fiscal year returns.
Diversified Income Series-4
Delaware VIP® Trust — Delaware VIP Diversified Income Series
Security Type/Sector Allocation
As of December 31, 2012 (Unaudited)
Sector designations may be different than the sector designations presented in other Series materials. The sector designations may represent the investment manager’s internal sector classifications, which may result in the sector designations for one series being different than another series’ sector designations.
| Percentage |
| Security Type/Sector | of Net Assets |
| Agency Asset-Backed Securities | | 0.01 | % | |
| Agency Collateralized Mortgage Obligations | | 1.35 | % | |
| Agency Mortgage-Backed Securities | | 13.21 | % | |
| Commercial Mortgage-Backed Securities | | 3.79 | % | |
| Convertible Bonds | | 1.71 | % | |
| Corporate Bonds | | 48.66 | % | |
| Automotive | | 0.80 | % | |
| Banking | | 5.49 | % | |
| Basic Industry | | 4.63 | % | |
| Brokerage | | 0.52 | % | |
| Capital Goods | | 0.89 | % | |
| Communications | | 6.67 | % | |
| Consumer Cyclical | | 2.27 | % | |
| Consumer Non-Cyclical | | 4.11 | % | |
| Electric | | 3.86 | % | |
| Energy | | 5.36 | % | |
| Finance Companies | | 2.09 | % | |
| Healthcare | | 0.59 | % | |
| Insurance | | 2.28 | % | |
| Natural Gas | | 2.81 | % | |
| Real Estate | | 1.84 | % | |
| Services Cyclical | | 1.07 | % | |
| Technology | | 2.05 | % | |
| Transportation | | 0.96 | % | |
| Utilities | | 0.37 | % | |
| Municipal Bond | | 0.00 | % | |
| Non-Agency Asset-Backed Securities | | 1.47 | % | |
| Non-Agency Collateralized Mortgage Obligations | | 0.35 | % | |
| Regional Bonds | | 2.43 | % | |
| Senior Secured Loans | | 6.13 | % | |
| Sovereign Bonds | | 8.30 | % | |
| Supranational Banks | | 0.52 | % | |
| U.S. Treasury Obligations | | 3.96 | % | |
| Common Stock | | 0.00 | % | |
| Convertible Preferred Stock | | 0.25 | % | |
| Preferred Stock | | 0.63 | % | |
| Short-Term Investments | | 18.38 | % | |
| Securities Lending Collateral | | 0.06 | % | |
| Total Value of Securities | | 111.21 | % | |
| Obligation to Return Securities Lending Collateral | | (0.15 | %) | |
| Other Liabilities Net of Receivables and Other Assets | | (11.06 | %) | |
| Total Net Assets | | 100.00 | % | |
Diversified Income Series-5
Delaware VIP® Trust — Delaware VIP Diversified Income Series
Statement of Net Assets
December 31, 2012
| | Principal | | Value |
| | | Amount° | | (U.S. $) |
| AGENCY ASSET-BACKED | | | | | | |
| SECURITIES–0.01% | | | | | | |
| Fannie Mae Grantor Trust | | | | | | |
| Series 2003-T4 2A5 | | | | | | |
| 5.407% 9/26/33 | USD | | 275,098 | | $ | 293,894 |
| •Fannie Mae Whole Loan | | | | | | |
| Series 2002-W11 AV1 | | | | | | |
| | 0.55% 11/25/32 | | | 3,761 | | | 3,477 |
| Total Agency Asset-Backed Securities | | | | | | |
| (cost $277,655) | | | | | | 297,371 |
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| AGENCY COLLATERALIZED | | | | | | |
| MORTGAGE OBLIGATIONS–1.35% | | | | | | |
| Fannie Mae Grantor Trust | | | | | | |
| • | Series 1999-T2 A1 7.50% 1/19/39 | | | 799 | | | 904 |
| Series 2002-T4 A3 7.50% 12/25/41 | | | 16,625 | | | 19,261 |
| Series 2004-T1 1A2 6.50% 1/25/44 | | | 12,888 | | | 15,441 |
| Fannie Mae REMICs | | | | | | |
| Series 1996-46 ZA 7.50% 11/25/26 | | | 62,634 | | | 72,916 |
| Series 2001-50 BA 7.00% 10/25/41 | | | 81,085 | | | 86,175 |
| Series 2002-90 A1 6.50% 6/25/42 | | | 10,686 | | | 12,560 |
| Series 2002-90 A2 6.50% 11/25/42 | | | 33,363 | | | 38,598 |
| Series 2003-26 AT 5.00% 11/25/32 | | | 2,068,264 | | | 2,167,013 |
| Series 2003-38 MP 5.50% 5/25/23 | | | 1,030,509 | | | 1,135,057 |
| Series 2003-122 AJ 4.50% 2/25/28 | | | 15,888 | | | 16,019 |
| Series 2005-110 MB 5.50% 9/25/35 | | | 251,216 | | | 275,731 |
| Series 2009-94 AC 5.00% 11/25/39 | | | 1,400,000 | | | 1,565,589 |
| Series 2010-41 PN 4.50% 4/25/40 | | | 1,675,000 | | | 1,905,336 |
| Series 2010-96 DC 4.00% 9/25/25 | | | 3,245,000 | | | 3,524,278 |
| Series 2010-116 Z 4.00% 10/25/40 | | | 82,051 | | | 88,589 |
| • | Series 2012-124 SD 5.94% 11/25/42 | | | 3,529,097 | | | 1,100,274 |
| Fannie Mae Whole Loan | | | | | | |
| • | Series 2002-W6 2A1 6.595% 6/25/42 | | | 29,858 | | | 33,909 |
| Series 2004-W9 2A1 6.50% 2/25/44 | | | 4,433 | | | 5,068 |
| Series 2004-W11 1A2 6.50% 5/25/44 | | | 49,606 | | | 58,165 |
| Freddie Mac REMICs | | | | | | |
| Series 1730 Z 7.00% 5/15/24 | | | 50,857 | | | 58,451 |
| Series 2326 ZQ 6.50% 6/15/31 | | | 53,386 | | | 61,036 |
| Series 2557 WE 5.00% 1/15/18 | | | 1,161,213 | | | 1,239,159 |
| Series 2622 PE 4.50% 5/15/18 | | | 2,030,331 | | | 2,146,091 |
| Series 2687 PG 5.50% 3/15/32 | | | 249,334 | | | 252,919 |
| Series 2762 LG 5.00% 9/15/32 | | | 2,286,953 | | | 2,348,563 |
| Series 2809 DC 4.50% 6/15/19 | | | 667,713 | | | 706,152 |
| Series 3123 HT 5.00% 3/15/26 | | | 95,000 | | | 106,309 |
| Series 3131 MC 5.50% 4/15/33 | | | 640,149 | | | 652,470 |
| Series 3416 GK 4.00% 7/15/22 | | | 12,263 | | | 12,601 |
| Series 3656 PM 5.00% 4/15/40 | | | 2,540,000 | | | 2,837,970 |
| Series 4065 DE 3.00% 6/15/32 | | | 350,000 | | | 367,612 |
| wFreddie Mac Structured Pass | | | | | | |
| Through Securities | | | | | | |
| Series T-54 2A 6.50% 2/25/43 | | | 17,839 | | | 20,984 |
| Series T-58 2A 6.50% 9/25/43 | | | 7,115 | | | 8,292 |
| GNMA Series 2010-113 KE | | | | | | |
| 4.50% 9/20/40 | | | 4,115,000 | | | 4,705,596 |
| Total Agency Collateralized | | | | | | |
| Mortgage Obligations | | | | | | |
| (cost $26,118,594) | | | | | | 27,645,088 |
| | | | | | | |
| AGENCY MORTGAGE-BACKED | | | | | | |
| SECURITIES–13.21% | | | | | | |
| Fannie Mae 6.50% 8/1/17 | | | 12,171 | | | 13,468 |
| •Fannie Mae ARM | | | | | | |
| 2.402% 10/1/33 | | | 16,413 | | | 17,064 |
| 2.695% 6/1/37 | | | 5,406 | | | 5,756 |
| 2.811% 11/1/35 | | | 274,020 | | | 292,255 |
| 5.155% 8/1/35 | | | 34,436 | | | 37,007 |
| 5.843% 8/1/37 | | | 215,898 | | | 234,348 |
| Fannie Mae Relocation 15 yr | | | | | | |
| 4.00% 9/1/20 | | | 193,391 | | | 203,518 |
| Fannie Mae Relocation 30 yr | | | | | | |
| 5.00% 11/1/33 | | | 5,855 | | | 6,284 |
| 5.00% 11/1/34 | | | 4,684 | | | 5,027 |
| 5.00% 11/1/34 | | | 13,034 | | | 13,988 |
| 5.00% 4/1/35 | | | 24,014 | | | 25,773 |
| 5.00% 10/1/35 | | | 63,166 | | | 67,792 |
| 5.00% 1/1/36 | | | 80,906 | | | 86,832 |
| 5.00% 2/1/36 | | | 30,824 | | | 33,081 |
| Fannie Mae S.F. 15 yr | | | | | | |
| 2.50% 12/1/27 | | | 4,140,000 | | | 4,332,337 |
| 3.00% 11/1/27 | | | 425,760 | | | 452,813 |
| 4.00% 11/1/25 | | | 4,522,254 | | | 4,921,578 |
| 4.50% 8/1/41 | | | 332,765 | | | 361,238 |
| 5.00% 5/1/21 | | | 233,886 | | | 254,173 |
| 6.00% 12/1/22 | | | 867,206 | | | 954,487 |
| Fannie Mae S.F. 15 yr TBA | | | | | | |
| 2.50% 1/1/27 | | | 34,837,000 | | | 36,426,438 |
| 3.00% 1/1/27 | | | 46,169,000 | | | 48,729,939 |
| Fannie Mae S.F. 20 yr 5.50% 8/1/28 | | | 890,506 | | | 968,674 |
| Fannie Mae S.F. 30 yr | | | | | | |
| 5.00% 5/1/34 | | | 5,680 | | | 6,174 |
| 5.00% 1/1/35 | | | 7,103 | | | 7,720 |
| 5.00% 2/1/35 | | | 459,356 | | | 500,468 |
| 5.00% 5/1/35 | | | 14,237 | | | 15,458 |
| 5.00% 6/1/35 | | | 23,359 | | | 25,362 |
| 6.00% 8/1/36 | | | 116,617 | | | 127,674 |
| 6.00% 3/1/37 | | | 57,888 | | | 63,783 |
| 6.00% 2/1/38 | | | 236,694 | | | 259,135 |
| 6.00% 12/1/38 | | | 36,697 | | | 40,096 |
| 6.00% 11/1/39 | | | 415,088 | | | 454,442 |
| 6.00% 7/1/40 | | | 250,990 | | | 274,786 |
| 6.00% 2/1/41 | | | 2,474,208 | | | 2,729,743 |
| 6.50% 2/1/36 | | | 615,476 | | | 695,141 |
| 6.50% 3/1/36 | | | 610,949 | | | 689,355 |
| 7.50% 3/1/32 | | | 559 | | | 683 |
| 7.50% 4/1/32 | | | 1,900 | | | 2,333 |
| Fannie Mae S.F. 30 yr TBA | | | | | | |
| 3.00% 1/1/42 | | | 61,370,000 | | | 64,304,253 |
| 3.50% 1/1/42 | | | 66,963,000 | | | 71,391,452 |
| •Freddie Mac ARM | | | | | | |
| 2.342% 12/1/33 | | | 43,226 | | | 45,986 |
| 2.675% 2/1/37 | | | 279,412 | | | 300,231 |
| 2.764% 7/1/36 | | | 144,426 | | | 153,942 |
| 2.78% 8/1/37 | | | 5,055 | | | 5,393 |
| 2.787% 4/1/34 | | | 2,667 | | | 2,846 |
| 2.987% 6/1/37 | | | 387,023 | | | 412,924 |
| 5.902% 10/1/37 | | | 4,004 | | | 4,334 |
| 6.15% 10/1/37 | | | 51,421 | | | 56,068 |
Diversified Income Series-6
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
| | Principal | | Value |
| | Amount° | | (U.S. $) |
| AGENCY MORTGAGE-BACKED | | | | | | |
| | SECURITIES (continued) | | | | | | |
| Freddie Mac Relocation 30 yr | | | | | | |
| 5.00% 9/1/33 | USD | | 13,852 | | $ | 14,802 |
| Freddie Mac S.F. 15 yr | | | | | | |
| 4.50% 5/1/20 | | | 505,275 | | | 538,563 |
| 5.00% 6/1/18 | | | 175,439 | | | 187,945 |
| Freddie Mac S.F. 30 yr | | | | | | |
| | 5.00% 3/1/34 | | | 24,150 | | | 27,194 |
| 5.00% 2/1/36 | | | 8,084 | | | 8,729 |
| 5.50% 7/1/38 | | | 656,312 | | | 708,590 |
| 5.50% 7/1/40 | | | 15,637,573 | | | 16,922,268 |
| 6.00% 2/1/36 | | | 927,506 | | | 1,010,806 |
| 6.00% 8/1/38 | | | 1,908,149 | | | 2,096,695 |
| 6.00% 10/1/38 | | | 2,804,068 | | | 3,084,820 |
| 6.00% 5/1/40 | | | 4,430,849 | | | 4,821,863 |
| 6.50% 8/1/38 | | | 234,509 | | | 262,056 |
| GNMA I S.F. 30 yr 7.00% 12/15/34 | | | 255,658 | | | 299,981 |
| Total Agency Mortgage-Backed Securities | | | | | | |
| (cost $269,951,024) | | | | | | 270,997,964 |
| | |
| COMMERCIAL MORTGAGE-BACKED | | | | | | |
| SECURITIES–3.79% | | | | | | |
| BAML Commercial Mortgage Securities | | | | | | |
| • | Series 2005-6 A4 5.19% 9/10/47 | | | 1,280,000 | | | 1,425,988 |
| • | Series 2006-2 A4 5.727% 5/10/45 | | | 1,765,000 | | | 2,022,109 |
| Series 2006-4 A4 5.634% 7/10/46 | | | 3,465,000 | | | 3,964,067 |
| •Bear Stearns Commercial Mortgage Securities | | | | | | |
| Series 2005-PW10 A4 | | | | | | |
| 5.405% 12/11/40 | | | 1,684,000 | | | 1,875,377 |
| Series 2005-T20 A4A | | | | | | |
| 5.149% 10/12/42 | | | 870,000 | | | 965,241 |
| Series 2006-PW12 A4 | | | | | | |
| 5.712% 9/11/38 | | | 1,230,000 | | | 1,407,995 |
| Citigroup Commercial Mortgage Trust | | | | | | |
| Series 2012-GC8 A4 | | | | | | |
| 3.024% 9/10/45 | | | 2,490,000 | | | 2,610,974 |
| •tCommercial Mortgage Pass | | | | | | |
| Through Certificates | | | | | | |
| Series 2005-C6 A5A 5.116% 6/10/44 | | | 1,295,000 | | | 1,429,071 |
| •Credit Suisse Mortgage Capital Certificates | | | | | | |
| Series 2006-C1 AAB | | | | | | |
| 5.409% 2/15/39 | | | 65,911 | | | 68,650 |
| #DBUBS Mortgage Trust 144A | | | | | | |
| Series 2011-LC1A A3 144A | | | | | | |
| 5.002% 11/10/46 | | | 3,230,000 | | | 3,847,657 |
| • | Series 2011-LC1A C 144A | | | | | | |
| 5.557% 11/10/46 | | | 1,870,000 | | | 2,192,769 |
| #•FREMF Mortgage Trust | | | | | | |
| Series 2012-K21 B 3.938% 7/25/45 | | | 1,110,000 | | | 1,133,419 |
| Goldman Sachs Mortgage Securities II | | | | | | |
| • | Series 2004-GG2 A6 | | | | | | |
| 5.396% 8/10/38 | | | 2,310,000 | | | 2,440,928 |
| Series 2005-GG4 A4 | | | | | | |
| 4.761% 7/10/39 | | | 2,070,000 | | | 2,230,901 |
| Series 2005-GG4 A4A | | | | | | |
| 4.751% 7/10/39 | | | 5,185,000 | | | 5,592,271 |
| • | Series 2006-GG6 A4 | | | | | | |
| 5.553% 4/10/38 | | | 1,815,000 | | | 2,043,400 |
| # | Series 2010-C1 A2 144A | | | | | | |
| 4.592% 8/10/43 | | | 3,090,000 | | | 3,610,946 |
| •# | Series 2010-C1 C 144A | | | | | | |
| 5.635% 8/10/43 | | | 1,010,000 | | | 1,165,423 |
| •Greenwich Capital Commercial Funding | | | | | | |
| Series 2005-GG5 A5 | | | | | | |
| 5.224% 4/10/37 | | | 6,780,000 | | | 7,491,108 |
| JP Morgan Chase Commercial | | | | | | |
| Mortgage Securities | | | | | | |
| • | Series 2005-LDP3 A4A | | | | | | |
| 4.936% 8/15/42 | | | 880,000 | | | 967,666 |
| • | Series 2005-LDP4 A4 | | | | | | |
| 4.918% 10/15/42 | | | 2,321,000 | | | 2,519,986 |
| • | Series 2005-LDP5 A4 | | | | | | |
| 5.20% 12/15/44 | | | 2,685,000 | | | 2,992,620 |
| Series 2011-C5 A3 | | | | | | |
| 4.171% 8/15/46 | | | 3,070,000 | | | 3,496,365 |
| Lehman Brothers-UBS Commercial | | | | | | |
| Mortgage Trust Series 2004-C1 A4 | | | | | | |
| 4.568% 1/15/31 | | | 1,100,000 | | | 1,141,399 |
| Merrill Lynch Mortgage Trust | | | | | | |
| Series 2005-CIP1 A2 | | | | | | |
| 4.96% 7/12/38 | | | 430,906 | | | 438,957 |
| • | Series 2005-CKI1 A6 | | | | | | |
| 5.263% 11/12/37 | | | 900,000 | | | 1,000,329 |
| •Morgan Stanley Capital I | | | | | | |
| Series 2007-T27 A4 | | | | | | |
| 5.651% 6/11/42 | | | 4,890,000 | | | 5,790,636 |
| •#Morgan Stanley Dean Witter Capital I | | | | | | |
| Series 2001-TOP1 E 144A | | | | | | |
| 7.336% 2/15/33 | | | 77,338 | | | 77,346 |
| NCUA Guaranteed Notes | | | | | | |
| Series 2010-C1 A2 | | | | | | |
| 2.90% 10/29/20 | | | 1,420,000 | | | 1,513,672 |
| #OBP Depositor Trust | | | | | | |
| Series 2010-OBP A 144A | | | | | | |
| 4.646% 7/15/45 | | | 1,890,000 | | | 2,217,949 |
| #Timberstar Trust | | | | | | |
| Series 2006-1A A 144A | | | | | | |
| 5.668% 10/15/36 | | | 2,010,000 | | | 2,306,316 |
| #VNO Mortgage Trust | | | | | | |
| Series 2012-6AVE | | | | | | |
| 2.996% 11/15/30 | | | 2,645,000 | | | 2,730,002 |
| WF-RBS Commercial Mortgage Trust | | | | | | |
| Series 2012-C9 A3 | | | | | | |
| 2.87% 11/15/45 | | | 2,365,000 | | | 2,439,051 |
| Series 2012-C9 B | | | | | | |
| 3.84% 11/15/45 | | | 555,000 | | | 572,183 |
| Total Commercial Mortgage-Backed | | | | | | |
| Securities (cost $71,080,450) | | | | | | 77,722,771 |
Diversified Income Series-7
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
| | Principal | | Value |
| | Amount° | | (U.S. $) |
| CONVERTIBLE BONDS–1.71% | | | | | | |
| AAR 1.75% exercise price $28.61, | | | | | | |
| | expiration date 1/1/26 | USD | | 1,014,000 | | $ | 1,016,535 |
| Advanced Micro Devices | | | | | | |
| | 6.00% exercise price | | | | | | |
| $28.08, expiration date 4/30/15 | | | 1,109,000 | | | 1,036,915 |
| #Alaska Communications System | | | | | | |
| Group 144A 6.25% exercise price | | | | | | |
| $10.28, expiration date 4/27/18 | | | 889,000 | | | 600,075 |
| Alcatel-Lucent USA 2.875% exercise price | | | | | | |
| $15.35, expiration date 6/15/25 | | | 197,000 | | | 198,724 |
| *Alere 3.00% exercise price $43.98, | | | | | | |
| expiration date 5/15/16 | | | 834,000 | | | 783,960 |
| Ares Capital 5.75% exercise price $19.13, | | | | | | |
| expiration date 2/1/16 | | | 917,000 | | | 989,214 |
| ϕArvinMeritor 4.00% exercise price $26.73, | | | | | | |
| expiration date 2/12/27 | | | 1,396,000 | | | 1,051,363 |
| BGC Partners 4.50% exercise price $9.84, | | | | | | |
| expiration date 7/13/16 | | | 522,000 | | | 481,545 |
| Chesapeake Energy | | | | | | |
| 2.25% exercise price $85.86, | | | | | | |
| expiration date 12/14/38 | | | 420,000 | | | 341,250 |
| * | 2.50% exercise price $51.14, | | | | | | |
| expiration date 5/15/37 | | | 457,000 | | | 413,585 |
| #Clearwire Communications 144A | | | | | | |
| 8.25% exercise price $7.08, | | | | | | |
| expiration date 11/30/40 | | | 483,000 | | | 534,319 |
| #Corporate Office Properties 144A | | | | | | |
| 4.25% exercise price $47.96, | | | | | | |
| expiration date 4/12/30 | | | 1,277,000 | | | 1,324,089 |
| Dendreon 2.875% exercise price $51.24, | | | | | | |
| expiration date 1/13/16 | | | 377,000 | | | 286,520 |
| #Gaylord Entertainment 144A | | | | | | |
| 3.75% exercise price $22.50, | | | | | | |
| expiration date 9/29/14 | | | 322,000 | | | 562,293 |
| ϕGeneral Cable 4.50% exercise price $36.75, | | | | | | |
| expiration date 11/15/29 | | | 680,000 | | | 736,950 |
| Helix Energy Solutions Group | | | | | | |
| 3.25% exercise price $25.02, | | | | | | |
| expiration date 3/12/32 | | | 907,000 | | | 1,074,228 |
| *ϕHologic 2.00% exercise price $31.17, | | | | | | |
| expiration date 2/27/42 | | | 474,000 | | | 472,519 |
| #Iconix Brand Group 144A | | | | | | |
| 2.50% exercise price $30.75, | | | | | | |
| expiration date 5/31/16 | | | 803,000 | | | 835,622 |
| #Illumina 144A 0.25% exercise price $83.55, | | | | | | |
| expiration date 3/11/16 | | | 672,000 | | | 654,780 |
| Intel 3.25% exercise price $22.20, | | | | | | |
| expiration date 8/1/39 | | | 669,000 | | | 787,329 |
| International Game Technology | | | | | | |
| 3.25% exercise price $19.97, | | | | | | |
| expiration date 5/1/14 | | | 651,000 | | | 682,329 |
| Jefferies Group 3.875% exercise price | | | | | | |
| $37.20, expiration date 10/31/29 | | | 1,299,000 | | | 1,293,317 |
| L-3 Communications Holdings | | | | | | |
| 3.00% exercise price $91.21, | | | | | | |
| expiration date 8/1/35 | | | 958,000 | | | 974,765 |
| Leap Wireless International | | | | | | |
| 4.50% exercise price $93.21, | | | | | | |
| expiration date 7/10/14 | | | 1,251,000 | | | 1,199,396 |
| #Lexington Realty Trust 144A | | | | | | |
| 6.00% exercise price $6.93, | | | | | | |
| expiration date 1/11/30 | | | 563,000 | | | 868,428 |
| Linear Technology 3.00% exercise price | | | | | | |
| $42.07 expiration date 4/30/27 | | | 1,646,000 | | | 1,722,127 |
| Live Nation Entertainment | | | | | | |
| 2.875% exercise price $27.14, | | | | | | |
| expiration date 7/14/27 | | | 1,592,000 | | | 1,584,039 |
| MGM Resorts International | | | | | | |
| 4.25% exercise price $18.58, | | | | | | |
| expiration date 4/10/15 | | | 985,000 | | | 1,044,716 |
| Mirant (Escrow) 2.50% exercise price | | | | | | |
| $67.95, expiration date 6/15/21 | | | 110,000 | | | 0 |
| Mylan 3.75% exercise price $13.32, | | | | | | |
| expiration date 9/15/15 | | | 384,000 | | | 818,160 |
| =National Retail Properties | | | | | | |
| 3.95% exercise price $23.46, | | | | | | |
| expiration date 12/6/12 | | | 405,000 | | | 531,516 |
| Nuance Communications | | | | | | |
| 2.75% exercise price $32.30, | | | | | | |
| expiration date 11/1/31 | | | 331,000 | | | 360,997 |
| NuVasive | | | | | | |
| 2.25% exercise price $44.74, | | | | | | |
| expiration date 3/15/13 | | | 353,000 | | | 353,441 |
| 2.75% exercise price $42.13, | | | | | | |
| expiration date 6/30/17 | | | 1,321,000 | | | 1,162,480 |
| #Owens-Brockway Glass Container 144A | | | | | | |
| 3.00% exercise price $47.47, | | | | | | |
| expiration date 5/28/15 | | | 1,610,000 | | | 1,600,943 |
| *Peabody Energy 4.75% exercise price | | | | | | |
| $58.19, expiration date 12/15/41 | | | 211,000 | | | 204,274 |
| PHH 4.00% exercise price $25.80, | | | | | | |
| expiration date 2/28/14 | | | 1,232,000 | | | 1,383,690 |
| Rovi 2.625% exercise price $47.36, | | | | | | |
| expiration date 2/10/40 | | | 659,000 | | | 658,588 |
| *SanDisk 1.50% exercise price $52.37, | | | | | | |
| expiration date 8/11/17 | | | 822,000 | | | 957,630 |
| SBA Communications 4.00% exercise price | | | | | | |
| $30.38, expiration date 9/29/14 | | | 380,000 | | | 900,363 |
| Steel Dynamics 5.125% exercise price | | | | | | |
| $17.32, expiration date 6/15/14 | | | 444,000 | | | 485,348 |
| #Tibco Software 144A | | | | | | |
| 2.25% 5/1/32 exercise price $50.57, | | | | | | |
| expiration date 4/30/32 | | | 413,000 | | | 394,673 |
| #Titan Machinery 144A | | | | | | |
| 3.75% 5/1/19 exercise price $43.17, | | | | | | |
| expiration date 4/30/19 | | | 416,000 | | | 393,380 |
Diversified Income Series-8
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
| | Principal | | Value |
| | | Amount° | | (U.S. $) |
| CONVERTIBLE BONDS (continued) | | | | | | |
| VeriSign 3.25% exercise price $34.37, | | | | | | |
| expiration date 8/15/37 | USD | | 561,000 | | $ | 710,366 |
| #WellPoint 2.75% exercise price $75.57, | | | | | | |
| expiration date 10/15/42 | | | 491,000 | | | 530,587 |
| Total Convertible Bonds | | | | | | |
| (cost $33,024,792) | | | | | | 34,997,368 |
| |
| CORPORATE BONDS–48.66% | | | | | | |
| Automotive–0.80% | | | | | | |
| America Axle & Manufacturing | | | | | | |
| 7.875% 3/1/17 | | | 1,450,000 | | | 1,504,375 |
| ArvinMeritor 8.125% 9/15/15 | | | 2,010,000 | | | 2,125,575 |
| *Chrysler Group 8.25% 6/15/21 | | | 1,050,000 | | | 1,160,250 |
| Ford Motor 7.45% 7/16/31 | | | 3,045,000 | | | 3,882,375 |
| Ford Motor Credit | | | | | | |
| 5.00% 5/15/18 | | | 3,075,000 | | | 3,400,753 |
| 12.00% 5/15/15 | | | 1,445,000 | | | 1,784,575 |
| #Hyundai Capital America 144A | | | | | | |
| 2.125% 10/2/17 | | | 2,000,000 | | | 2,016,586 |
| Tomkins 9.00% 10/1/18 | | | 410,000 | | | 461,250 |
| | | | | | | 16,335,739 |
| Banking–5.49% | | | | | | |
| Abbey National Treasury Services | | | | | | |
| | 4.00% 4/27/16 | | | 2,245,000 | | | 2,375,659 |
| AgriBank 9.125% 7/15/19 | | | 2,750,000 | | | 3,734,349 |
| Banco do Brasil 3.875% 10/10/22 | | | 2,010,000 | | | 2,030,100 |
| #Banco Santander Chile 144A | | | | | | |
| 3.875% 9/20/22 | | | 1,330,000 | | | 1,366,761 |
| #Banco Santander Mexico SA Institucion | | | | | | |
| de Banca Multiple Grupo Financiero | | | | | | |
| Santand 4.125% 11/9/22 | | | 2,040,000 | | | 2,080,800 |
| Bancolombia 5.125% 9/11/22 | | | 1,898,000 | | | 1,983,410 |
| Bank of America | | | | | | |
| 3.75% 7/12/16 | | | 1,490,000 | | | 1,594,021 |
| 3.875% 3/22/17 | | | 2,140,000 | | | 2,323,145 |
| 6.125% 9/15/21 | GBP | | 1,650,000 | | | 3,166,215 |
| *Barclays Bank 7.625% 11/21/22 | USD | | 2,135,000 | | | 2,137,669 |
| BB&T 5.25% 11/1/19 | | | 10,782,000 | | | 12,484,759 |
| BBVA US Senior 4.664% 10/9/15 | | | 1,560,000 | | | 1,600,529 |
| #Caixa Economica Federal 144A | | | | | | |
| 2.375% 11/6/17 | | | 2,710,000 | | | 2,696,450 |
| Capital One Capital V 10.25% 8/15/39 | | | 1,815,000 | | | 1,815,000 |
| City National 5.25% 9/15/20 | | | 2,635,000 | | | 2,939,798 |
| •Fifth Third Capital Trust IV 6.50% 4/15/37 | | | 3,570,000 | | | 3,583,388 |
| •#*HBOS Capital Funding 144A | | | | | | |
| 6.071% 6/29/49 | | | 1,240,000 | | | 1,091,200 |
| #HSBC Bank 144A 4.75% 1/19/21 | | | 3,750,000 | | | 4,334,460 |
| HSBC Holdings 4.00% 3/30/22 | | | 3,585,000 | | | 3,932,738 |
| JPMorgan Chase | | | | | | |
| 2.00% 8/15/17 | | | 1,355,000 | | | 1,385,651 |
| 2.92% 9/19/17 | CAD | | 3,411,000 | | | 3,460,452 |
| # | 144A 6.00% 3/14/13 | BRL | | 396,300 | | | 5,220,204 |
| 6.00% 10/1/17 | USD | | 3,230,000 | | | 3,827,834 |
| KeyBank 6.95% 2/1/28 | | | 4,255,000 | | | 5,086,401 |
| Morgan Stanley 7.60% 8/8/17 | NZD | | 1,818,000 | | | 1,622,699 |
| •National City Bank 0.681% 6/7/17 | USD | | 1,905,000 | | | 1,863,536 |
| PNC Bank 6.875% 4/1/18 | | | 5,710,000 | | | 7,140,498 |
| PNC Financial Services Group | | | | | | |
| 2.854% 11/9/22 | | | 605,000 | | | 609,824 |
| •#PNC Preferred Funding Trust II 144A | | | | | | |
| 1.531% 3/31/49 | | | 2,500,000 | | | 2,162,500 |
| •SunTrust Bank 0.602% 8/24/15 | | | 1,965,000 | | | 1,910,259 |
| *SVB Financial Group 5.375% 9/15/20 | | | 865,000 | | | 973,846 |
| U.S. Bank 4.95% 10/30/14 | | | 1,755,000 | | | 1,887,804 |
| •USB Capital IX 3.50% 10/29/49 | | | 7,105,000 | | | 6,431,233 |
| Wachovia | | | | | | |
| • | 0.71% 10/15/16 | | | 1,755,000 | | | 1,725,465 |
| 5.60% 3/15/16 | | | 4,065,000 | | | 4,578,157 |
| Wells Fargo | | | | | | |
| 3.50% 3/8/22 | | | 590,000 | | | 630,565 |
| 4.75% 2/9/15 | | | 2,165,000 | | | 2,326,420 |
| Zions Bancorp | | | | | | |
| 4.50% 3/27/17 | | | 1,895,000 | | | 1,981,708 |
| 7.75% 9/23/14 | | | 550,000 | | | 600,931 |
| | | | | | | 112,696,438 |
| Basic Industry–4.63% | | | | | | |
| AK Steel 7.625% 5/15/20 | | | 695,000 | | | 608,125 |
| Alcoa | | | | | | |
| 5.40% 4/15/21 | | | 860,000 | | | 896,591 |
| 6.75% 7/15/18 | | | 2,680,000 | | | 3,065,261 |
| #Anglo American Capital 144A | | | | | | |
| 2.625% 4/3/17 | | | 2,670,000 | | | 2,721,715 |
| 2.625% 9/27/17 | | | 3,855,000 | | | 3,938,495 |
| ArcelorMittal | | | | | | |
| * | 6.75% 2/25/22 | | | 115,000 | | | 120,900 |
| 10.35% 6/1/19 | | | 2,685,000 | | | 3,224,210 |
| Barrick Gold 3.85% 4/1/22 | | | 2,895,000 | | | 3,070,408 |
| Barrick North America Finance | | | | | | |
| 4.40% 5/30/21 | | | 1,145,000 | | | 1,257,875 |
| Cabot | | | | | | |
| 2.55% 1/15/18 | | | 2,535,000 | | | 2,616,072 |
| 3.70% 7/15/22 | | | 1,400,000 | | | 1,422,403 |
| #Cemex Espana Luxembourg 144A | | | | | | |
| 9.25% 5/12/20 | | | 1,059,000 | | | 1,159,605 |
| •#*Cemex SAB 144A 5.311% 9/30/15 | | | 2,618,000 | | | 2,663,815 |
| Century Aluminum 8.00% 5/15/14 | | | 1,229,000 | | | 1,247,435 |
| CF Industries | | | | | | |
| 6.875% 5/1/18 | | | 4,030,000 | | | 4,928,746 |
| 7.125% 5/1/20 | | | 1,165,000 | | | 1,468,372 |
| Compass Minerals International | | | | | | |
| 8.00% 6/1/19 | | | 904,000 | | | 980,840 |
| Domtar 4.40% 4/1/22 | | | 970,000 | | | 982,866 |
| Dow Chemical 8.55% 5/15/19 | | | 9,021,000 | | | 12,194,839 |
| Ecolab 1.45% 12/8/17 | | | 1,445,000 | | | 1,440,142 |
| #FMG Resources August 2006 144A | | | | | | |
| 6.875% 4/1/22 | | | 380,000 | | | 389,975 |
| 7.00% 11/1/15 | | | 875,000 | | | 923,125 |
| Georgia-Pacific 8.00% 1/15/24 | | | 5,225,000 | | | 7,319,985 |
| #HD Supply 144A 11.00% 4/15/20 | | | 600,000 | | | 711,000 |
| Headwaters 7.625% 4/1/19 | | | 1,585,000 | | | 1,691,988 |
| International Paper | | | | | | |
| 4.75% 2/15/22 | | | 725,000 | | | 821,870 |
| 6.00% 11/15/41 | | | 720,000 | | | 855,723 |
| 9.375% 5/15/19 | | | 505,000 | | | 689,551 |
Diversified Income Series-9
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
| | Principal | | Value |
| | | Amount° | | (U.S. $) |
| CORPORATE BONDS (continued) | | | | | | |
| Basic Industry (continued) | | | | | | |
| LyondellBasell Industries | | | | | | |
| 5.75% 4/15/24 | USD | | 1,810,000 | | $ | 2,135,800 |
| | 6.00% 11/15/21 | | | 1,000,000 | | | 1,177,500 |
| #MacDermid 144A 9.50% 4/15/17 | | | 1,111,000 | | | 1,162,384 |
| #Mexichem SAB 144A 4.875% 9/19/22 | | | 1,475,000 | | | 1,593,000 |
| Mohawk Industries 6.375% 1/15/16 | | | 621,000 | | | 701,730 |
| #Murray Energy 144A 10.25% 10/15/15 | | | 1,070,000 | | | 1,043,250 |
| #NewMarket 144A 4.10% 12/15/22 | | | 620,000 | | | 632,141 |
| Norcraft Finance 10.50% 12/15/15 | | | 715,000 | | | 723,938 |
| Nortek 8.50% 4/15/21 | | | 1,380,000 | | | 1,538,700 |
| Novelis 8.75% 12/15/20 | | | 1,475,000 | | | 1,652,000 |
| Precision Castparts 2.50% 1/15/23 | | | 1,745,000 | | | 1,759,979 |
| Rio Tinto Finance USA 2.875% 8/21/22 | | | 3,765,000 | | | 3,797,835 |
| #Ryerson 144A | | | | | | |
| 9.00% 10/15/17 | | | 795,000 | | | 813,881 |
| 11.25% 10/15/18 | | | 330,000 | | | 304,838 |
| #Samarco Mineracao 144A | | | | | | |
| 4.125% 11/1/22 | | | 2,522,000 | | | 2,572,440 |
| Southern Copper 5.25% 11/8/42 | | | 2,890,000 | | | 2,906,843 |
| Teck Resources | | | | | | |
| 3.00% 3/1/19 | | | 1,150,000 | | | 1,187,209 |
| * | 3.75% 2/1/23 | | | 1,450,000 | | | 1,490,348 |
| Vale Overseas 4.375% 1/11/22 | | | 4,045,000 | | | 4,338,291 |
| | | | | | | 94,944,039 |
| Brokerage–0.52% | | | | | | |
| •Bear Stearns 3.557% 4/24/14 | AUD | | 3,300,000 | | | 3,406,421 |
| Jefferies Group | | | | | | |
| 6.25% 1/15/36 | USD | | 695,000 | | | 722,800 |
| 6.45% 6/8/27 | | | 878,000 | | | 939,460 |
| Lazard Group 6.85% 6/15/17 | | | 4,829,000 | | | 5,586,877 |
| | | | | | | 10,655,558 |
| Capital Goods–0.89% | | | | | | |
| Anixter 10.00% 3/15/14 | | | 426,000 | | | 464,340 |
| *Berry Plastics 9.75% 1/15/21 | | | 1,155,000 | | | 1,336,913 |
| Case New Holland 7.75% 9/1/13 | | | 1,000,000 | | | 1,045,000 |
| #Cemex Finance 144A 9.375% 10/12/22 | | | 880,000 | | | 994,400 |
| #Cemex SAB de CV 144A 9.50% 6/15/18 | | | 290,000 | | | 325,525 |
| #Consolidated Container 144A | | | | | | |
| 10.125% 7/15/20 | | | 635,000 | | | 682,625 |
| #Hutchison Whampoa International 144A | | | | | | |
| 12 II 2.00% 11/8/17 | | | 2,050,000 | | | 2,053,596 |
| Kratos Defense & Security Solutions | | | | | | |
| 10.00% 6/1/17 | | | 565,000 | | | 622,913 |
| #Plastipak Holdings 144A 10.625% 8/15/19 | | | 873,000 | | | 1,001,768 |
| Reynolds Group Issuer 9.00% 4/15/19 | | | 3,065,000 | | | 3,202,925 |
| #URS 144A 5.00% 4/1/22 | | | 1,860,000 | | | 1,918,266 |
| #Votorantim Cimentos 144A 7.25% 4/5/41 | | | 4,135,000 | | | 4,672,549 |
| | | | | | | 18,320,820 |
| Communications–6.67% | | | | | | |
| Amazon.com 2.50% 11/29/22 | | | 4,185,000 | | | 4,133,813 |
| America Movil SAB | | | | | | |
| 3.125% 7/16/22 | | | 1,330,000 | | | 1,355,201 |
| 5.00% 3/30/20 | | | 2,720,000 | | | 3,178,244 |
| American Tower 5.90% 11/1/21 | | | 5,580,000 | | | 6,673,009 |
| AT&T 2.625% 12/1/22 | | | 2,690,000 | | | 2,700,281 |
| Baidu 3.50% 11/28/22 | | | 2,345,000 | | | 2,363,305 |
| #CC Holdings GS V 144A 3.849% 4/15/23 | | | 1,690,000 | | | 1,722,892 |
| CCO Holdings | | | | | | |
| 5.25% 9/30/22 | | | 1,125,000 | | | 1,144,688 |
| 7.375% 6/1/20 | | | 220,000 | | | 245,300 |
| CenturyLink 5.80% 3/15/22 | | | 3,230,000 | | | 3,420,622 |
| Citizens Communications 6.25% 1/15/13 | | | 336,000 | | | 336,630 |
| Clear Channel Communications | | | | | | |
| 9.00% 3/1/21 | | | 635,000 | | | 569,913 |
| Clear Channel Worldwide Holdings | | | | | | |
| 7.625% 3/15/20 | | | 1,140,000 | | | 1,154,250 |
| 7.625% 3/15/20 | | | 120,000 | | | 120,300 |
| #Clearwire Communications 144A | | | | | | |
| 12.00% 12/1/15 | | | 1,194,000 | | | 1,286,325 |
| #Columbus International 144A | | | | | | |
| 11.50% 11/20/14 | | | 1,925,000 | | | 2,156,000 |
| Comcast 4.65% 7/15/42 | | | 3,185,000 | | | 3,370,943 |
| #Cox Communications 144A | | | | | | |
| 3.25% 12/15/22 | | | 1,240,000 | | | 1,281,477 |
| *Cricket Communications 7.75% 10/15/20 | | | 1,360,000 | | | 1,394,000 |
| #Crown Castle Towers 144A | | | | | | |
| 4.883% 8/15/20 | | | 9,485,000 | | | 10,719,794 |
| #Deutsche Telekom International Finance 144A | | | | | | |
| 2.25% 3/6/17 | | | 3,365,000 | | | 3,454,196 |
| 3.125% 4/11/16 | | | 2,015,000 | | | 2,133,008 |
| #Digicel Group 144A | | | | | | |
| 8.25% 9/1/17 | | | 185,000 | | | 199,800 |
| 8.25% 9/30/20 | | | 1,795,000 | | | 1,983,475 |
| 10.50% 4/15/18 | | | 280,000 | | | 310,800 |
| DirecTV Holdings | | | | | | |
| 3.80% 3/15/22 | | | 2,715,000 | | | 2,806,373 |
| 5.15% 3/15/42 | | | 900,000 | | | 913,737 |
| DISH DBS | | | | | | |
| 5.875% 7/15/22 | | | 600,000 | | | 648,000 |
| 7.875% 9/1/19 | | | 1,140,000 | | | 1,356,600 |
| Entravision Communications | | | | | | |
| 8.75% 8/1/17 | | | 535,000 | | | 583,150 |
| Historic TW 6.875% 6/15/18 | | | 5,675,000 | | | 7,159,954 |
| Intelsat Bermuda | | | | | | |
| 11.25% 2/4/17 | | | 1,545,000 | | | 1,639,631 |
| # | PIK 144A 11.50% 2/4/17 | | | 610,000 | | | 650,413 |
| Intelsat Jackson Holdings 7.25% 10/15/20 | | | 835,000 | | | 911,194 |
| Interpublic Group | | | | | | |
| 2.25% 11/15/17 | | | 1,260,000 | | | 1,243,292 |
| 3.75% 2/15/23 | | | 1,885,000 | | | 1,893,986 |
| 4.00% 3/15/22 | | | 3,160,000 | | | 3,277,941 |
| Level 3 Communications 11.875% 2/1/19 | | | 610,000 | | | 706,075 |
| Level 3 Financing 10.00% 2/1/18 | | | 930,000 | | | 1,041,600 |
| MetroPCS Wireless 6.625% 11/15/20 | | | 655,000 | | | 698,394 |
| #Nara Cable Funding 144A 8.875% 12/1/18 | | | 1,770,000 | | | 1,809,825 |
| Nielsen Finance 11.625% 2/1/14 | | | 368,000 | | | 410,320 |
| #Oi 144A 5.75% 2/10/22 | | | 3,731,000 | | | 3,898,895 |
| PAETEC Holding 8.875% 6/30/17 | | | 698,000 | | | 752,095 |
| #Qtel International Finance 3.25% 2/21/23 | | | 1,175,000 | | | 1,176,763 |
| Qwest 6.75% 12/1/21 | | | 1,725,000 | | | 2,025,119 |
| #Sinclair Television Group 144A | | | | | | |
| 9.25% 11/1/17 | | | 785,000 | | | 867,425 |
| #Sirius XM Radio 144A 8.75% 4/1/15 | | | 1,083,000 | | | 1,231,913 |
| #SK Telecom 144A 2.125% 5/1/18 | | | 990,000 | | | 997,888 |
Diversified Income Series-10
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
| | Principal | | Value |
| | | Amount° | | (U.S. $) |
| CORPORATE BONDS (continued) | | | | | | |
| Communications (continued) | | | | | | |
| Sprint Capital 8.75% 3/15/32 | USD | | 685,000 | | $ | 840,838 |
| Sprint Nextel | | | | | | |
| 6.00% 12/1/16 | | | 565,000 | | | 617,263 |
| 8.375% 8/15/17 | | | 600,000 | | | 700,500 |
| 9.125% 3/1/17 | | | 1,165,000 | | | 1,377,613 |
| Telecom Italia Capital 5.25% 10/1/15 | | | 310,000 | | | 330,615 |
| #Telefonica Chile 3.875% 10/12/22 | | | 2,655,000 | | | 2,663,655 |
| Telefonica Emisiones | | | | | | |
| | 5.462% 2/16/21 | | | 950,000 | | | 1,015,313 |
| 6.421% 6/20/16 | | | 2,495,000 | | | 2,766,955 |
| Telesat Canada | | | | | | |
| # | 144A 6.00% 5/15/17 | | | 760,000 | | | 801,800 |
| 12.50% 11/1/17 | | | 391,000 | | | 430,589 |
| Time Warner Cable | | | | | | |
| 5.85% 5/1/17 | | | 580,000 | | | 685,833 |
| 8.25% 4/1/19 | | | 3,485,000 | | | 4,643,571 |
| #Univision Communications 144A | | | | | | |
| 6.875% 5/15/19 | | | 1,130,000 | | | 1,180,850 |
| #UPC Holding 144A 9.875% 4/15/18 | | | 590,000 | | | 669,650 |
| #UPCB Finance III 144A 6.625% 7/1/20 | | | 1,870,000 | | | 2,012,588 |
| #VimpelCom 144A 7.748% 2/2/21 | | | 1,965,000 | | | 2,274,488 |
| #VimpelCom Holdings 144A 7.504% 3/1/22 | | | 318,000 | | | 365,303 |
| Virgin Media Finance 8.375% 10/15/19 | | | 568,000 | | | 647,520 |
| Virgin Media Secured Finance | | | | | | |
| 6.50% 1/15/18 | | | 7,925,000 | | | 8,568,905 |
| #Vivendi 144A | | | | | | |
| 3.45% 1/12/18 | | | 1,700,000 | | | 1,757,554 |
| 6.625% 4/4/18 | | | 4,275,000 | | | 5,031,554 |
| #Wind Acquisition Finance 144A | | | | | | |
| 11.75% 7/15/17 | | | 680,000 | | | 715,700 |
| Windstream | | | | | | |
| 7.875% 11/1/17 | | | 235,000 | | | 265,550 |
| 8.125% 8/1/13 | | | 455,000 | | | 474,338 |
| | | | | | | 136,947,394 |
| Consumer Cyclical–2.27% | | | | | | |
| CKE Restaurants 11.375% 7/15/18 | | | 958,000 | | | 1,106,490 |
| CVS Caremark 2.75% 12/1/22 | | | 4,060,000 | | | 4,083,713 |
| #Daimler Finance North America 144A | | | | | | |
| 2.25% 7/31/19 | | | 2,595,000 | | | 2,618,620 |
| Darden Restaurants 3.35% 11/1/22 | | | 3,690,000 | | | 3,577,935 |
| Dave & Buster’s 11.00% 6/1/18 | | | 350,000 | | | 393,750 |
| Delphi 6.125% 5/15/21 | | | 1,865,000 | | | 2,079,475 |
| Dollar General 4.125% 7/15/17 | | | 515,000 | | | 543,325 |
| Ebay 4.00% 7/15/42 | | | 5,385,000 | | | 5,267,014 |
| Ford Motor Credit 3.984% 6/15/16 | | | 1,625,000 | | | 1,726,862 |
| Hanesbrands 6.375% 12/15/20 | | | 1,070,000 | | | 1,182,350 |
| Host Hotels & Resorts | | | | | | |
| 4.75% 3/1/23 | | | 2,060,000 | | | 2,193,900 |
| 5.25% 3/15/22 | | | 1,220,000 | | | 1,342,000 |
| 5.875% 6/15/19 | | | 905,000 | | | 990,975 |
| Ingles Markets 8.875% 5/15/17 | | | 851,000 | | | 911,634 |
| Levi Strauss 7.625% 5/15/20 | | | 320,000 | | | 350,400 |
| Macy’s 5.90% 12/1/16 | | | 1,085,000 | | | 1,276,025 |
| *Quiksilver 6.875% 4/15/15 | | | 1,220,000 | | | 1,204,750 |
| Rite Aid 9.25% 3/15/20 | | | 325,000 | | | 347,750 |
| #Sealy Mattress 144A 10.875% 4/15/16 | | | 271,000 | | | 287,938 |
| Suburban Propane Partners | | | | | | |
| 7.375% 8/1/21 | | | 464,000 | | | 506,920 |
| Tops Markets 10.125% 10/15/15 | | | 510,000 | | | 538,369 |
| #Viacom 144A 4.375% 3/15/43 | | | 2,925,000 | | | 2,889,283 |
| Walgreen 3.10% 9/15/22 | | | 3,210,000 | | | 3,244,585 |
| Walt Disney 2.35% 12/1/22 | | | 1,855,000 | | | 1,876,164 |
| Western Union 3.65% 8/22/18 | | | 1,510,000 | | | 1,545,450 |
| Wyndham Worldwide | | | | | | |
| 4.25% 3/1/22 | | | 1,045,000 | | | 1,080,977 |
| 5.625% 3/1/21 | | | 1,610,000 | | | 1,799,935 |
| 5.75% 2/1/18 | | | 1,390,000 | | | 1,555,489 |
| | | | | | | 46,522,078 |
| Consumer Non-Cyclical–4.11% | | | | | | |
| Amgen | | | | | | |
| 3.875% 11/15/21 | | | 1,150,000 | | | 1,265,244 |
| 5.375% 5/15/43 | | | 1,225,000 | | | 1,450,097 |
| Boston Scientific 6.00% 1/15/20 | | | 1,555,000 | | | 1,816,487 |
| #Brasil Foods 144A 5.875% 6/6/22 | | | 2,800,000 | | | 3,094,000 |
| CareFusion 6.375% 8/1/19 | | | 8,080,000 | | | 9,648,230 |
| Celgene | | | | | | |
| 3.25% 8/15/22 | | | 1,940,000 | | | 1,981,677 |
| 3.95% 10/15/20 | | | 2,215,000 | | | 2,407,960 |
| Constellation Brands | | | | | | |
| 4.625% 3/1/23 | | | 610,000 | | | 640,500 |
| 6.00% 5/1/22 | | | 1,135,000 | | | 1,305,250 |
| Del Monte 7.625% 2/15/19 | | | 1,635,000 | | | 1,712,663 |
| #Dole Food 144A 8.00% 10/1/16 | | | 705,000 | | | 736,725 |
| Energizer Holdings 4.70% 5/24/22 | | | 4,080,000 | | | 4,377,285 |
| #Express Scripts Holding 144A | | | | | | |
| 2.65% 2/15/17 | | | 265,000 | | | 275,707 |
| #Heineken 144A | | | | | | |
| 2.75% 4/1/23 | | | 1,380,000 | | | 1,358,006 |
| 3.40% 4/1/22 | | | 2,850,000 | | | 2,978,643 |
| Humana 3.15% 12/1/22 | | | 1,565,000 | | | 1,559,573 |
| Jarden | | | | | | |
| 6.125% 11/15/22 | | | 680,000 | | | 737,800 |
| 7.50% 1/15/20 | | | 365,000 | | | 402,413 |
| #Korea Expressway 144A 1.875% 10/22/17 | | | 2,035,000 | | | 2,022,379 |
| #Kraft Foods Group 144A 5.00% 6/4/42 | | | 2,155,000 | | | 2,433,105 |
| Laboratory Corporation of America | | | | | | |
| 2.20% 8/23/17 | | | 2,075,000 | | | 2,132,214 |
| NBTY 9.00% 10/1/18 | | | 1,635,000 | | | 1,855,725 |
| Newell Rubbermaid 2.05% 12/1/17 | | | 1,270,000 | | | 1,288,388 |
| #Penrod-Ricard 144A | | | | | | |
| 4.25% 7/15/22 | | | 1,295,000 | | | 1,425,970 |
| 4.45% 1/15/22 | | | 525,000 | | | 581,729 |
| 5.75% 4/7/21 | | | 2,840,000 | | | 3,402,737 |
| Quest Diagnostics 4.70% 4/1/21 | | | 3,205,000 | | | 3,594,988 |
| Reynolds American | | | | | | |
| 3.25% 11/1/22 | | | 2,275,000 | | | 2,290,008 |
| 4.75% 11/1/42 | | | 1,535,000 | | | 1,554,814 |
| #SABMiller Holdings 144A 3.75% 1/15/22 | | | 4,600,000 | | | 4,976,795 |
| *Safeway 4.75% 12/1/21 | | | 2,870,000 | | | 2,962,305 |
| Scotts Miracle-Gro 6.625% 12/15/20 | | | 540,000 | | | 595,350 |
| Teva Pharmaceutical Finance | | | | | | |
| 2.95% 12/18/22 | | | 2,030,000 | | | 2,057,878 |
| Western Union 2.875% 12/10/17 | | | 900,000 | | | 892,781 |
Diversified Income Series-11
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
| | Principal | | Value |
| | | Amount° | | (U.S. $) |
| CORPORATE BONDS (continued) | | | | | | |
| Consumer Non-Cyclical (continued) | | | | | | |
| #Woolworths 144A | | | | | | |
| 3.15% 4/12/16 | USD | | 775,000 | | $ | 813,396 |
| | 4.55% 4/12/21 | | | 930,000 | | | 1,041,701 |
| Yale University 2.90% 10/15/14 | | | 3,520,000 | | | 3,674,584 |
| Zimmer Holdings | | | | | | |
| 3.375% 11/30/21 | | | 2,700,000 | | | 2,803,680 |
| 4.625% 11/30/19 | | | 3,610,000 | | | 4,101,177 |
| | | | | | | 84,249,964 |
| Electric–3.86% | | | | | | |
| #Abu Dhabi National Energy 144A | | | | | | |
| 2.50% 1/12/18 | | | 820,000 | | | 830,250 |
| 3.625% 1/12/23 | | | 755,000 | | | 781,425 |
| Ameren Illinois 9.75% 11/15/18 | | | 5,810,000 | | | 8,079,143 |
| American Electric Power 1.65% 12/15/17 | | | 335,000 | | | 336,572 |
| #American Transmission Systems 144A | | | | | | |
| 5.25% 1/15/22 | | | 4,370,000 | | | 5,041,612 |
| #APT Pipelines 144A 3.875% 10/11/22 | | | 1,565,000 | | | 1,561,648 |
| CenterPoint Energy 5.95% 2/1/17 | | | 2,590,000 | | | 3,011,732 |
| CMS Energy | | | | | | |
| 4.25% 9/30/15 | | | 5,345,000 | | | 5,698,085 |
| 6.25% 2/1/20 | | | 1,695,000 | | | 1,988,089 |
| ComEd Financing III 6.35% 3/15/33 | | | 2,015,000 | | | 2,105,675 |
| Duquense Light Holdings 5.50% 8/15/15 | | | 1,076,000 | | | 1,166,468 |
| •FPL Group Capital | | | | | | |
| 6.35% 10/1/66 | | | 3,675,000 | | | 3,926,333 |
| 6.65% 6/15/67 | | | 195,000 | | | 208,851 |
| Great Plains Energy 5.292% 6/15/22 | | | 3,250,000 | | | 3,659,110 |
| •Integrys Energy Group 6.11% 12/1/66 | | | 3,120,000 | | | 3,274,939 |
| Ipalco Enterprises 5.00% 5/1/18 | | | 1,370,000 | | | 1,441,925 |
| Jersey Central Power & Light | | | | | | |
| 5.625% 5/1/16 | | | 495,000 | | | 562,048 |
| LG&E & KU Energy | | | | | | |
| 3.75% 11/15/20 | | | 2,635,000 | | | 2,787,469 |
| 4.375% 10/1/21 | | | 3,430,000 | | | 3,770,582 |
| #Narragansett Electric 144A | | | | | | |
| 4.17% 12/10/42 | | | 1,415,000 | | | 1,408,010 |
| #Niagara Mohawk Power 144A | | | | | | |
| 2.721% 11/28/22 | | | 2,670,000 | | | 2,660,762 |
| Pennsylvania Electric 5.20% 4/1/20 | | | 3,195,000 | | | 3,689,739 |
| PPL Capital Funding | | | | | | |
| 4.20% 6/15/22 | | | 740,000 | | | 797,358 |
| • | 6.70% 3/30/67 | | | 1,330,000 | | | 1,407,772 |
| Public Service Company of Oklahoma | | | | | | |
| 5.15% 12/1/19 | | | 3,595,000 | | | 4,203,353 |
| Puget Energy 6.00% 9/1/21 | | | 1,065,000 | | | 1,176,455 |
| •Puget Sound Energy 6.974% 6/1/67 | | | 4,314,000 | | | 4,599,803 |
| SCANA 4.125% 2/1/22 | | | 2,260,000 | | | 2,374,198 |
| •Wisconsin Energy 6.25% 5/15/67 | | | 4,880,000 | | | 5,257,131 |
| Wisconsin Power & Light 2.25% 11/15/22 | | | 1,475,000 | | | 1,454,242 |
| | | | | | | 79,260,779 |
| Energy–5.36% | | | | | | |
| AmeriGas Finance | | | | | | |
| 6.75% 5/20/20 | | | 180,000 | | | 198,450 |
| 7.00% 5/20/22 | | | 285,000 | | | 318,487 |
| AmeriGas Partners 6.50% 5/20/21 | | | 349,000 | | | 380,410 |
| Antero Resources Finance | | | | | | |
| 9.375% 12/1/17 | | | 545,000 | | | 600,863 |
| Apache 2.625% 1/15/23 | | | 985,000 | | | 985,310 |
| Chevron 2.355% 12/5/22 | | | 2,420,000 | | | 2,429,194 |
| Comstock Resources 7.75% 4/1/19 | | | 440,000 | | | 448,800 |
| Continental Resources 5.00% 9/15/22 | | | 805,000 | | | 871,413 |
| Copano Energy 7.75% 6/1/18 | | | 820,000 | | | 868,175 |
| Ecopetrol 7.625% 7/23/19 | | | 3,426,000 | | | 4,445,234 |
| #ENI 144A 4.15% 10/1/20 | | | 3,855,000 | | | 3,954,259 |
| EOG Resources 2.625% 3/15/23 | | | 1,535,000 | | | 1,549,246 |
| *Forest Oil 7.25% 6/15/19 | | | 907,000 | | | 916,070 |
| #Gazprom Neft 144A 4.375% 9/19/22 | | | 3,205,000 | | | 3,293,138 |
| #Helix Energy Solutions Group 144A | | | | | | |
| 9.50% 1/15/16 | | | 663,000 | | | 681,233 |
| #Hercules Offshore 144A | | | | | | |
| 10.50% 10/15/17 | | | 1,345,000 | | | 1,455,963 |
| #Hilcorp Energy I 144A 7.625% 4/15/21 | | | 640,000 | | | 700,800 |
| Holly 9.875% 6/15/17 | | | 435,000 | | | 473,063 |
| #IPIC GMTN 144A 5.50% 3/1/22 | | | 1,888,000 | | | 2,234,920 |
| Linn Energy | | | | | | |
| # | 144A 6.25% 11/1/19 | | | 250,000 | | | 252,500 |
| 6.50% 5/15/19 | | | 210,000 | | | 213,150 |
| 8.625% 4/15/20 | | | 615,000 | | | 673,425 |
| Lukoil International Finance | | | | | | |
| 6.125% 11/9/20 | | | 3,480,000 | | | 4,041,149 |
| Murphy Oil | | | | | | |
| 2.50% 12/1/17 | | | 1,025,000 | | | 1,032,508 |
| 3.70% 12/1/22 | | | 2,055,000 | | | 2,051,396 |
| Newfield Exploration 5.625% 7/1/24 | | | 445,000 | | | 481,713 |
| Occidental Petroleum 2.70% 2/15/23 | | | 640,000 | | | 654,451 |
| Pemex Project Funding Master Trust | | | | | | |
| 6.625% 6/15/35 | | | 1,020,000 | | | 1,300,500 |
| Petrobras International Finance | | | | | | |
| 3.875% 1/27/16 | | | 2,235,000 | | | 2,369,107 |
| 5.375% 1/27/21 | | | 3,242,000 | | | 3,666,118 |
| Petrohawk Energy 7.25% 8/15/18 | | | 3,185,000 | | | 3,599,894 |
| *Petroleos de Venezuela 9.00% 11/17/21 | | | 11,180,000 | | | 10,721,619 |
| Petroleos Mexicanos 5.50% 6/27/44 | | | 3,090,000 | | | 3,406,725 |
| Pride International 6.875% 8/15/20 | | | 8,765,000 | | | 11,102,274 |
| #PTT 3.375% 10/25/22 | | | 1,880,000 | | | 1,873,604 |
| *Quicksilver Resources 9.125% 8/15/19 | | | 575,000 | | | 514,625 |
| Range Resources | | | | | | |
| 5.75% 6/1/21 | | | 390,000 | | | 419,250 |
| 8.00% 5/15/19 | | | 1,167,000 | | | 1,298,288 |
| #Ras Laffan Liquefied Natural Gas III 144A | | | | | | |
| 5.832% 9/30/16 | | | 1,315,424 | | | 1,452,228 |
| #Samson Investment 144A 9.75% 2/15/20 | | | 300,000 | | | 318,750 |
| SandRidge Energy | | | | | | |
| 7.50% 3/15/21 | | | 360,000 | | | 387,000 |
| 8.125% 10/15/22 | | | 610,000 | | | 671,000 |
| Shell International Finance BV | | | | | | |
| 2.25% 1/6/23 | | | 2,100,000 | | | 2,079,286 |
| #Sinopec Group Overseas Development 2012 | | | | | | |
| 144A 2.75% 5/17/17 | | | 2,190,000 | | | 2,276,369 |
| Talisman Energy 5.50% 5/15/42 | | | 4,940,000 | | | 5,465,358 |
| Transocean | | | | | | |
| 3.80% 10/15/22 | | | 3,835,000 | | | 3,938,629 |
| 5.05% 12/15/16 | | | 4,335,000 | | | 4,831,049 |
Diversified Income Series-12
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
| | Principal | | Value |
| | | Amount° | | (U.S. $) |
| CORPORATE BONDS (continued) | | | | | | |
| Energy (continued) | | | | | | |
| Weatherford International | | | | | | |
| 4.50% 4/15/22 | USD | | 3,170,000 | | $ | 3,370,452 |
| 9.625% 3/1/19 | | | 2,550,000 | | | 3,330,887 |
| #Woodside Finance 144A | | | | | | |
| 8.125% 3/1/14 | | | 1,300,000 | | | 1,403,050 |
| 8.75% 3/1/19 | | | 3,000,000 | | | 3,949,518 |
| | | | | | | 109,950,900 |
| Finance Companies–2.09% | | | | | | |
| #CDP Financial 144A | | | | | | |
| 4.40% 11/25/19 | | | 4,590,000 | | | 5,289,378 |
| 5.60% 11/25/39 | | | 3,200,000 | | | 4,002,458 |
| E*TRADE Financial 6.375% 11/15/19 | | | 1,260,000 | | | 1,297,800 |
| General Electric Capital | | | | | | |
| 2.10% 12/11/19 | | | 795,000 | | | 798,530 |
| # | 144A 3.80% 6/18/19 | | | 1,805,000 | | | 1,926,128 |
| 5.50% 2/1/17 | NZD | | 2,280,000 | | | 1,992,713 |
| 5.55% 5/4/20 | USD | | 1,850,000 | | | 2,202,630 |
| 5.625% 5/1/18 | | | 670,000 | | | 796,582 |
| 6.00% 8/7/19 | | | 6,780,000 | | | 8,259,829 |
| • | 6.25% 12/15/49 | | | 2,100,000 | | | 2,296,772 |
| • | 7.125% 12/15/49 | | | 1,800,000 | | | 2,042,572 |
| •#ILFC E-Capital Trust I 144A | | | | | | |
| 4.54% 12/21/65 | | | 545,000 | | | 416,217 |
| •#ILFC E-Capital Trust II 144A | | | | | | |
| 6.25% 12/21/65 | | | 760,000 | | | 653,600 |
| International Lease Finance | | | | | | |
| 5.875% 4/1/19 | | | 815,000 | | | 863,084 |
| 6.25% 5/15/19 | | | 1,898,000 | | | 2,030,860 |
| 8.25% 12/15/20 | | | 795,000 | | | 950,025 |
| 8.75% 3/15/17 | | | 950,000 | | | 1,102,000 |
| #Nuveen Investments 144A | | | | | | |
| 9.50% 10/15/20 | | | 1,995,000 | | | 1,995,000 |
| #Rosneft Oil Via Rosneft International Finance | | | | | | |
| 144A 4.199% 3/6/22 | | | 1,563,000 | | | 1,594,260 |
| #Temasek Financial I 144A | | | | | | |
| 2.375% 1/23/23 | | | 2,365,000 | | | 2,341,128 |
| | | | | | | 42,851,566 |
| Healthcare–0.59% | | | | | | |
| Accellent 8.375% 2/1/17 | | | 635,000 | | | 669,925 |
| Air Medical Group Holdings | | | | | | |
| 9.25% 11/1/18 | | | 960,000 | | | 1,065,600 |
| #Alere 144A 7.25% 7/1/18 | | | 240,000 | | | 241,800 |
| #Biomet 144A | | | | | | |
| 6.50% 8/1/20 | | | 720,000 | | | 767,700 |
| 6.50% 10/1/20 | | | 215,000 | | | 214,731 |
| Bio-Rad Laboratories 8.00% 9/15/16 | | | 515,000 | | | 562,382 |
| Community Health Systems | | | | | | |
| 8.00% 11/15/19 | | | 460,000 | | | 500,250 |
| #Fresenius Medical Care US Finance II 144A | | | | | | |
| 5.875% 1/31/22 | | | 1,200,000 | | | 1,308,000 |
| HCA 7.50% 2/15/22 | | | 1,245,000 | | | 1,431,750 |
| *HCA Holdings 7.75% 5/15/21 | | | 1,405,000 | | | 1,531,450 |
| #Kinetic Concepts 144A 12.50% 11/1/19 | | | 1,095,000 | | | 1,052,569 |
| #Multiplan 144A 9.875% 9/1/18 | | | 1,390,000 | | | 1,556,800 |
| #Mylan 144A 6.00% 11/15/18 | | | 630,000 | | | 696,110 |
| Radnet Management 10.375% 4/1/18 | | | 570,000 | | | 582,825 |
| | | | | | | 12,181,892 |
| Insurance–2.28% | | | | | | |
| Alleghany 4.95% 6/27/22 | | | 835,000 | | | 916,367 |
| American International Group | | | | | | |
| 5.85% 1/16/18 | | | 285,000 | | | 337,676 |
| 6.40% 12/15/20 | | | 1,015,000 | | | 1,261,441 |
| 8.25% 8/15/18 | | | 2,515,000 | | | 3,312,205 |
| •Chubb 6.375% 3/29/67 | | | 3,000,000 | | | 3,285,000 |
| #Highmark 144A | | | | | | |
| 4.75% 5/15/21 | | | 1,235,000 | | | 1,245,887 |
| 6.125% 5/15/41 | | | 515,000 | | | 496,593 |
| •*ING Groep 5.775% 12/29/49 | | | 1,495,000 | | | 1,420,250 |
| #ING US 144A 5.50% 7/15/22 | | | 2,110,000 | | | 2,294,070 |
| #Liberty Mutual Group 144A | | | | | | |
| 4.95% 5/1/22 | | | 2,210,000 | | | 2,413,190 |
| 6.50% 5/1/42 | | | 2,450,000 | | | 2,765,947 |
| • | 7.00% 3/15/37 | | | 790,000 | | | 789,013 |
| MetLife | | | | | | |
| 3.048% 12/15/22 | | | 1,270,000 | | | 1,298,265 |
| 6.40% 12/15/36 | | | 75,000 | | | 80,567 |
| 6.817% 8/15/18 | | | 2,630,000 | | | 3,317,201 |
| #MetLife Capital Trust X 144A 9.25% 4/8/38 | | | 3,120,000 | | | 4,321,200 |
| #Metropolitan Life Global Funding I 144A | | | | | | |
| 3.875% 4/11/22 | | | 605,000 | | | 659,265 |
| Montpelier Re Holdings 4.70% 10/15/22 | | | 1,945,000 | | | 1,993,788 |
| Prudential Financial | | | | | | |
| 3.875% 1/14/15 | | | 1,020,000 | | | 1,079,730 |
| 4.50% 11/15/20 | | | 785,000 | | | 877,968 |
| 4.50% 11/16/21 | | | 585,000 | | | 659,135 |
| • | 5.625% 6/15/43 | | | 1,745,000 | | | 1,817,069 |
| 6.00% 12/1/17 | | | 1,880,000 | | | 2,258,233 |
| @=#‡tTwin Reefs Pass Through Trust 144A | | | | | | |
| 0.00% 12/29/49 | | | 600,000 | | | 0 |
| WellPoint 3.30% 1/15/23 | | | 4,215,000 | | | 4,333,837 |
| •XL Group 6.50% 12/29/49 | | | 1,210,000 | | | 1,137,400 |
| •#ZFS Finance USA Trust II 144A | | | | | | |
| 6.45% 12/15/65 | | | 2,275,000 | | | 2,445,625 |
| | | | | | | 46,816,922 |
| Natural Gas–2.81% | | | | | | |
| #CNOOC Finance 2012 144A | | | | | | |
| 3.875% 5/2/22 | | | 3,290,000 | | | 3,503,077 |
| El Paso Pipeline Partners Operating | | | | | | |
| 6.50% 4/1/20 | | | 2,820,000 | | | 3,452,608 |
| •Enbridge Energy Partners 8.05% 10/1/37 | | | 4,085,000 | | | 4,644,453 |
| Energy Transfer Partners 9.70% 3/15/19 | | | 2,159,000 | | | 2,911,811 |
| Enterprise Products Operating | | | | | | |
| • | 7.034% 1/15/68 | | | 4,750,000 | | | 5,444,597 |
| 9.75% 1/31/14 | | | 2,840,000 | | | 3,108,053 |
| #GDF Suez 144A 2.875% 10/10/22 | | | 2,205,000 | | | 2,187,106 |
| Kinder Morgan Energy Partners | | | | | | |
| 9.00% 2/1/19 | | | 3,840,000 | | | 5,182,141 |
| NiSource Finance | | | | | | |
| 5.25% 2/15/43 | | | 835,000 | | | 887,256 |
| 5.80% 2/1/42 | | | 2,255,000 | | | 2,577,032 |
| #Pertamina Persero 144A | | | | | | |
| 4.875% 5/3/22 | | | 1,885,000 | | | 2,064,075 |
| 6.00% 5/3/42 | | | 2,010,000 | | | 2,273,813 |
| Plains All American Pipeline | | | | | | |
| 8.75% 5/1/19 | | | 3,435,000 | | | 4,679,030 |
Diversified Income Series-13
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
| | Principal | | Value |
| | | Amount° | | (U.S. $) |
| CORPORATE BONDS (continued) | | | | | | |
| Natural Gas (continued) | | | | | | |
| Sempra Energy 2.875% 10/1/22 | USD | | 3,590,000 | | $ | 3,606,313 |
| Statoil ASA 2.45% 1/17/23 | | | 1,615,000 | | | 1,614,787 |
| •TransCanada Pipelines 6.35% 5/15/67 | | | 5,835,000 | | | 6,260,401 |
| Williams Partners 7.25% 2/1/17 | | | 2,765,000 | | | 3,362,046 |
| | | | | | | 57,758,599 |
| Real Estate–1.84% | | | | | | |
| Alexandria Real Estate Equities | | | | | | |
| 4.60% 4/1/22 | | | 2,980,000 | | | 3,204,591 |
| Brandywine Operating Partnership | | | | | | |
| 4.95% 4/15/18 | | | 2,655,000 | | | 2,907,323 |
| BRE Properties 3.375% 1/15/23 | | | 2,220,000 | | | 2,202,060 |
| DDR | | | | | | |
| 4.625% 7/15/22 | | | 800,000 | | | 874,742 |
| 4.75% 4/15/18 | | | 2,200,000 | | | 2,441,074 |
| 7.50% 4/1/17 | | | 1,060,000 | | | 1,272,637 |
| 7.875% 9/1/20 | | | 2,175,000 | | | 2,792,400 |
| 9.625% 3/15/16 | | | 865,000 | | | 1,062,627 |
| Digital Realty Trust | | | | | | |
| 5.25% 3/15/21 | | | 2,985,000 | | | 3,309,285 |
| 5.875% 2/1/20 | | | 2,105,000 | | | 2,408,726 |
| Mack-Cali Realty | | | | | | |
| 2.50% 12/15/17 | | | 710,000 | | | 718,423 |
| 4.50% 4/18/22 | | | 1,920,000 | | | 2,051,516 |
| National Retail Properties | | | | | | |
| 3.80% 10/15/22 | | | 445,000 | | | 452,779 |
| #Qatari Diar Finance 144A 5.00% 7/21/20 | | | 1,601,000 | | | 1,877,173 |
| Regency Centers | | | | | | |
| 4.80% 4/15/21 | | | 1,960,000 | | | 2,171,323 |
| 5.875% 6/15/17 | | | 575,000 | | | 665,664 |
| UDR 4.625% 1/10/22 | | | 2,620,000 | | | 2,886,535 |
| •#USB Realty 144A 1.487% 12/22/49 | | | 300,000 | | | 258,042 |
| #WEA Finance 144A | | | | | | |
| 3.375% 10/3/22 | | | 1,560,000 | | | 1,606,555 |
| 4.625% 5/10/21 | | | 2,235,000 | | | 2,506,944 |
| | | | | | | 37,670,419 |
| Services Cyclical–1.07% | | | | | | |
| #Algeco Scotsman Global Finance 144A | | | | | | |
| 8.50% 10/15/18 | | | 1,095,000 | | | 1,138,800 |
| 10.75% 10/15/19 | | | 1,305,000 | | | 1,291,950 |
| Ameristar Casinos 7.50% 4/15/21 | | | 1,175,000 | | | 1,279,281 |
| #Equinox Holdings 144A 9.50% 2/1/16 | | | 225,000 | | | 237,628 |
| FTI Consulting 6.75% 10/1/20 | | | 670,000 | | | 718,575 |
| Geo Group 6.625% 2/15/21 | | | 645,000 | | | 719,175 |
| #H&E Equipment Services 144A | | | | | | |
| 7.00% 9/1/22 | | | 1,075,000 | | | 1,150,250 |
| Iron Mountain 7.75% 10/1/19 | | | 290,000 | | | 328,425 |
| Kansas City Southern de Mexico SA de CV | | | | | | |
| 8.00% 2/1/18 | | | 345,000 | | | 383,813 |
| M/I Homes 8.625% 11/15/18 | | | 1,010,000 | | | 1,116,050 |
| MGM Resorts International | | | | | | |
| 7.75% 3/15/22 | | | 315,000 | | | 338,625 |
| 11.375% 3/1/18 | | | 2,440,000 | | | 2,964,600 |
| PHH | | | | | | |
| 7.375% 9/1/19 | | | 690,000 | | | 769,350 |
| * | 9.25% 3/1/16 | | | 1,630,000 | | | 1,911,175 |
| Pinnacle Entertainment 8.75% 5/15/20 | | | 565,000 | | | 613,025 |
| Royal Caribbean Cruises 7.00% 6/15/13 | | | 1,130,000 | | | 1,163,900 |
| RSC Equipment Rental 10.25% 11/15/19 | | | 975,000 | | | 1,135,875 |
| Ryland Group 8.40% 5/15/17 | | | 1,088,000 | | | 1,302,880 |
| Standard Pacific 10.75% 9/15/16 | | | 1,090,000 | | | 1,359,775 |
| #United Air Lines 144A 12.00% 11/1/13 | | | 1,260,000 | | | 1,272,600 |
| West 7.875% 1/15/19 | | | 425,000 | | | 442,000 |
| Wynn Las Vegas 7.75% 8/15/20 | | | 240,000 | | | 274,800 |
| | | | | | | 21,912,552 |
| Technology–2.05% | | | | | | |
| Amkor Technology 7.375% 5/1/18 | | | 550,000 | | | 572,000 |
| Autodesk 1.95% 12/15/17 | | | 1,425,000 | | | 1,419,582 |
| *Avaya | | | | | | |
| # | 144A 7.00% 4/1/19 | | | 650,000 | | | 611,000 |
| 9.75% 11/1/15 | | | 1,185,000 | | | 1,060,575 |
| 10.125% 11/1/15 | | | 85,000 | | | 76,500 |
| CDW 12.535% 10/12/17 | | | 607,000 | | | 651,766 |
| Fidelity National Information Services | | | | | | |
| 7.875% 7/15/20 | | | 320,000 | | | 363,600 |
| First Data | | | | | | |
| * | 9.875% 9/24/15 | | | 1,255,000 | | | 1,286,375 |
| 10.55% 9/24/15 | | | 735,000 | | | 756,131 |
| 11.25% 3/31/16 | | | 720,000 | | | 709,200 |
| Fiserv 3.50% 10/1/22 | | | 1,745,000 | | | 1,780,226 |
| GXS Worldwide 9.75% 6/15/15 | | | 2,105,000 | | | 2,202,356 |
| Infor US 9.375% 4/1/19 | | | 245,000 | | | 276,238 |
| Intel 2.70% 12/15/22 | | | 2,275,000 | | | 2,276,749 |
| Jabil Circuit 7.75% 7/15/16 | | | 330,000 | | | 389,400 |
| Microsoft 2.125% 11/15/22 | | | 2,100,000 | | | 2,084,038 |
| National Semiconductor 6.60% 6/15/17 | | | 4,745,000 | | | 5,865,755 |
| NetApp | | | | | | |
| 2.00% 12/15/17 | | | 1,330,000 | | | 1,326,815 |
| 3.25% 12/15/22 | | | 1,640,000 | | | 1,617,853 |
| Oracle | | | | | | |
| 2.50% 10/15/22 | | | 3,780,000 | | | 3,822,302 |
| 5.75% 4/15/18 | | | 205,000 | | | 249,778 |
| #Samsung Electronics America 144A | | | | | | |
| 1.75% 4/10/17 | | | 3,005,000 | | | 3,043,434 |
| #Seagate Technology International 144A | | | | | | |
| 10.00% 5/1/14 | | | 2,215,000 | | | 2,394,969 |
| *Symantec 4.20% 9/15/20 | | | 2,290,000 | | | 2,409,767 |
| #Tencent Holdings 144A 3.375% 3/5/18 | | | 2,880,000 | | | 2,978,133 |
| Xerox 6.35% 5/15/18 | | | 1,555,000 | | | 1,795,456 |
| | | | | | | 42,019,998 |
| Transportation–0.96% | | | | | | |
| #Brambles USA 144A | | | | | | |
| 3.95% 4/1/15 | | | 6,910,000 | | | 7,207,856 |
| 5.35% 4/1/20 | | | 910,000 | | | 1,015,559 |
| #ERAC USA Finance 144A 5.25% 10/1/20 | | | 6,355,000 | | | 7,279,113 |
| #Penske Truck Leasing 144A | | | | | | |
| 3.375% 3/15/18 | | | 1,080,000 | | | 1,090,976 |
| 3.75% 5/11/17 | | | 2,200,000 | | | 2,304,328 |
| 4.875% 7/11/22 | | | 780,000 | | | 807,271 |
| | | | | | | 19,705,103 |
| Utilities–0.37% | | | | | | |
| AES 8.00% 6/1/20 | | | 616,000 | | | 711,480 |
| #Calpine 144A 7.875% 7/31/20 | | | 882,000 | | | 994,455 |
| Elwood Energy 8.159% 7/5/26 | | | 721,707 | | | 755,086 |
Diversified Income Series-14
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
| | Principal | | Value |
| | | Amount° | | (U.S. $) |
| CORPORATE BONDS (continued) | | | | | | |
| Utilities (continued) | | | | | | |
| GenOn Energy 9.875% 10/15/20 | USD | | 850,000 | | $ | 986,000 |
| #Korea Hydro & Nuclear Power Company | | | | | | |
| 144A 3.00% 9/19/22 | | | 2,755,000 | | | 2,717,031 |
| Mirant Americas Generation | | | | | | |
| 8.50% 10/1/21 | | | 486,000 | | | 556,470 |
| NRG Energy 7.875% 5/15/21 | | | 805,000 | | | 897,575 |
| | | | | | | 7,618,097 |
| Total Corporate Bonds | | | | | | |
| (cost $928,151,168) | | | | | | 998,418,857 |
| |
| MUNICIPAL BOND–0.00% | | | | | | |
| Oregon State Taxable Pension | | | | | | |
| 5.892% 6/1/27 | | | 5,000 | | | 6,409 |
| Total Municipal Bond (cost $5,000) | | | | | | 6,409 |
| |
| NON-AGENCY ASSET-BACKED | | | | | | |
| SECURITIES–1.47% | | | | | | |
| •Ally Master Owner Trust | | | | | | |
| Series 2011-1 A1 | | | | | | |
| 1.079% 1/15/16 | | | 2,200,000 | | | 2,214,360 |
| #Avis Budget Rental Car Funding AESOP | | | | | | |
| | Series 2011-2A A 144A | | | | | | |
| 2.37% 11/20/14 | | | 1,550,000 | | | 1,589,063 |
| Capital One Multi-Asset Execution Trust | | | | | | |
| Series 2007-A7 A7 | | | | | | |
| 5.75% 7/15/20 | | | 2,485,000 | | | 3,021,848 |
| CenterPoint Energy Transition Bond | | | | | | |
| Series 2012-1 A2 | | | | | | |
| 2.161% 10/15/21 | | | 1,355,000 | | | 1,413,410 |
| Chase Funding Mortgage Loan | | | | | | |
| Asset-Backed Certificates | | | | | | |
| Series 2002-3 1A6 | | | | | | |
| 4.707% 6/25/32 | | | 139,660 | | | 140,706 |
| Citibank Credit Card Issuance Trust | | | | | | |
| Series 2007-A3 A3 | | | | | | |
| 6.15% 6/15/39 | | | 772,000 | | | 1,024,663 |
| Citicorp Residential Mortgage Securities | | | | | | |
| Series 2006-3 A4 | | | | | | |
| 5.703% 11/25/36 | | | 1,447,198 | | | 1,443,569 |
| Series 2006-3 A5 | | | | | | |
| 5.948% 11/25/36 | | | 1,800,000 | | | 1,677,524 |
| Discover Card Master Trust | | | | | | |
| Series 2007-A1 A1 | | | | | | |
| 5.65% 3/16/20 | | | 1,010,000 | | | 1,222,214 |
| Series 2012-A1 A1 | | | | | | |
| 0.81% 8/15/17 | | | 1,980,000 | | | 1,994,933 |
| #Enterprise Fleet Financing | | | | | | |
| Series 2012-1 A2 144A | | | | | | |
| 1.14% 11/20/17 | | | 845,000 | | | 849,462 |
| GE Capital Credit Card Master Note Trust | | | | | | |
| Series 2012-2A | | | | | | |
| 2.22% 1/15/22 | | | 1,060,000 | | | 1,102,217 |
| Series 2012-6 A | | | | | | |
| 1.36% 8/17/20 | | | 1,795,000 | | | 1,813,056 |
| #Golden Credit Card Trust 144A | | | | | | |
| Series 2012-2A A1 | | | | | | |
| 1.77% 1/15/19 | | | 1,735,000 | | | 1,786,781 |
| Series 2012-5A A | | | | | | |
| 0.79% 9/15/17 | | | 1,815,000 | | | 1,819,646 |
| #Master Credit Card Trust | | | | | | |
| Series 2012-2A A 144A | | | | | | |
| 0.78% 4/21/17 | | | 2,000,000 | | | 2,004,255 |
| •#MASTR Specialized Loan Trust | | | | | | |
| Series 2005-2 A2 144A | | | | | | |
| 5.006% 7/25/35 | | | 67,078 | | | 68,004 |
| Mid-State Trust Series 11 A1 | | | | | | |
| 4.864% 7/15/38 | | | 12,954 | | | 13,361 |
| •Residential Asset Securities | | | | | | |
| Series 2006-KS3 AI3 | | | | | | |
| 0.38% 4/25/36 | | | 19,744 | | | 18,980 |
| #Sonic Capital Series 2011-1A A2 144A | | | | | | |
| 5.438% 5/20/41 | | | 1,081,088 | | | 1,211,664 |
| •#Trafigura Securitisation Finance | | | | | | |
| Series 2012-1A A 144A | | | | | | |
| 2.609% 10/15/15 | | | 1,510,000 | | | 1,530,998 |
| #Trinity Rail Leasing LP | | | | | | |
| Series 2012-1A A1 144A | | | | | | |
| 2.266% 1/15/43 | | | 1,115,000 | | | 1,109,482 |
| World Financial Network Credit Card | | | | | | |
| Master Trust 1.76% 5/17/21 | | | 1,005,000 | | | 1,016,101 |
| Total Non-Agency Asset-Backed Securities | | | | | | |
| (cost $28,715,344) | | | | | | 30,086,297 |
| |
| NON-AGENCY COLLATERALIZED | | | | | | |
| MORTGAGE OBLIGATIONS–0.35% | | | | | | |
| •American Home Mortgage Investment Trust | | | | | | |
| Series 2005-2 5A1 5.064% 9/25/35 | | | 247,801 | | | 250,792 |
| Bank of America Alternative Loan Trust | | | | | | |
| Series 2005-1 2A1 5.50% 2/25/20 | | | 260,199 | | | 264,839 |
| Series 2005-3 2A1 5.50% 4/25/20 | | | 35,713 | | | 37,450 |
| Series 2005-6 7A1 5.50% 7/25/20 | | | 224,353 | | | 233,475 |
| •Chaseflex Trust Series 2006-1 A4 | | | | | | |
| 6.23% 6/25/36 | | | 1,490,000 | | | 1,307,474 |
| Citicorp Mortgage Securities | | | | | | |
| Series 2006-3 1A9 5.75% 6/25/36 | | | 209,972 | | | 212,906 |
| Series 2006-4 3A1 5.50% 8/25/21 | | | 155,024 | | | 161,264 |
| •Citigroup Mortgage Loan Trust | | | | | | |
| Series 2004-UST1 A6 | | | | | | |
| 5.085% 8/25/34 | | | 171,098 | | | 173,589 |
| •tCountrywide Home Loan | | | | | | |
| Mortgage Pass Through Trust | | | | | | |
| Series 2003-21 A1 3.105% 5/25/33 | | | 230 | | | 231 |
| •GSR Mortgage Loan Trust | | | | | | |
| Series 2006-AR1 3A1 3.32% 1/25/36 | | | 297,453 | | | 273,280 |
| •JPMorgan Mortgage Trust | | | | | | |
| Series 2005-A2 5A1 4.295% 4/25/35 | | | 4,631 | | | 4,691 |
| Series 2006-A2 3A3 5.52% 4/25/36 | | | 431,959 | | | 380,072 |
Diversified Income Series-15
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
| | Principal | | Value |
| | | Amount° | | (U.S. $) |
| NON-AGENCY COLLATERALIZED | | | | | | |
| MORTGAGE OBLIGATIONS (continued) | | | | | | |
| •MASTR ARM Trust | | | | | | |
| Series 2003-6 1A2 2.825% 12/25/33 | USD | | 982 | | $ | 979 |
| Series 2005-6 7A1 5.316% 6/25/35 | | | 280,878 | | | 275,759 |
| tWashington Mutual Alternative Mortgage | | | | | | |
| Pass Through Certificates | | | | | | |
| Series 2005-1 5A2 6.00% 3/25/35 | | | 128,028 | | | 49,909 |
| •tWashington Mutual Mortgage Pass Through | | | | | | |
| Certificates Series 2006-AR14 2A1 | | | | | | |
| 4.86% 11/25/36 | | | 1,581,789 | | | 1,333,021 |
| Wells Fargo Mortgage-Backed | | | | | | |
| Securities Trust | | | | | | |
| Series 2006-2 3A1 | | | | | | |
| 5.75% 3/25/36 | | | 876,384 | | | 879,492 |
| Series 2006-3 A11 | | | | | | |
| 5.50% 3/25/36 | | | 735,617 | | | 769,335 |
| • | Series 2006-AR5 2A1 | | | | | | |
| 2.616% 4/25/36 | | | 575,335 | | | 518,799 |
| Total Non-Agency Collateralized Mortgage | | | | | | |
| Obligations (cost $6,505,722) | | | | | | 7,127,357 |
| |
| ΔREGIONAL BONDS–2.43% | | | | | | |
| Australia–1.84% | | | | | | |
| New South Wales Treasury | | | | | | |
| 6.00% 4/1/19 | AUD | | 4,500,000 | | | 5,326,372 |
| 6.00% 3/1/22 | AUD | | 4,813,000 | | | 5,781,565 |
| Queensland Treasury 6.25% 6/14/19 | AUD | | 13,894,000 | | | 16,656,904 |
| Treasury Corp of Victoria 6.00% 10/17/22 | AUD | | 8,314,000 | | | 10,068,174 |
| | | | | | | 37,833,015 |
| Canada–0.59% | | | | | | |
| Province of British Columbia | | | | | | |
| 2.00% 10/23/22 | USD | | 3,935,000 | | | 3,886,249 |
| Province of Manitoba Canada | | | | | | |
| 2.10% 9/6/22 | USD | | 4,505,000 | | | 4,488,999 |
| Province of Ontario Canada | | | | | | |
| 3.15% 6/2/22 | CAD | | 2,696,000 | | | 2,810,192 |
| Province of Quebec Canada | | | | | | |
| 4.25% 12/1/21 | CAD | | 837,000 | | | 942,858 |
| | | | | | | 12,128,298 |
| Total Regional Bonds | | | | | | |
| (cost $48,431,228) | | | | | | 49,961,313 |
| |
| «SENIOR SECURED LOANS–6.13% | | | | | | |
| Air Medical Group Holdings Tranche B1 | | | | | | |
| 1st Lien 6.50% 5/26/18 | USD | | 305,000 | | | 308,050 |
| Allied Security Holdings Tranche 2L | | | | | | |
| 8.50% 1/21/18 | | | 665,000 | | | 668,325 |
| Avaya | | | | | | |
| Tranche B-1 3.034% 10/26/14 | | | 1,862,916 | | | 1,830,604 |
| Trance B-3 4.814% 10/27/17 | | | 1,042,789 | | | 922,869 |
| Avis Budget Car Rental Tranche C | | | | | | |
| 4.25% 8/7/19 | | | 598,495 | | | 604,629 |
| Bausch & Lomb | | | | | | |
| 4.75% 6/27/15 | | | 200,000 | | | 202,126 |
| Trance B 4.75% 4/17/19 | | | 1,830,800 | | | 1,849,273 |
| Biomet Tranche B1 1st Lien | | | | | | |
| 3.75% 7/25/17 | | | 750,000 | | | 755,625 |
| BJ’S Wholesale Club | | | | | | |
| 1st Lien 6.50% 9/29/18 | | | 1,180,000 | | | 1,197,210 |
| 2nd Lien 9.75% 3/29/19 | | | 920,000 | | | 947,600 |
| Blackboard Tranche B2 1st Lien | | | | | | |
| 6.25% 11/8/18 | | | 1,286,775 | | | 1,289,728 |
| BNY ConvergEx Group | | | | | | |
| 8.75% 11/29/17 | | | 421,199 | | | 399,352 |
| 8.75% 12/16/17 | | | 1,003,801 | | | 951,734 |
| Bresnan Broadband Holdings | | | | | | |
| 4.50% 12/14/17 | | | 1,565,000 | | | 1,575,759 |
| Brickman Group Holdings Tranche B1 | | | | | | |
| 5.50% 10/14/16 | | | 1,117,136 | | | 1,135,289 |
| Brock Holdings III | | | | | | |
| 10.00% 2/15/18 | | | 734,000 | | | 739,505 |
| Tranche B 6.00% 2/15/17 | | | 351,824 | | | 353,583 |
| Burlington Coat Factory 5.75% 5/1/17 | | | 1,904,079 | | | 1,923,120 |
| Caesars Entertainment Tranche B6 | | | | | | |
| 5.494% 1/28/18 | | | 2,958,894 | | | 2,649,260 |
| Chrysler Group Tranche B 6.00% 5/24/17 | | | 4,511,283 | | | 4,613,418 |
| Cinemark USA Tranche B 3.00% 12/18/19 | | | 310,000 | | | 310,711 |
| Clear Channel Communication | | | | | | |
| Tranche A 3.639% 7/30/14 | | | 4,760,861 | | | 4,639,124 |
| Tranche B 3.889% 1/29/16 | | | 2,072,470 | | | 1,717,881 |
| Community Health Systems | | | | | | |
| 3.819% 1/25/17 | | | 1,140,000 | | | 1,148,191 |
| Cricket Communications Tranche B | | | | | | |
| 3.50% 9/24/19 | | | 460,000 | | | 463,450 |
| Crown Castle Tranche B 4.00% 1/31/19 | | | 1,205,000 | | | 1,213,682 |
| Datatel Tranche B 6.25% 6/5/18 | | | 441,006 | | | 447,290 |
| David’s Bridal Tranche B 5.25% 9/25/19 | | | 460,000 | | | 461,822 |
| DaVita Tranche B 4.50% 10/20/16 | | | 1,468,760 | | | 1,481,222 |
| Delos Aircraft 4.75% 3/17/16 | | | 380,000 | | | 383,800 |
| Delta Air Lines Tranche B 5.50% 4/20/17 | | | 2,136,237 | | | 2,160,932 |
| Deltek | | | | | | |
| 6.00% 8/26/17 | | | 460,000 | | | 464,271 |
| 10.00% 8/28/17 | | | 75,000 | | | 76,375 |
| Dynegy Power Tranche 1st Lien | | | | | | |
| 9.25% 8/5/16 | | | 821,734 | | | 861,794 |
| Emdeon Tranche B 5.00% 11/2/18 | | | 1,331,575 | | | 1,346,416 |
| Equipower Resources Holdings | | | | | | |
| Tranche B 5.50% 12/21/18 | | | 453,863 | | | 461,047 |
| 2nd Lien 10.00% 5/23/19 | | | 785,000 | | | 807,895 |
| Essar Steel Algoma 8.75% 9/12/14 | | | 798,000 | | | 792,681 |
| First Data 5.00% 3/24/17 | | | 2,724,831 | | | 2,683,101 |
| §@GenCorp 9.00% 7/22/13 | | | 1,335,000 | | | 1,335,000 |
| Generac Power Systems Tranche B | | | | | | |
| 6.25% 5/30/18 | | | 872,813 | | | 894,995 |
| Getty Images Tranche B 4.75% 9/19/19 | | | 1,585,000 | | | 1,589,161 |
| Gray Television 4.75% 10/11/19 | | | 1,927,027 | | | 1,943,484 |
| Harrah’s Las Vegas Propco 3.00% 2/13/15 | | | 790,000 | | | 705,273 |
| Harrah’s Loan Operating Term | | | | | | |
| Tranche Loan B 9.50% 10/31/16 | | | 830,000 | | | 843,317 |
| HCA Tranche B3 3.619% 5/1/18 | | | 900,000 | | | 903,497 |
| HD Supply Tranche B 7.25% 10/12/17 | | | 1,608,957 | | | 1,656,221 |
| Hologic Tranche B 4.50% 4/29/19 | | | 1,486,275 | | | 1,505,909 |
| Houghton International | | | | | | |
| 1st Lien 5.25% 11/20/19 | | | 415,000 | | | 419,281 |
| 2nd Lien 9.50% 11/20/20 | | | 260,000 | | | 257,725 |
Diversified Income Series-16
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
| | Principal | | Value |
| | | Amount° | | (U.S. $) |
| «SENIOR SECURED LOANS (continued) | | | | | | |
| IASIS Healthcare Tranche B 5.00% 5/3/18 | USD | | 1,804,518 | | $ | 1,812,412 |
| Immucor 5.75% 8/9/19 | | | 1,898,684 | | | 1,926,338 |
| Ineos US Finance 6.50% 5/4/18 | | | 906,347 | | | 917,422 |
| Infor US Tranche B2 4.00% 4/5/18 | | | 890,531 | | | 900,309 |
| Intelsat Jackson Holdings Tranche B1 | | | | | | |
| | 4.50% 4/2/18 | | | 1,740,593 | | | 1,758,365 |
| Landry’s Tranche B 6.50% 3/22/18 | | | 2,577,832 | | | 2,610,055 |
| Level 3 Financing Tranche B 1st Lien | | | | | | |
| 4.75% 8/1/19 | | | 2,195,000 | | | 2,210,782 |
| MGM Resorts International Tranche B | | | | | | |
| 4.25% 12/13/19 | | | 770,000 | | | 778,951 |
| MModal Tranche B 6.75% 7/2/19 | | | 1,097,281 | | | 1,058,876 |
| MTL Publishing Tranche B | | | | | | |
| 5.50% 11/14/17 | | | 301,225 | | | 305,555 |
| MultiPlan Tranche B 4.75% 8/26/17 | | | 1,390,316 | | | 1,402,481 |
| National Cinemedia 3.25% 11/26/19 | | | 306,000 | | | 306,765 |
| Nexstar Broadcasting Group Tranche B | | | | | | |
| 4.50% 7/19/19 | | | 305,000 | | | 308,813 |
| Nuveen Investments | | | | | | |
| 5.863% 5/13/17 | | | 1,114,518 | | | 1,121,311 |
| 8.25% 3/1/19 | | | 3,087,000 | | | 3,154,543 |
| Tranche B 7.25% 5/13/17 | | | 820,000 | | | 825,256 |
| 1st Lien 5.96% 5/13/17 | | | 400,000 | | | 402,450 |
| NXP | | | | | | |
| 5.25% 2/13/19 | | | 1,488,750 | | | 1,502,335 |
| Tranche C 4.75% 12/4/20 | | | 305,000 | | | 307,542 |
| OSI Restaurant Partners Tranche B 1st Lien | | | | | | |
| 3.50% 10/5/19 | | | 1,265,000 | | | 1,279,573 |
| Par Pharmaceutical Tranche B | | | | | | |
| 5.00% 8/2/19 | | | 1,566,075 | | | 1,566,897 |
| Party City Holdings Tranche B | | | | | | |
| 5.75% 7/10/19 | | | 1,581,038 | | | 1,601,536 |
| Peninsula Gaming Tranche B | | | | | | |
| 5.75% 5/16/17 | | | 1,580,000 | | | 1,602,713 |
| Pharmaceutical Product Development | | | | | | |
| 6.25% 11/10/18 | | | 891,000 | | | 906,753 |
| PQ Tranche B 5.25% 5/1/17 | | | 1,530,000 | | | 1,540,733 |
| Protection One 5.75% 3/31/19 | | | 1,012,227 | | | 1,026,778 |
| PVH Tranche B 3.25% 12/19/19 | | | 1,365,000 | | | 1,374,480 |
| Remy International Tranche B | | | | | | |
| 6.25% 12/16/16 | | | 440,034 | | | 444,067 |
| Reynolds Group Holdings 1st Lien | | | | | | |
| 4.75% 9/21/18 | | | 1,855,350 | | | 1,879,479 |
| RGIS Services 5.50% 5/3/17 | | | 1,122,259 | | | 1,133,481 |
| Samson Investment 2nd Lien | | | | | | |
| 6.00% 9/10/18 | | | 1,335,000 | | | 1,351,133 |
| Sensus USA 2nd Lien 8.50% 4/13/18 | | | 1,810,000 | | | 1,819,050 |
| Seven Seas Cruises Tranche B | | | | | | |
| 6.25% 2/16/19 | | | 1,071,438 | | | 1,087,509 |
| Smart & Final | | | | | | |
| 1st Lien 5.75% 11/8/19 | | | 914,000 | | | 915,421 |
| 2nd Lien 10.50% 11/8/20 | | | 1,410,000 | | | 1,424,100 |
| SRAM 8.50% 11/12/18 | | | 400,000 | | | 407,000 |
| Sungard Data Systems 1st Lien | | | | | | |
| 4.50% 12/4/19 | | | 220,000 | | | 222,200 |
| SUPERVALU Tranche B 8.00% 8/1/18 | | | 1,191,475 | | | 1,210,717 |
| Swift Transportation Tranche B2 | | | | | | |
| 1.25% 12/15/17 | | | 663,464 | | | 671,482 |
| Taminco Global Chemical 5.25% 2/15/19 | | | 792,396 | | | 799,329 |
| Tempur-Pedic International Tranche B | | | | | | |
| 5.00% 9/27/19 | | | 1,074,000 | | | 1,089,154 |
| Toys R US Delaware | | | | | | |
| Tranche B 6.00% 9/1/16 | | | 3,006,869 | | | 2,917,910 |
| Tranche B2 5.25% 5/25/18 | | | 266,617 | | | 254,454 |
| Truven Health Tranche B 5.75% 5/23/19 | | | 240,000 | | | 240,600 |
| Univision Communications | | | | | | |
| 4.489% 3/31/17 | | | 1,057,058 | | | 1,041,699 |
| US TelePacific 5.75% 2/10/17 | | | 969,397 | | | 960,008 |
| USI Insurance Services Tranche B | | | | | | |
| 5.25% 12/14/19 | | | 1,950,000 | | | 1,948,382 |
| Vantage Drilling Tranche B | | | | | | |
| 6.25% 10/17/17 | | | 1,081,313 | | | 1,081,318 |
| Visant 5.25% 12/22/16 | | | 475,000 | | | 432,844 |
| Warner Chilcott | | | | | | |
| Tranche B1 4.25% 3/15/18 | | | 490,729 | | | 495,895 |
| Tranche B2 4.25% 3/15/18 | | | 177,830 | | | 179,702 |
| Tranche B3 4.25% 3/15/18 | | | 244,516 | | | 247,090 |
| West Tranche B6 5.75% 8/1/18 | | | 1,870,600 | | | 1,902,625 |
| Wide Open West Finance 1st Lien | | | | | | |
| 6.25% 7/17/18 | | | 1,845,725 | | | 1,869,535 |
| Wolverine Healthcare Tranche B | | | | | | |
| 6.75% 6/6/19 | | | 1,785,525 | | | 1,789,989 |
| Yankee Candle 5.25% 3/2/19 | | | 352,009 | | | 356,245 |
| Zayo Group Tranche B 1st Lien | | | | | | |
| 5.25% 7/2/19 | | | 2,124,662 | | | 2,153,876 |
| Total Senior Secured Loans | | | | | | |
| (cost $124,347,390) | | | | | | 125,728,925 |
| |
| ΔSOVEREIGN BONDS–8.30% | | | | | | |
| Brazil–0.33% | | | | | | |
| Brazil Government International Bonds | | | | | | |
| 5.625% 1/7/41 | USD | | 1,510,000 | | | 1,985,650 |
| Brazil Notas do Tesouro Nacional Series F | | | | | | |
| 10.00% 1/1/17 | BRL | | 9,551,000 | | | 4,912,781 |
| | | | | | | 6,898,431 |
| Colombia–0.50% | | | | | | |
| Colombia Government International Bonds | | | | | | |
| 4.375% 3/21/23 | COP | | 10,756,000,000 | | | 6,093,849 |
| 6.125% 1/18/41 | USD | | 3,071,000 | | | 4,231,838 |
| | | | | | | 10,325,687 |
| Finland–0.17% | | | | | | |
| Finland Government Bond 4.00% 7/4/25 | EUR | | 2,089,000 | | | 3,442,379 |
| | | | | | | 3,442,379 |
| Indonesia–0.98% | | | | | | |
| #Indonesia Government International Bonds | | | | | | |
| 144A 5.25% 1/17/42 | USD | | 2,845,000 | | | 3,317,981 |
| Indonesia Treasury Bonds | | | | | | |
| 7.00% 5/15/22 | IDR | | 76,513,000,000 | | | 9,022,548 |
| 7.00% 5/15/27 | IDR | | 36,321,000,000 | | | 4,177,260 |
| 11.00% 11/15/20 | IDR | | 25,404,000,000 | | | 3,637,194 |
| | | | | | | 20,154,983 |
Diversified Income Series-17
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
| | Principal | | Value |
| | | Amount° | | (U.S. $) |
| ΔSOVEREIGN BONDS (continued) | | | | | | |
| Ireland–0.14% | | | | | | |
| #VEB Finance 144A 6.025% 7/5/22 | USD | | 2,495,000 | | $ | 2,912,913 |
| | | | | | | 2,912,913 |
| Malaysia–0.07% | | | | | | |
| Malaysia Government Bond | | | | | | |
| | 4.262% 9/15/16 | MYR | | 4,022,000 | | | 1,367,416 |
| | | | | | | 1,367,416 |
| Mexico–1.15% | | | | | | |
| Mexican Bonos | | | | | | |
| | 6.00% 6/18/15 | MXN | | 91,422,800 | | | 7,327,123 |
| 6.50% 6/10/21 | MXN | | 16,082,600 | | | 1,359,031 |
| 6.50% 6/9/22 | MXN | | 17,093,000 | | | 1,446,050 |
| 8.00% 12/17/15 | MXN | | 130,653,400 | | | 11,025,132 |
| Mexico Government International Bond | | | | | | |
| 4.75% 3/8/44 | USD | | 2,180,000 | | | 2,468,850 |
| | | | | | | 23,626,186 |
| Mongolia–0.04% | | | | | | |
| #Mongolia Government International Bond | | | | | | |
| 144A 5.125% 12/5/22 | USD | | 847,000 | | | 834,295 |
| | | | | | | 834,295 |
| Panama–0.27% | | | | | | |
| Panama Government International Bonds | | | | | | |
| 6.70% 1/26/36 | | | 728,000 | | | 1,037,400 |
| 7.125% 1/29/26 | | | 1,340,000 | | | 1,906,150 |
| 8.875% 9/30/27 | | | 1,551,000 | | | 2,532,008 |
| | | | | | | 5,475,558 |
| Peru–0.34% | | | | | | |
| Peruvian Government International Bonds | | | | | | |
| 5.625% 11/18/50 | | | 920,000 | | | 1,197,380 |
| 7.125% 3/30/19 | | | 4,354,000 | | | 5,721,156 |
| | | | | | | 6,918,536 |
| Philippines–0.28% | | | | | | |
| Philippine Government International Bonds | | | | | | |
| 5.00% 1/13/37 | | | 2,140,000 | | | 2,608,125 |
| 9.50% 10/21/24 | | | 1,906,000 | | | 3,078,190 |
| | | | | | | 5,686,315 |
| Poland–0.54% | | | | | | |
| Poland Government Bond | | | | | | |
| 4.00% 10/25/23 | PLN | | 3,909,000 | | | 1,295,162 |
| 5.75% 10/25/21 | PLN | | 26,234,000 | | | 9,864,309 |
| | | | | | | 11,159,471 |
| Republic of Korea–0.13% | | | | | | |
| Inflation Linked Korea Treasury Bond | | | | | | |
| 2.75% 6/10/20 | KRW | | 2,476,828,278 | | | 2,686,196 |
| | | | | | | 2,686,196 |
| Republic of Sri Lanka–0.16% | | | | | | |
| #Sri Lanka Government International Bond | | | | | | |
| 144A 5.875% 7/25/22 | USD | | 3,003,000 | | | 3,213,210 |
| | | | | | | 3,213,210 |
| South Africa–1.33% | | | | | | |
| #Eskom Holdings 144A 5.75% 1/26/21 | | | 3,272,000 | | | 3,725,990 |
| South Africa Government Bonds | | | | | | |
| 7.00% 2/28/31 | ZAR | | 13,842,000 | | | 1,519,940 |
| 7.25% 1/15/20 | ZAR | | 54,613,000 | | | 6,820,125 |
| 8.00% 12/21/18 | ZAR | | 25,777,000 | | | 3,351,187 |
| 10.50% 12/21/26 | ZAR | | 78,188,000 | | | 11,866,140 |
| | | | | | | 27,283,382 |
| Sweden–0.05% | | | | | | |
| #Kommuninvest I Sverige AB 144A | | | | | | |
| 1.00% 10/24/17 | USD | | 1,000,000 | | | 1,000,170 |
| | | | | | | 1,000,170 |
| Turkey–0.69% | | | | | | |
| Turkey Government Bond | | | | | | |
| 4.50% 2/11/15 | TRY | | 2,603,610 | | | 1,585,384 |
| 9.00% 3/5/14 | TRY | | 7,705,000 | | | 4,486,313 |
| 10.50% 1/15/20 | TRY | | 8,411,000 | | | 5,785,292 |
| Turkey Government International Bond | | | | | | |
| 6.00% 1/14/41 | USD | | 1,801,000 | | | 2,253,501 |
| | | | | | | 14,110,490 |
| United Kingdom–0.95% | | | | | | |
| United Kingdom Gilt | | | | | | |
| 4.00% 3/7/22 | GBP | | 5,733,777 | | | 11,182,617 |
| 4.50% 3/7/19 | GBP | | 1,667,000 | | | 3,260,470 |
| 4.75% 3/7/20 | GBP | | 2,574,100 | | | 5,168,507 |
| | | | | | | 19,611,594 |
| Uruguay–0.18% | | | | | | |
| Uruguay Government International Bond | | | | | | |
| 8.00% 11/18/22 | USD | | 2,480,250 | | | 3,613,724 |
| | | | | | | 3,613,724 |
| Total Sovereign Bonds | | | | | | |
| (cost $159,593,172) | | | | | | 170,320,936 |
| | |
| SUPRANATIONAL BANKS–0.52% | | | | | | |
| Andina de Fomento 4.375% 6/15/22 | | | 1,900,000 | | | 2,066,750 |
| International Bank for | | | | | | |
| Reconstruction & Development | | | | | | |
| 3.375% 4/30/15 | NOK | | 22,000,000 | | | 4,103,583 |
| 3.625% 6/22/20 | NOK | | 12,410,000 | | | 2,388,006 |
| 6.00% 2/15/17 | AUD | | 1,770,000 | | | 2,016,507 |
| Total Supranational Banks | | | | | | |
| (cost $9,535,176) | | | | | | 10,574,846 |
| |
| U.S. TREASURY OBLIGATIONS–3.96% | | | | | | |
| U.S. Treasury Bond 2.75% 8/15/42 | USD | | 45,805,000 | | | 44,237,599 |
| ∞U.S. Treasury Note 1.625% 11/15/22 | | | 37,495,000 | | | 37,090,766 |
| Total U.S. Treasury Obligations | | | | | | |
| (cost $82,926,922) | | | | | | 81,328,365 |
| |
| | Number of | | | |
| | Shares | | | |
| COMMON STOCK–0.00% | | | | | | |
| =†Adelphia Recovery Trust Series Arahova | | | 1 | | | 0 |
| =†Calpine | | | 385,000 | | | 0 |
| =†Century Communications | | | 2,500,000 | | | 0 |
| †Delta Air Lines | | | 67 | | | 795 |
| NRG Energy | | | 40 | | | 917 |
| Total Common Stock (cost $78,017) | | | | | | 1,712 |
| |
| CONVERTIBLE PREFERRED STOCK–0.25% | | | | | | |
| *Apache 6.00% exercise price $109.12, | | | | | | |
| expiration date 8/1/13 | | | 15,050 | | | 687,785 |
| Aspen Insurance 5.625% exercise price | | | | | | |
| $29.28, expiration date 12/31/49 | | | 14,277 | | | 855,728 |
Diversified Income Series-18
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
| | Number of | | Value |
| | | Shares | | (U.S. $) |
| CONVERTIBLE PREFERRED STOCK (continued) | | | | | | |
| Bank of America 7.25% exercise price | | | | | | |
| $50.00, expiration date 12/31/49 | | | 281 | | $ | 319,005 |
| #Chesapeake Energy 144A | | | | | | |
| 5.75% exercise price $27.90, | | | | | | |
| expiration date 12/31/49 | | | 179 | | | 159,422 |
| HealthSouth 6.50% exercise price $30.50, | | | | | | |
| expiration date 12/31/49 | | | 926 | | | 960,956 |
| *Huntington Bancshares 8.50% exercise price | | | | | | |
| $11.95, expiration date 12/31/49 | | | 678 | | | 833,940 |
| PPL 9.50% exercise price $28.80, | | | | | | |
| expiration date 7/1/13 | | | 16,700 | | | 881,092 |
| SandRidge Energy 8.50% exercise price | | | | | | |
| $8.01, expiration date 12/31/49 | | | 4,440 | | | 464,202 |
| Total Convertible Preferred Stock | | | | | | |
| (cost $5,443,491) | | | | | | 5,162,130 |
| |
| PREFERRED STOCK–0.63% | | | | | | |
| Alabama Power 5.625% | | | 69,530 | | | 1,759,109 |
| #Ally Financial 144A 7.00% | | | 2,000 | | | 1,964,438 |
| BB&T 5.85% | | | 48,325 | | | 1,255,484 |
| *JPMorgan Chase 5.50% | | | 30,000 | | | 754,200 |
| •PNC Financial Services Group | | | | | | |
| 6.125% | | | 50,000 | | | 1,385,500 |
| 8.25% | | | 2,440,000 | | | 2,494,899 |
| •US Bancorp | | | | | | |
| 6.00% | | | 10,000 | | | 277,400 |
| 6.50% | | | 35,600 | | | 1,019,584 |
| *Wells Fargo 2.50% | | | 78,000 | | | 1,964,040 |
| Total Preferred Stock | | | | | | |
| (cost $12,215,581) | | | | | | 12,874,654 |
| |
| | Principal | | | |
| | Amount° | | | |
| SHORT-TERM INVESTMENTS–18.38% | | | | | | |
| ≠Discount Notes–7.38% | | | | | | |
| Federal Home Loan Bank | | | | | | |
| 0.075% 1/4/13 | USD | | 15,622,066 | | | 15,622,050 |
| 0.10% 1/18/13 | | | 8,809,964 | | | 8,809,929 |
| 0.10% 1/23/13 | | | 38,716,238 | | | 38,716,006 |
| 0.12% 4/2/13 | | | 28,022,528 | | | 28,018,324 |
| 0.125% 3/6/13 | | | 32,038,765 | | | 32,036,522 |
| 0.13% 2/6/13 | | | 23,184,116 | | | 23,183,444 |
| 0.135% 2/15/13 | | | 5,100,506 | | | 5,100,317 |
| | | | | | | 151,486,592 |
| Repurchase Agreements–2.12% | | | | | | |
| Bank of America 0.11%, dated 12/31/12, | | | | | | |
| to be repurchased on 1/2/13, repurchase | | | | | | |
| price $29,356,334 (collateralized | | | | | | |
| by U.S. government obligations | | | | | | |
| 0.25%-2.375% 2/18/15-12/15/15; | | | | | | |
| market value $29,943,278) | | | 29,356,155 | | | 29,356,155 |
| BNP Paribas 0.15%, dated 12/31/12, | | | | | | |
| to be repurchased on 1/2/13, repurchase | | | | | | |
| price $14,197,149 (collateralized | | | | | | |
| by U.S. government obligations | | | | | | |
| 0.125%-0.25% 12/31/14-5/15/15; | | | | | | |
| market value $14,480,972) | | | 14,197,031 | | | 14,197,031 |
| | | | | | | 43,553,186 |
| ≠U.S. Treasury Obligations–8.88% | | | | | | |
| U.S. Treasury Bills | | | | | | |
| 0.04% 1/17/13 | | | 29,299,058 | | | 29,298,853 |
| 0.04% 3/21/13 | | | 32,379,076 | | | 32,376,809 |
| 0.04% 3/28/13 | | | 22,609,229 | | | 22,607,489 |
| 0.105% 5/23/13 | | | 24,500,000 | | | 24,490,396 |
| 0.105% 5/30/13 | | | 24,500,000 | | | 24,489,931 |
| 0.12% 6/6/13 | | | 24,500,000 | | | 24,489,465 |
| 0.125% 6/13/13 | | | 24,500,000 | | | 24,488,706 |
| | | | | | | 182,241,649 |
| Total Short-Term Investments | | | | | | |
| (cost $377,259,434) | | | | | | 377,281,427 |
| | |
| Total Value of Securities Before Securities | | | | | | |
| Lending Collateral–111.15% | | | | | | |
| (cost $2,183,660,160) | | | | | | 2,280,533,790 |
| |
| | Number of | | | |
| | Shares | | | |
| **SECURITIES LENDING COLLATERAL–0.06% | | | | | | |
| Investment Companies | | | | | | |
| Delaware Investments Collateral | | | | | | |
| Fund No.1 | | | 1,319,367 | | | 1,319,367 |
| @† | Mellon GSL Reinvestment Trust II | | | 1,759,132 | | | 0 |
| Total Securities Lending Collateral | | | | | | |
| (cost $3,078,499) | | | | | | 1,319,367 |
Diversified Income Series-19
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
| TOTAL VALUE OF SECURITIES–111.21%(cost $2,186,738,659) | $ | 2,281,853,157 | © |
| **OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL–(0.15%) | | (3,078,499 | ) |
| z«OTHER LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS–(11.06%) | | (226,929,620 | ) |
| NET ASSETS APPLICABLE TO 186,157,427 SHARES OUTSTANDING–100.00% | $ | 2,051,845,038 | |
NET ASSET VALUE–DELAWARE VIP DIVERSIFIED INCOME SERIES
STANDARD CLASS ($531,992,311 / 48,046,398 Shares) | | | $11.07 | |
NET ASSET VALUE–DELAWARE VIP DIVERSIFIED INCOME SERIES
SERVICE CLASS ($1,519,852,727 / 138,111,029 Shares) | | | $11.00 | |
| COMPONENTS OF NET ASSETS AT DECEMBER 31, 2012: | | | |
| Shares of beneficial interest (unlimited authorization–no par) | $ | 1,890,904,817 | |
| Undistributed net investment income | | 39,131,712 | |
| Accumulated net realized gain | | 28,301,095 | |
| Net unrealized appreciation of investments and derivatives | | 93,507,414 | |
| Total net assets | $ | 2,051,845,038 | |
____________________
| ° | Principal amount shown is stated in the currency in which each security is denominated. |
| • | Variable rate security. The rate shown is the rate as of December 31, 2012. Interest rates reset periodically. |
| t | Pass Through Agreement. Security represents the contractual right to receive a proportionate amount of underlying payments due to the counterparty pursuant to various agreements related to the rescheduling of obligations and the exchange of certain notes. |
| # | Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. At December 31, 2012, the aggregate value of Rule 144A securities was $325,645,755, which represented 15.87% of the Series’ net assets. See Note 11 in “Notes to Financial Statements.” |
| * | Fully or partially on loan. |
| ϕ | Step coupon bond. Coupon increases or decreases periodically based on a predetermined schedule. Stated rate in effect at December 31, 2012. |
| @ | Illiquid security. At December 31, 2012, the aggregate value of illiquid securities was $1,335,000 which represented 0.07% of the Series’ net assets. See Note 11 in “Notes to Financial Statements.” |
| = | Security is being fair valued in accordance with the Series’ fair valuation policy. At December 31, 2012, the aggregate value of fair valued securities was $531,516, which represented 0.03% of the Series’ net assets. See Note 1 in “Notes to Financial Statements.” |
| ‡ | Non income producing security. Security is currently in default. |
| Δ | Securities have been classified by country of origin. |
| « | Senior Secured Loans generally pay interest at rates which are periodically redetermined by reference to a base lending rate plus a premium. These base lending rates are generally (i) the prime rate offered by one or more United States banks, (ii) the lending rate offered by one or more European banks such as the London Inter-Bank Offered Rate (LIBOR), and (iii) the certificate of deposit rate. Senior Secured Loans may be subject to restrictions on resale. Stated rate in effect at December 31, 2012. |
| § | All or a portion of this holding is subject to unfunded loan commitments. See Note 7 in “Notes to financial statements.” |
| ∞ | Fully or partially pledged as collateral for futures contracts. |
| † | Non income producing security. |
| ≠ | The rate shown is the effective yield at the time of purchase. |
| ** | See Note 10 in “Notes to Financial Statements” for additional information on securities lending collateral. |
| © | Includes $2,718,577 of securities loaned. |
| z | Of this amount, $248,832,403 represents payable for securities purchased as of December 31, 2012. |
| « | Includes foreign currency valued at $3,227,703 with a cost of $3,249,696. |
Diversified Income Series-20
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
The following foreign currency exchange contracts and futures contracts were outstanding at December 31, 2012:1
Foreign Currency Exchange Contracts
| | | | | | | | | | | | Unrealized |
| | | | | | | | | | Settlement | | Appreciation |
| Counterparty | | Contracts to Receive (Deliver) | | In Exchange For | | Date | | (Depreciation) |
| BAML | | CAD | 13,800,273 | | | USD | (13,914,615 | ) | | 2/1/13 | | | $ | (30,254 | ) | |
| BAML | | COP | 6,053,918,000 | | | USD | (3,363,662 | ) | | 2/1/13 | | | | 53,992 | | |
| BAML | | EUR | (19,803,891 | ) | | USD | 25,629,800 | | | 2/1/13 | | | | (510,988 | ) | |
| BAML | | JPY | (1,658,659,704 | ) | | USD | 20,101,173 | | | 2/1/13 | | | | 976,012 | | |
| BAML | | KRW | (1,443,935,350 | ) | | USD | 1,334,999 | | | 2/1/13 | | | | (19,596 | ) | |
| BAML | | NOK | (6,350,067 | ) | | USD | 1,117,497 | | | 2/1/13 | | | | (23,239 | ) | |
| BAML | | NZD | (2,796,913 | ) | | USD | 2,330,444 | | | 2/1/13 | | | | 18,433 | | |
| BAML | | TRY | 8,964,969 | | | USD | (4,978,879 | ) | | 2/1/13 | | | | 29,385 | | |
| BAML | | ZAR | 6,017,756 | | | USD | (699,755 | ) | | 2/1/13 | | | | 8,774 | | |
| BAML | | ZAR | (6,017,756 | ) | | USD | 687,131 | | | 2/1/13 | | | | (21,399 | ) | |
| BCLY | | RUB | 147,869,875 | | | USD | (4,766,613 | ) | | 2/1/13 | | | | 44,061 | | |
| CITI | | GBP | (840,548 | ) | | USD | 1,352,426 | | | 2/1/13 | | | | (13,293 | ) | |
| CITI | | JPY | 251,514,501 | | | USD | (3,059,326 | ) | | 2/1/13 | | | | (159,240 | ) | |
| CITI | | RUB | 138,142,200 | | | USD | (4,458,674 | ) | | 2/1/13 | | | | 35,529 | | |
| CITI | | TRY | 8,964,969 | | | USD | (4,974,873 | ) | | 2/1/13 | | | | 33,391 | | |
| CS | | IDR | 31,501,545,200 | | | USD | (3,226,956 | ) | | 2/1/13 | | | | 28,760 | | |
| GSC | | BRL | 20,234,846 | | | USD | (9,656,333 | ) | | 2/1/13 | | | | 177,833 | | |
| GSC | | GBP | (4,706,210 | ) | | USD | 7,569,280 | | | 2/1/13 | | | | (77,349 | ) | |
| GSC | | NOK | (7,086,080 | ) | | USD | 1,246,036 | | | 2/1/13 | | | | (26,919 | ) | |
| HSBC | | CAD | (475,241 | ) | | USD | 480,527 | | | 2/1/13 | | | | 2,390 | | |
| HSBC | | EUR | (7,188,727 | ) | | USD | 9,306,527 | | | 2/1/13 | | | | (182,467 | ) | |
| HSBC | | GBP | (1,754,333 | ) | | USD | 2,822,371 | | | 2/1/13 | | | | (28,061 | ) | |
| HSBC | | JPY | 622,068,364 | | | USD | (7,544,887 | ) | | 2/1/13 | | | | (372,133 | ) | |
| HSBC | | MXN | (89,509,050 | ) | | USD | 6,967,962 | | | 2/1/13 | | | | 23,319 | | |
| HSBC | | TRY | 4,158,640 | | | USD | (2,309,073 | ) | | 2/1/13 | | | | 14,144 | | |
| JPMC | | BRL | 10,170,750 | | | USD | (4,842,061 | ) | | 2/1/13 | | | | 100,939 | | |
| JPMC | | EUR | (9,392,060 | ) | | USD | 12,149,569 | | | 2/1/13 | | | | (247,785 | ) | |
| JPMC | | GBP | (3,837,608 | ) | | USD | 6,167,036 | | | 2/1/13 | | | | (68,292 | ) | |
| JPMC | | JPY | 445,448,225 | | | USD | (5,321,000 | ) | | 2/1/13 | | | | (184,763 | ) | |
| JPMC | | MXN | (30,398,867 | ) | | USD | 2,365,487 | | | 2/1/13 | | | | 6,962 | | |
| JPMC | | NOK | 85,556,788 | | | USD | (15,336,537 | ) | | 2/1/13 | | | | 33,020 | | |
| JPMC | | SEK | 44,082,315 | | | USD | (6,700,000 | ) | | 2/1/13 | | | | 75,578 | | |
| MSC | | BRL | 10,290,543 | | | USD | (4,910,898 | ) | | 2/1/13 | | | | 90,321 | | |
| MSC | | GBP | (1,731,322 | ) | | USD | 2,784,503 | | | 2/1/13 | | | | (28,542 | ) | |
| MSC | | JPY | 741,624,763 | | | USD | (9,016,386 | ) | | 2/1/13 | | | | (465,088 | ) | |
| TD | | JPY | (689,249,464 | ) | | USD | 8,188,000 | | | 2/1/13 | | | | 240,615 | | |
| TD | | RUB | 175,845,000 | | | USD | (5,700,000 | ) | | 2/1/13 | | | | 20,794 | | |
| | | | | | | | | | | | | $ | (445,156 | ) | |
Futures Contracts
| | | | | | | | | | | | | | | | | | | Unrealized |
| | | | | Notional Cost | | Notional | | Expiration | | Appreciation |
| Contracts to Buy (Sell) | | | (Proceeds) | | Value | | Date | | (Depreciation) |
| (162) | | Euro-O.A.T. | | | | $ | (28,766,079 | ) | | | | $ | (29,107,631 | ) | | | 3/12/13 | | | $ | (341,552 | ) | |
| 91 | | Long Gilt | | | | | 17,416,815 | | | | | | 17,584,754 | | | | 3/29/13 | | | | 167,939 | | |
| (24) | | U.S. Treasury 10 yr Notes | | | | | (3,188,932 | ) | | | | | (3,186,750 | ) | | | 3/29/13 | | | | 2,182 | | |
| (486) | | U.S. Treasury Long Notes | | | | | (70,935,450 | ) | | | | | (71,685,000 | ) | | | 3/29/13 | | | | (749,550 | ) | |
| | | | | | | | | | | | | | | | | | | | $ | (920,981 | ) | |
Diversified Income Series-21
Delaware VIP® Diversified Income Series
Statement of Net Assets (continued)
The use of foreign currency exchange contracts and futures contracts involves elements of market risk and risks in excess of the amount disclosed in the financial statements. The notional values and foreign currency exchange contracts presented above represent the Series’ total exposure in such contracts, whereas only the net unrealized appreciation (depreciation) is reflected in the Series’ net assets.
1See Note 9 in “Notes to Financial Statements.”
Summary of Abbreviations:
ARM – Adjustable Rate Mortgage
AUD – Australian Dollar
BAML – Bank of America Merrill Lynch
BCLY – Barclays Bank
BRL – Brazilian Real
CAD – Canadian Dollar
CITI – Citigroup Global Markets
CS – Credit Suisse
COP – Colombian Peso
EUR – European Monetary Unit
GBP – British Pound Sterling
GNMA – Government National Mortgage Association
GSC – Goldman Sachs Capital
HSBC – Hong Kong Shanghai Bank
IDR – Indonesian Rupiah
JPMC – JPMorgan Chase Bank
JPY – Japanese Yen
KRW – South Korean Won
MASTR – Mortgage Asset Securitization Transactions, Inc.
MSC – Morgan Stanley Capital
MXN – Mexican Peso
MYR – Malaysian Ringgit
NCUA – National Credit Union Administration
NOK – Norwegian Krone
NZD – New Zealand Dollar
O.A.T – Obligations Assimilables du Tresor
PIK – Pay-in-kind
PLN – Polish Zloty
REMIC – Real Estate Mortgage Investment Conduit
RUB – Russian Ruble
SEK – Swedish Krona
S.F. – Single Family
TBA – To be announced
TD – Toronto Dominion Bank
TRY – Turkish Lira
USD – United States Dollar
yr – Year
ZAR – South African Rand
See accompanying notes, which are an integral part of the financial statements.
Diversified Income Series-22
Delaware VIP® Trust —
Delaware VIP Diversified Income Series
Statement of Operations
Year Ended December 31, 2012
| INVESTMENT INCOME: | | | |
| Interest | $ | 80,103,850 | |
| Dividends | | 919,620 | |
| Securities lending income | | 46,983 | |
| | 81,070,453 | |
| |
| EXPENSES: | | | |
| Management fees | | 11,592,249 | |
| Distribution expenses – Service Class | | 4,334,523 | |
| Accounting and administration expenses | | 769,328 | |
| Reports and statements to shareholders | | 294,470 | |
| Dividend disbursing and transfer agent fees and expenses | | 170,314 | |
| Custodian fees | | 156,372 | |
| Legal fees | | 146,689 | |
| Trustees’ fees | | 87,050 | |
| Audit and tax | | 80,162 | |
| Insurance fees | | 34,302 | |
| Pricing fees | | 33,451 | |
| Registration fees | | 28,755 | |
| Consulting fees | | 20,921 | |
| Dues and services | | 11,314 | |
| Trustees’ expenses | | 6,138 | |
| | | 17,766,038 | |
| Less waived distribution expenses – Service Class | | (722,420 | ) |
| Less expense paid indirectly | | (1 | ) |
| Total operating expenses | | 17,043,617 | |
| |
| NET INVESTMENT INCOME | | 64,026,836 | |
| |
| NET REALIZED AND UNREALIZED GAIN (LOSS): | | | |
| Net realized gain (loss) on: | | | |
| Investments | | 60,631,352 | |
| Foreign currencies | | 2,255,795 | |
| Foreign currency exchange contracts | | (12,761,756 | ) |
| Futures contracts | | (7,206,815 | ) |
| Options written | | 813,157 | |
| Swap contracts | | (27,668,718 | ) |
| Net realized gain | | 16,063,015 | |
| Net change in unrealized appreciation (depreciation) of: | | | |
| Investments | | 58,879,135 | |
| Futures contracts | | (1,987,642 | ) |
| Options written | | (92,305 | ) |
| Swap contracts | | 1,451,877 | |
| Foreign currencies | | (8,701 | ) |
| Foreign currency exchange contracts | | (5,410,707 | ) |
| Net change in unrealized appreciation (depreciation) | | 52,831,657 | |
| |
| NET REALIZED AND UNREALIZED GAIN | | 68,894,672 | |
| |
| NET INCREASE IN NET ASSETS RESULTING | | | |
| FROM OPERATIONS | $ | 132,921,508 | |
Delaware VIP Trust —
Delaware VIP Diversified Income Series
Statements of Changes in Net Assets
| | Year Ended |
| | 12/31/12 | | 12/31/11 |
| INCREASE (DECREASE) IN NET ASSETS | | | | | | | | |
| FROM OPERATIONS: | | | | | | | | |
| Net investment income | | $ | 64,026,836 | | | $ | 67,316,814 | |
| Net realized gain | | | 16,063,015 | | | | 54,919,797 | |
| Net change in unrealized | | | | | | | | |
| appreciation (depreciation) | | | 52,831,657 | | | | (10,429,179 | ) |
| Net increase in net assets resulting | | | | | | | | |
| from operations | | | 132,921,508 | | | | 111,807,432 | |
| |
| DIVIDENDS AND DISTRIBUTIONS TO | | | | | | | | |
| SHAREHOLDERS FROM: | | | | | | | | |
| Net investment income: | | | | | | | | |
| Standard Class | | | (16,819,225 | ) | | | (27,424,124 | ) |
| Service Class | | | (42,559,575 | ) | | | (47,070,418 | ) |
| Net realized gain: | | | | | | | | |
| Standard Class | | | (16,444,423 | ) | | | (26,962,244 | ) |
| Service Class | | | (44,995,213 | ) | | | (49,176,477 | ) |
| | | (120,818,436 | ) | | | (150,633,263 | ) |
| |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | | |
| Proceeds from shares sold: | | | | | | | | |
| Standard Class | | | 29,574,716 | | | | 40,279,608 | |
| Service Class | | | 216,676,722 | | | | 296,976,262 | |
| Net asset value of shares issued upon | | | | | | | | |
| reinvestment of dividends and distributions: | | | | | | | | |
| Standard Class | | | 21,971,163 | | | | 26,872,556 | |
| Service Class | | | 87,554,788 | | | | 96,246,896 | |
| | | | 355,777,389 | | | | 460,375,322 | |
| Cost of shares redeemed: | | | | | | | | |
| Standard Class | | | (40,281,662 | ) | | | (193,953,088 | ) |
| Service Class | | | (93,058,916 | ) | | | (170,077,093 | ) |
| | | | (133,340,578 | ) | | | (364,030,181 | ) |
| Increase in net assets derived from capital | | | | | | | | |
| share transactions | | | 222,436,811 | | | | 96,345,141 | |
| |
| NET INCREASE IN NET ASSETS | | | 234,539,883 | | | | 57,519,310 | |
| |
| NET ASSETS: | | | | | | | | |
| Beginning of year | | | 1,817,305,155 | | | | 1,759,785,845 | |
| End of year (including undistributed | | | | | | | | |
| net investment income of $39,131,712 | | | | | | | | |
| and $49,910,411, respectively) | | $ | 2,051,845,038 | | | $ | 1,817,305,155 | |
See accompanying notes, which are an integral part of the financial statements.
Diversified Income Series-23
Delaware VIP® Trust — Delaware VIP Diversified Income Series
Financial Highlights
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP Diversified Income Series Standard Class |
| | Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $11.020 | | | $11.280 | | | $10.980 | | | $9.250 | | | $10.220 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.376 | | | 0.426 | | | 0.521 | | | 0.628 | | | 0.500 | |
| Net realized and unrealized gain (loss) | | 0.384 | | | 0.256 | | | 0.345 | | | 1.721 | | | (0.926 | ) |
| Total from investment operations | | 0.760 | | | 0.682 | | | 0.866 | | | 2.349 | | | (0.426 | ) |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.359 | ) | | (0.475 | ) | | (0.539 | ) | | (0.619 | ) | | (0.405 | ) |
| Net realized gain | | (0.351 | ) | | (0.467 | ) | | (0.027 | ) | | – | | | (0.139 | ) |
| Total dividends and distributions | | (0.710 | ) | | (0.942 | ) | | (0.566 | ) | | (0.619 | ) | | (0.544 | ) |
| |
| Net asset value, end of period | | $11.070 | | | $11.020 | | | $11.280 | | | $10.980 | | | $9.250 | |
| |
| Total return2 | | 7.20% | | | 6.39% | | | 8.06% | | | 26.96% | | | (4.54% | ) |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $531,992 | | | $517,362 | | | $659,032 | | | $652,804 | | | $542,074 | |
| Ratio of expenses to average net assets | | 0.68% | | | 0.68% | | | 0.70% | | | 0.73% | | | 0.73% | |
| Ratio of net investment income to average | | | | | | | | | | | | | | | |
| net assets | | 3.43% | | | 3.87% | | | 4.68% | | | 6.33% | | | 5.16% | |
| Portfolio turnover | | 216% | | | 233% | | | 237% | | | 202% | | | 244% | |
____________________ | 1The average shares outstanding method has been applied for per share information. |
| 2Total 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 does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
Diversified Income Series-24
Delaware VIP® Diversified Income Series
Financial Highlights (continued)
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP Diversified Income Series Service Class |
| | Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $10.960 | | | $11.220 | | | $10.920 | | | $9.200 | | | $10.180 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.347 | | | 0.396 | | | 0.491 | | | 0.603 | | | 0.476 | |
| Net realized and unrealized gain (loss) | | 0.376 | | | 0.258 | | | 0.351 | | | 1.712 | | | (0.937 | ) |
| Total from investment operations | | 0.723 | | | 0.654 | | | 0.842 | | | 2.315 | | | (0.461 | ) |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.332 | ) | | (0.447 | ) | | (0.515 | ) | | (0.595 | ) | | (0.380 | ) |
| Net realized gain | | (0.351 | ) | | (0.467 | ) | | (0.027 | ) | | – | | | (0.139 | ) |
| Total dividends and distributions | | (0.683 | ) | | (0.914 | ) | | (0.542 | ) | | (0.595 | ) | | (0.519 | ) |
| |
| Net asset value, end of period | | $11.000 | | | $10.960 | | | $11.220 | | | $10.920 | | | $9.200 | |
| |
| Total return2 | | 6.87% | | | 6.15% | | | 7.87% | | | 26.66% | | | (4.90% | ) |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $1,519,853 | | | $1,299,943 | | | $1,100,754 | | | $791,973 | | | $431,062 | |
| Ratio of expenses to average net assets | | 0.93% | | | 0.93% | | | 0.95% | | | 0.98% | | | 0.98% | |
Ratio of expenses to average net assets
prior to fees waived | | 0.98% | | | 0.98% | | | 1.00% | | | 1.03% | | | 1.03% | |
| Ratio of net investment income to average net assets | | 3.18% | | | 3.62% | | | 4.43% | | | 6.08% | | | 4.91% | |
Ratio of net investment income to average
net assets prior to fees waived | | 3.13% | | | 3.57% | | | 4.38% | | | 6.03% | | | 4.86% | |
| Portfolio turnover | | 216% | | | 233% | | | 237% | | | 202% | | | 244% | |
____________________ | 1The average shares outstanding method has been applied for per share information. |
| 2Total 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 during all of the periods shown reflects a waiver by the distributor. Performance would have been lower had the waiver not been in effect. Total investment return does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
Diversified Income Series-25
Delaware VIP® Trust — Delaware VIP Diversified Income Series
Notes to Financial Statements
December 31, 2012
Delaware VIP Trust (Trust) is organized as a Delaware statutory trust and offers 10 series: Delaware VIP Diversified Income Series, Delaware VIP Emerging Markets Series, Delaware VIP High Yield Series, Delaware VIP International Value Equity Series, Delaware VIP Limited-Term Diversified Income Series, Delaware VIP REIT Series, Delaware VIP Small Cap Value Series, Delaware VIP Smid Cap Growth Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series. These financial statements and the related notes pertain to Delaware VIP Diversified Income Series (Series). The Trust is an open-end investment company. The Series is considered diversified under the Investment Company Act of 1940, as amended, and offers Standard Class and Service Class shares. The Standard Class shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee. The shares of the Series are sold only to separate accounts of life insurance companies.
The investment objective of the Series is to seek maximum long-term total return consistent with reasonable risk.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and are consistently followed by the Series.
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, which approximates fair value. Securities listed on a foreign exchange are normally valued at the last quoted sales price on the valuation date. Debt securities, credit default swap (CDS) contracts and interest rate swap contracts are valued based upon valuations provided by an independent pricing service or broker/counterparty and reviewed by management. To the extent current market prices are not available, the pricing service may take into account developments related to the specific security, as well as transactions in comparable securities. U.S. government and agency securities are valued at the mean between the bid and ask prices, which approximates fair value. Valuations for fixed income securities utilize matrix systems, which reflect such factors as security prices, yields, maturities, and ratings, and are supplemented by dealer and exchange quotations. Swap prices are derived using daily swap curves and models that incorporate a number of market date factors, such as discounted cash flows, trades and values of the underlying reference instruments. Investment company securities are valued at net asset value per share, as reported by the underlying investment company. Foreign currency exchange contracts are valued at the mean between the bid and ask prices of the contracts, which approximates fair value. Interpolated values are derived when the settlement date of the contract is an interim date for which quotations are not available. Futures contracts are valued at the daily quoted settlement prices. 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 Series’ 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 Series 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 Series values its securities, generally as of 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 Series may frequently value foreign securities using fair value prices based on third-party vendor modeling tools (international fair value pricing).
Federal & Foreign Income Taxes—No provision for federal income taxes has been made as the Series 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 Series evaluates tax positions taken or expected to be taken in the course of preparing the Series’ tax returns 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 analyzed the Series’ tax positions taken for all open federal income tax years (December 31, 2009 – December 31, 2012), and has concluded that no provision for federal income tax is required in the Series’ financial statements. In regards to foreign taxes, the Series only has open tax years in certain foreign countries it invests in that may date back to the inception of the Series.
Class Accounting—Investment income, common expenses and realized and unrealized gain (loss) on investments are allocated to the classes of the Series 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 Series may purchase certain U.S. government securities subject to the counterparty’s agreement to repurchase them at an agreed upon date and price. The counterparty will be required on a daily basis to maintain the value of the collateral subject to the agreement at not less than the repurchase price (including accrued interest). The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system with the Series’ custodian or a third-party sub-custodian. In the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. All open repurchase agreements as of the date of this report were entered into on December 31, 2012.
To Be Announced Trades—The Series may contract to purchase securities for a fixed price at a transaction date beyond the customary settlement period (e.g., “when issued,” “delayed delivery,” “forward commitment,” or “TBA transactions”) consistent with the Series’ ability to manage its investment portfolio and meet redemption requests. These transactions involve a commitment by the Series to purchase securities for a predetermined price or yield with payment and delivery taking place more than three days in the future, or after a period longer than the customary settlement period for that type of security. No interest will be earned by the Series on such purchases until the securities are delivered; however, the market value may change prior to delivery.
Foreign Currency Transactions—Transactions denominated in foreign currencies are recorded at the prevailing exchange rates on the valuation date in accordance with the Series’ prospectus. The value of all assets and liabilities denominated in foreign currencies is translated into U.S. dollars at the exchange rate of such currencies against the U.S. dollar daily. Transaction gains or losses resulting from changes in exchange rates during the reporting period or upon settlement of the foreign currency transaction are reported in operations for the current period. The Series generally isolates that portion of realized gains and losses on investments in debt securities which are due to changes in the foreign exchange rates from that which are due to changes in market prices of debt securities. The Series reports certain foreign currency related transactions as components of realized gains (losses) for financial reporting purposes, whereas such components are treated as ordinary income (loss) for federal income tax purposes.
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments, the reported amounts of assets and liabilities and disclosure of contingent 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 and the differences could be material.
Diversified Income Series-26
Delaware VIP® Diversified Income Series
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
Other—Expenses directly attributable to the Series are charged directly to the Series. Other expenses common to various funds within the Delaware Investments® Family of Funds are generally allocated among 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. Withholding taxes have been provided for in accordance with the Series’ understanding of the applicable country’s tax rules and rates. Discounts and premiums on debt securities are amortized to interest income over the lives of the respective securities using the effective interest method. Realized gains (losses) on paydowns of mortgage- and asset-backed securities are classified as interest income. The Series declares and pays dividends from net investment income and distributions from net realized gain on investments, if any, following the close of the fiscal year. The Series may distribute income dividends and capital gains more frequently, if necessary for tax purposes. Dividends and distributions, if any, are recorded on the ex-dividend date.
The Series 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 year ended December 31, 2012.
The Series receives earnings credits from its transfer agent when positive cash balances are maintained, which are used to offset transfer agent fees. The expense paid under this arrangement is included in dividend disbursing and transfer agent fees and expenses on the Statement of Operations with the corresponding expense offset shown as “expense paid indirectly.” For the year ended December 31, 2012, the Series earned $1 under this agreement.
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Series 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 Series, 0.60% on the next $500 million, 0.55% on the next $1.5 billion, and 0.50% on the average daily net assets in excess of $2.5 billion.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to the Series. For these services, the Series 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 year ended December 31, 2012, the Series was charged $96,440 for these services.
DSC is also the transfer agent and dividend disbursing agent of the Series. The Series pays DSC a monthly asset-based fee for these services. Pursuant to a sub-transfer agency agreement between DSC and BNY Mellon Investment Servicing (US) Inc. (BNYMIS), BNYMIS provides certain sub-transfer agency services to the Series. Sub-transfer agency fees are passed on to and paid directly by the Series.
Pursuant to a distribution agreement and distribution plan, the Series pays Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an annual distribution and service fee of 0.30% of the average daily net assets of the Service Class shares. DDLP has contracted to waive distribution and service fees through April 30, 2013 in order to prevent distribution and service fees of the Service Class shares from exceeding 0.25% of average daily net assets. Standard Class shares pay no distribution and service expenses.
At December 31, 2012, the Series had liabilities payable to affiliates as follows:
| | | Dividend Disbursing, | | | | Other |
| Investment | | Transfer Agent and Fund | | | | Expenses |
| Management | | Accounting Oversight | | Distribution | | Payable |
| | Fee Payable to | | Fees and Other Expenses | | Fee Payable | | to DMC |
| DMC | | Payable to DSC | | to DDLP | | and Affiliates* |
| $1,018,713 | | $21,488 | | $321,490 | | $56,142 |
____________________
*DMC, as part of its administrative services, pays operating expenses on behalf of the Series and is reimbursed on a periodic basis. Expenses include items such as printing of shareholder reports, legal and tax services, custodian fees and trustees’ fees.
As provided in the investment management agreement, the Series bears the cost of certain legal and tax services, including internal legal and tax services provided to the Series by DMC and/or its affiliates’ employees. For the year ended December 31, 2012, the Series was charged $59,154 for internal legal and tax services provided by DMC and/or its affiliates’ employees.
Trustees’ fees include expenses accrued by the Series 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 Series.
Diversified Income Series-27
Delaware VIP® Diversified Income Series
Notes to Financial Statements (continued)
3. Investments
For the year ended December 31, 2012, the Series made purchases and sales of investment securities other than short-term investments as follows:
| Purchases other than U.S. government securities | | $ | 2,971,793,156 |
| Purchases of U.S. government securities | | | 1,079,013,138 |
| Sales other than U.S. government securities | | | 2,867,133,492 |
| Sales of U.S. government securities | | | 1,115,314,477 |
At December 31, 2012, the cost of investments for federal income tax purposes and unrealized appreciation (depreciation) for the Series were as follows:
| | | Aggregate | | Aggregate | | |
| Cost of | | Unrealized | | Unrealized | | Net Unrealized |
| | Investments | | Appreciation | | Depreciation | | Appreciation |
| $2,188,585,040 | | $104,944,114 | | $(11,675,997) | | $93,268,117 |
U. S. GAAP defines fair value as the price that the Series 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. A three level hierarchy for fair value measurements has been established 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 Series’ investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three level hierarchy of inputs is summarized below.
| Level 1 – | inputs are quoted prices in active markets for identical investments (e.g., equity securities, open-end investment companies, futures contracts, exchange-traded options contracts) |
| Level 2 – | other observable inputs (including, but not limited to: quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs) (e.g., debt securities, government securities, swap contracts, foreign currency exchange contracts, foreign securities utilizing international fair value pricing, broker-quoted securities, fair valued securities) |
| Level 3 – | inputs are significant unobservable inputs (including the Series’ own assumptions used to determine the fair value of investments) (e.g., broker-quoted securities, fair valued securities) |
Level 3 investments are valued using significant unobservable inputs. The Series may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Valuations may also be based upon current market prices of securities that are comparable in coupon, rating, maturity and industry. The derived value of a Level 3 investment may not represent the value which is received upon disposition and this could impact the results of operations.
The following table summarizes the valuation of the Series’ investments by fair value hierarchy levels as of December 31, 2012:
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Agency, Asset-Backed & Mortgage-Backed Securities | | $ | – | | $ | 412,345,849 | | $ | 1,530,999 | | $ | 413,876,848 | |
| Corporate Debt | | | – | | | 1,157,278,635 | | | 1,866,515 | | | 1,159,145,150 | |
| Foreign Debt | | | – | | | 230,857,095 | | | – | | | 230,857,095 | |
| Municipal Bonds | | | – | | | 6,409 | | | – | | | 6,409 | |
| Common Stock | | | 1,712 | | | – | | | – | | | 1,712 | |
| Convertible Preferred Stock | | | 1,521,725 | | | 3,640,405 | | | – | | | 5,162,130 | |
| Preferred Stock | | | 7,661,117 | | | 5,213,537 | | | – | | | 12,874,654 | |
| Short-Term Investments | | | – | | | 377,281,427 | | | – | | | 377,281,427 | |
| U.S. Treasury Obligations | | | – | | | 81,328,365 | | | – | | | 81,328,365 | |
| Securities Lending Collateral | | | – | | | 1,319,367 | | | – | | | 1,319,367 | |
| Total | | $ | 9,184,554 | | $ | 2,269,271,089 | | $ | 3,397,514 | | $ | 2,281,853,157 | |
| |
| Foreign Currency Exchange Contracts | | $ | – | | $ | (445,156 | ) | $ | – | | $ | (445,156 | ) |
| Futures Contracts | | | (920,981 | ) | | – | | | – | | | (920,981 | ) |
The securities that have been deemed worthless on the statement of net assets are considered to be Level 3 securities in this table.
During the year ended December 31, 2012, there were no transfers between Level 1 investments, Level 2 investments or Level 3 investments that had a significant impact to the Series. The Series’ policy is to recognize transfers between levels at the beginning of the reporting period.
A reconciliation of Level 3 investments is presented when the Series has a significant amount of Level 3 investments at the beginning, interim or end of the period in relation to net assets. Management has determined not to provide additional disclosure on Level 3 inputs under ASU No. 2011-04 since the Level 3 investments are not considered significant to the Series’ net assets at the end of the period.
Diversified Income Series-28
Delaware VIP® Diversified Income Series
Notes to Financial Statements (continued)
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. The tax character of dividends and distributions paid during the years ended December 31, 2012 and 2011 was as follows:
| | Year | | Year |
| | Ended | | Ended |
| | 12/31/12 | | 12/31/11 |
| Ordinary income | | $ | 94,212,098 | | $ | 124,204,185 |
| Long-term capital gain | | | 26,606,338 | | | 26,429,078 |
| | $ | 120,818,436 | | $ | 150,633,263 |
5. Components of Net Assets on a Tax Basis
As of December 31, 2012, the components of net assets on a tax basis were as follows:
| Shares of beneficial interest | | $ | 1,890,904,817 | |
| Undistributed ordinary income | | | 63,400,166 | |
| Undistributed long-term capital gains | | | 10,112,326 | |
| Other temporary differences | | | (5,208,461 | ) |
| Unrealized appreciation | | | 92,636,190 | |
| Net assets | | $ | 2,051,845,038 | |
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales, tax deferral of losses on straddles, amortization on convertible debt securities, mark-to-market on foreign currency contracts, mark-to-market on futures contracts, and tax treatment of contingent payment debt instruments.
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 paydown gains (losses) of mortgage- and asset-backed securities, CDS contracts, contingent payment debt instruments, amortization on convertible debt securities, capital gains tax on foreign gains, distributions, and gain (loss) on foreign currency transactions. Results of operations and net assets were not affected by these reclassifications. For the year ended December 31, 2012, the Series recorded the following reclassifications.
| | Undistributed | | Accumulated |
| Net Investment | | Net Realized |
| Income | | Gain |
| $(15,426,735) | | $15,426,735 |
6. Capital Shares
Transactions in capital shares were as follows:
| | Year | | Year |
| | Ended | | Ended |
| | 12/31/12 | | 12/31/11 |
| Shares sold: | | | | | | |
| Standard Class | | 2,693,865 | | | 3,660,237 | |
| Service Class | | 19,756,660 | | | 26,988,618 | |
| |
| Shares issued upon reinvestment of dividends and distributions: | | | | | | |
| Standard Class | | 2,076,670 | | | 2,539,939 | |
| Service Class | | 8,314,794 | | | 9,131,584 | |
| | | 32,841,989 | | | 42,320,378 | |
| Shares redeemed: | | | | | | |
| Standard Class | | (3,675,672 | ) | | (17,692,005 | ) |
| Service Class | | (8,613,580 | ) | | (15,613,600 | ) |
| | | (12,289,252 | ) | | (33,305,605 | ) |
| Net increase | | 20,552,737 | | | 9,014,773 | |
Diversified Income Series-29
Delaware VIP® Diversified Income Series
Notes to Financial Statements (continued)
7. Unfunded Commitments
The Series may invest in floating rate loans. In connection with these investments, the Series may also enter into unfunded corporate loan commitments (commitments). Commitments may obligate the Series to furnish temporary financing to a borrower until permanent financing can be arranged. In connection with these commitments, the Series earns a commitment fee, typically set as a percentage of the commitment amount.
As of December 31, 2012, the Series had the following unfunded loan commitments:
| Borrower | | | Unfunded Loan Commitment |
| GenCorp | | $1,335,000 |
8. Line of Credit
The Series, along with certain other funds in the Delaware Investments® Family of Funds (Participants), was a participant in a $125,000,000 revolving line of credit 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 were charged an annual commitment fee, which was allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants were permitted to borrow up to a maximum of one third of their net assets under the agreement. Each Participant was individually, and not jointly, liable for its particular advances, if any, under the line of credit. The line of credit available under the agreement expired on November 13, 2012.
On November 13, 2012, the Series, along with the other Participants, entered into an amendment to the agreement for a $125,000,000 revolving line of credit. The agreement is to be used as described above and operates in substantially the same manner as the original agreement. The line of credit under the agreement expires on November 12, 2013. The Series had no amounts outstanding as of December 31, 2012 or at any time during the year then ended.
9. Derivatives
U.S. GAAP requires disclosures that enable investors to understand: 1) how and why an entity uses derivatives; 2) how they are accounted for; and 3) how they affect an entity’s results of operations and financial position.
Foreign Currency Exchange Contracts
The Series may enter into foreign currency exchange contracts and foreign cross currency exchange contracts as a way of managing foreign exchange rate risk. The Series 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 Series 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 and foreign cross 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 an unfavorable change in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency change favorably. In addition, the Series could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts. The Series’ 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 Series and the counterparty and by the posting of collateral by the counterparty to the Series to cover the Series’ exposure to the counterparty.
Futures Contracts
A futures contract is an agreement in which the writer (or seller) of the contract agrees to deliver to the buyer an amount of cash or securities equal to a specific dollar amount times the difference between the value of a specific security or index at the close of the last trading day of the contract and the price at which the agreement is made. The Series may use futures in the normal course of pursuing its investment objective. The Series may invest in futures contracts to hedge its existing portfolio securities against fluctuations in fair value caused by changes in prevailing market interest rates. Upon entering into a futures contract, the Series deposits cash or pledges U.S. government securities to a broker, equal to the minimum “initial margin” requirements of the exchange on which the contract is traded. Subsequent payments are received from the broker or paid to the broker each day, based on the daily fluctuation in the market value of the contract. These receipts or payments are known as “variation margin” and are recorded daily by the Series as unrealized gains or losses until the contracts are closed. When the contracts are closed, the Series records a realized gain or loss 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. Risks of entering into futures contracts include potential imperfect correlation between the futures contracts and the underlying securities and the possibility of an illiquid secondary market for these instruments. When investing in futures, there is reduced counterparty credit risk to the Series because futures are exchange-traded and the exchange’s clearinghouse, as counterparty to all exchange-traded futures, guarantees against default.
Options Contracts
During the year ended December 31, 2012, the Series entered into options contracts in the normal course of pursuing its investment objective. The Series may buy or write options contracts for any number of reasons, including without limitation: to manage the Series’ exposure to changes in securities prices and foreign currencies; as an efficient means of adjusting the Series’ overall exposure to certain markets; to protect the value of portfolio securities; and as a cash management tool. The Series may buy or write call or put options on securities, futures, swaps, “swaptions”, financial indices, and foreign currencies. When the Series buys an option, a premium is paid and an asset is recorded and adjusted on a daily basis to reflect the current market value of the options purchased. When the Series writes an option, a premium is received and a liability is recorded and adjusted on a daily basis to reflect the current market value of the options written. Premiums received from writing options that expire unexercised are treated by the Series on the expiration date as realized gains. The difference between the premium received and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is treated as realized gain or loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Series has a realized gain or loss. If a put option is exercised, the premium reduces the cost basis of the securities purchased by the Series. The Series, as writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. When writing options, the Series is subject to minimal
Diversified Income Series-30
Delaware VIP® Diversified Income Series
Notes to Financial Statements (continued)
9. Derivatives (continued)
counterparty risk because the counterparty is only obligated to pay premiums and does not bear the market risk of an unfavorable market change. Transactions in options written during the year ended December 31, 2012 for the Series were as follows:
| Number of | | | | |
| Contracts | | Premiums |
| Options outstanding at December 31, 2011 | | 201 | | | $ | 216,087 | |
| Options written | | 1,869 | | | | 1,572,639 | |
| Options expired | | (443 | ) | | | (503,346 | ) |
| Options terminated in closing sales transactions | | (1,627 | ) | | | (1,285,380 | ) |
| Options outstanding at December 31, 2012 | | – | | | $ | – | |
Swap Contracts
The Series may enter into interest rate swap contracts and CDS contracts in the normal course of pursuing its investment objective. The Series may use interest rate swaps to adjust the Series’ sensitivity to interest rates or to hedge against changes in interest rates. The Series may enter into CDS contracts in order to hedge against a credit event, to enhance total return or to gain exposure to certain securities or markets.
Interest Rate Swaps. An interest rate swap contract is an exchange of interest rates between counterparties. In one instance, an interest rate swap involves payments received by the Series from another party based on a variable or floating interest rate, in return for making payments based on a fixed interest rate. An interest rate swap can also work in reverse with the Series receiving payments based on a fixed interest rate and making payments based on a variable or floating interest rate. Interest rate swaps may be used to adjust the Series’ sensitivity to interest rates or to hedge against changes in interest rates. Periodic payments on such contracts are accrued daily and recorded as unrealized appreciation/depreciation on swap contracts. Upon periodic payment/receipt or termination of the contract, such amounts are recorded as realized gains or losses on swap contracts.
Credit Default Swaps. A CDS contract is a risk-transfer instrument through which one party (purchaser of protection) transfers to another party (seller of protection) the financial risk of a credit event (as defined in the CDS agreement), as it relates to a particular reference security or basket of securities (such as an index). In exchange for the protection offered by the seller of protection, the purchaser of protection agrees to pay the seller of protection a periodic amount at a stated rate that is applied to the notional amount of the CDS contract. In addition, an upfront payment may be made or received by the Series in connection with an unwinding or assignment of a CDS contract. Upon the occurrence of a credit event, the seller of protection would pay the par (or other agreed-upon) value of the reference security (or basket of securities) to the counterparty. Credit events generally include, among others, bankruptcy, failure to pay, and obligation default.
During the year ended December 31, 2012, the Series entered into CDS contracts as a purchaser and seller of protection. Periodic payments (receipts) on such contracts are accrued daily and recorded as unrealized losses (gains) on swap contracts. Upon payment (receipt), such amounts are recorded as realized losses (gains) on swap contracts. Upfront payments made or received in connection with CDS contracts are amortized over the expected life of the CDS contracts as unrealized losses (gains) on swap contracts. The change in value of CDS contracts is recorded as unrealized appreciation or depreciation daily. A realized gain or loss is recorded upon a credit event (as defined in the CDS agreement) or the maturity or termination of the agreement. The Series had posted $1,830,000 cash collateral for certain open derivatives and received $110,000 cash collateral and $219,000 in securities collateral for certain open derivatives.
CDS contracts may involve greater risks than if the Series had invested in the reference obligation directly. CDS contracts are subject to general market risk, liquidity risk, counterparty risk and credit risk. The Series’ maximum risk of loss from counterparty credit risk, either as the seller of protection or the buyer of protection, is the fair value of the contract. This risk is mitigated by having a netting arrangement between the Series and the counterparty and by the posting of collateral by the counterparty to the Series to cover the Series’ exposure to the counterparty.
Swaps Generally. The value of open swaps may differ from that which would be realized in the event the Series terminated its position in the agreement. Risks of entering into these contracts include the potential inability of the counterparty to meet the terms of the contracts. This type of risk is generally limited to the amount of favorable movement in the value of the underlying security, instrument or basket of instruments, if any, at the day of default. Risks also arise from potential losses from adverse market movements and such losses could exceed the unrealized amounts shown on the Statement of Net Assets. No swap contracts were outstanding at December 31, 2012.
Fair values of derivative instruments as of December 31, 2012 were as follows:
| | Asset Derivatives | | Liability Derivatives |
| | Statement of | | | | | | | Statement of | | | | |
| | Net Assets Location | | Fair Value | | Net Assets Location | | Fair Value |
| Forward currency exchange contracts (Foreign currency exchange contracts) | | Other liabilities net of receivables and other assets | | | $ | 2,014,252 | | | Other liabilities net of receivables and other assets | | $ | (2,459,408 | ) |
| |
| Interest rate contracts (Futures contracts) | | Other liabilities net of receivables and other assets | | | | 170,121 | | | Other liabilities net of receivables and other assets | | | (1,091,102 | ) |
| Total | | | | | $ | 2,184,373 | | | | | $ | (3,550,510 | ) |
Diversified Income Series-31
Delaware VIP® Diversified Income Series
Notes to Financial Statements (continued)
9. Derivatives (continued)
The effect of derivative instruments on the statement of operations for the year ended December 31, 2012 was as follows:
| | | | | | | | | | Change in Unrealized |
| | Location of Gain or | | Realized Gain or | | Appreciation or Depreciation |
| | Loss on Derivatives | | Loss on Derivatives | | on Derivatives Recognized |
| | Recognized in Income | | Recognized in Income | | in Income |
Forward currency exchange contracts
(Foreign currency exchange contracts) | | Net realized loss on foreign currency exchange contracts and net change in unrealized appreciation (depreciation) of foreign currency exchange contracts | | | $ | (12,761,756 | ) | | | | $ | (5,410,707 | ) | |
| | |
Interest rate contracts
(Futures contracts) | | Net realized loss on futures contracts and net change in unrealized appreciation (depreciation) of futures contracts | | | | (7,206,815 | ) | | | | | (1,987,642 | ) | |
| | |
Equity contracts
(Options Written) | | Net realized gain on options written and net change in unrealized appreciation (depreciation) of options written | | | | 813,157 | | | | | | (92,305 | ) | |
| | |
Credit contracts
(Swap contracts) | | Net realized loss on swap contracts and net change in unrealized appreciation (depreciation) of swap contracts | | | | (27,668,718 | ) | | | | | 1,451,877 | | |
| Total | | | | | $ | (46,824,132 | ) | | | | $ | (6,038,777 | ) | |
Derivatives Generally. The table below summarizes the average balance of derivative holdings by the Series during the year ended December 31, 2012.
| Long | | Short |
| Derivative | | Derivative |
| Volume | | Volume |
| Forward foreign currency exchange contracts (Average cost) | USD 84,287,971 | | USD 193,260,209 |
| Futures contracts (Average notional value) | 69,049,727 | | 35,212,607 |
| Options contracts (Average notional value) | 51,366 | | 142,078 |
| Swap contracts (Average notional value)* | 93,397,816 | | 2,673,829 |
| EUR 53,207,460 | | – |
____________________
*Long represents buying protection and short represents selling protection.
10. Securities Lending
The Series, along with other funds in the Delaware Investments® Family of Funds, may lend its securities pursuant to a security lending agreement (Lending Agreement) with The Bank of New York Mellon (BNY Mellon). At the time a security is loaned, the borrower must post collateral equal to the required percentage of the market value of the loaned security, including any accrued interest. The required percentage is: (i) 102% with respect to U.S. securities and foreign securities that are denominated and payable in U.S. dollars; and (ii) 105% with respect to foreign securities. With respect to each loan, if on any business day the aggregate market value of securities collateral plus cash collateral held 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 by the end of the following business day which, together with the collateral already held, will be not less than the applicable initial collateral requirements for such security loan. If the aggregate market value of securities collateral and cash collateral held with respect to a security loan exceeds the applicable initial collateral requirement, upon request of the borrower BNY Mellon must return enough collateral to the borrower by the end of the following business day to reduce the value of the remaining collateral to the applicable initial collateral requirement for such security loan. As a result of the foregoing, the value of the collateral held with respect to a loaned security may be temporarily more or less than the value of the security on loan.
Diversified Income Series-32
Delaware VIP® Diversified Income Series
Notes to Financial Statements (continued)
10. Securities Lending (continued)
Cash collateral received is generally invested in the Delaware Investments Collateral Fund No. 1 (Collective Trust) established by BNY Mellon for the purpose of investment on behalf of funds managed by DMC that participate in BNY Mellon’s securities lending program. The Collective Trust may invest in U.S. government securities and high quality corporate debt, asset-backed and other money market securities and in repurchase agreements collateralized by such securities, provided that the Collective Trust will generally have a dollar-weighted average portfolio maturity of 60 days or less. In October 2008, BNY Mellon transferred certain distressed securities from the Series’ previous collateral investment pool into the Mellon GSL Reinvestment Trust II. The Series 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 Series or, at the discretion of the lending agent, replace the loaned securities. The Series continues to record dividends or interest, as applicable, on the securities loaned and is subject to changes in value of the securities loaned that may occur during the term of the loan. The Series 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 Series 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 Series, the security lending agent and the borrower. The Series records security lending income net of allocations to the security lending agent and the borrower.
The Collective Trust used for the investment of cash collateral received from borrowers of securities 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. The Series may incur investment losses as a result of investing securities lending collateral in the Collective Trust or another collateral investment pool. This could occur if an investment in a collateral investment pool defaulted or if it were necessary to liquidate assets in the collateral investment pool to meet returns on outstanding security loans at a time when the collateral investment pool’s net asset value per unit was less than $1.00. Under those circumstances, the Series may not receive an amount from the collateral investment pool that is equal in amount to the collateral the Series would be required to return to the borrower of the securities and the Series would be required to make up for this shortfall.
At December 31, 2012, the value of securities on loan was $2,718,577, for which cash collateral was received and invested in accordance with the Lending Agreement. At December 31, 2012, the value of invested collateral was $1,319,367. These investments are presented on the Statement of Net Assets under the caption “Securities Lending Collateral.”
11. Credit and Market Risk
Some countries in which the Series 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 Series may be inhibited. In addition, a significant portion of the aggregate market value of 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 Series.
The Series invests in fixed income securities whose value is derived from underlying mortgages or consumer loans. The value of these securities is sensitive to changes in economic conditions, including delinquencies and/or defaults, and may be adversely affected by shifts in the market’s perception of the issuers and changes in interest rates. Investors receive principal and interest payments as the underlying mortgages or consumer loans are paid back. Some of these securities are collateralized mortgage obligations (CMOs). CMOs are debt securities issued by U.S. government agencies or by financial institutions and other mortgage lenders, which are collateralized by a pool of mortgages held under an indenture. Prepayment of mortgages may shorten the stated maturity of the obligations and can result in a loss of premium, if any has been paid. Certain of these securities may be stripped (securities which provide only the principal or interest feature of the underlying security). The yield to maturity on an interest-only CMO is extremely sensitive not only to changes in prevailing interest rates, but also to the rate of principal payments (including prepayments) on the related underlying mortgage assets. A rapid rate of principal payments may have a material adverse affect on the Series’ yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Series may fail to fully recoup its initial investment in these securities even if the securities are rated in the highest rating categories.
The Series invests a portion of its assets in high yield fixed income securities, which are securities rated lower than BBB- by Standard & Poor’s and Baa3 by Moody’s Investor Services, or similarly rated by another nationally recognized statistical rating organization. Investments in these higher yielding securities are generally accompanied by a greater degree of credit risk than higher rated securities. Additionally, lower rated securities may be more susceptible to adverse economic and competitive industry conditions than investment grade securities.
The Series 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 Series 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 Series’ Board has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of the Series’ limitation on investments in illiquid securities. Securities eligible for resale pursuant to Rule 144A, which are determined to be liquid, are not subject to the Series’ 15% limit on investments in illiquid securities. Rule 144A and illiquid securities have been identified on the Statement of Net Assets.
12. Contractual Obligations
The Series enters into contracts in the normal course of business that contain a variety of indemnifications. The Series’ maximum exposure under these arrangements is unknown. However, the Series has not had prior claims or losses pursuant to these contracts. Management has reviewed the Series’ existing contracts and expects the risk of loss to be remote.
13. Subsequent Events
Management has determined that no material events or transactions occurred subsequent to December 31, 2012 that would require recognition or disclosure in the Series’ financial statements.
Diversified Income Series-33
Delaware VIP® Trust — Delaware VIP Diversified Income Series
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Delaware VIP Trust
and Shareholders of Delaware VIP Diversified Income Series:
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Delaware VIP Diversified Income Series (one of the series constituting Delaware VIP Trust, hereafter referred to as the “Series”) at December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2012 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the two years in the period ended December 31, 2009 were audited by other independent accountants whose report dated February 17, 2010 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 15, 2013
Diversified Income Series-34
Delaware VIP® Trust — Delaware VIP Diversified Income Series
Other Series Information (Unaudited)
Board Consideration of Delaware VIP Diversified Income Series Investment Advisory Agreement
At a meeting held on August 21-23, 2012 (“Annual Meeting”), the Board of Trustees (“Board”), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreement for Delaware VIP Diversified Income Series (“Series”). In making its decision, the Board considered information furnished at regular quarterly Board meetings, including reports detailing Series performance, investment strategies and expenses, as well as information prepared specifically in connection with the renewal of the investment advisory contract. Information furnished specifically in connection with the renewal of the Investment Advisory Agreement with Delaware Management Company (“DMC”) included materials provided by DMC and its affiliates (“Delaware Investments”) concerning, among other things, the nature, extent and quality of services provided to the Series, the costs of such services to the Series, economies of scale and the financial condition and profitability of Delaware Investments. In addition, in connection with the Annual Meeting, reports were provided in May 2012 and included independent historical and comparative reports provided by Lipper, Inc., an independent statistical compilation organization (“Lipper”). The Lipper reports compared the Series’ investment performance and expenses with those of other comparable mutual funds. The Independent Trustees reviewed and discussed the Lipper reports with independent legal 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; comparative client fee information; 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 the Series’ policies.
In considering information relating to the approval of the Series’ advisory agreement, the Independent Trustees received assistance and advice from and met separately with independent legal 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 Series 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 Series, compliance of portfolio managers with the investment policies, strategies and restrictions for the Series, 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 Series’ investment advisor and the emphasis placed on research in the investment process. The Board recognized DMC’s receipt of several industry distinctions. The Board gave favorable consideration to DMC’s efforts to control expenditures while maintaining service levels committed to fund matters. The Board noted that in July 2011, Management implemented measures to reduce overall costs and improve transfer agent and shareholder servicing functions through outsourcing. 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 Series in view of the importance of investment performance 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 Series showed the investment performance of its Standard Class 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 Series was shown for the past one-, three-, five- and ten-year periods, as applicable, ended March 31, 2012. The Board’s objective is that the Series’ performance for the periods considered be at or above the median of its Performance Universe. The following paragraph summarizes the performance results for the Series and the Board’s view of such performance.
Lipper currently classifies the Series as an intermediate investment-grade debt fund. Management believes that it would be more appropriate to include the Series in the general bond funds category. Accordingly, the Lipper report prepared for the Series compares the Series’ performance to two separate Performance Universes consisting of the Series and all underlying variable insurance product intermediate investment-grade debt funds and all underlying variable insurance product general bond funds. When compared to other intermediate investment-grade debt funds, the Lipper report comparison showed that the Series’ total return for the one-year period was in the third quartile of its Performance Universe. The report further showed that the Series’ total return for the three- and five-year periods was in the first quartile. When compared to other general bond funds, the Lipper report comparison showed that the Series’ total return for the one- and three-year periods was in the second quartile of its Performance Universe. The report further showed that the Series’ total return for the five-year period was in the first quartile. The Board was satisfied with performance.
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 Series as of its most recently completed fiscal year. The Board also focused on the comparative analysis of effective management fees and total expense ratios of the Series versus effective management fees and expense ratios of a group of similar funds as selected by Lipper (“Expense Group”). In reviewing comparative costs, the Series’ contractual management fee and the actual management fee incurred by the Series were compared with the contractual management fees (assuming all funds in the Expense Group were similar in size to the Series) and actual management fees (as reported by each fund) within the Expense Group, taking into account any applicable breakpoints and fee waivers. The Series’ total expenses were also compared with those of its Expense Group. The Lipper total expenses, for comparative consistency, were shown by Lipper for Standard Class shares which do not charge 12b-1 and non 12b-1 service fees. The Board considered fees paid to Delaware Investments for non-management services. The Board’s objective is to limit the Series’ total expense ratio to be competitive with that of the Expense Group. The following paragraph summarizes the expense results for the Series and the Board’s view of such expenses.
When compared to other intermediate investment-grade debt funds, the expense comparisons for the Series showed that the actual management fee was in the quartile with the second highest expenses of its Expense Group and the total expenses were in the quartile with the highest expenses of its Expense Group. When compared to other general bond funds, the expense comparisons for the Series showed that the actual management fee and total expenses were in the quartile with the highest expenses of its Expense Group. The Board noted that the Series’ total expenses were not in line with the Board’s objective. In evaluating total expenses, the Board considered various initiatives implemented by Management. The Board was satisfied with Management’s efforts to improve the Series’ total expense ratio and bring it in line with the Board’s objective and noted 12b-1 waivers in place through April 2013.
Diversified Income Series-35
Delaware VIP® Diversified Income Series
Other Series Information (Unaudited) (continued)
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are realized by Delaware Investments as the Series’ 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 Series’ management contract fell within the standard structure. The Board also noted that the Series’ assets exceeded the second breakpoint level. The Board believed that, given the extent to which economies of scale might be realized by the advisor and its affiliates, the schedule of fees under the Investment Advisory Agreement provides a sharing of benefits with the Series and its shareholders.
Tax Information
For the fiscal year ended December 31, 2012, the Series designates distributions paid during the year as follows:
| (A) | | (B) | | |
| Long-Term | | Ordinary | | |
| | Capital Gain | | Income | | Total |
| Distributions | | Distributions | | Distributions |
| (Tax Basis) | | (Tax Basis) | | (Tax Basis) |
| 22.02% | | 77.98% | | 100% |
____________________
(A) and (B) are based on a percentage of the Series’ total distributions.
Diversified Income Series-36
Delaware Investments® Family of Funds
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors (“Trustees”), which has oversight responsibility for the management of a fund’s business affairs. Trustees establish procedures and oversee and review the performance of the investment manager, the distributor, and others who perform services for the fund. The independent fund trustees, in particular, are advocates for shareholder interests. Each trustee has served in that capacity since he or she was elected to or appointed to the Board of Trustees, and will continue to serve until his or her retirement or the election of a new trustee in his or her place. The following is a list of the Trustees and Officers with certain background and related information.
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INTERESTED TRUSTEES | | | | | |
| Patrick P. Coyne1 | Chairman, | Chairman and Trustee | Patrick P. Coyne has served in | 71 | Director and Audit |
| 2005 Market Street | President, | since August 16, 2006 | various executive capacities | | Committee Member — |
| Philadelphia, PA | Chief Executive | | at different times at | | Kaydon Corp. |
| 19103 | Officer, and | President and | Delaware Investments.2 | | |
| Trustee | Chief Executive Officer | | | Board of Governors |
| April 1963 | | since August 1, 2006 | | | Member — Investment |
| | | | | Company Institute (ICI) |
| | | | | |
| INDEPENDENT TRUSTEES | | | | | |
| Thomas L. Bennett | Trustee | Since | Private Investor — | 71 | Director — |
| 2005 Market Street | | March 2005 | (March 2004–Present) | | Bryn Mawr |
| Philadelphia, PA | | | | | Bank Corp. (BMTC) |
| 19103 | | | Investment Manager — | | (2007–2011) |
| | | Morgan Stanley & Co. | | |
| October 1947 | | | (January 1984–March 2004) | | |
| Joseph W. Chow | Trustee | Since | Executive Vice President | 71 | Director and Audit |
| 2005 Market Street | | January 2013 | (Emerging Economies Strategies, | | Committee |
| Philadelphia, PA 19103 | | | Risk and Corporate Administration) | | Member — Hercules |
| | | State Street Corporation | | Technology Growth |
| January 1953 | | | (July 2004–March 2011) | | Capital, Inc. |
| John A. Fry | Trustee | Since | President | 71 | Board of Governors |
| 2005 Market Street | | January 2001 | Drexel University | | Member — NASDAQ |
| Philadelphia, PA | | | (August 2010–Present) | | OMX PHLX LLC |
| 19103 | | | | | |
| | | President — | | Director and Audit |
| May 1960 | | | Franklin & Marshall College | | Committee Member — |
| | | (June 2002–July 2010) | | Community Health |
| | | | | Systems |
| | | | | | |
| | | | | Director — Ecore |
| | | | | International |
| | | | | (2009–2010) |
| Anthony D. Knerr | Trustee | Since | Managing Director — | 71 | None |
| 2005 Market Street | | April 1990 | Anthony Knerr & Associates | | |
| Philadelphia, PA | | | (Strategic Consulting) | | |
| 19103 | | | (1990–Present) | | |
| | | | | | |
| December 1938 | | | | | |
| Lucinda S. Landreth | Trustee | Since | Private Investor | 71 | None |
| 2005 Market Street | | March 2005 | (2004–Present) | | |
| Philadelphia, PA | | | | | |
| 19103 | | | | | |
| | | | | | |
| June 1947 | | | | | |
Diversified Income Series-37
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INDEPENDENT TRUSTEES (continued) | | | | |
| Frances A. Sevilla-Sacasa | Trustee | Since | Chief Executive Officer — | 71 | Trust Manager — |
| 2005 Market Street | | September 2011 | Banco Itaú Europa | | Camden Property Trust |
| Philadelphia, PA | | | International | | (2011–Present) |
| 19103 | | | (April 2012–Present) | | |
| |
| January 1956 | | | Executive Advisor to Dean | | |
| | | (August 2011–March 2012) | | |
| | | and Interim Dean | | |
| | | (January 2011–July 2011) — | | |
| | | University of Miami School of | | |
| | | Business Administration | | |
| |
| | | President — U.S. Trust, | | |
| | | Bank of America Private | | |
| | | Wealth Management | | |
| | | (Private Banking) | | |
| | | (July 2007–December 2008) | | |
| Thomas K. Whitford | Trustee | Since | Vice Chairman | 71 | None |
| 2005 Market Street | | January 2013 | (2010–Present) | | |
| Philadelphia, PA 19103 | | | Chief Administrative | | |
| | | Officer (2008–2010) | | |
| March 1956 | | | and Executive Vice | | |
| | | President and Chief | | |
| | | Administrative Officer | | |
| | | (2007–2009) — | | |
| | | PNC Financial | | |
| | | Services Group | | |
| Janet L. Yeomans | Trustee | Since | Vice President and Treasurer | 71 | Director, Audit |
| 2005 Market Street | | April 1999 | (January 2006–Present) | | Committee Member |
| Philadelphia, PA | | | Vice President — Mergers | | and Investment |
| 19103 | | | & Acquisitions | | Committee Member |
| | | (January 2003–January 2006), | | Okabena Company |
| July 1948 | | | and | | |
| | | Vice President and Treasurer | | Chair — 3M |
| | | (July 1995–January 2003) | | Investment Management |
| | | | 3M Corporation | | Company |
| | | | | (January 2005–July 2012) |
| J. Richard Zecher | Trustee | Since | Founder — | 71 | Director and Compensation |
| 2005 Market Street | | March 2005 | Investor Analytics | | Committee Member — |
| Philadelphia, PA | | | (Risk Management) | | Investor Analytics |
| 19103 | | | (May 1999–Present) | | |
| | | | | Director — |
| July 1940 | | | Founder — | | P/E Investments |
| | | P/E Investments | | |
| | | (Hedge Fund) | | |
| | | (September 1996–Present) | | |
| |
| OFFICERS | | | | | |
| David F. Connor | Vice President, | Vice President since | David F. Connor has served as | 71 | None3 |
| 2005 Market Street | Deputy General | September 2000 | Vice President and Deputy | | |
| Philadelphia, PA | Counsel, and Secretary | and Secretary | General Counsel of | | |
| 19103 | | since | Delaware Investments | | |
| | October 2005 | since 2000. | | |
| December 1963 | | | | | |
| Daniel V. Geatens | Vice President | Treasurer | Daniel V. Geatens has served | 71 | None3 |
| 2005 Market Street | and Treasurer | since | in various capacities at | | |
| Philadelphia, PA | | October 2007 | different times at | | |
| 19103 | | | Delaware Investments. | | |
| |
| October 1972 | | | | | |
Diversified Income Series-38
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| OFFICERS (continued) | | | | | |
| David P. O’Connor | Executive Vice | Executive Vice President | David P. O’Connor has served in | 71 | None3 |
| 2005 Market Street | President, | since February 2012; | various executive and legal | | |
| Philadelphia, PA | General Counsel, | Senior Vice President | capacities at different times | | |
| 19103 | and Chief | October 2005–February 2012; | at Delaware Investments. | | |
| Legal Officer | General Counsel and | | | |
| February 1966 | | Chief Legal Officer | | | |
| | since October 2005 | | | |
| Richard Salus | Senior | Chief Financial | Richard Salus has served in | 71 | None3 |
| 2005 Market Street | Vice President | Officer since | various executive capacities | | |
| Philadelphia, PA | and | November 2006 | at different times at | | |
| 19103 | Chief Financial | | Delaware Investments. | | |
| Officer | | | | |
| October 1963 | | | | | |
1 Patrick P. Coyne is considered to be an “Interested Trustee” because he is an executive officer of the Fund’s(s’) investment advisor. |
2 Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund’s(s’) investment advisor, principal underwriter, and its transfer agent. |
3 David F. Connor, Daniel V. Geatens, David P. O’Connor, and Richard Salus serve in similar capacities for the six portfolios of the Optimum Fund Trust, which have the same investment advisor, principal underwriter, and transfer agent as the registrant. |
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is available, without charge, upon request by calling 800 523-1918.
The Series files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q. The Series’ Forms N-Q, as well as a description of the policies and procedures that the Series 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 website at sec.gov. In addition, a description of the policies and procedures that the Series uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge on the Delaware Investments® Funds’ website at delawareinvestments.com. The Series’ Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Series voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the Delaware Investments Funds’ website at delawareinvestments.com; and (ii) on the Commission’s website at sec.gov. |
| AR-VIPDIVINC [12/12] DG3 18578 (2/13) | | (10125) | | Diversified Income Series-39 |
| Delaware VIP® Trust |
| Delaware VIP Emerging Markets Series |
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| Annual Report |
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| December 31, 2012 |
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Table of contents
| > Portfolio management review | | 1 |
| | | |
| > Performance summary | | 2 |
| | | |
| > Disclosure of Series expenses | | 4 |
| | | |
| > Security type/country and sector allocations | | 5 |
| | | |
| > Statement of net assets | | 6 |
| | | |
| > Statement of operations | | 9 |
| | | |
| > Statements of changes in net assets | | 9 |
| | | |
| > Financial highlights | | 10 |
| | | |
| > Notes to financial statements | | 12 |
| | | |
| > Report of independent registered public accounting firm | | 18 |
| | | |
| > Other Series information | | 19 |
| | | |
| > Board of trustees/directors and officers addendum | | 21 |
Investments in Delaware VIP® Emerging Markets Series 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 (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 Series, the repayment of capital from the Series, or any particular rate of return.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
The Series is not FDIC insured and is 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 and member of Macquarie Group. Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries, including the Series’ distributor, Delaware Distributors, L.P. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide.
This material may be used in conjunction with the offering of shares in the Delaware VIP Emerging Markets Series only if preceded or accompanied by the Series’ current prospectus, and if available, the summary prospectus.
© 2013 Delaware Management Holdings, Inc.
All third-party marks cited are the property of their respective owners.
| Delaware VIP® Trust — Delaware VIP Emerging Markets Series | |
| Portfolio management review | Jan. 8, 2013 |
For the fiscal year ended Dec. 31, 2012, Delaware VIP Emerging Markets Series returned +14.44% for Standard Class shares and +14.19% for Service Class shares (both returns assume reinvestment of all distributions). The Series’ benchmark, the MSCI Emerging Markets Index, advanced 18.63% (gross) and 18.22% (net) for the same period.
Emerging markets posted solid overall gains during the Series’ fiscal year. In a clear reflection of the unsettled global economic and political environment, however, volatility was elevated and returns from individual markets were highly variable.
As the fiscal year began, many investors were shedding risk worldwide amid indications that the 17-country euro zone might be on the verge of breaking apart. However, after the European Central Bank launched the first of two loan programs intended to give the region more breathing room, emerging-market stocks climbed strongly through early March 2012, when another, more pronounced bout of risk aversion set in. This time, investors seemed to worry about slowing growth in the United States. China was also a cause for concern, as authorities dealt with a once-a-decade leadership change and struggled to restart a slumping economy without triggering inflation or creating a property bubble.
Emerging-market stocks began to rally in June, as it became apparent that global economic conditions had grown dire enough to make additional central bank easing inevitable. Although this powerful bull run lost steam in the fall, the combination of liquidity and signs of economic progress in the U.S. helped most emerging markets close the Series’ fiscal year above their September highs.
Notes on the Series’ performance versus the benchmark index:
• At the country level, the Series’ allocation weights within India and Brazil were among those that had a negative effect on performance. Meanwhile, allocations within Mexico and Turkey were among those that benefited the Series’ performance.
• At the individual company level, holdings in U.S.-based Avon Products were among the prominent detractors from performance. The company has been the focus of a lengthy Securities and Exchange Commission investigation into foreign bribery charges, and its earnings have consistently fallen short of consensus expectations. Petroleo Brasileiro SA also underperformed; the large Brazil-based integrated oil and gas producer suffered from flat diesel and gasoline prices in its domestic market, tight refining margins, and declining overall output due to heightened maintenance standards imposed by the Brazilian government. Relatively weaker stocks were offset by shares that included Yahoo, a notable contributor to Series performance. Although Yahoo languished for much of the fiscal year due to investor dissatisfaction with management’s inability to unlock the value of its Chinese internet assets, the stock began climbing in summer 2012 after Chief Executive Officer Carol Bartz was replaced by veteran Google executive Marissa Ann Mayer. The Mexican cement producer Cemex also generated outperformance for the Series, on the basis of improved financials and signs of recovery in the U.S. housing market.
As the Series’ fiscal year drew to a close, its largest country allocations were in China/Hong Kong, Republic of Korea, Brazil, the U.S., Mexico, and Russia. The size of its Mexican and Brazilian holdings represented a large overweight versus the benchmark index; conversely, the Series was significantly underweight in countries that included Taiwan, South Africa, and India.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
Emerging Markets Series-1
| Delaware VIP® Trust — Delaware VIP Emerging Markets Series |
| Performance summary |
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
Carefully consider the Series’ investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Series’ prospectuses and, if available, their summary prospectuses, which may be obtained by calling 800 523-1918. Investors should read the prospectuses and, if available, the summary prospectuses carefully before investing.
| Delaware VIP Emerging Markets Series | | | | | | | | | | |
| Average annual total returns | | | | | | | | | | |
| For periods ended Dec. 31, 2012 | | 1 year | | 3 years | | 5 years | | 10 years | | Lifetime |
| Standard Class shares (commenced operations on May 1, 1997) | | +14.44% | | +2.85% | | -1.26% | | +17.00% | | +8.55% |
| Service Class shares (commenced operations on May 1, 2000) | | +14.19% | | +2.59% | | -1.50% | | +16.72% | | +12.27% |
Returns reflect the reinvestment of all distributions and any applicable sales charges as noted in the following paragraphs.
As described in the Series’ most recent prospectus, the net expense ratio for Service Class shares of the Series was 1.64%, while total operating expenses for Standard Class and Service Class shares were 1.39% and 1.69%, respectively. The management fee for Standard Class and Service Class shares was 1.24%.
The Series’ distributor has contracted to limit the 12b-1 fees for Service Class shares to 0.25% of average daily net assets from April 30, 2012 through April 30, 2013.
Earnings from a variable annuity or variable life investment compound tax-free until withdrawal, and as a result, no adjustments were made for income taxes.
Expense limitations were in effect for all classes during certain periods shown in the Series’ performance table above and in the Performance of a $10,000 Investment chart on the next page.
Performance data do not reflect other costs incurred by beneficial owners such as insurance company separate account fees and variable annuity or variable life contract charges or deferred sales charges. Performance shown here would have been reduced if such fees were included and the expense limitation removed. For more information about fees, consult your variable annuity or variable life prospectus.
Investments in variable products involve risk.
International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.
Please read both the contract and underlying prospectus for specific details regarding the product’s risk profile.
Emerging Markets Series-2
Delaware VIP® Emerging Markets Series
Performance summary (continued)
| For period beginning Dec. 31, 2002, through Dec. 31, 2012 | | Starting value | | Ending value |
| –– | Delaware VIP Emerging Markets Series (Standard Class shares) | | $10,000 | | $48,084 |
| –– | MSCI Emerging Markets Index (gross) | | $10,000 | | $47,601 |
| – – | MSCI Emerging Markets Index (net) | | $10,000 | | $46,125 |
The chart shows a $10,000 investment in the Delaware VIP Emerging Markets Series Standard Class shares for the period from Dec. 31, 2002 through Dec. 31, 2012.
The chart also shows $10,000 invested in the MSCI Emerging Markets Index for the period from Dec. 31, 2002 through Dec. 31, 2012. The MSCI Emerging Markets Index measures equity market performance across emerging market countries worldwide. Index “gross” return approximates the maximum possible dividend reinvestment. Index “net” return approximates the minimum possible dividend reinvestment, after deduction of withholding tax at the highest possible rate.
Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
Performance of Service Class shares will vary due to different charges and expenses.
Past performance is not a guarantee of future results.
Emerging Markets Series-3
Delaware VIP® Trust — Delaware VIP Emerging Markets Series
Disclosure of Series Expenses
For the Six-Month Period from July 1, 2012 to December 31, 2012 (Unaudited)
As a shareholder of the Series, you incur ongoing costs, which may include management fees; distribution and/or service (12b-1) fees; and other Series expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Series 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 six-month period from July 1, 2012 to December 31, 2012.
Actual Expenses
The first section of the table shown, “Actual Series 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 the 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 Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ 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 Series and other funds. To do so, compare the 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. As a shareholder of the Series, you do not incur any transaction costs, such as sales charges (loads), redemption fees or exchange fees, but shareholders of other funds may incur such costs. Also, the fees related to the variable annuity investment or the deferred sales charge that could apply have not been included. 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. The Series’ actual expenses shown in the table reflect fee waivers in effect for Service Class shares. The expenses shown in the table assume reinvestment of all dividends and distributions.
Expense Analysis of an Investment of $1,000
| | | | | | | | | | | | Expenses |
| | Beginning | | Ending | | | | Paid During |
| | Account | | Account | | Annualized | | Period |
| | Value | | Value | | Expense | | 7/1/12 to |
| | 7/1/12 | | 12/31/12 | | Ratio | | 12/31/12* |
| Actual Series Return† | | | | | | | | | | | | | | | |
| Standard Class Shares | | | $ | 1,000.00 | | | $ | 1,144.20 | | 1.41% | | | $ | 7.60 | |
| Service Class Shares | | | | 1,000.00 | | | | 1,142.70 | | 1.66% | | | | 8.94 | |
| Hypothetical 5% Return (5% return before expenses) | | | | | | | |
| Standard Class Shares | | | $ | 1,000.00 | | | $ | 1,018.05 | | 1.41% | | | $ | 7.15 | |
| Service Class Shares | | | | 1,000.00 | | | | 1,016.79 | | 1.66% | | | | 8.42 | |
*“Expenses Paid During Period” are equal to the Series’ annualized expense ratio, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period).
†Because actual returns reflect only the most recent six-month period, the returns shown may differ significantly from fiscal year returns.
Emerging Markets Series-4
Delaware VIP® Trust — Delaware VIP Emerging Markets Series
Security Type/Country and Sector Allocations
As of December 31, 2012 (Unaudited)
Sector designations may be different than the sector designations presented in other Series materials. The sector designations may represent the investment manager’s internal sector classifications, which may result in the sector designations for one series being different than another series’ sector designations.
| | Percentage |
| Security Type/Country | | of Net Assets |
| Common Stock | | | 94.03 | % | |
| Argentina | | | 1.44 | % | |
| Brazil | | | 14.22 | % | |
| China/Hong Kong | | | 15.61 | % | |
| India | | | 2.42 | % | |
| Indonesia | | | 0.67 | % | |
| Kingdom of Bahrain | | | 0.10 | % | |
| Malaysia | | | 2.04 | % | |
| Mexico | | | 8.46 | % | |
| Peru | | | 0.85 | % | |
| Poland | | | 0.94 | % | |
| Republic of Korea | | | 14.93 | % | |
| Russia | | | 8.16 | % | |
| South Africa | | | 4.88 | % | |
| Taiwan | | | 5.66 | % | |
| Thailand | | | 2.42 | % | |
| Turkey | | | 1.80 | % | |
| United Kingdom | | | 0.78 | % | |
| United States | | | 8.65 | % | |
| Preferred Stock by Country | | | 5.72 | % | |
| Brazil | | | 2.40 | % | |
| Republic of Korea | | | 1.65 | % | |
| Russia | | | 1.67 | % | |
| Participation Notes | | | 0.00 | % | |
| Short-Term Investments | | | 0.22 | % | |
| Securities Lending Collateral | | | 8.48 | % | |
| Total Value of Securities | | | 108.45 | % | |
| Obligation to Return Securities Lending Collateral | | | (8.57 | %) | |
| Receivables and Other Assets Net of Other Liabilities | | | 0.12 | % | |
| Total Net Assets | | | 100.00 | % | |
| | | | | | |
| Common Stock, Preferred Stock | | | | | |
| and Participation Notes by Sector | | | | | |
| Consumer Discretionary | | | 4.84 | % | |
| Consumer Staples | | | 10.28 | % | |
| Energy | | | 17.70 | % | |
| Financials | | | 16.93 | % | |
| Industrials | | | 3.31 | % | |
| Information Technology | | | 20.43 | % | |
| Materials | | | 11.58 | % | |
| Telecommunication Services | | | 12.30 | % | |
| Utilities | | | 2.38 | % | |
| Total | | | 99.75 | % | |
Emerging Markets Series-5
Delaware VIP® Trust — Delaware VIP Emerging Markets Series
Statement of Net Assets
December 31, 2012
| | Number of | | Value |
| | Shares | | (U.S. $) |
| ΔCOMMON STOCK–94.03% | | | | | |
| Argentina–1.44% | | | | | |
| @Cresud ADR | | 322,769 | | $ | 2,685,437 |
| #Grupo Clarin Class B GDR 144A | | 209,100 | | | 723,089 |
| @IRSA Inversiones y Representaciones ADR | | 363,112 | | | 2,530,891 |
| Pampa Energia ADR | | 44,500 | | | 153,080 |
| YPF ADR | | 106,800 | | | 1,553,940 |
| | | | | 7,646,437 |
| Brazil–14.22% | | | | | |
| AES Tiete | | 319,936 | | | 3,276,669 |
| B2W Cia Global Do Varejo | | 251,484 | | | 2,087,004 |
| Banco Santander Brasil ADR | | 476,000 | | | 3,460,520 |
| *Brasil Foods ADR | | 341,500 | | | 7,209,065 |
| *Braskem ADR | | 78,499 | | | 1,047,962 |
| Centrais Eletricas Brasileiras | | 711,800 | | | 2,199,509 |
| *Cia Brasileira de Distribuicao Grupo Pao | | | | | |
| de Acucar ADR | | 71,690 | | | 3,182,319 |
| Cia Siderurgica Nacional ADR | | 611,900 | | | 3,610,210 |
| Cyrela Brazil Realty | | 266,900 | | | 2,330,896 |
| *Fibria Celulose ADR | | 523,900 | | | 5,956,743 |
| @Gerdau | | 389,400 | | | 2,929,292 |
| Gerdau ADR | | 444,900 | | | 3,999,651 |
| Hypermarcas | | 57,400 | | | 465,701 |
| Itau Unibanco Holding ADR | | 500,000 | | | 8,230,000 |
| Petroleo Brasileiro SA ADR | | 488,906 | | | 9,518,999 |
| Petroleo Brasileiro SP ADR | | 403,795 | | | 7,793,244 |
| Tim Participacoes ADR | | 410,000 | | | 8,126,200 |
| | | | | 75,423,984 |
| China/Hong Kong–15.61% | | | | | |
| †Baidu ADR | | 26,700 | | | 2,677,743 |
| Bank of China | | 13,346,000 | | | 6,044,641 |
| †Bitauto Holdings ADR | | 37,400 | | | 273,020 |
| China Construction Bank | | 7,118,000 | | | 5,817,366 |
| China Mengniu Dairy | | 724,000 | | | 2,069,617 |
| *China Mobile ADR | | 154,500 | | | 9,072,240 |
| *China Petroleum & Chemical ADR | | 32,488 | | | 3,733,521 |
| China Telecom | | 2,736,000 | | | 1,547,178 |
| *China Unicom Hong Kong ADR | | 505,492 | | | 8,234,465 |
| First Pacific | | 2,831,285 | | | 3,126,871 |
| Fosun International | | 131,708 | | | 85,101 |
| †*Foxconn International Holdings | | 2,262,000 | | | 1,109,635 |
| †*Hollysys Automation Technologies | | 129,100 | | | 1,532,417 |
| Industrial & Commercial Bank of China | | 7,785,500 | | | 5,619,829 |
| *Kunlun Energy | | 2,622,900 | | | 5,546,136 |
| *PetroChina ADR | | 44,500 | | | 6,398,210 |
| Shanda Games ADR | | 1,118,325 | | | 3,399,708 |
| †SINA | | 89,000 | | | 4,469,580 |
| †*Sohu.com | | 153,500 | | | 7,266,690 |
| †Tianjin Development Holdings | | 35,950 | | | 20,157 |
| †@Tom Group | | 23,322,004 | | | 2,756,945 |
| Travelsky Technology | | 3,700,441 | | | 1,982,872 |
| | | | | 82,783,942 |
| India–2.42% | | | | | |
| Cairn India | | 473,000 | | | 2,772,388 |
| Coal India | | 102,385 | | | 666,524 |
| †Indiabulls Real Estate GDR | | 44,628 | | | 60,739 |
| #Reliance Industries GDR 144A | | 300,000 | | | 9,155,999 |
| *†Sify Technologies ADR | | 91,200 | | | 176,928 |
| | | | | 12,832,578 |
| Indonesia–0.67% | | | | | |
| Tambang Batubara Bukit Asam Persero | | 2,241,097 | | | 3,533,178 |
| | | | | 3,533,178 |
| Kingdom of Bahrain–0.10% | | | | | |
| #@Aluminum Bahrain 144A GDR | | 91,200 | | | 522,457 |
| | | | | 522,457 |
| Malaysia–2.04% | | | | | |
| Hong Leong Bank | | 1,549,790 | | | 7,510,771 |
| †UEM Land Holdings | | 4,748,132 | | | 3,290,122 |
| | | | | 10,800,893 |
| Mexico–8.46% | | | | | |
| America Movil Series L ADR | | 210,742 | | | 4,876,570 |
| Cemex ADR | | 925,301 | | | 9,132,721 |
| †Empresas ICA | | 1,105,736 | | | 2,777,206 |
| Fomento Economico Mexicano ADR | | 116,107 | | | 11,691,974 |
| Grupo Financiero Banorte | | 754,700 | | | 4,903,007 |
| Grupo Televisa ADR | | 432,500 | | | 11,495,850 |
| | | | | 44,877,328 |
| Peru–0.85% | | | | | |
| Cia de Minas Buenaventura ADR | | 125,440 | | | 4,509,568 |
| | | | | 4,509,568 |
| Poland–0.94% | | | | | |
| Jastrzebska Spolka Weglowa | | 26,987 | | | 809,935 |
| †Polski Koncern Naftowy Orlen | | 261,369 | | | 4,194,489 |
| | | | | 5,004,424 |
| Republic of Korea–14.93% | | | | | |
| CJ | | 45,695 | | | 5,111,813 |
| KB Financial Group ADR | | 165,996 | | | 5,959,256 |
| KCC | | 3,272 | | | 920,396 |
| †Korea Electric Power | | 113,650 | | | 3,248,151 |
| *Korea Electric Power ADR | | 177,900 | | | 2,485,263 |
| KT | | 99,830 | | | 3,341,515 |
| *LG Display ADR | | 188,309 | | | 2,726,714 |
| LG Electronics | | 62,908 | | | 4,394,506 |
| Lotte Chilsung Beverage | | 8 | | | 11,399 |
| Lotte Confectionery | | 2,904 | | | 4,457,982 |
| Samsung Electronics | | 19,054 | | | 27,555,284 |
| Samsung Life Insurance | | 71,180 | | | 6,318,857 |
| †SK Communications | | 95,525 | | | 710,930 |
| SK Telecom | | 16,491 | | | 2,366,654 |
| *SK Telecom ADR | | 605,000 | | | 9,577,150 |
| | | | | 79,185,870 |
| Russia–8.16% | | | | | |
| @†Chelyabinsk Zink Plant GDR | | 69,200 | | | 186,861 |
| @†Enel OGK-5 GDR | | 15,101 | | | 40,116 |
| Gazprom ADR | | 783,900 | | | 7,576,747 |
| LUKOIL ADR | | 23,433 | | | 1,581,728 |
| LUKOIL ADR (London International Exchange) | | 133,500 | | | 8,963,311 |
| †*MegaFon GDR | | 261,878 | | | 6,232,696 |
| Mobile Telesystems ADR | | 154,402 | | | 2,879,597 |
| =Sberbank | | 3,308,402 | | | 10,125,696 |
| Surgutneftegas ADR | | 294,652 | | | 2,653,970 |
| @†TGK-5 GDR | | 6,229 | | | 2,913 |
| *VTB Bank GDR | | 861,186 | | | 3,047,450 |
| | | | | 43,291,085 |
Emerging Markets Series-6
Delaware VIP® Emerging Markets Series
Statement of Net Assets (continued)
| | Number of | | Value |
| | Shares | | (U.S. $) |
| ΔCOMMON STOCK (continued) | | | | | | |
| South Africa–4.88% | | | | | | |
| *ArcelorMittal South Africa | | | 374,610 | | $ | 1,606,181 |
| Impala Platinum Holdings | | | 135,751 | | | 2,722,578 |
| Sasol | | | 76,270 | | | 3,298,302 |
| Sasol ADR | | | 65,127 | | | 2,819,348 |
| Standard Bank Group | | | 287,970 | | | 4,073,290 |
| Sun International | | | 168,124 | | | 1,889,347 |
| Tongaat Hulett | | | 180,473 | | | 2,877,799 |
| *Vodacom Group | | | 444,868 | | | 6,565,442 |
| | | | | | 25,852,287 |
| Taiwan–5.66% | | | | | | |
| Formosa Chemicals & Fibre | | | 2,066,989 | | | 5,362,893 |
| Hon Hai Precision Industry | | | 777,049 | | | 2,403,063 |
| MediaTek | | | 255,678 | | | 2,857,732 |
| President Chain Store | | | 890,000 | | | 4,770,895 |
| Taiwan Semiconductor Manufacturing | | | 2,375,864 | | | 7,939,706 |
| United Microelectronics | | | 6,688,461 | | | 2,700,910 |
| *United Microelectronics ADR | | | 889,700 | | | 1,770,503 |
| Walsin Lihwa | | | 6,477,100 | | | 2,228,343 |
| | | | | | 30,034,045 |
| Thailand–2.42% | | | | | | |
| Bangkok Bank | | | 638,091 | | | 4,374,800 |
| PTT Exploration & Production | | | 617,051 | | | 3,295,911 |
| Siam Cement NVDR | | | 355,900 | | | 5,133,178 |
| | | | | | 12,803,889 |
| Turkey–1.80% | | | | | | |
| *Alarko Gayrimenkul Yatirim Ortakligi | | | 50,675 | | | 649,078 |
| Alarko Holding | | | 1,008,347 | | | 2,897,403 |
| *Turkcell lletisim Hizmetleri | | | 368,462 | | | 2,397,132 |
| Turkiye Sise ve Cam Fabrikalari | | | 2,162,412 | | | 3,598,252 |
| | | | | | 9,541,865 |
| United Kingdom–0.78% | | | | | | |
| Anglo American ADR | | | 92,815 | | | 1,428,738 |
| †#=Etalon Group GDR 144A | | | 354,800 | | | 1,933,660 |
| @Griffin Mining | | | 1,642,873 | | | 786,861 |
| | | | | | 4,149,259 |
| United States–8.65% | | | | | | |
| Avon Products | | | 1,193,100 | | | 17,132,916 |
| †MEMC Electronic Materials | | | 177,900 | | | 571,059 |
| †Yahoo | | | 1,415,400 | | | 28,166,460 |
| | | | | | | 45,870,435 |
| Total Common Stock | | | | | | |
| (cost $500,217,880) | | | | | | 498,663,524 |
| |
| PREFERRED STOCK–5.72% | | | | | | |
| Brazil–2.40% | | | | | | |
| Braskem Class A | | | 288,768 | | | 1,804,359 |
| Centrais Elecricas Brasileiras Class B | | | 233,700 | | | 1,195,595 |
| Vale Class A | | | 489,400 | | | 9,764,110 |
| | | | | | 12,764,064 |
| Republic of Korea–1.65% | | | | | | |
| CJ | | | 28,030 | | | 674,551 |
| Samsung Electronics | | | 9,995 | | | 8,083,903 |
| | | | | | | 8,758,454 |
| Russia–1.67% | | | | | | |
| =AK Transneft | | | 3,887 | | | 8,833,985 |
| | | | | | 8,833,985 |
| Total Preferred Stock | | | | | | |
| (cost $20,729,629) | | | | | | 30,356,503 |
| |
| PARTICIPATION NOTES–0.00% | | | | | | |
| =†@#Lehman Indian Oil CW 12 LEPO 144A | | | 100,339 | | | 0 |
| =†Lehman Oil & Natural Gas CW 12 LEPO | | | 146,971 | | | 0 |
| Total Participation Notes | | | | | | |
| (cost $4,952,197) | | | | | | 0 |
| |
| | Principal | | | |
| | Amount | | | |
| | (U.S. $) | | | |
| SHORT-TERM INVESTMENTS–0.22% | | | | | | |
| Repurchase Agreements–0.22% | | | | | | |
| Bank of America 0.11%, dated 12/31/12, to be | | | | | | |
| repurchased on 1/2/13, repurchase price | | | | | | |
| $772,021 (collateralized by U.S. government | | | | | | |
| obligations 0.25%-2.375% 2/28/15-12/15/15; | | | | | | |
| market value $787,457) | | | $772,016 | | | 772,016 |
| BNP Paribas 0.15%, dated 12/31/12, to be | | | | | | |
| repurchased on 1/2/13, repurchase price | | | | | | |
| $373,361 (collateralized by U.S. government | | | | | | |
| obligations 0.125%-0.25% 12/31/14-5/15/15; | | | | | | |
| market value $380,825) | | | 373,358 | | | 373,358 |
| Total Short-Term Investments | | | | | | |
| (cost $1,145,374) | | | | | | 1,145,374 |
| |
| Total Value of Securities | | | | | | |
| Before Securities Lending | | | | | | |
| Collateral–99.97% (cost $527,045,080) | | | | | | 530,165,401 |
| |
| | | Number of | | | |
| | | Shares | | | |
| **SECURITIES LENDING COLLATERAL–8.48% | | | | | | |
| Investment Companies | | | | | | |
| Delaware Investments Collateral Fund No.1 | | | 44,978,973 | | | 44,978,973 |
| @†Mellon GSL Reinvestment Trust II | | | 494,768 | | | 0 |
| Total Securities Lending Collateral | | | | | | |
| (cost $45,473,741) | | | | | | 44,978,973 |
Emerging Markets Series-7
Delaware VIP® Emerging Markets Series
Statement of Net Assets (continued)
| TOTAL VALUE OF SECURITIES–108.45% (cost $572,518,821) | | $ | 575,144,374 | © |
| **OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL–(8.57%) | | | (45,473,741 | ) |
| «RECEIVABLES AND OTHER ASSETS NET OF OTHER LIABILITIES–0.12% | | | 644,592 | |
| NET ASSETS APPLICABLE TO 26,794,631 SHARES OUTSTANDING–100.00% | | $ | 530,315,225 | |
| NET ASSET VALUE–DELAWARE VIP EMERGING MARKETS SERIES STANDARD CLASS ($140,965,843 / 7,106,680 Shares) | | | $19.84 | |
| NET ASSET VALUE–DELAWARE VIP EMERGING MARKETS SERIES SERVICE CLASS ($389,349,382 / 19,687,951 Shares) | | | $19.78 | |
| COMPONENTS OF NET ASSETS AT DECEMBER 31, 2012: | | | | |
| Shares of beneficial interest (unlimited authorization–no par) | | $ | 536,490,000 | |
| Undistributed net investment income | | | 8,226,142 | |
| Accumulated net realized loss on investments | | | (16,857,334 | ) |
| Net unrealized appreciation of investments and foreign currencies | | | 2,456,417 | |
| Total net assets | | $ | 530,315,225 | |
____________________
| Δ | Securities have been classified by country of origin. Classification by type of business has been presented on page 5 in “Security Type/Country and Sector Allocations.” |
| @ | Illiquid security. At December 31, 2012, the aggregate value of illiquid securities was $12,441,773, which represented 2.35% of the Series’ net assets. See Note 10 in “Notes to Financial Statements.” |
| # | Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. At December 31, 2012, the aggregate value of Rule 144A securities was $12,335,205, which represented 2.33% of the Series’ net assets. See Note 10 in “Notes to Financial Statements.” |
| † | Non income producing security. |
| * | Fully or partially on loan. |
| = | Security is being fair valued in accordance with the Series’ fair valuation policy. At December 31, 2012, the aggregate value of fair valued securities was $20,893,341, which represented 3.94% of the Series’ net assets. See Note 1 in “Notes to Financial Statements.” |
| ** | See Note 9 in “Notes to Financial Statements” for additional information on securities lending collateral. |
| © | Includes $44,422,453 of securities loaned. |
| « | Includes foreign currency valued at $11,781 with a cost of $13,141. |
Summary of Abbreviations:
ADR – American Depositary Receipt
GDR – Global Depositary Receipt
ICA – Ingenieros Civiles Asociados
LEPO – Low Exercise Price Option
NVDR – Non-Voting Depositary Receipt
See accompanying notes, which are an integral part of the financial statements.
Emerging Markets Series-8
Delaware VIP® Trust —
Delaware VIP Emerging Markets Series
Statement of Operations
Year Ended December 31, 2012
| INVESTMENT INCOME: | | | | |
| Dividends | | $ | 14,292,229 | |
| Securities lending income | | | 307,080 | |
| Foreign tax withheld | | | (1,181,506 | ) |
| | | 13,417,803 | |
| |
| EXPENSES: | | | | |
| Management fees | | | 6,672,413 | |
| Distribution expenses – Service Class | | | 1,133,000 | |
| Custodian fees | | | 335,258 | |
| Accounting and administration expenses | | | 208,918 | |
| Reports and statements to shareholders | | | 71,537 | |
| Audit and tax | | | 57,899 | |
| Dividend disbursing and transfer agent fees and expenses | | | 45,825 | |
| Legal fees | | | 38,524 | |
| Trustees’ fees | | | 23,999 | |
| Insurance fees | | | 9,885 | |
| Consulting fees | | | 5,023 | |
| Dues and services | | | 4,907 | |
| Pricing fees | | | 3,940 | |
| Trustees’ expenses | | | 1,674 | |
| Registration fees | | | 633 | |
| | | 8,613,435 | |
| Less waived distribution expenses – Service Class | | | (188,833 | ) |
| Less expense paid indirectly | | | (1 | ) |
| Total operating expenses | | | 8,424,601 | |
| |
| NET INVESTMENT INCOME | | | 4,993,202 | |
| |
| NET REALIZED AND UNREALIZED GAIN (LOSS): | | | | |
| Net realized loss on: | | | | |
| Investments | | | (8,829,407 | ) |
| Foreign currencies | | | (382,912 | ) |
| Foreign currency exchange contracts | | | (167,085 | ) |
| Net realized loss | | | (9,379,404 | ) |
| Net change in unrealized appreciation (depreciation) of: | | | | |
| Investments | | | 66,573,635 | |
| Foreign currencies | | | (169,524 | ) |
| Net change in unrealized appreciation (depreciation) | | | 66,404,111 | |
| |
| NET REALIZED AND UNREALIZED GAIN | | | 57,024,707 | |
| |
| NET INCREASE IN NET ASSETS RESULTING | | | | |
| FROM OPERATIONS | | $ | 62,017,909 | |
Delaware VIP Trust —
Delaware VIP Emerging Markets Series
Statements of Changes in Net Assets
| | Year Ended |
| | 12/31/12 | | 12/31/11 |
| INCREASE (DECREASE) IN NET ASSETS | | | | | | | | |
| FROM OPERATIONS: | | | | | | | | |
| Net investment income | | $ | 4,993,202 | | | $ | 5,569,541 | |
| Net realized gain (loss) | | | (9,379,404 | ) | | | 11,185,999 | |
| Net change in unrealized appreciation | | | | | | | | |
| (depreciation) | | | 66,404,111 | | | | (140,798,721 | ) |
| Net increase (decrease) in net assets resulting | | | | | | | | |
| from operations | | | 62,017,909 | | | | (124,043,181 | ) |
| |
| DIVIDENDS AND DISTRIBUTIONS TO | | | | | | | | |
| SHAREHOLDERS FROM: | | | | | | | | |
| Net investment income: | | | | | | | | |
| Standard Class | | | (2,117,098 | ) | | | (4,451,474 | ) |
| Service Class | | | (2,851,016 | ) | | | (5,691,229 | ) |
| | | (4,968,114 | ) | | | (10,142,703 | ) |
| |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | | |
| Proceeds from shares sold: | | | | | | | | |
| Standard Class | | | 65,343,824 | | | | 28,421,850 | |
| Service Class | | | 52,502,069 | | | | 125,742,269 | |
| Net asset value of shares issued upon | | | | | | | | |
| reinvestment of dividends and distributions: | | | | | | | | |
| Standard Class | | | 2,043,219 | | | | 3,475,990 | |
| Service Class | | | 2,851,016 | | | | 5,691,229 | |
| | | | 122,740,128 | | | | 163,331,338 | |
| Cost of shares redeemed: | | | | | | | | |
| Standard Class | | | (97,242,192 | ) | | | (87,991,145 | ) |
| Service Class | | | (57,766,770 | ) | | | (61,976,460 | ) |
| | | | (155,008,962 | ) | | | (149,967,605 | ) |
| Increase (decrease) in net assets derived | | | | | | | | |
| from capital share transactions | | | (32,268,834 | ) | | | 13,363,733 | |
| |
| NET INCREASE (DECREASE) IN NET ASSETS | | | 24,780,961 | | | | (120,822,151 | ) |
| |
| NET ASSETS: | | | | | | | | |
| Beginning of year | | | 505,534,264 | | | | 626,356,415 | |
| End of year (including undistributed | | | | | | | | |
| net investment income of $8,226,142 | | | | | | | | |
| and $3,668,522, respectively) | | $ | 530,315,225 | | | $ | 505,534,264 | |
See accompanying notes, which are an integral part of the financial statements.
Emerging Markets Series-9
Delaware VIP® Trust — Delaware VIP Emerging Markets Series
Financial Highlights
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP Emerging Markets Series Standard Class |
| | Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $17.510 | | | $22.190 | | | $18.870 | | | $11.290 | | | $27.840 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.205 | | | 0.228 | | | 0.352 | | | 0.152 | | | 0.282 | |
| Net realized and unrealized gain (loss) | | 2.316 | | | (4.526 | ) | | 3.115 | | | 8.173 | | | (12.865 | ) |
| Total from investment operations | | 2.521 | | | (4.298 | ) | | 3.467 | | | 8.325 | | | (12.583 | ) |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.191 | ) | | (0.382 | ) | | (0.147 | ) | | (0.181 | ) | | (0.355 | ) |
| Net realized gain | | – | | | – | | | – | | | (0.564 | ) | | (3.612 | ) |
| Total dividends and distributions | | (0.191 | ) | | (0.382 | ) | | (0.147 | ) | | (0.745 | ) | | (3.967 | ) |
| |
| Net asset value, end of period | | $19.840 | | | $17.510 | | | $22.190 | | | $18.870 | | | $11.290 | |
| |
| Total return2 | | 14.44% | | | (19.78% | ) | | 18.49% | | | 78.11% | | | (51.56% | ) |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $140,966 | | | $160,142 | | | $266,238 | | | $245,149 | | | $159,025 | |
| Ratio of expenses to average net assets | | 1.40% | | | 1.39% | | | 1.40% | | | 1.39% | | | 1.41% | |
| Ratio of expenses to average net assets prior to fees waived | | 1.40% | | | 1.39% | | | 1.40% | | | 1.41% | | | 1.41% | |
| Ratio of net investment income to average net assets | | 1.11% | | | 1.11% | | | 1.84% | | | 1.07% | | | 1.48% | |
| Ratio of net investment income to average net assets | | | | | | | | | | | | | | | |
| prior to fees waived | | 1.11% | | | 1.11% | | | 1.84% | | | 1.05% | | | 1.48% | |
| Portfolio turnover | | 22% | | | 16% | | | 21% | | | 28% | | | 42% | |
____________________
1The average shares outstanding method has been applied for per share information. |
2Total 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 during some of the periods shown reflects a waiver by the manager. Performance would have been lower had the waiver not been in effect. Total investment return does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
Emerging Markets Series-10
Delaware VIP® Emerging Markets Series
Financial Highlights (continued)
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP Emerging Markets Series Service Class |
| | Year Ended |
| | | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $17.450 | | | $22.130 | | | $18.830 | | | $11.250 | | | $27.750 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.158 | | | 0.174 | | | 0.304 | | | 0.117 | | | 0.235 | |
| Net realized and unrealized gain (loss) | | 2.312 | | | (4.520 | ) | | 3.108 | | | 8.160 | | | (12.829 | ) |
| Total from investment operations | | 2.470 | | | (4.346 | ) | | 3.412 | | | 8.277 | | | (12.594 | ) |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.140 | ) | | (0.334 | ) | | (0.112 | ) | | (0.133 | ) | | (0.294 | ) |
| Net realized gain | | – | | | – | | | – | | | (0.564 | ) | | (3.612 | ) |
| Total dividends and distributions | | (0.140 | ) | | (0.334 | ) | | (0.112 | ) | | (0.697 | ) | | (3.906 | ) |
| |
| Net asset value, end of period | | $19.780 | | | $17.450 | | | $22.130 | | | $18.830 | | | $11.250 | |
| |
| Total return2 | | 14.19% | | | (20.00% | ) | | 18.21% | | | 77.67% | | | (51.68% | ) |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $389,349 | | | $345,392 | | | $360,118 | | | $266,768 | | | $166,008 | |
| Ratio of expenses to average net assets | | 1.65% | | | 1.64% | | | 1.65% | | | 1.64% | | | 1.66% | |
| Ratio of expenses to average net assets prior to fees waived | | 1.70% | | | 1.69% | | | 1.70% | | | 1.71% | | | 1.71% | |
| Ratio of net investment income to average net assets | | 0.86% | | | 0.86% | | | 1.59% | | | 0.82% | | | 1.23% | |
| Ratio of net investment income to average net assets | | | | | | | | | | | | | | | |
| prior to fees waived | | 0.81% | | | 0.81% | | | 1.54% | | | 0.75% | | | 1.18% | |
| Portfolio turnover | | 22% | | | 16% | | | 21% | | | 28% | | | 42% | |
____________________
1The average shares outstanding method has been applied for per share information. |
2Total 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 during all of the periods shown reflects waivers by the manager and/or distributor. Performance would have been lower had the waivers not been in effect. Total investment return does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
Emerging Markets Series-11
Delaware VIP® Trust — Delaware VIP Emerging Markets Series
Notes to Financial Statements
December 31, 2012
Delaware VIP Trust (Trust) is organized as a Delaware statutory trust and offers 10 series: Delaware VIP Diversified Income Series, Delaware VIP Emerging Markets Series, Delaware VIP High Yield Series, Delaware VIP International Value Equity Series, Delaware VIP Limited-Term Diversified Income Series, Delaware VIP REIT Series, Delaware VIP Small Cap Value Series, Delaware VIP Smid Cap Growth Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series. These financial statements and the related notes pertain to Delaware VIP Emerging Markets Series (Series). The Trust is an open-end investment company. The Series is considered diversified under the Investment Company Act of 1940, as amended, and offers Standard Class and Service Class shares. The Standard Class shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee. The shares of the Series are sold only to separate accounts of life insurance companies.
The investment objective of the Series 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 (U.S. GAAP) and are consistently followed by the Series.
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, which approximates fair value. Securities listed on a foreign exchange are normally valued at the last quoted sales price on the valuation date. U.S. government and agency securities are valued at the mean between the bid and ask prices, which approximates fair value. Investment company securities are valued at net asset value per share, as reported by the underlying investment company. Foreign currency exchange contracts are valued at the mean between the bid and ask prices, which approximates fair value. Interpolated values are derived when the settlement date of the contract is an interim date for which quotations are not available. 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 Series’ 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 Series 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 Series values its securities, generally as of 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 Series may frequently value foreign securities using fair value prices based on third-party vendor modeling tools (international fair value pricing).
Federal & Foreign Income Taxes—No provision for federal income taxes has been made as the Series 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 Series evaluates tax positions taken or expected to be taken in the course of preparing the Series’ tax returns 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 analyzed the Series’ tax positions taken for all open federal income tax years (December 31, 2009 – December 31, 2012), and has concluded that no provision for federal income tax is required in the Series’ financial statements. In regards to foreign taxes, the Series only has open tax years in certain foreign countries it invests in that may date back to the inception of the Series.
Class Accounting—Investment income, common expenses and realized and unrealized gain (loss) on investments are allocated to the classes of the Series 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 Series may purchase certain U.S. government securities subject to the counterparty’s agreement to repurchase them at an agreed upon date and price. The counterparty will be required on a daily basis to maintain the value of the collateral subject to the agreement at not less than the repurchase price (including accrued interest). The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system with the Series’ custodian or a third party sub-custodian. In the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. All open repurchase agreements as of the date of this report were entered into on December 31, 2012.
Foreign Currency Transactions—Transactions denominated in foreign currencies are recorded at the prevailing exchange rates on the valuation date in accordance with the Series’ prospectus. The value of all assets and liabilities denominated in foreign currencies is translated into U.S. dollars at the exchange rate of such currencies against the U.S. dollar daily. Transaction gains or losses resulting from changes in exchange rates during the reporting period or upon settlement of the foreign currency transaction are reported in operations for the current period. The Series generally does not isolate that portion of realized gains and losses on investments which are due to changes in foreign exchange rates from that which are due to changes in market prices. The changes are included with the net realized and unrealized gain or loss on investments. The Series reports certain foreign currency related transactions as components of realized gains (losses) for financial reporting purposes, whereas such components are treated as ordinary income (loss) for federal income tax purposes.
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments, the reported amounts of assets and liabilities and disclosure of contingent 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 and the differences could be material.
Other—Expenses directly attributable to the Series are charged directly to the Series. Other expenses common to various funds within the Delaware Investments® Family of Funds are generally allocated among 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. Foreign dividends are also recorded on the ex-dividend date or as soon after the ex-dividend date that the Series is aware of such dividends, net of all non-rebatable tax withholdings. Withholding taxes on foreign dividends have been recorded in accordance with the Series’ understanding of the applicable country’s tax rules and rates. The Series declares and pays dividends from net investment income and distributions from net realized gain on investments, if any, following the close of the fiscal year. The Series may distribute income dividends and capital gains more frequently, if necessary for tax purposes. Dividends and distributions, if any, are recorded on the ex-dividend date.
Emerging Markets Series-12
Delaware VIP® Emerging Markets Series
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
The Series 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 year ended December 31, 2012.
The Series receives earnings credits from its transfer agent when positive cash balances are maintained, which are used to offset transfer agent fees. The expense paid under this arrangement is included in dividend disbursing and transfer agent fees and expenses on the Statement of Operations with the corresponding expense offset shown as “expense paid indirectly.” For the year ended December 31, 2012, the Series earned $1 under this agreement.
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Series 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 1.25% on the first $500 million of average daily net assets of the Series, 1.20% on the next $500 million, 1.15% on the next $1.5 billion, and 1.10% on average daily net assets in excess of $2.5 billion.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to the Series. For these services, the Series 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 year ended December 31, 2012, the Series was charged $26,191 for these services.
DSC is also the transfer agent and dividend disbursing agent of the Series. The Series pays DSC a monthly asset-based fee for these services. Pursuant to a sub-transfer agency agreement between DSC and BNY Mellon Investment Servicing (US) Inc. (BNYMIS), BNYMIS provides certain sub-transfer agency services to the Series. Sub-transfer agency fees are passed on to and paid directly by the Series.
Pursuant to a distribution agreement and distribution plan, the Series pays Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an annual distribution and service fee of 0.30% of the average daily net assets of the Service Class shares. DDLP has contracted to waive distribution and service fees through April 30, 2013 in order to prevent distribution and service fees of the Service Class shares from exceeding 0.25% of average daily net assets. Standard Class shares pay no distribution and service expenses.
At December 31, 2012, the Series had liabilities payable to affiliates as follows:
| | | Dividend Disbursing, | | | | Other |
| Investment | | Transfer Agent and Fund | | | | Expenses |
| Management | | Accounting Oversight | | Distribution | | Payable |
| Fee Payable to | | Fees and Other Expenses | | Fee Payable | | to DMC |
| | DMC | | Payable to DSC | | to DDLP | | and Affiliates* |
| $546,566 | | $5,417 | | $80,610 | | $12,607 |
____________________
*DMC as part of its administrative services, pays operating expenses on behalf of the Series and is reimbursed on a periodic basis. Expenses include items such as printing of shareholder reports, legal and tax services, custodian fees and trustees’ fees.
As provided in the investment management agreement, the Series bears the cost of certain legal and tax services, including internal legal and tax services provided to the Series by DMC and/or its affiliates’ employees. For the year ended December 31, 2012, the Series was charged $17,213 for internal legal and tax services provided by DMC and/or its affiliates’ employees.
Trustees’ fees include expenses accrued by the Series 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 Series.
3. Investments
For the year ended December 31, 2012, the Series made purchases and sales of investment securities other than short-term investments as follows:
| Purchases | | $ | 113,563,046 |
| Sales | | $ | 130,766,646 |
At December 31, 2012, the cost of investments for federal income tax purposes and unrealized appreciation (depreciation) for the Series were as follows:
| | | Aggregate | | Aggregate | | |
| | Cost of | | Unrealized | | Unrealized | | Net Unrealized |
| Investments | | Appreciation | | Depreciation | | Appreciation |
| $573,419,369 | | $108,572,890 | | $(106,847,885) | | $1,725,005 |
Emerging Markets Series-13
Delaware VIP® Emerging Markets Series
Notes to Financial Statements (continued)
3. Investments (continued)
U.S. GAAP defines fair value as the price that the Series 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. A three level hierarchy for fair value measurements has been established 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 Series’ investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three level hierarchy of inputs is summarized below.
| Level 1 – | inputs are quoted prices in active markets for identical investments (e.g., equity securities, open-end investment companies, futures contracts, exchange-traded options contracts) |
| Level 2 – | other observable inputs (including, but not limited to: quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs) (e.g., debt securities, government securities, swap contracts, foreign currency exchange contracts, foreign securities utilizing international fair value pricing, broker-quoted securities, fair valued securities) |
| Level 3 – | inputs are significant unobservable inputs (including the Series’ own assumptions used to determine the fair value of investments) (e.g., broker-quoted securities, fair valued securities) |
Level 3 investments are valued using significant unobservable inputs. The Series may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Valuations may also be based upon current market prices of securities that are comparable in coupon, rating, maturity and industry. The derived value of a Level 3 investment may not represent the value which is received upon disposition and this could impact the results of operations.
The following table summarizes the valuation of the Series’ investments by fair value hierarchy levels as of December 31, 2012:
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Common Stock | | $ | 267,090,656 | | $ | 231,572,868 | | | $ | – | | | $ | 498,663,524 |
| Preferred Stock | | | 12,764,064 | | | 17,592,439 | | | | – | | | | 30,356,503 |
| Participation Notes | | | – | | | – | | | | – | | | | – |
| Short-Term Investments | | | – | | | 1,145,374 | | | | – | | | | 1,145,374 |
| Securities Lending Collateral | | | – | | | 44,978,973 | | | | – | | | | 44,978,973 |
| Total | | $ | 279,854,720 | | $ | 295,289,654 | | | $ | – | | | $ | 575,144,374 |
Certain securities have been fair valued in accordance with the Series’ fair valuation policy and presented as Level 2 investments as a result of utilizing the price of a similar asset with an observable input that had been using a quoted price in an active market.
The securities that have been deemed worthless on the statement of net assets are considered to be Level 3 securities in this table.
During the year ended December 31, 2012, the Series had the following transfers that had a material impact to the Series.
| From Level 1 investments to Level 2 | | | |
| investments as a result of utilizing | | | |
| a vendor price with observable inputs | | | |
| that had been using a quoted price in an active market | | $ | 168,048 |
| |
| From Level 1 investments to Level 2 | | | |
| investments as a result of utilizing | | | |
| the price of a similar asset with an observable input | | | |
| that had been using a quoted price in an active market | | | 6,101,591 |
This does not include transfers between Level 1 investments and Level 2 investments due to the Series utilizing international fair value pricing during the period. In accordance with the fair valuation procedures described in Note 1, international fair value pricing uses other observable market-based inputs in place of the closing exchange price due to the events occurring after the close of the exchange or market on which the investment is principally traded causing a change in classification between levels. There were no transfers into or out of Level 3 investments that had a significant impact to the series. The Series’ policy is to recognize transfers between levels at the beginning of the reporting period.
A reconciliation of Level 3 investments is presented when the Series has a significant amount of Level 3 investments at the beginning, interim or end of period in relation to net assets. Management has determined not to provide additional disclosure on Level 3 inputs under ASU No. 2011-04 since the Level 3 investments are not considered significant to the Series’ net assets at the end of the period.
Emerging Markets Series-14
Delaware VIP® Emerging Markets Series
Notes to Financial Statements (continued)
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. The tax character of dividends and distributions paid during the years ended December 31, 2012 and 2011 was as follows:
| | Year | | Year |
| | Ended | | Ended |
| | | 12/31/12 | | 12/31/11 |
| Ordinary income | | $4,968,114 | | $10,142,703 |
5. Components of Net Assets on a Tax Basis
As of December 31, 2012, the components of net assets on a tax basis were as follows:
| Shares of beneficial interest | | $ | 536,490,000 | |
| Undistributed ordinary income | | | 8,260,339 | |
| Capital loss carryforwards | | | (15,771,473 | ) |
| Qualified late year losses deferred | | | (219,510 | ) |
| Unrealized appreciation | | | 1,555,869 | |
| Net assets | | $ | 530,315,225 | |
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales and tax treatment of unrealized gain on investments in passive foreign investment companies.
Qualified late year losses represent losses realized on investment transactions from November 1, 2012 through December 31, 2012 that, in accordance with federal income tax regulations, the Series has elected to defer and treat as having arisen in the following fiscal year.
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 gain (loss) on foreign currency transactions and passive foreign investment companies. Results of operations and net assets were not affected by these reclassifications. For the year ended December 31, 2012, the Series recorded the following reclassifications.
| Undistributed | | Accumulated |
| Net Investment | | Net Realized |
| | Income | | Loss |
| $4,532,532 | | $(4,532,532) |
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. Capital loss carryforwards remaining at December 31, 2012 will expire as follows: $2,210,358 expires in 2017.
On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (Act) was enacted, which changed various technical rules governing the tax treatment of regulated investment companies. The changes were generally effective for taxable years beginning after the date of enactment. Under the Act, the Series is permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered all short-term as permitted under previous regulation.
Losses incurred that will be carried forward under the Act are as follows:
| Loss carryforward character |
| Short-term | | Long-term |
| | $1,133,538 | | $12,427,577 |
Emerging Markets Series-15
Delaware VIP® Emerging Markets Series
Notes to Financial Statements (continued)
6. Capital Shares
Transactions in capital shares were as follows:
| | Year | | Year |
| | Ended | | Ended |
| | 12/31/12 | | 12/31/11 |
| Shares sold: | | | | | | |
| Standard Class | | 3,479,386 | | | 1,375,822 | |
| Service Class | | 2,878,459 | | | 6,213,107 | |
| |
| Shares issued upon reinvestment of dividends and distributions: | | | | | | |
| Standard Class | | 107,143 | | | 151,328 | |
| Service Class | | 149,738 | | | 248,092 | |
| | 6,614,726 | | | 7,988,349 | |
| Shares redeemed: | | | | | | |
| Standard Class | | (5,626,864 | ) | | (4,379,757 | ) |
| Service Class | | (3,130,761 | ) | | (2,945,428 | ) |
| | (8,757,625 | ) | | (7,325,185 | ) |
| Net increase (decrease) | | (2,142,899 | ) | | 663,164 | |
7. Line of Credit
The Series, along with certain other funds in the Delaware Investments® Family of Funds (Participants), was a participant in a $125,000,000 revolving line of credit 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 were charged an annual commitment fee, which was allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants were permitted to borrow up to a maximum of one third of their net assets under the agreement. Each Participant was individually, and not jointly, liable for its particular advances, if any, under the line of credit. The line of credit under the agreement expired on November 13, 2012.
On November 13, 2012, the Series, along with the other Participants, entered into an amendment to the agreement for a $125,000,000 revolving line of credit. The agreement is to be used as described above and operates in substantially the same manner as the original agreement. The line of credit available under the agreement expires on November 12, 2013. The Series had no amounts outstanding as of December 31, 2012 or at any time during the year then ended.
8. Derivatives
U.S. GAAP requires disclosures that enable investors to understand: 1) how and why an entity uses derivatives; 2) how they are accounted for; and 3) how they affect an entity’s results of operations and financial position.
Foreign Currency Exchange Contracts
The Series may enter into foreign currency exchange contracts and foreign cross currency exchange contracts as a way of managing foreign exchange rate risk. The Series 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 Series 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 and foreign cross 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 an unfavorable change in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency change favorably. In addition, the Series could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts. The Series’ 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 Series and the counterparty and by the posting of collateral by the counterparty to the Series to cover the Series’ exposure to the counterparty. No foreign currency exchange contracts were outstanding at December 31, 2012.
See the Statement of Operations on page 9 for the realized and unrealized gain or loss on derivatives.
Derivatives Generally. The table below summarizes the average balance of derivative holdings by the Series during the year ended December 31, 2012.
| Long Derivative Volume | | | |
| Foreign Currency | | | |
| Exchange Contracts | | | |
| (Average Cost) | | $ | 527,830 |
| |
| Short Derivative Volume | | | |
| Foreign Currency | | | |
| Exchange Contracts | | | |
| (Average Cost) | | $ | 130,535 |
Emerging Markets Series-16
Delaware VIP® Emerging Markets Series
Notes to Financial Statements (continued)
9. Securities Lending
The Series, along with other funds in the Delaware Investments® Family of Funds, may lend its securities pursuant to a security lending agreement (Lending Agreement) with The Bank of New York Mellon (BNY Mellon). At the time a security is loaned, the borrower must post collateral equal to the required percentage of the market value of the loaned security, including any accrued interest. The required percentage is: (i) 102% with respect to U.S. securities and foreign securities that are denominated and payable in U.S. dollars; and (ii) 105% with respect to foreign securities. With respect to each loan, if on any business day the aggregate market value of securities collateral plus cash collateral held 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 by the end of the following business day which, together with the collateral already held, will be not less than the applicable initial collateral requirements for such security loan. If the aggregate market value of securities collateral and cash collateral held with respect to a security loan exceeds the applicable initial collateral requirement, upon request of the borrower BNY Mellon must return enough collateral to the borrower by the end of the following business day to reduce the value of the remaining collateral to the applicable initial collateral requirement for such security loan. As a result of the foregoing, the value of the collateral held with respect to a loaned security may be temporarily more or less than the value of the security on loan.
Cash collateral received is generally invested in the Delaware Investments Collateral Fund No. 1 (Collective Trust) established by BNY Mellon for the purpose of investment on behalf of funds managed by DMC that participate in BNY Mellon’s securities lending program. The Collective Trust may invest in U.S. government securities and high quality corporate debt, asset-backed and other money market securities and in repurchase agreements collateralized by such securities, provided that the Collective Trust will generally have a dollar-weighted average portfolio maturity of 60 days or less. In October 2008, BNY Mellon transferred certain distressed securities from the previous collateral investment pool into the Mellon GSL Reinvestment Trust II. The Series 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 Series or, at the discretion of the lending agent, replace the loaned securities. The Series continues to record dividends or interest, as applicable, on the securities loaned and is subject to changes in value of the securities loaned that may occur during the term of the loan. The Series 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 Series 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 Series, the security lending agent and the borrower. The Series records security lending income net of allocations to the security lending agent and the borrower.
The Collective Trust used for the investment of cash collateral received from borrowers of securities 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. The Series may incur investment losses as a result of investing securities lending collateral in the Collective Trust or another collateral investment pool. This could occur if an investment in a collateral investment pool defaulted or if it were necessary to liquidate assets in the collateral investment pool to meet returns on outstanding security loans at a time when the collateral investment pool’s net asset value per unit was less than $1.00. Under those circumstances, the Series may not receive an amount from the collateral investment pool that is equal in amount to the collateral the Series would be required to return to the borrower of the securities and the Series would be required to make up for this shortfall.
At December 31, 2012, the value of the securities on loan was $44,422,453, for which cash collateral was received and invested in accordance with the Lending Agreement. At December 31, 2012, the value of invested collateral was $44,978,973. These investments are presented on the Statement of Net Assets under the caption “Securities Lending Collateral.”
10. Credit and Market Risk
Some countries in which the Series 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 Series 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 Series.
The Series may invest up to 10% 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 Series 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 Series’ Board has delegated to DMC the day-to-day functions of determining whether individual Rule 144A securities are liquid for purposes of the Series’ limitation on investments in illiquid securities. Securities eligible for resale pursuant to Rule 144A, which are determined to be liquid, are not subject to the Series’ 10% limit on investments in illiquid securities. Rule 144A and illiquid securities have been identified on the Statement of Net Assets.
11. Contractual Obligations
The Series enters into contracts in the normal course of business that contain a variety of indemnifications. The Series’ maximum exposure under these arrangements is unknown. However, the Series has not had prior claims or losses pursuant to these contracts. Management has reviewed the Series’ existing contracts and expects the risk of loss to be remote.
12. Subsequent Events
Management has determined that no material events or transactions occurred subsequent to December 31, 2012 that would require recognition or disclosure in the Series’ financial statements.
Emerging Markets Series-17
Delaware VIP® Trust — Delaware VIP Emerging Markets Series
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Delaware VIP Trust
and the Shareholders of Delaware VIP Emerging Markets Series:
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Delaware VIP Emerging Markets Series (one of the series constituting Delaware VIP Trust, hereafter referred to as the “Series”) at December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2012 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the two years in the period ended December 31, 2009 were audited by other independent accountants whose report dated February 17, 2010 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 15, 2013
Emerging Markets Series-18
Delaware VIP® Trust — Delaware VIP Emerging Markets Series
Other Series Information (Unaudited)
Board Consideration of Delaware VIP Emerging Market Series Investment Advisory Agreement
At a meeting held on August 21-23, 2012 (“Annual Meeting”), the Board of Trustees (“Board”), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreement for Delaware VIP Emerging Markets Series (“Series”). In making its decision, the Board considered information furnished at regular quarterly Board meetings, including reports detailing Series performance, investment strategies and expenses, as well as information prepared specifically in connection with the renewal of the investment advisory contract. Information furnished specifically in connection with the renewal of the Investment Advisory Agreement with Delaware Management Company (“DMC”) included materials provided by DMC and its affiliates (“Delaware Investments”) concerning, among other things, the nature, extent and quality of services provided to the Series, the costs of such services to the Series, economies of scale and the financial condition and profitability of Delaware Investments. In addition, in connection with the Annual Meeting, reports were provided in May 2012 and included independent historical and comparative reports provided by Lipper, Inc., an independent statistical compilation organization (“Lipper”). The Lipper reports compared the Series’ investment performance and expenses with those of other comparable mutual funds. The Independent Trustees reviewed and discussed the Lipper reports with independent legal 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; comparative client fee information; 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 the Series’ policies.
In considering information relating to the approval of the Series’ advisory agreement, the Independent Trustees received assistance and advice from and met separately with independent legal 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 Series 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 Series, compliance of portfolio managers with the investment policies, strategies and restrictions for the Series, 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 Series’ investment advisor and the emphasis placed on research in the investment process. The Board recognized DMC’s receipt of several industry distinctions. The Board gave favorable consideration to DMC’s efforts to control expenditures while maintaining service levels committed to fund matters. The Board noted that in July 2011, Management implemented measures to reduce overall costs and improve transfer agent and shareholder servicing functions through outsourcing. 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 Series in view of the importance of investment performance 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 Series showed the investment performance of its Standard Class 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 Series was shown for the past one-, three-, five- and ten-year periods, as applicable, ended March 31, 2012. The Board’s objective is that the Series’ performance for the periods considered be at or above the median of its Performance Universe. The following paragraph summarizes the performance results for the Series and the Board’s view of such performance.
The Performance Universe for the Series consisted of the Series and all emerging markets funds underlying variable insurance products as selected by Lipper. The Lipper report comparison showed that the Series’ total return for the one-year period was in the third quartile of its Performance Universe. The report further showed that the Series’ total return for the three- and five-year periods was in the second quartile and the Series’ total return for the ten-year period was in the first quartile. The Board was satisfied with performance.
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 Series as of its most recently completed fiscal year. The Board also focused on the comparative analysis of effective management fees and total expense ratios of the Series versus effective management fees and expense ratios of a group of similar funds as selected by Lipper (“Expense Group”). In reviewing comparative costs, the Series’ contractual management fee and the actual management fee incurred by the Series were compared with the contractual management fees (assuming all funds in the Expense Group were similar in size to the Series) and actual management fees (as reported by each fund) within the Expense Group, taking into account any applicable breakpoints and fee waivers. The Series’ total expenses were also compared with those of its Expense Group. The Lipper total expenses, for comparative consistency, were shown by Lipper for Standard Class shares which do not charge 12b-1 and non 12b-1 service fees. The Board considered fees paid to Delaware Investments for non-management services. The Board’s objective is to limit the Series’ total expense ratio to be competitive with that of the Expense Group. The following paragraph summarizes the expense results for the Series and the Board’s view of such expenses.
The expense comparisons for the Series showed that the actual management fee was in the quartile with the highest expenses of its Expense Group and the total expenses were in the quartile with the second highest expenses of its Expense Group. The Series’ total expenses were not in line with the Board’s objective. In evaluating total expenses, the Board considered various initiatives implemented by Management. The Board was satisfied with Management’s efforts to improve the Series’ total expense ratio and bring it in line with the Board’s objective and noted 12b-1 waivers in place through April 2013.
Emerging Markets Series-19
Delaware VIP® Emerging Markets Series
Other Series Information (Unaudited) (continued)
MANAGEMENT PROFITABILITY. The Board considered the level of profits realized by Delaware Investments in connection with the operation of the Series. 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, reflects 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 profitability of Delaware Investments.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are realized by Delaware Investments as the Series’ 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 Series’ management contract fell within the standard structure. Although the Series has not reached a size at which the advantages of breakpoints would be realized, the Board recognized that the fee was structured so that when the Series grows, economies of scale may be shared. |
| |
Tax Information
For the fiscal year ended December 31, 2012, the Series designates distributions paid during the year as follows:
| (A) |
| Ordinary |
| Income |
| Distributions |
| (Tax Basis) |
| 100% |
____________________
(A) is based on a percentage of the Series’ total distributions.
The Series intends to pass through foreign tax credits in the maximum amount of $811,453. The gross foreign source income earned during the fiscal year 2012 by the Series was $13,331,731.
Emerging Markets Series-20
Delaware Investments® Family of Funds
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors (“Trustees”), which has oversight responsibility for the management of a fund’s business affairs. Trustees establish procedures and oversee and review the performance of the investment manager, the distributor, and others who perform services for the fund. The independent fund trustees, in particular, are advocates for shareholder interests. Each trustee has served in that capacity since he or she was elected to or appointed to the Board of Trustees, and will continue to serve until his or her retirement or the election of a new trustee in his or her place. The following is a list of the Trustees and Officers with certain background and related information.
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INTERESTED TRUSTEES | | | | | |
| Patrick P. Coyne1 | Chairman, | Chairman and Trustee | Patrick P. Coyne has served in | 71 | Director and Audit |
| 2005 Market Street | President, | since August 16, 2006 | various executive capacities | | Committee Member — |
| Philadelphia, PA | Chief Executive | | at different times at | | Kaydon Corp. |
| 19103 | Officer, and | President and | Delaware Investments.2 | | |
| Trustee | Chief Executive Officer | | | Board of Governors |
| April 1963 | | since August 1, 2006 | | | Member — Investment |
| | | | | Company Institute (ICI) |
| | | | | |
| INDEPENDENT TRUSTEES | | | | | |
| Thomas L. Bennett | Trustee | Since | Private Investor — | 71 | Director — |
| 2005 Market Street | | March 2005 | (March 2004–Present) | | Bryn Mawr |
| Philadelphia, PA | | | | | Bank Corp. (BMTC) |
| 19103 | | | Investment Manager — | | (2007–2011) |
| | | Morgan Stanley & Co. | | |
| October 1947 | | | (January 1984–March 2004) | | |
| Joseph W. Chow | Trustee | Since | Executive Vice President | 71 | Director and Audit |
| 2005 Market Street | | January 2013 | (Emerging Economies Strategies, | | Committee |
| Philadelphia, PA 19103 | | | Risk and Corporate Administration) | | Member — Hercules |
| | | State Street Corporation | | Technology Growth |
| January 1953 | | | (July 2004–March 2011) | | Capital, Inc. |
| John A. Fry | Trustee | Since | President | 71 | Board of Governors |
| 2005 Market Street | | January 2001 | Drexel University | | Member — NASDAQ |
| Philadelphia, PA | | | (August 2010–Present) | | OMX PHLX LLC |
| 19103 | | | | | |
| | | President — | | Director and Audit |
| May 1960 | | | Franklin & Marshall College | | Committee Member — |
| | | (June 2002–July 2010) | | Community Health |
| | | | | Systems |
| | | | | |
| | | | | Director — Ecore |
| | | | | International |
| | | | | (2009–2010) |
| Anthony D. Knerr | Trustee | Since | Managing Director — | 71 | None |
| 2005 Market Street | | April 1990 | Anthony Knerr & Associates | | |
| Philadelphia, PA | | | (Strategic Consulting) | | |
| 19103 | | | (1990–Present) | | |
| | | | | |
| December 1938 | | | | | |
| Lucinda S. Landreth | Trustee | Since | Private Investor | 71 | None |
| 2005 Market Street | | March 2005 | (2004–Present) | | |
| Philadelphia, PA | | | | | |
| 19103 | | | | | |
| | | | | | |
| June 1947 | | | | | |
Emerging Markets Series-21
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INDEPENDENT TRUSTEES (continued) | | | | |
| Frances A. Sevilla-Sacasa | Trustee | Since | Chief Executive Officer — | 71 | Trust Manager — |
| 2005 Market Street | | September 2011 | Banco Itaú Europa | | Camden Property Trust |
| Philadelphia, PA | | | International | | (2011–Present) |
| 19103 | | | (April 2012–Present) | | |
| |
| January 1956 | | | Executive Advisor to Dean | | |
| | | (August 2011–March 2012) | | |
| | | and Interim Dean | | |
| | | (January 2011–July 2011) — | | |
| | | University of Miami School of | | |
| | | Business Administration | | |
| |
| | | President — U.S. Trust, | | |
| | | Bank of America Private | | |
| | | Wealth Management | | |
| | | (Private Banking) | | |
| | | (July 2007–December 2008) | | |
| Thomas K. Whitford | Trustee | Since | Vice Chairman | 71 | None |
| 2005 Market Street | | January 2013 | (2010–Present) | | |
| Philadelphia, PA 19103 | | | Chief Administrative | | |
| | | Officer (2008–2010) | | |
| March 1956 | | | and Executive Vice | | |
| | | President and Chief | | |
| | | Administrative Officer | | |
| | | (2007–2009) — | | |
| | | PNC Financial | | |
| | | Services Group | | |
| Janet L. Yeomans | Trustee | Since | Vice President and Treasurer | 71 | Director, Audit |
| 2005 Market Street | | April 1999 | (January 2006–Present) | | Committee Member |
| Philadelphia, PA | | | Vice President — Mergers | | and Investment |
| 19103 | | | & Acquisitions | | Committee Member |
| | | (January 2003–January 2006), | | Okabena Company |
| July 1948 | | | and | | |
| | | Vice President and Treasurer | | Chair — 3M |
| | | (July 1995–January 2003) | | Investment Management |
| | | 3M Corporation | | Company |
| | | | | (January 2005–July 2012) |
| J. Richard Zecher | Trustee | Since | Founder — | 71 | Director and Compensation |
| 2005 Market Street | | March 2005 | Investor Analytics | | Committee Member — |
| Philadelphia, PA | | | (Risk Management) | | Investor Analytics |
| 19103 | | | (May 1999–Present) | | |
| | | | | Director — |
| July 1940 | | | Founder — | | P/E Investments |
| | | P/E Investments | | |
| | | (Hedge Fund) | | |
| | | (September 1996–Present) | | |
| |
| OFFICERS | | | | | |
| David F. Connor | Vice President, | Vice President since | David F. Connor has served as | 71 | None3 |
| 2005 Market Street | Deputy General | September 2000 | Vice President and Deputy | | |
| Philadelphia, PA | Counsel, and Secretary | and Secretary | General Counsel of | | |
| 19103 | | since | Delaware Investments | | |
| | October 2005 | since 2000. | | |
| December 1963 | | | | | |
| Daniel V. Geatens | Vice President | Treasurer | Daniel V. Geatens has served | 71 | None3 |
| 2005 Market Street | and Treasurer | since | in various capacities at | | |
| Philadelphia, PA | | October 2007 | different times at | | |
| 19103 | | | Delaware Investments. | | |
| |
| October 1972 | | | | | |
Emerging Markets Series-22
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| OFFICERS (continued) | | | | | |
| David P. O’Connor | Executive Vice | Executive Vice President | David P. O’Connor has served in | 71 | None3 |
| 2005 Market Street | President, | since February 2012; | various executive and legal | | |
| Philadelphia, PA | General Counsel, | Senior Vice President | capacities at different times | | |
| 19103 | and Chief | October 2005–February 2012; | at Delaware Investments. | | |
| Legal Officer | General Counsel and | | | |
| February 1966 | | Chief Legal Officer | | | |
| | since October 2005 | | | |
| Richard Salus | Senior | Chief Financial | Richard Salus has served in | 71 | None3 |
| 2005 Market Street | Vice President | Officer since | various executive capacities | | |
| Philadelphia, PA | and | November 2006 | at different times at | | |
| 19103 | Chief Financial | | Delaware Investments. | | |
| Officer | | | | |
| October 1963 | | | | | |
1 Patrick P. Coyne is considered to be an “Interested Trustee” because he is an executive officer of the Fund’s(s’) investment advisor. |
2 Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund’s(s’) investment advisor, principal underwriter, and its transfer agent. |
3 David F. Connor, Daniel V. Geatens, David P. O’Connor, and Richard Salus serve in similar capacities for the six portfolios of the Optimum Fund Trust, which have the same investment advisor, principal underwriter, and transfer agent as the registrant. |
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is available, without charge, upon request by calling 800 523-1918.
The Series files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q. The Series’ Forms N-Q, as well as a description of the policies and procedures that the Series 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 website at sec.gov. In addition, a description of the policies and procedures that the Series uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge on the Delaware Investments® Funds’ website at delawareinvestments.com. The Series’ Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Series voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the Delaware Investments Funds’ website at delawareinvestments.com; and (ii) on the Commission’s website at sec.gov. |
| AR-VIPEM [12/12] DG3 18579 (2/13) | | (10125) | | Emerging Markets Series-23 |
| Delaware VIP® Trust |
| Delaware VIP High Yield Series |
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| Annual Report |
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| December 31, 2012 |
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Table of contents
| > Portfolio management review | 1 |
| | |
| > Performance summary | 2 |
| | |
| > Disclosure of Series expenses | 4 |
| | |
| > Security type/sector allocation | 5 |
| | |
| > Statement of net assets | 6 |
| | |
| > Statement of operations | 11 |
| | |
| > Statements of changes in net assets | 11 |
| | |
| > Financial highlights | 12 |
| | |
| > Notes to financial statements | 14 |
| | |
| > Report of independent registered public accounting firm | 19 |
| | |
| > Other Series information | 20 |
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| > Board of trustees/directors and officers addendum | 22 |
Investments in Delaware VIP® High Yield Series 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 (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 Series, the repayment of capital from the Series, or any particular rate of return.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
The Series is not FDIC insured and is 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 and member of Macquarie Group. Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries, including the Series’ distributor, Delaware Distributors, L.P. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide.
This material may be used in conjunction with the offering of shares in the Delaware VIP High Yield Series only if preceded or accompanied by the Series’ current prospectus, and if available, the summary prospectus.
© 2013 Delaware Management Holdings, Inc.
All third-party marks cited are the property of their respective owners.
| Delaware VIP® Trust — Delaware VIP High Yield Series | |
| Portfolio management review | Jan. 8, 2013 |
For the fiscal year ended Dec. 31, 2012, Delaware VIP High Yield Series Standard Class shares returned +17.82% and Service Class shares returned +17.35% (both figures assume reinvestment of all income distributions). For the same period, the Series’ benchmark, the BofA Merrill Lynch U.S. High Yield Constrained Index, returned +15.55%.
Volatility in the high yield market during the Series’ fiscal year was driven more by global macroeconomic concerns than by underlying weakness in issuers of high yield bonds. Sentiment toward the high yield asset class alternately warmed and cooled as the European debt crisis periodically disappeared and reappeared in the headlines. Still, many high yield bonds posted solid total returns, reflecting, in our view, below-average default rates, attractive relative yields, low and stable benchmark interest rates, and the financial soundness of the U.S. corporate sector.
Overall, returns in high yield and leveraged loan markets were driven by an apparent quest for income in an exceptionally low rate environment and by expectations that default rates would remain below the long-run average despite tepid economic growth. Though new issuance reached record highs, most businesses used the proceeds to refinance debt at favorable rates rather than undertake leveraged acquisitions, which historically have been riskier.
Relative to its benchmark, the Series benefited from its consistent overweight to CCC-rated bonds (which are at the lower end of the credit-quality spectrum), despite holding securities within that category that often were of higher quality (and thus lower yield) than those within that segment of the index. It’s important to note that at times during the fiscal year, particularly when investors embraced a “risk on” mode, our focus on what we viewed to be higher-quality bonds caused the Series to generate milder returns than those of the broader high yield market. Over the course of the year, however, except for those occasions when risk aversion spiked, bonds rated CCC and B generally outperformed the (higher-rated) BB-rated segment of the sub-investment-grade universe. On a sector level, the Series’ holdings in banking, capital goods, and energy contributed to relative performance while our allocation to healthcare, utilities, and metals and mining mostly detracted from relative returns.
At the close of the fiscal year, the Series was positioned in a slightly more conservative, risk-aware manner — slightly more than three-quarters of its assets were invested in securities rated B or BB, the two highest rungs of the sub-investment-grade credit ladder. From a sector standpoint, the Series held overweight allocations to basic industry, insurance, media, consumer cyclical, technology and electric, and automotive companies. The Series also maintained a modest cash position to seek to guard against volatility and redemptions, and to provide buying power as opportunities arise in the new issuance or secondary markets. Conversely, the Series ended the fiscal year with underweight allocations in energy, services, telecommunications, healthcare, capital goods, banking, financial services, and utilities. As always, we arrived at these credit and sector weightings through a combination of top-down macroeconomic analysis and bottom-up, bond-by-bond credit research.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
High Yield Series-1
Delaware VIP® Trust — Delaware VIP High Yield Series
Performance summary
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
Carefully consider the Series’ investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Series’ prospectuses and, if available, their summary prospectuses, which may be obtained by calling 800 523-1918. Investors should read the prospectuses and, if available, the summary prospectuses carefully before investing.
| Delaware VIP High Yield Series | | | | | | | | | | |
| Average annual total returns | | | | | | | | | | |
| For periods ended Dec. 31, 2012 | | 1 year | | 3 years | | 5 years | | 10 years | | Lifetime |
| Standard Class shares (commenced operations on July 28, 1988) | | +17.82% | | +11.63% | | +9.46% | | +10.71% | | +7.36% |
| Service Class shares (commenced operations on May 1, 2000) | | +17.35% | | +11.33% | | +9.16% | | +10.45% | | +7.00% |
Returns reflect the reinvestment of all distributions and any applicable sales charges as noted in the following paragraphs.
As described in the Series’ most recent prospectus, the net expense ratio for Service Class shares of the Series was 0.99%, while total operating expenses for Standard Class and Service Class shares were 0.74% and 1.04%, respectively. The management fee for Standard Class and Service Class shares was 0.65%.
The Series’ distributor has contracted to limit the 12b-1 fees for Service Class shares to 0.25% of average daily net assets from April 30, 2012 through April 30, 2013.
Earnings from a variable annuity or variable life investment compound tax-free until withdrawal, and as a result, no adjustments were made for income taxes.
Expense limitations were in effect for all classes during certain periods shown in the Series’ performance table above and in the Performance of a $10,000 Investment chart on the next page.
Performance data do not reflect other costs incurred by beneficial owners such as insurance company separate account fees and variable annuity or variable life contract charges or deferred sales charges. Performance shown here would have been reduced if such fees were included and the expense limitation removed. For more information about fees, consult your variable annuity or variable life prospectus.
Investments in variable products involve risk.
Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt.
The Series may also be subject to prepayment risk, the risk that the principal of a fixed income security that is held by the Series may be prepaid prior to maturity, potentially forcing the Series to reinvest that money at a lower interest rate.
High yielding, noninvestment grade bonds (junk bonds) involve higher risk than investment grade bonds. The high yield secondary market is particularly susceptible to liquidity problems when institutional investors, such as mutual funds and certain other financial institutions, temporarily stop buying bonds for regulatory, financial, or other reasons. In addition, a less liquid secondary market makes it more difficult for the Series to obtain precise valuations of the high yield securities in its portfolio.
The Series may experience portfolio turnover in excess of 100%, which could result in higher transaction costs and tax liability.
International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.
Please read both the contract and underlying prospectus for specific details regarding the product’s risk profile.
High Yield Series-2
Delaware VIP® High Yield Series
Performance summary (continued)
| For period beginning Dec. 31, 2002, through Dec. 31, 2012 | | Starting value | | Ending value |
| –– Delaware VIP High Yield Series (Standard Class shares) | | $10,000 | | $27,673 |
| – – BofA Merrill Lynch U.S. High Yield Constrained Index | | $10,000 | | $26,844 |
The chart shows a $10,000 investment in the Delaware VIP High Yield Series Standard Class shares for the period from Dec. 31, 2002 through Dec. 31, 2012.
The chart also shows $10,000 invested in the BofA Merrill Lynch U.S. High Yield Constrained Index for the period from Dec. 31, 2002 through Dec. 31, 2012. The BofA Merrill Lynch U.S. High Yield Constrained Index tracks the performance of U.S. dollar-denominated high yield corporate debt publicly issued in the U.S. domestic market, but caps individual issuer exposure at 2% of the benchmark.
Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
Performance of Service Class shares will vary due to different charges and expenses.
Past performance is not a guarantee of future results.
High Yield Series-3
Delaware VIP® Trust — Delaware VIP High Yield Series
Disclosure of Series Expenses
For the Six-Month Period July 1, 2012 to December 31, 2012 (Unaudited)
As a shareholder of the Series, you incur ongoing costs, which may include management fees; distribution and/or service (12b-1) fees; and other Series expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Series 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 six-month period from July 1, 2012 to December 31, 2012.
Actual Expenses
The first section of the table shown, “Actual Series 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 the 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 Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ 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 Series and other funds. To do so, compare the 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. As a shareholder of the Series, you do not incur any transaction costs, such as sales charges (loads), redemption fees or exchange fees, but shareholders of other funds may incur such costs. Also, the fees related to the variable annuity investment or the deferred sales charge that could apply have not been included. 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. The Series’ actual expenses shown in the table reflect fee waivers in effect for Service Class shares. The expenses shown in the table assume reinvestment of all dividends and distributions.
Expense Analysis of an Investment of $1,000
| | | | | | | | Expenses |
| | Beginning | | Ending | | | | Paid During |
| | Account | | Account | | Annualized | | Period |
| | Value | | Value | | Expense | | 7/1/12 to |
| | 7/1/12 | | 12/31/12 | | Ratio | | 12/31/12* |
| Actual Series Return† | | | | | | | | |
| Standard Class | | $1,000.00 | | $1,087.20 | | 0.74% | | $3.88 |
| Service Class | | 1,000.00 | | 1,085.60 | | 0.99% | | 5.19 |
| Hypothetical 5% Return (5% return before expenses) | | | | |
| Standard Class | | $1,000.00 | | $1,021.42 | | 0.74% | | $3.76 |
| Service Class | | 1,000.00 | | 1,020.16 | | 0.99% | | 5.03 |
*“Expenses Paid During Period” are equal to the Series’ annualized expense ratio, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period).
†Because actual returns reflect only the most recent six-month period, the returns shown may differ significantly from fiscal year returns.
High Yield Series-4
Delaware VIP® Trust — Delaware VIP High Yield Series
Security Type/Sector Allocation
As of December 31, 2012 (Unaudited)
Sector designations may be different than the sector designations presented in other Series materials. The sector designations may represent the investment manager’s internal sector classifications, which may result in the sector designations for one series being different than another series’ sector designations.
| Percentage |
| Security Type/Sector | of Net Assets |
| Convertible Bonds | 0.25 | % |
| Corporate Bonds | 91.86 | % |
| Aerospace & Defense | 0.24 | % |
| Automobiles | 2.54 | % |
| Banking | 2.11 | % |
| Basic Industry | 13.43 | % |
| Capital Goods | 3.69 | % |
| Consumer Cyclical | 5.92 | % |
| Consumer Non-Cyclical | 3.54 | % |
| Energy | 11.48 | % |
| Financials | 2.11 | % |
| Healthcare | 6.22 | % |
| Insurance | 3.98 | % |
| Media | 8.42 | % |
| Services | 11.66 | % |
| Technology & Electronics | 6.77 | % |
| Telecommunications | 8.66 | % |
| Utilities | 1.09 | % |
| Senior Secured Loans | 2.42 | % |
| Common Stock | 0.40 | % |
| Preferred Stock | 2.02 | % |
| Repurchase Agreements | 1.39 | % |
| Securities Lending Collateral | 0.10 | % |
| Total Value of Securities | 98.44 | % |
| Obligation to Return Securities Lending Collateral | (0.21 | %) |
| Receivables and Other Assets Net of Other Liabilities | 1.77 | % |
| Total Net Assets | 100.00 | % |
High Yield Series-5
Delaware VIP® Trust — Delaware VIP High Yield Series
Statement of Net Assets
December 31, 2012
| | | | Principal | | | |
| | | Amount | | Value |
| | | (U.S. $) | | (U.S. $) |
| CONVERTIBLE BONDS–0.25% | | | | | | |
| ΦArvinMeritor 4.00% exercise price $26.73, | | | | | | |
| expiration date 2/15/27 | | $ | 1,393,000 | | $ | 1,049,103 |
| Total Convertible Bonds | | | | | | |
| (cost $1,034,546) | | | | | | 1,049,103 |
| |
| CORPORATE BONDS–91.86% | | | | | | |
| Aerospace & Defense–0.24% | | | | | | |
| #Silver II Borrower / Silver II US Holdings 144A | | | | | | |
| 7.75% 12/15/20 | | | 960,000 | | | 998,400 |
| | | | | | | 998,400 |
| Automobiles–2.54% | | | | | | |
| American Axle & Manufacturing | | | | | | |
| 7.75% 11/15/19 | | | 1,138,000 | | | 1,240,420 |
| 7.875% 3/1/17 | | | 700,000 | | | 726,250 |
| Chrysler Group 8.25% 6/15/21 | | | 4,000,000 | | | 4,420,000 |
| #International Automotive Components Group 144A | | | | | | |
| 9.125% 6/1/18 | | | 1,879,000 | | | 1,752,168 |
| #Jaguar Land Rover 144A 8.125% 5/15/21 | | | 2,310,000 | | | 2,552,550 |
| | | | | | | 10,691,388 |
| Banking–2.11% | | | | | | |
| *Barclays Bank 7.625% 11/21/22 | | | 2,015,000 | | | 2,017,519 |
| •#*HBOS Capital Funding 144A 6.071% 6/29/49 | | | 4,434,000 | | | 3,901,919 |
| •Regions Financing Trust ll 6.625% 5/15/47 | | | 2,975,000 | | | 2,982,438 |
| | | | | | | 8,901,876 |
| Basic Industry–13.43% | | | | | | |
| *AK Steel 7.625% 5/15/20 | | | 1,139,000 | | | 996,625 |
| #APERAM 144A 7.75% 4/1/18 | | | 1,735,000 | | | 1,535,475 |
| Arcelormittal 6.125% 6/1/18 | | | 1,935,000 | | | 1,963,359 |
| #Cemex Espana Luxembourg 144A 9.25% 5/12/20 | | | 2,215,000 | | | 2,425,425 |
| #Essar Steel Algoma 144A 9.375% 3/15/15 | | | 1,105,000 | | | 1,011,075 |
| #FMG Resources August 2006 144A | | | | | | |
| 6.875% 4/1/22 | | | 2,197,000 | | | 2,254,671 |
| #HD Supply 144A 11.00% 4/15/20 | | | 1,805,000 | | | 2,138,925 |
| Headwaters 7.625% 4/1/19 | | | 2,300,000 | | | 2,455,250 |
| Immucor 11.125% 8/15/19 | | | 1,781,000 | | | 2,012,530 |
| #INEOS Group Holdings 144A 8.50% 2/15/16 | | | 2,540,000 | | | 2,540,000 |
| #Inmet Mining 144A 8.75% 6/1/20 | | | 1,942,000 | | | 2,131,345 |
| Interface 7.625% 12/1/18 | | | 1,687,000 | | | 1,819,851 |
| #JMC Steel Group 144A 8.25% 3/15/18 | | | 2,305,000 | | | 2,420,250 |
| #Kinove German Bondco 144A 9.625% 6/15/18 | | | 1,760,000 | | | 1,931,600 |
| #Longview Fibre Paper & Packaging 144A | | | | | | |
| 8.00% 6/1/16 | | | 2,257,000 | | | 2,381,135 |
| #MacDermid 144A 9.50% 4/15/17 | | | 829,000 | | | 867,341 |
| #Masonite International 144A 8.25% 4/15/21 | | | 2,399,000 | | | 2,578,925 |
| Millar Western Forest Products 8.50% 4/1/21 | | | 1,506,000 | | | 1,370,460 |
| #Murray Energy 144A 10.25% 10/15/15 | | | 2,201,000 | | | 2,145,975 |
| #New Gold 144A 6.25% 11/15/22 | | | 2,040,000 | | | 2,121,600 |
| Norcraft Finance 10.50% 12/15/15 | | | 1,195,000 | | | 1,209,938 |
| Nortek 8.50% 4/15/21 | | | 2,355,000 | | | 2,625,826 |
| #Perstorp Holding AB 144A 8.75% 5/15/17 | | | 1,985,000 | | | 2,054,475 |
| #Ply Gem Industries 144A 9.375% 4/15/17 | | | 990,000 | | | 1,056,825 |
| Rockwood Specialties Group 4.625% 10/15/20 | | | 1,955,000 | | | 2,030,756 |
| #Ryerson 144A | | | | | | |
| 9.00% 10/15/17 | | | 1,340,000 | | | 1,371,825 |
| 11.25% 10/15/18 | | | 555,000 | | | 512,681 |
| #Sappi Papier Holding 144A 8.375% 6/15/19 | | | 1,985,000 | | | 2,176,056 |
| #Sawgrass Merger Sub 144A 8.75% 12/15/20 | | | 2,395,000 | | | 2,424,938 |
| #Taminco Global Chemical 144A 9.75% 3/31/20 | | | 1,844,000 | | | 2,028,400 |
| | | | | | | 56,593,537 |
| Capital Goods–3.69% | | | | | | |
| Berry Plastics | | | | | | |
| 9.75% 1/15/21 | | | 542,000 | | | 627,365 |
| 10.25% 3/1/16 | | | 1,178,000 | | | 1,217,758 |
| #Consolidated Container 144A 10.125% 7/15/20 | | | 1,899,000 | | | 2,041,425 |
| Kratos Defense & Security Solutions | | | | | | |
| 10.00% 6/1/17 | | | 1,977,000 | | | 2,179,643 |
| Mueller Water Products 7.375% 6/1/17 | | | 905,000 | | | 938,938 |
| Reynolds Group Issuer | | | | | | |
| # | 144A 5.75% 10/15/20 | | | 2,205,000 | | | 2,282,174 |
| 9.00% 4/15/19 | | | 1,195,000 | | | 1,248,775 |
| 9.875% 8/15/19 | | | 2,775,000 | | | 2,983,124 |
| #Sealed Air 144A | | | | | | |
| 8.125% 9/15/19 | | | 436,000 | | | 492,680 |
| 8.375% 9/15/21 | | | 1,343,000 | | | 1,541,093 |
| | | | | | | 15,552,975 |
| Consumer Cyclical–5.92% | | | | | | |
| Burlington Coat Factory Warehouse | | | | | | |
| 10.00% 2/15/19 | | | 1,137,000 | | | 1,233,645 |
| #CDR DB Sub 144A 7.75% 10/15/20 | | | 400,000 | | | 401,000 |
| *CKE Restaurants 11.375% 7/15/18 | | | 1,629,000 | | | 1,881,495 |
| Dave & Buster’s 11.00% 6/1/18 | | | 2,507,000 | | | 2,820,375 |
| DineEquity 9.50% 10/30/18 | | | 2,650,000 | | | 3,024,312 |
| Express 8.75% 3/1/18 | | | 1,359,000 | | | 1,477,913 |
| #Landry’s 144A 9.375% 5/1/20 | | | 2,002,000 | | | 2,122,120 |
| #Landry’s Holdings II 144A 10.25% 1/1/18 | | | 500,000 | | | 500,000 |
| Levi Strauss 6.875% 5/1/22 | | | 293,000 | | | 315,708 |
| #Pantry 144A 8.375% 8/1/20 | | | 1,250,000 | | | 1,312,500 |
| #Party City Holdings 144A 8.875% 8/1/20 | | | 1,950,000 | | | 2,101,125 |
| Rite Aid 9.25% 3/15/20 | | | 1,944,000 | | | 2,080,080 |
| Sealy Mattress 8.25% 6/15/14 | | | 411,000 | | | 412,545 |
| #Tempur-Pedic International 144A | | | | | | |
| 6.875% 12/15/20 | | | 1,160,000 | | | 1,199,150 |
| Tops Holdings 10.125% 10/15/15 | | | 1,871,000 | | | 1,975,074 |
| #Wok Acquisition 144A 10.25% 6/30/20 | | | 1,956,000 | | | 2,090,475 |
| | | | | | | 24,947,517 |
| Consumer Non-Cyclical–3.54% | | | | | | |
| #Alphabet Holding 144A PIK 7.75% 11/1/17 | | | 780,000 | | | 805,350 |
| Constellation Brands 4.625% 3/1/23 | | | 1,005,000 | | | 1,055,250 |
| Dean Foods 7.00% 6/1/16 | | | 886,000 | | | 976,815 |
| Del Monte 7.625% 2/15/19 | | | 2,370,000 | | | 2,482,575 |
| #JBS USA 144A 8.25% 2/1/20 | | | 1,879,000 | | | 2,001,135 |
| NBTY 9.00% 10/1/18 | | | 2,953,000 | | | 3,351,655 |
| *Smithfield Foods 6.625% 8/15/22 | | | 940,000 | | | 1,041,050 |
| #Spectrum Brands Escrow 144A | | | | | | |
| 6.375% 11/15/20 | | | 400,000 | | | 421,000 |
| 6.625% 11/15/22 | | | 1,500,000 | | | 1,612,500 |
| Visant 10.00% 10/1/17 | | | 1,329,000 | | | 1,199,423 |
| | | | | | | 14,946,753 |
High Yield Series-6
Delaware VIP® High Yield Series
Statement of Net Assets (continued)
| | | Principal | | | |
| | Amount | | Value |
| | (U.S. $) | | (U.S. $) |
| CORPORATE BONDS (continued) | | | | | |
| Energy–11.48% | | | | | |
| American Petroleum Tankers Parent | | | | | |
| 10.25% 5/1/15 | $ | 1,864,000 | | $ | 1,957,200 |
| AmeriGas Partners 6.50% 5/20/21 | | 468,000 | | | 510,120 |
| Antero Resources Finance 9.375% 12/1/17 | | 2,005,000 | | | 2,210,513 |
| Calumet Specialty Products Partners | | | | | |
| 9.375% 5/1/19 | | 2,998,000 | | | 3,267,819 |
| Chaparral Energy | | | | | |
| # | 144A 7.625% 11/15/22 | | 965,000 | | | 1,008,425 |
| 8.25% 9/1/21 | | 2,178,000 | | | 2,374,020 |
| Chesapeake Energy | | | | | |
| 6.125% 2/15/21 | | 372,000 | | | 387,810 |
| 6.625% 8/15/20 | | 1,200,000 | | | 1,293,000 |
| Comstock Resources 7.75% 4/1/19 | | 1,069,000 | | | 1,090,380 |
| Copano Energy 7.75% 6/1/18 | | 1,871,000 | | | 1,980,921 |
| Crosstex Energy | | | | | |
| # | 144A 7.125% 6/1/22 | | 545,000 | | | 570,888 |
| 8.875% 2/15/18 | | 1,684,000 | | | 1,827,140 |
| #Drill Rigs Holdings 144A 6.50% 10/1/17 | | 2,130,000 | | | 2,130,000 |
| Frontier Oil 6.875% 11/15/18 | | 1,692,000 | | | 1,827,360 |
| #Halcon Resources 144A 8.875% 5/15/21 | | 1,350,000 | | | 1,437,750 |
| #Hercules Offshore 144A 10.50% 10/15/17 | | 2,947,000 | | | 3,190,127 |
| #Hilcorp Energy I 144A 8.00% 2/15/20 | | 2,180,000 | | | 2,398,000 |
| #Holly Energy Partners 144A 6.50% 3/1/20 | | 545,000 | | | 585,875 |
| Kodiak Oil & Gas 8.125% 12/1/19 | | 854,000 | | | 945,805 |
| Laredo Petroleum | | | | | |
| 7.375% 5/1/22 | | 495,000 | | | 539,550 |
| 9.50% 2/15/19 | | 555,000 | | | 622,988 |
| Linn Energy 8.625% 4/15/20 | | 2,116,000 | | | 2,317,020 |
| Oasis Petroleum 7.25% 2/1/19 | | 1,840,000 | | | 1,987,200 |
| Offshore Group Investments 11.50% 8/1/15 | | 818,000 | | | 893,665 |
| #PDC Energy 144A 7.75% 10/15/22 | | 1,255,000 | | | 1,292,650 |
| Pioneer Drilling 9.875% 3/15/18 | | 2,454,000 | | | 2,680,995 |
| *Quicksilver Resources 9.125% 8/15/19 | | 944,000 | | | 844,880 |
| Range Resources 5.00% 8/15/22 | | 1,947,000 | | | 2,044,350 |
| #Samson Investment 144A 9.75% 2/15/20 | | 1,884,000 | | | 2,001,750 |
| SandRidge Energy | | | | | |
| 7.50% 3/15/21 | | 123,000 | | | 132,225 |
| 8.125% 10/15/22 | | 383,000 | | | 421,300 |
| 8.75% 1/15/20 | | 1,484,000 | | | 1,632,400 |
| | | | | | 48,404,126 |
| Financials–2.11% | | | | | |
| E*TRADE Financial 6.375% 11/15/19 | | 2,095,000 | | | 2,157,850 |
| #•ILFC E-Capital Trust II 144A 6.25% 12/21/65 | | 2,719,000 | | | 2,338,340 |
| International Lease Finance 5.875% 4/1/19 | | 2,146,000 | | | 2,272,612 |
| #Nuveen Investments 144A 9.50% 10/15/20 | | 2,135,000 | | | 2,135,000 |
| | | | | | 8,903,802 |
| Healthcare–6.22% | | | | | |
| Air Medical Group Holdings 9.25% 11/1/18 | | 2,134,000 | | | 2,368,739 |
| #Alere 144A 7.25% 7/1/18 | | 1,050,000 | | | 1,057,875 |
| #Biomet 144A 6.50% 10/1/20 | | 2,100,000 | | | 2,097,375 |
| #CDRT Holding 144A 9.25% 10/1/17 | | 1,025,000 | | | 1,050,625 |
| Community Health Systems | | | | | |
| 7.125% 7/15/20 | | 1,035,000 | | | 1,106,156 |
| 8.00% 11/15/19 | | 1,737,000 | | | 1,888,988 |
| HCA 7.50% 2/15/22 | | 1,747,000 | | | 2,009,050 |
| HealthSouth 7.75% 9/15/22 | | 405,000 | | | 446,006 |
| #Hologic 144A 6.25% 8/1/20 | | 2,015,000 | | | 2,181,238 |
| #Kinetic Concepts 144A | | | | | |
| 10.50% 11/1/18 | | 1,634,000 | | | 1,721,828 |
| 12.50% 11/1/19 | | 1,374,000 | | | 1,320,758 |
| #Multiplan 144A 9.875% 9/1/18 | | 368,000 | | | 412,160 |
| Radnet Management 10.375% 4/1/18 | | 1,031,000 | | | 1,054,198 |
| #Sky Growth Acquisition 144A 7.375% 10/15/20 | | 3,180,000 | | | 3,179,999 |
| #STHI Holding 144A 8.00% 3/15/18 | | 2,046,000 | | | 2,225,025 |
| #Truven Health Analytics 144A 10.625% 6/1/20 | | 805,000 | | | 861,350 |
| #VPI Escrow 144A 6.375% 10/15/20 | | 1,170,000 | | | 1,260,675 |
| | | | | | 26,242,045 |
| Insurance–3.98% | | | | | |
| •American International Group 8.175% 5/15/58 | | 2,875,000 | | | 3,759,062 |
| #Compass Investors 144A 7.75% 1/15/21 | | 1,590,000 | | | 1,574,100 |
| #Hub International 144A 8.125% 10/15/18 | | 1,550,000 | | | 1,596,500 |
| •ING Groep 5.775% 12/29/49 | | 4,750,000 | | | 4,512,499 |
| #•Liberty Mutual Group 144A 7.00% 3/15/37 | | 2,074,000 | | | 2,071,408 |
| •XL Group 6.50% 12/29/49 | | 3,493,000 | | | 3,283,420 |
| | | | | | 16,796,989 |
| Media–8.42% | | | | | |
| AMC Networks 7.75% 7/15/21 | | 1,110,000 | | | 1,276,500 |
| Cablevision Systems 8.00% 4/15/20 | | 1,410,000 | | | 1,595,063 |
| CCO Holdings | | | | | |
| 5.25% 9/30/22 | | 2,055,000 | | | 2,090,963 |
| 7.00% 1/15/19 | | 188,000 | | | 203,745 |
| #Cequel Communications Holdings I 144A | | | | | |
| 6.375% 9/15/20 | | 1,595,000 | | | 1,668,769 |
| Clear Channel Communications 9.00% 3/1/21 | | 4,244,000 | | | 3,808,989 |
| Clear Channel Worldwide Holdings | | | | | |
| 7.625% 3/15/20 | | 2,126,295 | | | 2,126,295 |
| #Dish DBS 144A 5.00% 3/15/23 | | 1,935,000 | | | 1,944,675 |
| Entravision Communications 8.75% 8/1/17 | | 1,084,000 | | | 1,181,560 |
| #Griffey Intermediate 144A 7.00% 10/15/20 | | 2,050,000 | | | 2,106,375 |
| MDC Partners 11.00% 11/1/16 | | 2,867,000 | | | 3,164,450 |
| #Nara Cable Funding 144A 8.875% 12/1/18 | | 2,085,000 | | | 2,121,638 |
| #Nexstar Broadcasting 144A 6.875% 11/15/20 | | 1,760,000 | | | 1,815,000 |
| #Nielsen Finance 144A 4.50% 10/1/20 | | 385,000 | | | 385,000 |
| #ONO Finance II 144A 10.875% 7/15/19 | | 1,670,000 | | | 1,603,200 |
| #Sinclair Television Group 144A 6.125% 10/1/22 | | 2,085,000 | | | 2,223,131 |
| #Unitymedia Hessen GmbH & KG 144A | | | | | |
| 5.50% 1/15/23 | | 565,000 | | | 586,188 |
| #Univision Communications 144A | | | | | |
| 6.75% 9/15/22 | | 1,000,000 | | | 1,037,500 |
| 8.50% 5/15/21 | | 1,138,000 | | | 1,180,675 |
| #UPC Holding 144A 9.875% 4/15/18 | | 1,328,000 | | | 1,507,280 |
| #UPCB Finance VI 144A 6.875% 1/15/22 | | 780,000 | | | 848,250 |
| Virgin Media Finance 4.875% 2/15/22 | | 995,000 | | | 1,022,363 |
| | | | | | 35,497,609 |
| Services–11.66% | | | | | |
| #Algeco Scotsman Global Finance 144A | | | | | |
| 8.50% 10/15/18 | | 1,990,000 | | | 2,069,600 |
| 10.75% 10/15/19 | | 2,045,000 | | | 2,024,550 |
| Caesars Entertainment Operating 8.50% 2/15/20 | | 1,914,000 | | | 1,905,626 |
| Cardtronics 8.25% 9/1/18 | | 937,000 | | | 1,044,755 |
High Yield Series-7
Delaware VIP® High Yield Series
Statement of Net Assets (continued)
| | | Principal | | | |
| | | | Amount | | Value |
| | | (U.S. $) | | (U.S. $) |
| CORPORATE BONDS (continued) | | | | | | |
| Services (continued) | | | | | | |
| #Carlson Wagonlit 144A 6.875% 6/15/19 | | $ | 1,895,000 | | $ | 2,008,700 |
| #CEVA Group 144A 8.375% 12/1/17 | | | 2,165,000 | | | 2,154,175 |
| CityCenter Holdings PIK 10.75% 1/15/17 | | | 1,045,000 | | | 1,139,050 |
| #Equinox Holdings 144A 9.50% 2/1/16 | | | 2,105,000 | | | 2,223,143 |
| #H&E Equipment Services 144A 7.00% 9/1/22 | | | 1,800,000 | | | 1,926,000 |
| Iron Mountain 8.375% 8/15/21 | | | 208,000 | | | 231,920 |
| Kansas City Southern de Mexico 6.125% 6/15/21 | | | 358,000 | | | 406,330 |
| M/I Homes 8.625% 11/15/18 | | | 3,561,000 | | | 3,934,904 |
| #Mattamy Group 144A 6.50% 11/15/20 | | | 2,095,000 | | | 2,110,713 |
| Meritage Homes 7.00% 4/1/22 | | | 403,000 | | | 440,278 |
| MGM Resorts International | | | | | | |
| 7.75% 3/15/22 | | | 977,000 | | | 1,050,275 |
| 11.375% 3/1/18 | | | 3,297,000 | | | 4,005,854 |
| Monitronics International 9.125% 4/1/20 | | | 903,000 | | | 934,605 |
| NCL 9.50% 11/15/18 | | | 363,000 | | | 404,745 |
| PHH | | | | | | |
| 7.375% 9/1/19 | | | 1,100,000 | | | 1,226,500 |
| 9.25% 3/1/16 | | | 1,039,000 | | | 1,218,228 |
| Pinnacle Entertainment | | | | | | |
| 7.75% 4/1/22 | | | 814,000 | | | 870,980 |
| 8.75% 5/15/20 | | | 119,000 | | | 129,115 |
| Seven Seas Cruises 9.125% 5/15/19 | | | 1,987,000 | | | 2,111,188 |
| Standard Pacific | | | | | | |
| 8.375% 5/15/18 | | | 1,465,000 | | | 1,706,725 |
| 10.75% 9/15/16 | | | 502,000 | | | 626,245 |
| Swift Services Holdings 10.00% 11/15/18 | | | 1,979,000 | | | 2,181,848 |
| #Taylor Morrison Communities 144A | | | | | | |
| 7.75% 4/15/20 | | | 2,081,000 | | | 2,216,265 |
| #United Air Lines 144A 9.875% 8/1/13 | | | 986,000 | | | 994,011 |
| United Rentals North America | | | | | | |
| # | 144A 5.75% 7/15/18 | | | 373,000 | | | 403,773 |
| * | 6.125% 6/15/23 | | | 385,000 | | | 408,100 |
| # | 144A 7.625% 4/15/22 | | | 545,000 | | | 611,763 |
| 8.25% 2/1/21 | | | 1,594,000 | | | 1,805,205 |
| 10.25% 11/15/19 | | | 264,000 | | | 307,560 |
| West 7.875% 1/15/19 | | | 2,222,000 | | | 2,310,879 |
| | | | | | | 49,143,608 |
| Technology & Electronics–6.77% | | | | | | |
| Aspect Software 10.625% 5/15/17 | | | 2,051,000 | | | 1,876,665 |
| Avaya | | | | | | |
| *# | 144A 7.00% 4/1/19 | | | 1,050,000 | | | 987,000 |
| PIK 10.125% 11/1/15 | | | 800,000 | | | 720,000 |
| CDW | | | | | | |
| 8.50% 4/1/19 | | | 1,205,000 | | | 1,310,438 |
| 12.535% 10/12/17 | | | 495,000 | | | 531,506 |
| First Data | | | | | | |
| # | 144A 8.25% 1/15/21 | | | 1,990,000 | | | 1,999,950 |
| 9.875% 9/24/15 | | | 3,000 | | | 3,075 |
| 10.55% 9/24/15 | | | 2,650,000 | | | 2,726,188 |
| 11.25% 3/31/16 | | | 2,126,000 | | | 2,094,110 |
| GXS Worldwide 9.75% 6/15/15 | | | 1,999,000 | | | 2,091,454 |
| iGate 9.00% 5/1/16 | | | 2,262,000 | | | 2,462,753 |
| Infor US 9.375% 4/1/19 | | | 2,590,000 | | | 2,920,225 |
| j2 Global 8.00% 8/1/20 | | | 3,020,000 | | | 3,155,899 |
| #Legend Acquisition Sub 144A 10.75% 8/15/20 | | | 1,665,000 | | | 1,523,475 |
| MagnaChip Semiconductor 10.50% 4/15/18 | | | 1,801,000 | | | 2,026,125 |
| #Viasystems 144A 7.875% 5/1/19 | | | 2,124,000 | | | 2,092,140 |
| | | | | | | 28,521,003 |
| Telecommunications–8.66% | | | | | | |
| #Clearwire Communications 144A 14.75% 12/1/16 | | | 975,000 | | | 1,343,063 |
| #Columbus International 144A 11.50% 11/20/14 | | | 2,547,000 | | | 2,852,640 |
| Cricket Communications | | | | | | |
| 7.75% 5/15/16 | | | 1,091,000 | | | 1,160,551 |
| 7.75% 10/15/20 | | | 1,072,000 | | | 1,098,800 |
| #Digicel Group 144A | | | | | | |
| 8.25% 9/30/20 | | | 1,084,000 | | | 1,197,820 |
| 10.50% 4/15/18 | | | 1,800,000 | | | 1,998,000 |
| Hughes Satellite Systems 7.625% 6/15/21 | | | 1,810,000 | | | 2,067,925 |
| Intelsat Bermuda 11.25% 2/4/17 | | | 991,000 | | | 1,051,699 |
| Intelsat Jackson Holdings | | | | | | |
| # | 144A 7.25% 10/15/20 | | | 3,022,000 | | | 3,293,979 |
| 7.50% 4/1/21 | | | 1,668,000 | | | 1,847,310 |
| Level 3 Communications | | | | | | |
| # | 144A 8.875% 6/1/19 | | | 500,000 | | | 534,375 |
| 11.875% 2/1/19 | | | 500,000 | | | 578,750 |
| #Level 3 Financing 144A 7.00% 6/1/20 | | | 2,945,000 | | | 3,088,568 |
| Satmex Escrow 9.50% 5/15/17 | | | 1,197,000 | | | 1,268,820 |
| Sprint Capital 8.75% 3/15/32 | | | 1,154,000 | | | 1,416,535 |
| Sprint Nextel | | | | | | |
| 8.375% 8/15/17 | | | 1,742,000 | | | 2,033,785 |
| 9.125% 3/1/17 | | | 2,129,000 | | | 2,517,543 |
| #Wind Acquisition Finance 144A | | | | | | |
| 7.25% 2/15/18 | | | 2,925,000 | | | 2,959,238 |
| 11.75% 7/15/17 | | | 1,075,000 | | | 1,131,438 |
| Windstream | | | | | | |
| 7.50% 6/1/22 | | | 615,000 | | | 654,975 |
| 7.50% 4/1/23 | | | 540,000 | | | 571,050 |
| Zayo Group 10.125% 7/1/20 | | | 1,594,000 | | | 1,821,145 |
| | | | | | | 36,488,009 |
| Utilities–1.09% | | | | | | |
| AES 7.375% 7/1/21 | | | 888,000 | | | 990,120 |
| Elwood Energy 8.159% 7/5/26 | | | 1,120,109 | | | 1,171,914 |
| GenOn Energy 9.875% 10/15/20 | | | 2,099,000 | | | 2,434,840 |
| | | | | | | 4,596,874 |
| Total Corporate Bonds | | | | | | |
| (cost $363,181,128) | | | | | | 387,226,511 |
| |
| «Senior Secured Loans–2.42% | | | | | | |
| BJ’S Wholesale Club 2nd Lien 9.75% 3/29/19 | | | 410,000 | | | 422,300 |
| Brock Holdings III 10.00% 2/15/18 | | | 755,000 | | | 760,663 |
| Dynegy 9.25% 8/5/16 | | | 1,494,936 | | | 1,567,814 |
| Equipower Resources Holdings 2nd Lien | | | | | | |
| 10.00% 5/23/19 | | | 800,000 | | | 823,332 |
| §@GenCorp 9.00% 7/22/13 | | | 2,240,000 | | | 2,239,999 |
| Smart & Final 2nd Lien 10.50 11/8/20 | | | 2,195,000 | | | 2,216,950 |
| Supervalu Tranche B 8.00% 8/1/18 | | | 935,300 | | | 950,405 |
| WideOpenWest Finance 6.25% 7/17/18 | | | 1,228,825 | | | 1,244,677 |
| Total Senior Secured Loans | | | | | | |
| (cost $9,934,886) | | | | | | 10,226,140 |
High Yield Series-8
Delaware VIP® High Yield Series
Statement of Net Assets (continued)
| | | Number of | | Value |
| | Shares | | (U.S. $) |
| COMMON STOCK–0.40% | | | | | |
| †Alliance Healthcare Services | | 19,550 | | $ | 124,730 |
| =†Calpine | | 1,204,800 | | | 0 |
| =†Century Communications | | 2,820,000 | | | 0 |
| †DIRECTV Class A | | 19,510 | | | 978,622 |
| †Flextronics International | | 55,400 | | | 344,034 |
| †GeoEye | | 7,260 | | | 223,100 |
| NRG Energy | | 257 | | | 5,918 |
| Total Common Stock | | | | | |
| (cost $1,522,056) | | | | | 1,676,404 |
| |
| PREFERRED STOCK–2.02% | | | | | |
| Ally Financial | | | | | |
| # | 144A 7.00% | | 3,400 | | | 3,339,544 |
| • | 8.50% | | 45,000 | | | 1,182,150 |
| Entergy Arkansas 4.90% | | 35,000 | | | 869,750 |
| •GMAC Capital Trust I 8.125% | | 40,000 | | | 1,066,000 |
| Regions Financial 6.375% | | 83,000 | | | 2,050,930 |
| Total Preferred Stock | | | | | |
| (cost $7,322,099) | | | | | 8,508,374 |
| | | | | |
| | Principal | | | |
| | Amount | | |
| | (U.S. $) | | |
| REPURCHASE AGREEMENTS–1.39% | | | | | |
| Bank of America 0.11%, dated 12/31/12, | | | | | |
| to be repurchased on 1/2/13, repurchase | | | | | |
| price $3,944,283 (collateralized by U.S. | | | | | |
| government obligations 0.25%-2.375% | | | | | |
| 2/28/15-12/15/15; market value $4,023,144) | $ | 3,944,259 | | | 3,944,259 |
| BNP Paribas 0.15%, dated 12/31/12, | | | | | |
| to be repurchased on 1/2/13, repurchase | | | | | |
| price $1,907,513 (collateralized by U.S. | | | | | |
| government obligations 0.125%-0.25% | | | | | |
| 12/31/14-5/15/15; market value $1,945,647) | | 1,907,497 | | | 1,907,497 |
| Total Repurchase Agreements | | | | | |
| (cost $5,851,756) | | | | | 5,851,756 |
| |
| Total Value of Securities Before Securities | | | | | |
| Lending Collateral–98.34% | | | | | |
| (cost $388,846,471) | | | | | 414,538,288 |
| |
| | Number of | | | |
| | Shares | | | |
| **SECURITIES LENDING COLLATERAL–0.10% | | | | | |
| Investment Companies | | | | | |
| Delaware Investments Collateral Fund No. 1 | | 418,172 | | | 418,172 |
| @† | Mellon GSL Reinvestment Trust II | | 466,327 | | | 0 |
| Total Securities Lending Collateral | | | | | |
| (cost $884,499) | | | | | 418,172 |
| TOTAL VALUE OF SECURITIES–98.44% (cost $389,730,970) | | 414,956,460 | © |
| **OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL–(0.21%) | | (884,499 | ) |
| RECEIVABLES AND OTHER ASSETS NET OF OTHER LIABILITIES–1.77% | | 7,441,838 | |
| NET ASSETS APPLICABLE TO 69,101,665 SHARES OUTSTANDING–100.00% | $ | 421,513,799 | |
| NET ASSET VALUE–DELAWARE VIP HIGH YIELD SERIES | | | |
| STANDARD CLASS ($147,292,680 / 24,098,568 Shares) | | | $6.11 | |
| NET ASSET VALUE–DELAWARE VIP HIGH YIELD SERIES | | | |
| SERVICE CLASS ($274,221,119 / 45,003,097 Shares) | | | $6.09 | |
| COMPONENTS OF NET ASSETS AT DECEMBER 31, 2012: | | | |
| Shares of beneficial interest (unlimited authorization–no par) | $ | 375,485,739 | |
| Undistributed net investment income | | 30,278,807 | |
| Accumulated net realized loss on investments | | (9,476,237 | ) |
| Net unrealized appreciation of investments | | 25,225,490 | |
| Total net assets | $ | 421,513,799 | |
High Yield Series-9
Delaware VIP® High Yield Series
Statement of Net Assets (continued)
____________________
| # | Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. At December 31, 2012, the aggregate value of Rule 144A securities was $178,049,031 which represented 42.24% of the Series’ net assets. See Note 10 in “Notes to Financial Statements.” |
| • | Variable rate security. The rate shown is the rate as of December 31, 2012. Interest rates reset periodically. |
| @ | Illiquid security. At December 31, 2012, the aggregate value of illiquid securities was $2,239,999, which represented 0.53% of the Series’ net assets. See Note 10 in “Notes to Financial Statements.” |
| § | All or a portion of this holding is subject to unfunded loan commitments. See Note 7 in “Notes to financial statements.” |
| † | Non income producing security. |
| = | Security is being fair valued in accordance with the Series’ fair valuation policy. At December 31, 2012, the aggregate value of fair valued securities was $0, which represented 0.00% of the Series’ net assets. See Note 1 in “Notes to Financial Statements.” |
| « | Senior Secured Loans generally pay interest at rates which are periodically redetermined by reference to a base lending rate plus a premium. These base lending rates are generally: (i) the prime rate offered by one or more United States banks, (ii) the lending rate offered by one or more European banks such as the London Inter-Bank Offered Rate (LIBOR), and (iii) the certificate of deposit rate. Senior Secured Loans may be subject to restrictions on resale. Stated rate in effect at December 31, 2012. |
| Φ | Step coupon bond. Coupon increases periodically based on a predetermined schedule. Stated rate in effect at December 31, 2012. |
| * | Fully or partially on loan. |
| ** | See Note 9 in “Notes to Financial Statements” for additional information on securities lending collateral. |
| © | Includes $852,783 of securities loaned. |
PIK – Pay-in-kind
See accompanying notes, which are an integral part of the financial statements.
High Yield Series-10
Delaware VIP® Trust —
Delaware VIP High Yield Series
Statement of Operations
Year Ended December 31, 2012
| INVESTMENT INCOME: | | | |
| Interest | $ | 33,007,042 | |
| Dividends | | 456,602 | |
| Securities lending income | | 31,417 | |
| | 33,495,061 | |
| |
| EXPENSES: | | | |
| Management fees | | 2,634,120 | |
| Distribution expenses – Service Class | | 814,640 | |
| Accounting and administration expenses | | 158,154 | |
| Reports and statements to shareholders | | 74,653 | |
| Dividend disbursing and transfer agent fees and expenses | | 35,121 | |
| Legal fees | | 35,103 | |
| Audit and tax | | 24,604 | |
| Trustees’ fees | | 17,953 | |
| Custodian fees | | 9,321 | |
| Insurance fees | | 7,659 | |
| Pricing fees | | 4,534 | |
| Consulting fees | | 4,060 | |
| Dues and services | | 3,543 | |
| Registration fees | | 1,628 | |
| Trustees’ expenses | | 1,286 | |
| | | 3,826,379 | |
| Less waived distribution expenses – Service Class | | (135,773 | ) |
| Less expense paid indirectly | | (1 | ) |
| Total operating expenses | | 3,690,605 | |
| |
| NET INVESTMENT INCOME | | 29,804,456 | |
| |
| NET REALIZED AND UNREALIZED GAIN (LOSS): | | | |
| Net realized loss on investments | | (1,922,481 | ) |
| Net change in unrealized appreciation (depreciation) of investments | | 37,329,071 | |
| |
| NET REALIZED AND UNREALIZED GAIN | | 35,406,590 | |
| |
| NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS | $ | 65,211,046 | |
Delaware VIP Trust —
Delaware VIP High Yield Series
Statements of Changes in Net Assets
| Year Ended |
| 12/31/12 | | 12/31/11 |
| INCREASE (DECREASE) IN NET ASSETS | | | | | | | |
| FROM OPERATIONS: | | | | | | | |
| Net investment income | $ | 29,804,456 | | | $ | 33,611,432 | |
| Net realized gain (loss) | | (1,922,481 | ) | | | 13,105,517 | |
| Net change in unrealized appreciation | | | | | | | |
| (depreciation) | | 37,329,071 | | | | (35,412,527 | ) |
| Net increase in net assets resulting | | | | | | | |
| from operations | | 65,211,046 | | | | 11,304,422 | |
| |
| DIVIDENDS AND DISTRIBUTIONS TO | | | | | | | |
| SHAREHOLDERS FROM: | | | | | | | |
| Net investment income: | | | | | | | |
| Standard Class | | (11,175,102 | ) | | | (10,758,286 | ) |
| Service Class | | (23,351,271 | ) | | | (26,869,457 | ) |
| | | (34,526,373 | ) | | | (37,627,743 | ) |
| |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | |
| Proceeds from shares sold: | | | | | | | |
| Standard Class | | 32,836,976 | | | | 31,957,588 | |
| Service Class | | 23,258,208 | | | | 48,666,543 | |
| Net asset value of shares issued upon | | | | | | | |
| reinvestment of dividends and distributions: | | | | | | | |
| Standard Class | | 11,175,102 | | | | 10,758,286 | |
| Service Class | | 23,351,271 | | | | 26,869,457 | |
| | | 90,621,557 | | | | 118,251,874 | |
| Cost of shares redeemed: | | | | | | | |
| Standard Class | | (24,822,025 | ) | | | (44,576,329 | ) |
| Service Class | | (59,041,123 | ) | | | (133,978,785 | ) |
| | | (83,863,148 | ) | | | (178,555,114 | ) |
| Increase (decrease) in net assets derived | | | | | | | |
| from capital share transactions | | 6,758,409 | | | | (60,303,240 | ) |
| |
| NET INCREASE (DECREASE) IN NET ASSETS | | 37,443,082 | | | | (86,626,561 | ) |
| |
| NET ASSETS: | | | | | | | |
| Beginning of year | | 384,070,717 | | | | 470,697,278 | |
| End of year (including undistributed | | | | | | | |
| net investment income of $30,278,807 | | | | | | | |
| and $34,512,076, respectively) | $ | 421,513,799 | | | $ | 384,070,717 | |
See accompanying notes, which are an integral part of the financial statements.
High Yield Series-11
Delaware VIP® Trust — Delaware VIP High Yield Series
Financial Highlights
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP High Yield Series Standard Class |
| | Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $5.680 | | | $6.040 | | | $5.670 | | | $4.140 | | | $5.950 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.440 | | | 0.468 | | | 0.484 | | | 0.488 | | | 0.430 | |
| Net realized and unrealized gain (loss) | | 0.519 | | | (0.309 | ) | | 0.349 | | | 1.414 | | | (1.766 | ) |
| Total from investment operations | | 0.959 | | | 0.159 | | | 0.833 | | | 1.902 | | | (1.336 | ) |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.529 | ) | | (0.519 | ) | | (0.463 | ) | | (0.372 | ) | | (0.474 | ) |
| Total dividends and distributions | | (0.529 | ) | | (0.519 | ) | | (0.463 | ) | | (0.372 | ) | | (0.474 | ) |
| |
| Net asset value, end of period | | $6.110 | | | $5.680 | | | $6.040 | | | $5.670 | | | $4.140 | |
| |
| Total return2 | | 17.82% | | | 2.38% | | | 15.32% | | | 48.97% | | | (24.17% | ) |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $147,293 | | | $117,636 | | | $127,294 | | | $154,761 | | | $93,011 | |
| Ratio of expenses to average net assets | | 0.74% | | | 0.74% | | | 0.76% | | | 0.76% | | | 0.74% | |
| Ratio of expenses to average net assets prior to fees waived | | 0.74% | | | 0.74% | | | 0.76% | | | 0.77% | | | 0.77% | |
| Ratio of net investment income to average net assets | | 7.52% | | | 8.02% | | | 8.42% | | | 10.01% | | | 8.35% | |
Ratio of net investment income to average net assets
prior to fees waived | | 7.52% | | | 8.02% | | | 8.42% | | | 10.00% | | | 8.32% | |
| Portfolio turnover | | 76% | | | 78% | | | 115% | | | 123% | | | 109% | |
____________________
| 1The average shares outstanding method has been applied for per share information. |
| 2Total 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 during some of the periods shown reflects a waiver by the manager. Performance would have been lower had the waiver not been in effect. Total investment return does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
High Yield Series-12
Delaware VIP® High Yield Series
Financial Highlights (continued)
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP High Yield Series Service Class |
| | Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $5.670 | | | $6.020 | | | $5.660 | | | $4.130 | | | $5.930 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.424 | | | 0.454 | | | 0.469 | | | 0.475 | | | 0.418 | |
| Net realized and unrealized gain (loss) | | 0.510 | | | (0.299 | ) | | 0.342 | | | 1.414 | | | (1.759 | ) |
| Total from investment operations | | 0.934 | | | 0.155 | | | 0.811 | | | 1.889 | | | (1.341 | ) |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.514 | ) | | (0.505 | ) | | (0.451 | ) | | (0.359 | ) | | (0.459 | ) |
| Total dividends and distributions | | (0.514 | ) | | (0.505 | ) | | (0.451 | ) | | (0.359 | ) | | (0.459 | ) |
| |
| Net asset value, end of period | | $6.090 | | | $5.670 | | | $6.020 | | | $5.660 | | | $4.130 | |
| |
| Total return2 | | 17.35% | | | 2.33% | | | 14.91% | | | 48.65% | | | (24.43% | ) |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $274,221 | | | $266,435 | | | $343,403 | | | $286,395 | | | $178,579 | |
| Ratio of expenses to average net assets | | 0.99% | | | 0.99% | | | 1.01% | | | 1.01% | | | 0.99% | |
| Ratio of expenses to average net assets prior to fees waived | | 1.04% | | | 1.04% | | | 1.06% | | | 1.07% | | | 1.07% | |
| Ratio of net investment income to average net assets | | 7.27% | | | 7.77% | | | 8.17% | | | 9.76% | | | 8.10% | |
Ratio of net investment income to average net assets
prior to fees waived | | 7.22% | | | 7.72% | | | 8.12% | | | 9.70% | | | 8.02% | |
| Portfolio turnover | | 76% | | | 78% | | | 115% | | | 123% | | | 109% | |
____________________
| 1The average shares outstanding method has been applied for per share information. |
| 2Total 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 during all of the periods shown reflects waivers by the manager and/or distributor. Performance would have been lower had the waivers not been in effect. Total investment return does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
High Yield Series-13
Delaware VIP® Trust — Delaware VIP High Yield Series
Notes to Financial Statements
December 31, 2012
Delaware VIP Trust (Trust) is organized as a Delaware statutory trust and offers 10 series: Delaware VIP Diversified Income Series, Delaware VIP Emerging Markets Series, Delaware VIP High Yield Series, Delaware VIP International Value Equity Series, Delaware VIP Limited-Term Diversified Income Series, Delaware VIP REIT Series, Delaware VIP Small Cap Value Series, Delaware VIP Smid Cap Growth Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series. These financial statements and the related notes pertain to Delaware VIP High Yield Series (Series). The Trust is an open-end investment company. The Series is considered diversified under the Investment Company Act of 1940, as amended, and offers Standard Class and Service Class shares. The Standard Class shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee. The shares of the Series are sold only to separate accounts of life insurance companies.
The investment objective of the Series is to seek total return and, as a secondary objective, high current income.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and are consistently followed by the Series.
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, which approximates fair value. Debt securities are valued based upon valuations provided by an independent pricing service or broker and reviewed by management. To the extent current market prices are not available, the pricing service may take into account developments related to the specific security, as well as transactions in comparable securities. U.S. government and agency securities are valued at the mean between the bid and ask prices, which approximates fair value. Valuations for fixed income securities utilize matrix systems, which reflect such factors as security prices, yields, maturities, and ratings, and are supplemented by dealer and exchange quotations. Investment company securities are valued at net asset value per share, as reported by the underlying investment company. 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 Series’ 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 Series 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 Series values its securities, generally as of 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 Series 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 Series 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 Series evaluates tax positions taken or expected to be taken in the course of preparing the Series’ tax returns 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 analyzed the Series’ tax positions taken for all open federal income tax years (December 31, 2009 – December 31, 2012), and has concluded that no provision for federal income tax is required in the Series’ financial statements.
Class Accounting—Investment income, common expenses and realized and unrealized gain (loss) on investments are allocated to the classes of the Series 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 Series may purchase certain U.S. government securities subject to the counterparty’s agreement to repurchase them at an agreed upon date and price. The counterparty will be required on a daily basis to maintain the value of the collateral subject to the agreement at not less than the repurchase price (including accrued interest). The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system with the Series’ custodian or a third-party sub-custodian. In the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. All open repurchase agreements as of the date of this report were entered into on December 31, 2012.
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments, the reported amounts of assets and liabilities and disclosure of contingent 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 and the differences could be material.
Other—Expenses directly attributable to the Series are charged directly to the Series. Other expenses common to various funds within the Delaware Investments® Family of Funds are generally allocated among 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. Discounts and premiums on debt securities are amortized to interest income over the lives of the respective securities using the effective interest method. Realized gains (losses) on paydowns of mortgage- and asset-backed securities are classified as interest income. The Series declares and pays dividends from net investment income and distributions from net realized gain on investments, if any, following the close of the fiscal year. The Series may distribute income dividends and capital gains more frequently, if necessary for tax purposes. Dividends and distributions, if any, are recorded on the ex-dividend date.
The Series 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 year ended December 31, 2012.
The Series receives earnings credits from its transfer agent when positive cash balances are maintained, which are used to offset transfer agent fees. The expense paid under this arrangement is included in dividend disbursing and transfer agent fees and expenses on the Statement of Operations with the corresponding expense offset shown as “expense paid indirectly.” For the year ended December 31, 2012, the Series earned $1 under this agreement.
High Yield Series-14
Delaware VIP® High Yield Series
Notes to Financial Statements (continued)
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Series 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 Series, 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.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to the Series. For these services, the Series 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 year ended December 31, 2012, the Series was charged $19,826 for these services.
DSC is also the transfer agent and dividend disbursing agent of the Series. The Series pays DSC a monthly asset-based fee for these services. Pursuant to a sub-transfer agency agreement between DSC and BNY Mellon Investment Servicing (US) Inc. (BNYMIS), BNYMIS provides certain sub-transfer agency services to the Series. Sub-transfer agency fees are passed on to and paid directly by the Series.
Pursuant to a distribution agreement and distribution plan, the Series pays Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an annual distribution and service fee of 0.30% of the average daily net assets of the Service Class shares. DDLP has contracted to waive distribution and service fees through April 30, 2013 in order to prevent distribution and service fees of the Service Class shares from exceeding 0.25% of average daily net assets. Standard Class shares pay no distribution and service expenses.
At December 31, 2012, the Series had liabilities payable to affiliates as follows:
| | | Dividend Disbursing, | | | | Other |
| Investment | | Transfer Agent and Fund | | | | Expenses |
| Management | | Accounting Oversight | | Distribution | | Payable |
| | Fee Payable to | | Fees and Other Expenses | | Fee Payable | | to DMC |
| DMC | | Payable to DSC | | to DDLP | | and Affiliates* |
| $231,931 | | $4,415 | | $57,984 | | $10,706 |
____________________
*DMC, as part of its administrative services, pays operating expenses on behalf of the Series and is reimbursed on a periodic basis. Expenses include items such as printing of shareholder reports, legal and tax services, custodian fees and trustees’ fees.
As provided in the investment management agreement, the Series bears the cost of certain legal and tax services, including internal legal and tax services provided to the Series by DMC and/or its affiliates’ employees. For the year ended December 31, 2012, the Series was charged $12,172 for internal legal and tax services provided by DMC and/or its affiliates’ employees.
Trustees’ fees include expenses accrued by the Series 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 Series.
3. Investments
For the year ended December 31, 2012, the Series made purchases and sales of investment securities other than short-term investments as follows:
| Purchases | $ | 291,500,393 |
| Sales | | 293,511,060 |
At December 31, 2012, the cost of investments for federal income tax purposes and unrealized appreciation (depreciation) for the Series were as follows:
| | | Aggregate | | Aggregate | | |
| Cost of | | Unrealized | | Unrealized | | Net Unrealized |
| | Investments | | Appreciation | | Depreciation | | Appreciation |
| $390,026,324 | | $28,299,557 | | $(3,369,421) | | $24,930,136 |
U.S. GAAP defines fair value as the price that the Series 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. A three level hierarchy for fair value measurements has been established 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
High Yield Series-15
Delaware VIP® High Yield Series
Notes to Financial Statements (continued)
3. Investments (continued)
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 Series’ investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three level hierarchy of inputs is summarized below.
| Level 1 – | inputs are quoted prices in active markets for identical investments (e.g., equity securities, open-end investment companies, futures contracts, exchange-traded options contracts) |
| Level 2 – | other observable inputs (including, but not limited to: quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs) (e.g., debt securities, government securities, swap contracts, foreign currency exchange contracts, foreign securities utilizing international fair value pricing, broker-quoted securities, fair valued securities) |
| Level 3 – | inputs are significant unobservable inputs (including the Series’ own assumptions used to determine the fair value of investments) (e.g., broker-quoted securities, fair valued securities) |
Level 3 investments are valued using significant unobservable inputs. The Series may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Valuations may also be based upon current market prices of securities that are comparable in coupon, rating, maturity and industry. The derived value of a Level 3 investment may not represent the value which is received upon disposition and this could impact the results of operations.
The following table summarizes the valuation of the Series’ investments by fair value hierarchy levels as of December 31, 2012:
| Level 1 | | Level 2 | | Level 3 | | Total |
| Corporate Debt | $ | – | | $ | 396,261,755 | | $ | 2,239,999 | | $ | 398,501,754 |
| Common Stock | | 1,676,404 | | | – | | | – | | | 1,676,404 |
| Preferred Stock | | 5,168,830 | | | 3,339,544 | | | – | | | 8,508,374 |
| Short-Term Investments | | – | | | 5,851,756 | | | – | | | 5,851,756 |
| Securities Lending Collateral | | – | | | 418,172 | | | – | | | 418,172 |
| Total | $ | 6,845,234 | | $ | 405,871,227 | | $ | 2,239,999 | | $ | 414,956,460 |
The securities that have been deemed worthless on the statement of net assets are considered to be Level 3 securities in this table.
During the year ended December 31, 2012, there were no transfers between Level 1 investments, Level 2 investments or Level 3 investments that had a significant impact to the Series. The Series’ policy is to recognize transfers between levels at the beginning of the reporting period.
A reconciliation of Level 3 investments is presented when the Series has a significant amount of Level 3 investments at the beginning, interim or end of the period in relation to net assets. Management has determined not to provide additional disclosure on Level 3 inputs under ASU No. 2011-04 since the Level 3 investments are not considered significant to the Series’ net assets at the end of the period.
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 years ended December 31, 2012 and 2011 was as follows:
| | Year | | Year |
| | Ended | | Ended |
| | | 12/31/12 | | 12/31/11 |
| Ordinary income | | $34,526,373 | | $37,627,743 |
5. Components of Net Assets on a Tax Basis
As of December 31, 2012, the components of net assets on a tax basis were as follows:
| Shares of beneficial interest | $ | 375,485,739 | |
| Undistributed ordinary income | | 30,278,807 | |
| Capital loss carryforwards | | (6,955,963 | ) |
| Qualified late year losses deferred | | (2,224,920 | ) |
| Unrealized appreciation | | 24,930,136 | |
| Net assets | $ | 421,513,799 | |
High Yield Series-16
Delaware VIP® High Yield Series
Notes to Financial Statements (continued)
5. Components of Net Assets on a Tax Basis (continued)
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales and tax treatment of market discount and premium on debt instruments.
Qualified late year losses represent losses realized on investment transactions from November 1, 2012 through December 31, 2012 that, in accordance with federal income tax regulations, the Series has elected to defer and treat as having arisen in the following fiscal year.
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 market discount and premium on debt instruments and contingent payment debt instruments. Results of operations and net assets were not affected by these reclassifications. For the year ended December 31, 2012, the Series recorded the following reclassifications.
| Undistributed | | Accumulated |
| Net Investment | | Net Realized |
| | Income | | Loss |
| $488,648 | | $(488,648) |
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. Capital loss carryforwards remaining at December 31, 2012 will expire as follows: $6,722,565 expires in 2017.
On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (Act) was enacted, which changed various technical rules governing the tax treatment of regulated investment companies. The changes were generally effective for taxable years beginning after the date of enactment. Under the Act, the Series is permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered all short-term as permitted under previous regulation.
Losses incurred that will be carried forward under the Act are as follows:
| Loss carryforward character |
| Short-term | | Long-term |
| | $— | | $233,398 |
6. Capital Shares
Transactions in capital shares were as follows:
| Year | | Year |
| Ended | | Ended |
| 12/31/12 | | 12/31/11 |
| Shares sold: | | | | | |
| Standard Class | 5,655,380 | | | 5,447,108 | |
| Service Class | 4,017,646 | | | 8,362,442 | |
| |
| Shares issued upon reinvestment of dividends and distributions: | | | | | |
| Standard Class | 2,013,532 | | | 1,839,023 | |
| Service Class | 4,207,436 | | | 4,600,935 | |
| | 15,893,994 | | | 20,249,508 | |
| Shares redeemed: | | | | | |
| Standard Class | (4,272,005 | ) | | (7,671,629 | ) |
| Service Class | (10,253,635 | ) | | (22,966,808 | ) |
| | (14,525,640 | ) | | (30,638,437 | ) |
| Net increase (decrease) | 1,368,354 | | | (10,388,929 | ) |
7. Unfunded Commitments
The Series may invest in floating rate loans. In connection with these investments, the Series may also enter into unfunded corporate loan commitments (commitments). Commitments may obligate the Series to furnish temporary financing to a borrower until permanent financing can be arranged. In connection with these commitments, the Series earns a commitment fee, typically set as a percentage of the commitment amount.
As of December 31, 2012, the Series had the following unfunded loan commitments:
| Borrower | | Unfunded Loan Commitment |
| GenCorp | | $2,239,999 |
High Yield Series-17
Delaware VIP® High Yield Series
Notes to Financial Statements (continued)
8. Line of Credit
The Series, along with certain other funds in the Delaware Investments® Family of Funds (Participants), was a participant in a $125,000,000 revolving line of credit 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 were charged an annual commitment fee, which was allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants were permitted to borrow up to a maximum of one third of their net assets under the agreement. Each Participant was individually, and not jointly, liable for its particular advances, if any, under the line of credit. The line of credit available under the agreement expired on November 13, 2012.
On November 13, 2012, the Series, along with the other Participants, entered into an amendment to the agreement for a $125,000,000 revolving line of credit. The agreement is to be used as described above and operates in substantially the same manner as the original agreement. The line of credit under the agreement expires on November 12, 2013. The Series had no amounts outstanding as of December 31, 2012 or at any time during the year then ended.
9. Securities Lending
The Series, along with other funds in the Delaware Investments® Family of Funds, may lend its securities pursuant to a security lending agreement (Lending Agreement) with The Bank of New York Mellon (BNY Mellon). At the time a security is loaned, the borrower must post collateral equal to the required percentage of the market value of the loaned security, including any accrued interest. The required percentage is: (i) 102% with respect to U.S. securities and foreign securities that are denominated and payable in U.S. dollars; and (ii) 105% with respect to foreign securities. With respect to each loan, if on any business day the aggregate market value of securities collateral plus cash collateral held 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 by the end of the following business day which, together with the collateral already held, will be not less than the applicable initial collateral requirements for such security loan. If the aggregate market value of securities collateral and cash collateral held with respect to a security loan exceeds the applicable initial collateral requirement, upon request of the borrower BNY Mellon must return enough collateral to the borrower by the end of the following business day to reduce the value of the remaining collateral to the applicable initial collateral requirement for such security loan. As a result of the foregoing, the value of the collateral held with respect to a loaned security may be temporarily more or less than the value of the security on loan.
Cash collateral received is generally invested in the Delaware Investments Collateral Fund No. 1 (Collective Trust) established by BNY Mellon for the purpose of investment on behalf of funds managed by DMC that participate in BNY Mellon’s securities lending program. The Collective Trust may invest in U.S. government securities and high quality corporate debt, asset-backed and other money market securities and in repurchase agreements collateralized by such securities, provided that the Collective Trust will generally have a dollar-weighted average portfolio maturity of 60 days or less. In October 2008, BNY Mellon transferred certain distressed securities from the Series’ previous collateral investment pool into the Mellon GSL Reinvestment Trust II. The Series 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 Series or, at the discretion of the lending agent, replace the loaned securities. The Series continues to record dividends or interest, as applicable, on the securities loaned and is subject to changes in value of the securities loaned that may occur during the term of the loan. The Series 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 Series 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 Series, the security lending agent and the borrower. The Series records security lending income net of allocations to the security lending agent and the borrower.
The Collective Trust used for the investment of cash collateral received from borrowers of securities 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. The Series may incur investment losses as a result of investing securities lending collateral in the Collective Trust or another collateral investment pool. This could occur if an investment in a collateral investment pool defaulted or if it were necessary to liquidate assets in the collateral investment pool to meet returns on outstanding security loans at a time when the collateral investment pool’s net asset value per unit was less than $1.00. Under those circumstances, the Series may not receive an amount from the collateral investment pool that is equal in amount to the collateral the Series would be required to return to the borrower of the securities and the Series would be required to make up for this shortfall.
At December 31, 2012, the value of securities on loan was $852,783, for which cash collateral was received and invested in accordance with the Lending Agreement. At December 31, 2012, the value of invested collateral was $418,172. These investments are presented on the Statement of Net Assets under the caption “Securities Lending Collateral”.
10. Credit and Market Risk
The Series invests in high yield fixed income securities, which are securities rated lower than BBB- by Standard & Poor’s and Baa3 by Moody’s Investor Services, or similarly rated by another nationally recognized statistical rating organization. Investments in these higher yielding securities are generally accompanied by a greater degree of credit risk than higher rated securities. Additionally, lower rated securities may be more susceptible to adverse economic and competitive industry conditions than investment grade securities.
The Series 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 Series 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 Series’ Board has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of the Series’ limitation on investments in illiquid securities. Securities eligible for resale pursuant to Rule 144A, which are determined to be liquid, are not subject to the Series’ 15% limit on investments in illiquid securities. Rule 144A and illiquid securities have been identified on the Statement of Net Assets.
11. Contractual Obligations
The Series enters into contracts in the normal course of business that contain a variety of indemnifications. The Series’ maximum exposure under these arrangements is unknown. However, the Series has not had prior claims or losses pursuant to these contracts. Management has reviewed the Series’ existing contracts and expects the risk of loss to be remote.
12. Subsequent Events
Management has determined that no material events or transactions occurred subsequent to December 31, 2012 that would require recognition or disclosure in the Series’ financial statements.
High Yield Series-18
Delaware VIP® Trust — Delaware VIP High Yield Series
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Delaware VIP Trust
and the Shareholders of Delaware VIP High Yield Series:
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Delaware VIP High Yield Series (one of the series constituting Delaware VIP Trust, hereafter referred to as the “Series”) at December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2012 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the two years in the period ended December 31, 2009 were audited by other independent accountants whose report dated February 17, 2010 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 15, 2013
High Yield Series-19
Delaware VIP® Trust — Delaware VIP High Yield Series
Other Series Information (Unaudited)
Board Consideration of Delaware VIP High Yield Series Investment Advisory Agreement
At a meeting held on August 21-23, 2012 (“Annual Meeting”), the Board of Trustees (“Board”), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreement for Delaware VIP High Yield Series (“Series”). In making its decision, the Board considered information furnished at regular quarterly Board meetings, including reports detailing Series performance, investment strategies and expenses, as well as information prepared specifically in connection with the renewal of the investment advisory contract. Information furnished specifically in connection with the renewal of the Investment Advisory Agreement with Delaware Management Company (“DMC”) included materials provided by DMC and its affiliates (“Delaware Investments”) concerning, among other things, the nature, extent and quality of services provided to the Series, the costs of such services to the Series, economies of scale and the financial condition and profitability of Delaware Investments. In addition, in connection with the Annual Meeting, reports were provided in May 2012 and included independent historical and comparative reports provided by Lipper, Inc., an independent statistical compilation organization (“Lipper”). The Lipper reports compared the Series’ investment performance and expenses with those of other comparable mutual funds. The Independent Trustees reviewed and discussed the Lipper reports with independent legal 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; comparative client fee information; 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 the Series’ policies.
In considering information relating to the approval of the Series’ advisory agreement, the Independent Trustees received assistance and advice from and met separately with independent legal 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 Series 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 Series, compliance of portfolio managers with the investment policies, strategies and restrictions for the Series, 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 Series’ investment advisor and the emphasis placed on research in the investment process. The Board recognized DMC’s receipt of several industry distinctions. The Board gave favorable consideration to DMC’s efforts to control expenditures while maintaining service levels committed to fund matters. The Board noted that in July 2011, Management implemented measures to reduce overall costs and improve transfer agent and shareholder servicing functions through outsourcing. 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 Series in view of the importance of investment performance 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 Series showed the investment performance of its Standard Class 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 Series was shown for the past one-, three-, five- and ten-year periods, as applicable, ended March 31, 2012. The Board’s objective is that the Series’ performance for the periods considered be at or above the median of its Performance Universe. The following paragraph summarizes the performance results for the Series and the Board’s view of such performance.
The Performance Universe for the Series consisted of the Series and all high current yield funds underlying variable insurance products as selected by Lipper. The Lipper report comparison showed that the Series’ total return for the one-year period was in the third quartile of its Performance Universe. The report further showed that the Series’ total return for the three-year period was in the second quartile and the Series’ total return for the five- and ten-year periods was in the first quartile. The Board was satisfied with performance.
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 Series as of its most recently completed fiscal year. The Board also focused on the comparative analysis of effective management fees and total expense ratios of the Series versus effective management fees and expense ratios of a group of similar funds as selected by Lipper (“Expense Group”). In reviewing comparative costs, the Series’ contractual management fee and the actual management fee incurred by the Series were compared with the contractual management fees (assuming all funds in the Expense Group were similar in size to the Series) and actual management fees (as reported by each fund) within the Expense Group, taking into account any applicable breakpoints and fee waivers. The Series’ total expenses were also compared with those of its Expense Group. The Lipper total expenses, for comparative consistency, were shown by Lipper for Standard Class shares which do not charge 12b-1 and non 12b-1 service fees. The Board considered fees paid to Delaware Investments for non-management services. The Board’s objective is to limit the Series’ total expense ratio to be competitive with that of the Expense Group. The following paragraph summarizes the expense results for the Series and the Board’s view of such expenses.
The expense comparisons for the Series showed that the actual management fee and total expenses were in the quartile with the second highest expenses of its Expense Group. The Series’ total expenses were not in line with the Board’s objective. In evaluating total expenses, the Board considered various initiatives implemented by Management. The Board was satisfied with Management’s efforts to improve the Series’ total expense ratio and bring it in line with the Board’s objective and noted 12b-1 waivers in place through April 2013.
MANAGEMENT PROFITABILITY. The Board considered the level of profits realized by Delaware Investments in connection with the operation of the Series. 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, reflects 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
High Yield Series-20
Delaware VIP® High Yield Series
Other Series Information (Unaudited) (continued)
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 profitability of Delaware Investments.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are realized by Delaware Investments as the Series’ 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 Series’ management contract fell within the standard structure. Although the Series has not reached a size at which the advantages of breakpoints would be realized, the Board recognized that the fee was structured so that when the Series grows, economies of scale may be shared.
Tax Information
For the fiscal year ended December 31, 2012, the Series designates distributions paid during the year as follows:
| (A) | | |
| Ordinary | | |
| | Income | | (B) |
| Distributions | | Qualifying |
| (Tax Basis) | | Dividends1 |
| 100% | | 1.00% |
____________________
(A) is based on a percentage of the Series’ total distributions.
(B) is based on a percentage of the Series’ ordinary income distributions.
1Qualifying dividends represent dividends which qualify for the corporate dividends received deduction.
High Yield Series-21
Delaware Investments® Family of Funds
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors (“Trustees”), which has oversight responsibility for the management of a fund’s business affairs. Trustees establish procedures and oversee and review the performance of the investment manager, the distributor, and others who perform services for the fund. The independent fund trustees, in particular, are advocates for shareholder interests. Each trustee has served in that capacity since he or she was elected to or appointed to the Board of Trustees, and will continue to serve until his or her retirement or the election of a new trustee in his or her place. The following is a list of the Trustees and Officers with certain background and related information.
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INTERESTED TRUSTEES | | | | | |
| Patrick P. Coyne1 | Chairman, | Chairman and Trustee | Patrick P. Coyne has served in | 71 | Director and Audit |
| 2005 Market Street | President, | since August 16, 2006 | various executive capacities | | Committee Member — |
| Philadelphia, PA | Chief Executive | | at different times at | | Kaydon Corp. |
| 19103 | Officer, and | President and | Delaware Investments.2 | | |
| Trustee | Chief Executive Officer | | | Board of Governors |
| April 1963 | | since August 1, 2006 | | | Member — Investment |
| | | | | Company Institute (ICI) |
| | | | | |
| INDEPENDENT TRUSTEES | | | | | |
| Thomas L. Bennett | Trustee | Since | Private Investor — | 71 | Director — |
| 2005 Market Street | | March 2005 | (March 2004–Present) | | Bryn Mawr |
| Philadelphia, PA | | | | | Bank Corp. (BMTC) |
| 19103 | | | Investment Manager — | | (2007–2011) |
| | | Morgan Stanley & Co. | | |
| October 1947 | | | (January 1984–March 2004) | | |
| Joseph W. Chow | Trustee | Since | Executive Vice President | 71 | Director and Audit |
| 2005 Market Street | | January 2013 | (Emerging Economies Strategies, | | Committee |
| Philadelphia, PA 19103 | | | Risk and Corporate Administration) | | Member — Hercules |
| | | State Street Corporation | | Technology Growth |
| January 1953 | | | (July 2004–March 2011) | | Capital, Inc. |
| John A. Fry | Trustee | Since | President | 71 | Board of Governors |
| 2005 Market Street | | January 2001 | Drexel University | | Member — NASDAQ |
| Philadelphia, PA | | | (August 2010–Present) | | OMX PHLX LLC |
| 19103 | | | | | |
| | | President — | | Director and Audit |
| May 1960 | | | Franklin & Marshall College | | Committee Member — |
| | | (June 2002–July 2010) | | Community Health |
| | | | | Systems |
| | | | | | |
| | | | | Director — Ecore |
| | | | | International |
| | | | | (2009–2010) |
| Anthony D. Knerr | Trustee | Since | Managing Director — | 71 | None |
| 2005 Market Street | | April 1990 | Anthony Knerr & Associates | | |
| Philadelphia, PA | | | (Strategic Consulting) | | |
| 19103 | | | (1990–Present) | | |
| | | | | | |
| December 1938 | | | | | |
| Lucinda S. Landreth | Trustee | Since | Private Investor | 71 | None |
| 2005 Market Street | | March 2005 | (2004–Present) | | |
| Philadelphia, PA | | | | | |
| 19103 | | | | | |
| | | | | | |
| June 1947 | | | | | |
High Yield Series-22
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INDEPENDENT TRUSTEES (continued) | | | | |
| Frances A. Sevilla-Sacasa | Trustee | Since | Chief Executive Officer — | 71 | Trust Manager — |
| 2005 Market Street | | September 2011 | Banco Itaú Europa | | Camden Property Trust |
| Philadelphia, PA | | | International | | (2011–Present) |
| 19103 | | | (April 2012–Present) | | |
| |
| January 1956 | | | Executive Advisor to Dean | | |
| | | (August 2011–March 2012) | | |
| | | and Interim Dean | | |
| | | (January 2011–July 2011) — | | |
| | | University of Miami School of | | |
| | | Business Administration | | |
| |
| | | President — U.S. Trust, | | |
| | | Bank of America Private | | |
| | | Wealth Management | | |
| | | (Private Banking) | | |
| | | (July 2007–December 2008) | | |
| Thomas K. Whitford | Trustee | Since | Vice Chairman | 71 | None |
| 2005 Market Street | | January 2013 | (2010–Present) | | |
| Philadelphia, PA 19103 | | | Chief Administrative | | |
| | | Officer (2008–2010) | | |
| March 1956 | | | and Executive Vice | | |
| | | President and Chief | | |
| | | Administrative Officer | | |
| | | (2007–2009) — | | |
| | | PNC Financial | | |
| | | Services Group | | |
| Janet L. Yeomans | Trustee | Since | Vice President and Treasurer | 71 | Director, Audit |
| 2005 Market Street | | April 1999 | (January 2006–Present) | | Committee Member |
| Philadelphia, PA | | | Vice President — Mergers | | and Investment |
| 19103 | | | & Acquisitions | | Committee Member |
| | | (January 2003–January 2006), | | Okabena Company |
| July 1948 | | | and | | |
| | | Vice President and Treasurer | | Chair — 3M |
| | | (July 1995–January 2003) | | Investment Management |
| | | 3M Corporation | | Company |
| | | | | (January 2005–July 2012) |
| J. Richard Zecher | Trustee | Since | Founder — | 71 | Director and Compensation |
| 2005 Market Street | | March 2005 | Investor Analytics | | Committee Member — |
| Philadelphia, PA | | | (Risk Management) | | Investor Analytics |
| 19103 | | | (May 1999–Present) | | |
| | | | | Director — |
| July 1940 | | | Founder — | | P/E Investments |
| | | P/E Investments | | |
| | | (Hedge Fund) | | |
| | | (September 1996–Present) | | |
| |
| OFFICERS | | | | | |
| David F. Connor | Vice President, | Vice President since | David F. Connor has served as | 71 | None3 |
| 2005 Market Street | Deputy General | September 2000 | Vice President and Deputy | | |
| Philadelphia, PA | Counsel, and Secretary | and Secretary | General Counsel of | | |
| 19103 | | since | Delaware Investments | | |
| | October 2005 | since 2000. | | |
| December 1963 | | | | | |
| Daniel V. Geatens | Vice President | Treasurer | Daniel V. Geatens has served | 71 | None3 |
| 2005 Market Street | and Treasurer | since | in various capacities at | | |
| Philadelphia, PA | | October 2007 | different times at | | |
| 19103 | | | Delaware Investments. | | |
| |
| October 1972 | | | | | |
High Yield Series-23
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| OFFICERS (continued) | | | | | |
| David P. O’Connor | Executive Vice | Executive Vice President | David P. O’Connor has served in | 71 | None3 |
| 2005 Market Street | President, | since February 2012; | various executive and legal | | |
| Philadelphia, PA | General Counsel, | Senior Vice President | capacities at different times | | |
| 19103 | and Chief | October 2005–February 2012; | at Delaware Investments. | | |
| Legal Officer | General Counsel and | | | |
| February 1966 | | Chief Legal Officer | | | |
| | since October 2005 | | | |
| Richard Salus | Senior | Chief Financial | Richard Salus has served in | 71 | None3 |
| 2005 Market Street | Vice President | Officer since | various executive capacities | | |
| Philadelphia, PA | and | November 2006 | at different times at | | |
| 19103 | Chief Financial | | Delaware Investments. | | |
| Officer | | | | |
| October 1963 | | | | | |
1 Patrick P. Coyne is considered to be an “Interested Trustee” because he is an executive officer of the Fund’s(s’) investment advisor. |
2 Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund’s(s’) investment advisor, principal underwriter, and its transfer agent. |
3 David F. Connor, Daniel V. Geatens, David P. O’Connor, and Richard Salus serve in similar capacities for the six portfolios of the Optimum Fund Trust, which have the same investment advisor, principal underwriter, and transfer agent as the registrant. |
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is available, without charge, upon request by calling 800 523-1918.
The Series files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q. The Series’ Forms N-Q, as well as a description of the policies and procedures that the Series 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 website at sec.gov. In addition, a description of the policies and procedures that the Series uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge on the Delaware Investments® Funds’ website at delawareinvestments.com. The Series’ Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Series voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the Delaware Investments Funds’ website at delawareinvestments.com; and (ii) on the Commission’s website at sec.gov. |
| AR-VIPHY [12/12] DG3 18580 (2/13) | | (10125) | | High Yield Series-24 |
| Delaware VIP® Trust |
| Delaware VIP International Value Equity Series |
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| Annual Report |
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| December 31, 2012 |
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Table of contents
| > Portfolio management review | 1 |
| | |
| > Performance summary | 2 |
| | |
| > Disclosure of Series expenses | 4 |
| | |
| > Security type/country and sector allocations | 5 |
| | |
| > Statement of net assets | 6 |
| | |
| > Statement of operations | 9 |
| | |
| > Statements of changes in net assets | 9 |
| | |
| > Financial highlights | 10 |
| | |
| > Notes to financial statements | 12 |
| | |
| > Report of independent registered public accounting firm | 18 |
| | |
| > Other Series information | 19 |
| | |
| > Board of trustees/directors and officers addendum | 21 |
Investments in Delaware VIP® International Value Equity Series 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 (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 Series, the repayment of capital from the Series, or any particular rate of return.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
The Series is not FDIC insured and is 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 and member of Macquarie Group. Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries, including the Series’ distributor, Delaware Distributors, L.P. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide.
This material may be used in conjunction with the offering of shares in the Delaware VIP International Value Equity Series only if preceded or accompanied by the Series’ current prospectus, and if available, the summary prospectus.
© 2013 Delaware Management Holdings, Inc.
All third-party marks cited are the property of their respective owners.
| Delaware VIP® Trust — Delaware VIP International Value Equity Series | |
| Portfolio management review | Jan. 8, 2013 |
For the fiscal year ended Dec. 31, 2012, Delaware VIP International Value Equity Series returned +15.20% for Standard Class shares and +14.79% for Service Class shares (both figures reflect all distributions reinvested). The Series’ benchmark, the MSCI EAFE Index, advanced 17.90% (gross) and 17.32% (net) for the same period.
International equity markets managed solid gains during the Series’ fiscal year, despite a volatile set of economic and political circumstances. The euro zone in particular lurched from one crisis to another, triggering sharp shifts in investor sentiment and risk aversion. The United States remained trapped in a slow-growth holding pattern, even as the United Kingdom and Japan flirted with outright recession. Emerging markets countries were not immune to the malaise, as China’s struggles to emerge from a growth slowdown adversely affected these countries’ economies.
Unlike most business cycles, when recurrent macroeconomic patterns and company-specific issues affect stock prices, equity markets remained deeply dependent on policy interventions, especially by central banks. As the Series’ fiscal year began, stocks were slumping amid fears about the future of the European Monetary Union. Those worries soon dissipated, however, when the European Central Bank (ECB) initiated the first of two longer-term funding operations designed to relieve stresses on governments and banks.
After a strong rally stalled and stocks sustained an even more severe downturn during the spring and early summer of 2012, the ECB again calmed the equity waters by proclaiming that it would do whatever it takes to save the euro. The U.S. Federal Reserve also did its part, launching a third round of quantitative easing that was open-ended with regard to time. Cash infusions by global central banks mostly overcame the negative impact of continued fiscal imbalances and political dysfunction in many countries, helping international stocks to close the fiscal year near their highs for this period.
The unusually policy-driven characteristics of the world economic and political environment played a large role in the Series’ relative performance. For example, many risk-averse investors appeared to seek refuge in so-called “safe-haven” sectors such as consumer staples and healthcare. Those sectors outperformed their more cyclical, higher-risk counterparts, even during periods when the economic skies seemed to brighten. The sustained demand for perceived safe-haven assets caused valuations within the group to reach levels that we deemed overvalued, given our emphasis on companies whose shares trade below our estimates of intrinsic value. Similarly, we remain concerned about the lack of transparency within the financial sector, and continue to hold an underweight position in the sector relative to the benchmark. Our underweight exposure to financials, as well as adverse stock selection in the financial and consumer staples sectors, detracted from performance.
The Series benefited from adding several new holdings, such as the Danish brewer Carlsberg and the Norwegian offshore energy service business Subsea 7, each of which generated positive relative performance.
Not all of the Series’ stocks performed well. Its position in the U.K. supermarket retailer Tesco lagged the benchmark, especially early in the Series’ fiscal year, after management provided earnings guidance that fell short of consensus expectations. Its share price has since stabilized and has begun to inch higher, and we continue to hold the stock.
The French wireless provider Vivendi also detracted from relative performance; revenues were severely undermined by the emergence of a fourth competitor. The increased competition sparked a price war in the wireless sector, and we have since exited the position.
As the Series’ fiscal year ended, the Series’ largest country allocations were to France, Japan, the U.K., Canada, and Switzerland. Relative to the MSCI EAFE Index, our positions in France and Canada each represented a meaningful overweight while Series exposures to the U.K., Australia, and Germany were underweights. We emphasize, however, that these allocations are the result of our bottom-up stock selection process. We remain focused on risk management and on our stock selection process that seeks to identify strong businesses whose shares appear attractively priced relative to traditional valuation metrics, regardless of where they are domiciled.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
International Value Equity Series-1
Delaware VIP® Trust — Delaware VIP International Value Equity Series
Performance summary
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
Carefully consider the Series’ investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Series’ prospectuses and, if available, their summary prospectuses, which may be obtained by calling 800 523-1918. Investors should read the prospectuses and, if available, the summary prospectuses carefully before investing.
| Delaware VIP International Value Equity Series | | | | | | | | | |
| Average annual total returns | | | | | | | | | |
| For periods ended Dec. 31, 2012 | 1 year | | 3 years | | 5 years | | 10 years | | Lifetime |
| Standard Class shares (commenced operations on Oct. 29, 1992) | +15.20% | | +3.02% | | -3.24% | | +8.08% | | +6.83% |
| Service Class shares (commenced operations on May 1, 2000) | +14.79% | | +2.76% | | -3.49% | | +7.81% | | +4.59% |
Returns reflect the reinvestment of all distributions and any applicable sales charges as noted in the following paragraphs.
As described in the Series’ most recent prospectus, the net expense ratio for Service Class shares of the Series was 1.33%, while total operating expenses for Standard Class and Service Class shares were 1.08% and 1.38%, respectively. The management fee for Standard Class and Service Class shares was 0.85%.
The Series’ distributor has contracted to limit the 12b-1 fees for Service Class shares to 0.25% of average daily net assets from April 30, 2012 through April 30, 2013.
Earnings from a variable annuity or variable life investment compound tax-free until withdrawal, and as a result, no adjustments were made for income taxes.
Expense limitations were in effect for all classes during certain periods shown in the Series’ performance table above and in the Performance of a $10,000 Investment chart on the next page.
Performance data do not reflect other costs incurred by beneficial owners such as insurance company separate account fees and variable annuity or variable life contract charges or deferred sales charges. Performance shown here would have been reduced if such fees were included and the expense limitation removed. For more information about fees, consult your variable annuity or variable life prospectus.
Investments in variable products involve risk.
International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.
Please read both the contract and underlying prospectus for specific details regarding the product’s risk profile.
International Value Equity Series-2
Delaware VIP® International Value Equity Series
Performance summary (continued)
| For period beginning Dec. 31, 2002, through Dec. 31, 2012 | | Starting value | | Ending value |
| –– | MSCI EAFE Index (gross) | | $10,000 | | $23,032 |
| – – | MSCI EAFE Index (net) | | $10,000 | | $22,018 |
| –– | Delaware VIP International Value Equity Series (Standard Class shares) | | $10,000 | | $21,752 |
The chart shows a $10,000 investment in the Delaware VIP International Value Equity Series Standard Class shares for the period from Dec. 31, 2002 through Dec. 31, 2012.
The chart also shows $10,000 invested in the MSCI EAFE Index for the period from Dec. 31, 2002 through Dec. 31, 2012. The MSCI EAFE Index measures equity market performance across developed market countries in Europe, Australasia, and the Far East. Index “gross” return approximates the maximum possible dividend reinvestment. Index “net” return approximates the minimum possible dividend reinvestment, after deduction of withholding tax at the highest possible rate.
Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
Performance of Service Class shares will vary due to different charges and expenses.
Past performance is not a guarantee of future results.
International Value Equity Series-3
Delaware VIP® Trust — Delaware VIP International Value Equity Series
Disclosure of Series Expenses
For the Six-Month Period from July 1, 2012 to December 31, 2012 (Unaudited)
As a shareholder of the Series, you incur ongoing costs, which may include management fees; distribution and/or service (12b-1) fees; and other Series expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Series 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 six-month period from July 1, 2012 to December 31, 2012.
Actual Expenses
The first section of the table shown, “Actual Series 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 the 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 Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ 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 Series and other funds. To do so, compare the 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. As a shareholder of the Series, you do not incur any transaction costs, such as sales charges (loads), redemption fees or exchange fees, but shareholders of other funds may incur such costs. Also, the fees related to the variable annuity investment or the deferred sales charge that could apply have not been included. 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. The Series’ actual expenses shown in the table reflect fee waivers in effect for Service Class shares. The expenses shown in the table assume reinvestment of all dividends and distributions.
Expense Analysis of an Investment of $1,000
| | | | | | | | | | | | Expenses |
| | Beginning | | Ending | | | | Paid During |
| | | Account | | Account | | Annualized | | Period |
| | Value | | Value | | Expense | | 7/1/12 to |
| | 7/1/12 | | 12/31/12 | | Ratio | | 12/31/12* |
| Actual Series Return† | | | | | | | | | | | | | | |
| Standard Class | | | $ | 1,000.00 | | | $ | 1,123.60 | | 1.09% | | | $5.82 | |
| Service Class | | | | 1,000.00 | | | | 1,121.40 | | 1.34% | | | 7.15 | |
| Hypothetical 5% Return (5% return before expenses) | | | | | | |
| Standard Class | | | $ | 1,000.00 | | | $ | 1,019.66 | | 1.09% | | | $5.53 | |
| Service Class | | | | 1,000.00 | | | | 1,018.40 | | 1.34% | | | 6.80 | |
*“Expenses Paid During Period” are equal to the Series’ annualized expense ratio, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period).
†Because actual returns reflect only the most recent six-month period, the returns shown may differ significantly from fiscal year returns.
International Value Equity Series-4
Delaware VIP® Trust — Delaware VIP International Value Equity Series
Security Type/Country and Sector Allocations
As of December 31, 2012 (Unaudited)
Sector designations may be different than the sector designations presented in other Series materials. The sector designations may represent the investment manager’s internal sector classifications, which may result in the sector designations for one series being different than another series’ sector designations.
| Percentage |
| Security Type/Country | of Net Assets |
| Common Stock | 99.53 | % |
| Australia | 1.44 | % |
| Canada | 8.93 | % |
| China/Hong Kong | 5.82 | % |
| Denmark | 1.84 | % |
| France | 19.69 | % |
| Germany | 5.67 | % |
| Israel | 3.58 | % |
| Japan | 17.80 | % |
| Netherlands | 1.97 | % |
| Norway | 2.49 | % |
| Panama | 1.98 | % |
| Republic of Korea | 1.51 | % |
| Russia | 1.46 | % |
| Sweden | 3.34 | % |
| Switzerland | 8.21 | % |
| United Kingdom | 13.80 | % |
| Short-Term Investments | 1.31 | % |
| Securities Lending Collateral | 6.22 | % |
| Total Value of Securities | 107.06 | % |
| Obligation to Return Securities Lending Collateral | (6.87 | %) |
| Other Liabilities Net of Receivables and Other Assets | (0.19 | %) |
| Total Net Assets | 100.00 | % |
| |
| Percentage |
| Common Stock by Sector | of Net Assets |
| Consumer Discretionary | 19.51 | % |
| Consumer Staples | 10.90 | % |
| Energy | 9.38 | % |
| Financials | 10.52 | % |
| Healthcare | 12.09 | % |
| Industrials | 16.40 | % |
| Information Technology | 3.45 | % |
| Materials | 12.27 | % |
| Telecommunication Services | 4.02 | % |
| Utilities | 0.99 | % |
| Total | 99.53 | % |
International Value Equity Series-5
Delaware VIP® Trust — Delaware VIP International Value Equity Series
Statement of Net Assets
December 31, 2012
| | Number of | | Value |
| | Shares | | (U.S. $) |
| ΔCOMMON STOCK–99.53% | | | | | | |
| Australia–1.44% | | | | | | |
| Coca-Cola Amatil | | | 48,333 | | $ | 679,894 |
| | | | | | 679,894 |
| Canada–8.93% | | | | | | |
| †AuRico Gold | | | 126,969 | | | 1,046,943 |
| *†CGI Group Class A | | | 70,350 | | | 1,624,796 |
| Yamana Gold | | | 89,368 | | | 1,539,478 |
| | | | | | 4,211,217 |
| China/Hong Kong–5.82% | | | | | | |
| CNOOC | | | 456,000 | | | 1,004,652 |
| Techtronic Industries | | | 261,359 | | | 494,751 |
| Yue Yuen Industrial Holdings | | | 368,500 | | | 1,246,438 |
| | | | | | 2,745,841 |
| Denmark–1.84% | | | | | | |
| Carlsberg Class B | | | 8,826 | | | 869,329 |
| | | | | | 869,329 |
| France–19.69% | | | | | | |
| Alstom | | | 19,851 | | | 799,464 |
| AXA | | | 67,882 | | | 1,218,551 |
| Compagnie de Saint-Gobain | | | 11,952 | | | 513,129 |
| Lafarge | | | 10,131 | | | 654,008 |
| PPR | | | 5,942 | | | 1,115,675 |
| Publicis Groupe | | | 10,709 | | | 644,116 |
| Sanofi | | | 16,128 | | | 1,529,010 |
| Teleperformance | | | 38,194 | | | 1,388,522 |
| Total | | | 27,279 | | | 1,419,029 |
| | | | | | 9,281,504 |
| Germany–5.67% | | | | | | |
| Bayerische Motoren Werke | | | 9,240 | | | 898,915 |
| Deutsche Post | | | 44,664 | | | 983,486 |
| Stada Arzneimittel | | | 24,386 | | | 788,989 |
| | | | | | 2,671,390 |
| Israel–3.58% | | | | | | |
| Teva Pharmaceutical Industries ADR | | | 45,200 | | | 1,687,768 |
| | | | | | 1,687,768 |
| Japan–17.80% | | | | | | |
| Don Quijote | | | 30,100 | | | 1,105,786 |
| East Japan Railway | | | 16,956 | | | 1,094,992 |
| ITOCHU | | | 103,435 | | | 1,091,766 |
| KDDI | | | 9,000 | | | 635,432 |
| Mitsubishi UFJ Financial Group | | | 274,735 | | | 1,484,652 |
| Nitori Holdings | | | 9,529 | | | 697,231 |
| Sumitomo Rubber Industries | | | 42,039 | | | 507,675 |
| Toyota Motor | | | 38,043 | | | 1,774,106 |
| | | | | | 8,391,640 |
| Netherlands–1.97% | | | | | | |
| Koninklijke Philips Electronics | | | 35,071 | | | 928,440 |
| | | | | | 928,440 |
| Norway–2.49% | | | | | | |
| *Subsea 7 | | | 48,846 | | | 1,173,449 |
| | | | | | 1,173,449 |
| Panama–1.98% | | | | | | |
| Copa Holdings Class A | | | 9,400 | | | 934,830 |
| | | | | | 934,830 |
| Republic of Korea–1.51% | | | | | | |
| Hyundai Home Shopping Network | | | 6,257 | | | 713,950 |
| | | | | | 713,950 |
| Russia–1.46% | | | | | | |
| Mobile Telesystems ADR | | | 37,000 | | | 690,050 |
| | | | | | 690,050 |
| Sweden–3.34% | | | | | | |
| *Meda Class A | | | 33,752 | | | 348,057 |
| Nordea Bank | | | 127,331 | | | 1,225,212 |
| | | | | | 1,573,269 |
| Switzerland–8.21% | | | | | | |
| Aryzta | | | 33,033 | | | 1,698,149 |
| Novartis | | | 21,305 | | | 1,344,657 |
| Transocean | | | 18,500 | | | 826,025 |
| | | | | | 3,868,831 |
| United Kingdom–13.80% | | | | | | |
| Greggs | | | 91,268 | | | 681,045 |
| National Grid | | | 40,740 | | | 467,408 |
| Rexam | | | 132,001 | | | 944,784 |
| Rio Tinto | | | 27,464 | | | 1,602,348 |
| Standard Chartered | | | 39,896 | | | 1,032,816 |
| Tesco | | | 219,666 | | | 1,210,420 |
| Vodafone Group | | | 226,138 | | | 569,425 |
| | | | | | 6,508,246 |
| Total Common Stock | | | | | | |
| (cost $41,956,512) | | | | | | 46,929,648 |
| |
| | | Principal | | | |
| | | Amount | | | |
| | | (U.S. $) | | | |
| SHORT-TERM INVESTMENTS–1.31% | | | | | | |
| ≠Discount Notes–0.37% | | | | | | |
| Federal Home Loan Bank Discount Notes | | | | | | |
| 0.075% 1/4/13 | | $ | 18,111 | | | 18,111 |
| 0.10% 1/18/13 | | | 13,234 | | | 13,234 |
| 0.10% 1/23/13 | | | 45,661 | | | 45,659 |
| 0.12% 4/2/13 | | | 37,173 | | | 37,167 |
| 0.125% 3/6/13 | | | 17,538 | | | 17,537 |
| 0.13% 2/6/13 | | | 34,827 | | | 34,826 |
| 0.135% 2/15/13 | | | 7,662 | | | 7,662 |
| | | | | | 174,196 |
| Repurchase Agreements–0.34% | | | | | | |
| Bank of America 0.11%, dated 12/31/12, | | | | | | |
| to be repurchased on 1/2/13, | | | | | | |
| repurchase price $109,292 | | | | | | |
| (collateralized by U.S. government obligations | | | | | | |
| 0.25%-2.375% 2/28/15-12/15/15; | | | | | | |
| market value $111,477) | | | 109,291 | | | 109,291 |
| BNP Paribas 0.15%, dated 12/31/12, | | | | | | |
| to be repurchased on 1/2/13, | | | | | | |
| repurchase price $52,855 | | | | | | |
| (collateralized by U.S. government obligations | | | | | | |
| 0.125%-0.25% 12/31/14-5/15/15; | | | | | | |
| market value $53,912) | | | 52,855 | | | 52,855 |
| | | | | | 162,146 |
International Value Equity Series-6
Delaware VIP® International Value Equity Series
Statement of Net Assets (continued)
| Principal | | | |
| Amount | | Value |
| (U.S. $) | | (U.S. $) |
| ≠U.S. TREASURY OBLIGATIONS–0.60% | | | | | |
| U.S. Treasury Bills | | | | | |
| 0.04% 1/17/13 | $ | 40,040 | | $ | 40,039 |
| 0.04% 3/21/13 | | 168,876 | | | 168,865 |
| 0.04% 3/28/13 | | 72,861 | | | 72,855 |
| | | | | | 281,759 |
| Total Short-Term Investments | | | | | |
| (cost $618,080) | | | | | 618,101 |
| |
| Total Value of Securities | | | | | |
| Before Securities Lending | | | | | |
| Collateral–100.84% | | | | | |
| (cost $42,574,592) | | | | | 47,547,749 |
| | | | | | |
| Number of | | | |
| Shares | | | |
| **SECURITIES LENDING COLLATERAL–6.22% | | | | | |
| Investment Companies | | | | | |
| Delaware Investments Collateral Fund No. 1 | | 2,932,527 | | | 2,932,527 |
| †@Mellon GSL Reinvestment Trust II | | 306,314 | | | 0 |
| Total Securities Lending Collateral | | | | | |
| (cost $3,238,841) | | | | | 2,932,527 |
| TOTAL VALUE OF SECURITIES–107.06% (cost $45,813,433) | | 50,480,276 | © |
| **OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL–(6.87%) | | (3,238,841 | ) |
| OTHER LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS–(0.19%) | | (89,053 | ) |
| NET ASSETS APPLICABLE TO 4,672,766 SHARES OUTSTANDING–100.00% | $ | 47,152,382 | |
| NET ASSET VALUE–DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES | | | |
| STANDARD CLASS ($47,122,248 / 4,669,774 Shares) | | | $10.09 | |
| NET ASSET VALUE–DELAWARE VIP INTERNATIONAL VALUE EQUITY SERIES | | | |
| SERVICE CLASS ($30,134 / 2,992 Shares) | | | $10.07 | |
| COMPONENTS OF NET ASSETS AT DECEMBER 31, 2012: | | | |
| Shares of beneficial interest (unlimited authorization–no par) | $ | 67,361,677 | |
| Undistributed net investment income | | 741,380 | |
| Accumulated net realized loss on investments | | (25,617,685 | ) |
| Net unrealized appreciation of investments and derivatives | | 4,667,010 | |
| Total net assets | $ | 47,152,382 | |
____________________
| Δ | Securities have been classified by country of origin. Classification by type of business has been presented on page 5 in “Security Type/Country and Sector Allocations.” |
† | Non income producing security. |
| * | Fully or partially on loan. |
| ≠ | The rate shown is the effective yield at the time of purchase. |
| ** | See Note 9 in “Notes to financial statements” for additional information on securities lending collateral. |
| @ | Illiquid security. At December 31, 2012, the aggregate amount of illiquid securities was $0, which represented 0.00% of the Series’ net assets. See Note 10 in “Notes to Financial Statements” |
| © | Includes $3,106,234 of securities loaned. |
International Value Equity Series-7
Delaware VIP® International Value Equity Series
Statement of Net Assets (continued)
The following foreign currency exchange contracts were outstanding at December 31, 2012:1
Foreign Currency Exchange Contracts
| | | | | | | | | | Unrealized |
| | | | | | | | Settlement | | Appreciation |
| Counterparty | | | Contracts to Receive (Deliver) | | In Exchange For | | Date | | (Depreciation) |
| MNB | | EUR | 49,156 | | USD | (65,067) | | 1/2/13 | | $(200) |
The use of foreign currency exchange contracts involves elements of market risk and risks in excess of the amounts disclosed in the financial statements. The foreign currency exchange contracts presented above represent the Series’ total exposure in such contracts, whereas only the net unrealized appreciation (depreciation) is reflected in the Series’ net assets.
____________________
1See Note 8 in “Notes to financial statements.”
Summary of Abbreviations:
ADR – American Depositary Receipt
EUR – European Monetary Unit
MNB – Mellon National Bank
USD – United States Dollar
See accompanying notes, which are an integral part of the financial statements.
International Value Equity Series-8
Delaware VIP® Trust —
Delaware VIP International Value Equity Series
Statement of Operations
Year Ended December 31, 2012
| INVESTMENT INCOME: | | | | |
| Dividends | | $ | 1,394,118 | |
| Securities lending income | | | 38,301 | |
| Interest | | | 1,441 | |
| Foreign tax withheld | | | (105,162 | ) |
| | | 1,328,698 | |
| |
| EXPENSES: | | | | |
| Management fees | | | 382,368 | |
| Reports and statements to shareholders | | | 30,957 | |
| Custodian fees | | | 22,361 | |
| Accounting and administration expenses | | | 17,556 | |
| Audit and tax | | | 15,230 | |
| Dividend disbursing and transfer agent fees and expenses | | | 3,985 | |
| Legal fees | | | 3,156 | |
| Trustees’ fees | | | 2,012 | |
| Dues and services | | | 1,868 | |
| Pricing fees | | | 1,497 | |
| Insurance fees | | | 850 | |
| Registration fees | | | 656 | |
| Consulting fees | | | 460 | |
| Trustees’ expenses | | | 140 | |
| Distribution expenses – Service Class | | | 73 | |
| | | 483,169 | |
| Less waived distribution expenses – Service Class | | | (12 | ) |
| Less expense paid indirectly | | | (1 | ) |
| Total operating expenses | | | 483,156 | |
| |
| NET INVESTMENT INCOME | | | 845,542 | |
| |
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON: | | | | |
| Net realized loss on: | | | | |
| Investments | | | (199,428 | ) |
| Foreign currencies | | | (41,753 | ) |
| Foreign currency exchange contracts | | | (41,004 | ) |
| Net realized loss | | | (282,185 | ) |
| Net change in unrealized appreciation (depreciation) of: | | | | |
| Investments | | | 5,817,246 | |
| Foreign currencies | | | 1,191 | |
| Foreign currency exchange contracts | | | (200 | ) |
| Net change in unrealized appreciation (depreciation) | | | 5,818,237 | |
| |
| NET REALIZED AND UNREALIZED GAIN | | | 5,536,052 | |
| |
| NET INCREASE IN NET ASSETS RESULTING | | | | |
| FROM OPERATIONS | | $ | 6,381,594 | |
Delaware VIP Trust —
Delaware VIP International Value Equity Series
Statements of Changes in Net Assets
| Year Ended |
| 12/31/12 | | 12/31/11 |
| INCREASE (DECREASE) IN NET ASSETS | | | | | | | |
| FROM OPERATIONS: | | | | | | | |
| Net investment income | $ | 845,542 | | | $ | 1,254,714 | |
| Net realized loss | | (282,185 | ) | | | (1,099,316 | ) |
| Net change in unrealized | | | | | | | |
| appreciation (depreciation) | | 5,818,237 | | | | (7,698,735 | ) |
| Net increase (decrease) in net assets | | | | | | | |
| resulting from operations | | 6,381,594 | | | | (7,543,337 | ) |
| |
| DIVIDENDS AND DISTRIBUTIONS TO | | | | | | | |
| SHAREHOLDERS FROM: | | | | | | | |
| Net investment income: | | | | | | | |
| Standard Class | | (1,122,653 | ) | | | (675,509 | ) |
| Service Class | | (524 | ) | | | (128 | ) |
| | (1,123,177 | ) | | | (675,637 | ) |
| |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | |
| Proceeds from shares sold: | | | | | | | |
| Standard Class | | 5,513,372 | | | | 4,760,101 | |
| Service Class | | 11,928 | | | | 9,665 | |
| Net asset value of shares issued upon | | | | | | | |
| reinvestment of dividends and distributions: | | | | | | | |
| Standard Class | | 1,122,653 | | | | 675,509 | |
| Service Class | | 524 | | | | 128 | |
| | 6,648,477 | | | | 5,445,403 | |
| Cost of shares redeemed: | | | | | | | |
| Standard Class | | (7,805,700 | ) | | | (11,123,537 | ) |
| Service Class | | (1,987 | ) | | | (2,709 | ) |
| | (7,807,687 | ) | | | (11,126,246 | ) |
| Decrease in net assets derived | | | | | | | |
| from capital share transactions | | (1,159,210 | ) | | | (5,680,843 | ) |
| |
| NET INCREASE (DECREASE) IN NET ASSETS | | 4,099,207 | | | | (13,899,817 | ) |
| |
| NET ASSETS: | | | | | | | |
| Beginning of year | | 43,053,175 | | | | 56,952,992 | |
| End of year (including undistributed | | | | | | | |
| net investment income of $741,380 | | | | | | | |
| and $1,101,772, respectively) | $ | 47,152,382 | | | $ | 43,053,175 | |
See accompanying notes, which are an integral part of the financial statements.
International Value Equity Series-9
Delaware VIP® Trust — Delaware VIP International Value Equity Series
Financial Highlights
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP International Value Equity Series
Standard Class |
| | Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $8.980 | | | $10.610 | | | $9.920 | | | $7.640 | | | $14.700 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.177 | | | 0.243 | | | 0.155 | | | 0.216 | | | 0.306 | |
| Net realized and unrealized gain (loss) | | 1.171 | | | (1.745 | ) | | 0.903 | | | 2.324 | | | (6.103 | ) |
| Total from investment operations | | 1.348 | | | (1.502 | ) | | 1.058 | | | 2.540 | | | (5.797 | ) |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.238 | ) | | (0.128 | ) | | (0.368 | ) | | (0.260 | ) | | (0.271 | ) |
| Net realized gain | | – | | | – | | | – | | | – | | | (0.992 | ) |
| Total dividends and distributions | | (0.238 | ) | | (0.128 | ) | | (0.368 | ) | | (0.260 | ) | | (1.263 | ) |
| |
| Net asset value, end of period | | $10.090 | | | $8.980 | | | $10.610 | | | $9.920 | | | $7.640 | |
| |
| Total return2 | | 15.20% | | | (14.43% | ) | | 10.92% | | | 34.73% | | | (42.42% | ) |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $47,122 | | | $43,036 | | | $56,941 | | | $105,999 | | | $73,712 | |
| Ratio of expenses to average net assets | | 1.07% | | | 1.05% | | | 1.07% | | | 1.00% | | | 1.04% | |
| Ratio of expenses to average net assets prior to fees waived | | 1.07% | | | 1.08% | | | 1.07% | | | 1.03% | | | 1.05% | |
| Ratio of net investment income to average net assets | | 1.88% | | | 2.32% | | | 1.60% | | | 2.60% | | | 2.79% | |
Ratio of net investment income to average net assets
prior to fees waived | | 1.88% | | | 2.29% | | | 1.60% | | | 2.57% | | | 2.78% | |
| Portfolio turnover | | 36% | | | 47% | | | 40% | | | 37% | | | 35% | |
____________________
1The average shares outstanding method has been applied for per share information.
2Total 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 during some of the periods shown reflects a waiver by the manager. Performance would have been lower had the waiver not been in effect. Total investment return does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle.
See accompanying notes, which are an integral part of the financial statements.
International Value Equity Series-10
Delaware VIP® International Value Equity Series
Financial Highlights (continued)
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP International Value Equity Series
Service Class |
| | Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $8.970 | | | $10.600 | | | $9.910 | | | $7.620 | | | $14.660 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.154 | | | 0.214 | | | 0.131 | | | 0.196 | | | 0.279 | |
| Net realized and unrealized gain (loss) | | 1.158 | | | (1.740 | ) | | 0.907 | | | 2.327 | | | (6.096 | ) |
| Total from investment operations | | 1.312 | | | (1.526 | ) | | 1.038 | | | 2.523 | | | (5.817 | ) |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.212 | ) | | (0.104 | ) | | (0.348 | ) | | (0.233 | ) | | (0.231 | ) |
| Net realized gain | | – | | | – | | | – | | | – | | | (0.992 | ) |
| Total dividends and distributions | | (0.212 | ) | | (0.104 | ) | | (0.348 | ) | | (0.233 | ) | | (1.223 | ) |
| |
| Net asset value, end of period | | $10.070 | | | $8.970 | | | $10.600 | | | $9.910 | | | $7.620 | |
| |
| Total return2 | | 14.79% | | | (14.62% | ) | | 10.71% | | | 34.61% | | | (42.67% | ) |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $30 | | | $17 | | | $12 | | | $10 | | | $18 | |
| Ratio of expenses to average net assets | | 1.32% | | | 1.30% | | | 1.32% | | | 1.25% | | | 1.29% | |
| Ratio of expenses to average net assets prior to fees waived | | 1.37% | | | 1.38% | | | 1.37% | | | 1.33% | | | 1.35% | |
| Ratio of net investment income to average net assets | | 1.63% | | | 2.07% | | | 1.35% | | | 2.35% | | | 2.54% | |
Ratio of net investment income to average net assets
prior to fees waived | | 1.58% | | | 1.99% | | | 1.30% | | | 2.27% | | | 2.48% | |
| Portfolio turnover | | 36% | | | 47% | | | 40% | | | 37% | | | 35% | |
____________________
1The average shares outstanding method has been applied for per share information.
2Total 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 during all of the periods shown reflects waivers by the manager and/or distributor. Performance would have been lower had the waivers not been in effect. Total investment return does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle.
See accompanying notes, which are an integral part of the financial statements.
International Value Equity Series-11
Delaware VIP® Trust — Delaware VIP International Value Equity Series
Notes to Financial Statements
December 31, 2012
Delaware VIP Trust (Trust) is organized as a Delaware statutory trust and offers 10 series: Delaware VIP Diversified Income Series, Delaware VIP Emerging Markets Series, Delaware VIP High Yield Series, Delaware VIP International Value Equity Series, Delaware VIP Limited-Term Diversified Income Series, Delaware VIP REIT Series, Delaware VIP Small Cap Value Series, Delaware VIP Smid Cap Growth Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series. These financial statements and the related notes pertain to Delaware VIP International Value Equity Series (Series). The Trust is an open-end investment company. The Series is considered diversified under the Investment Company Act of 1940, as amended, and offers Standard Class and Service Class shares. The Standard Class shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee. The shares of the Series are sold only to separate accounts of life insurance companies.
The investment objective of the Series is to seek long-term growth without undue risk to principal.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and are consistently followed by the Series.
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, which approximates fair value. Securities listed on a foreign exchange are normally valued at the last quoted sales price on the valuation date. U.S. government and agency securities are valued at the mean between the bid and ask prices, which approximates fair value. Investment company securities are valued at net asset value per share, as reported by the underlying investment company. Foreign currency exchange contracts are valued at the mean between the bid and ask prices, which approximates fair value. Interpolated values are derived when the settlement date of the contract is an interim date for which quotations are not available. 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 Series’ 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 Series 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 Series values its securities, generally as of 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 Series may frequently value foreign securities using fair value prices based on third-party vendor modeling tools (international fair value pricing).
Federal & Foreign Income Taxes—No provision for federal income taxes has been made as the Series 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 Series evaluates tax positions taken or expected to be taken in the course of preparing the Series’ tax returns 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 analyzed the Series’ tax positions taken for all open federal income tax years (December 31, 2009–December 31, 2012), and has concluded that no provision for federal income tax is required in the Series’ financial statements. In regards to foreign taxes, the Series only has open tax years in certain foreign countries it invests in that may date back to the inception of the Series.
Class Accounting—Investment income, common expenses and realized and unrealized gain (loss) on investments are allocated to the classes of the Series 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 Series may purchase certain U.S. government securities subject to the counterparty’s agreement to repurchase them at an agreed upon date and price. The counterparty will be required on a daily basis to maintain the value of the collateral subject to the agreement at not less than the repurchase price (including accrued interest). The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system with the Series’ custodian or a third-party sub-custodian. In the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. All open repurchase agreements as of the date of this report were entered into on December 31, 2012.
Foreign Currency Transactions—Transactions denominated in foreign currencies are recorded at the prevailing exchange rates on the valuation date in accordance with the Series’ prospectus. The value of all assets and liabilities denominated in foreign currencies is translated into U.S. dollars at the exchange rate of such currencies against the U.S. dollar daily. Transaction gains or losses resulting from changes in exchange rates during the reporting period or upon settlement of the foreign currency transaction are reported in operations for the current period. The Series generally does not isolate that portion of realized gains and losses on investments which is due to changes in foreign exchange rates from that which is due to changes in market prices. The changes are included with the net realized and unrealized gain or loss on investments. The Series reports certain foreign currency related transactions as components of realized gains (losses) for financial reporting purposes, whereas such components are treated as ordinary income (loss) for federal income tax purposes.
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments, the reported amounts of assets and liabilities and disclosure of contingent 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 and the differences could be material.
Other—Expenses directly attributable to the Series are charged directly to the Series. Other expenses common to various funds within the Delaware Investments® Family of Funds are generally allocated among 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. Foreign dividends are also recorded on the ex-dividend date or as soon after the ex-dividend date that the Series is aware of such dividends, net of all non-rebatable tax withholdings. Withholding taxes on foreign dividends have been recorded in accordance with the Series’ understanding of the applicable country’s tax rules and rates. The Series declares and pays dividends from net investment income and distributions from net realized gain on investments, if any, following the close of the fiscal year. The Series may distribute income dividends and capital gains more frequently, if necessary for tax purposes. Dividends and distributions, if any, are recorded on the ex-dividend date.
International Value Equity Series-12
Delaware VIP® International Value Equity Series
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
The Series 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 year ended December 31, 2012.
The Series receives earnings credits from its transfer agent when positive cash balances are maintained, which are used to offset transfer agent fees. The expense paid under this arrangement is included in dividend disbursing and transfer agent fees and expenses on the Statement of Operations with the corresponding expense offset shown as “expense paid indirectly.” For the year ended December 31, 2012, the Series earned $1 under this agreement.
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Series 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 0.85% on the first $500 million of average daily net assets of the Series, 0.80% on the next $500 million, 0.75% on the next $1.5 billion, and 0.70% on average daily net assets in excess of $2.5 billion.
DMC had contractually agreed to waive that portion, if any, of its management fee and reimburse the Series to the extent necessary to ensure that total annual operating expenses (excluding any 12b-1 plan expenses, taxes, interest, inverse floater program 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)) did not exceed 1.05% of average daily net assets of the Series through April 30, 2012. For purposes of this waiver and reimbursement, nonroutine expenses may also include such additional costs and expenses as may be agreed upon from time to time by the Series’ Board and DMC. This expense waiver and reimbursement applied only to expenses paid directly by the Series.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to the Series. For these services, the Series 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 year ended December 31, 2012, the Series was charged $2,201 for these services.
DSC is also the transfer agent and dividend disbursing agent of the Series. The Series pays DSC a monthly asset-based fee for these services. Pursuant to a sub-transfer agency agreement between DSC and BNY Mellon Investment Servicing (US) Inc. (BNYMIS), BNYMIS provides certain sub-transfer agency services to the Series. Sub-transfer agency fees are passed on to and paid directly by the Series.
Pursuant to a distribution agreement and distribution plan, the Series pays Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an annual distribution and service fee of 0.30% of the average daily net assets of the Service Class shares. DDLP has contracted to waive distribution and service fees through April 30, 2013 in order to prevent distribution and service fees of the Service Class shares from exceeding 0.25% of average daily net assets. Standard Class shares pay no distribution and service expenses.
At December 31, 2012, the Series had liabilities payable to affiliates as follows:
| | | Dividend Disbursing, | | | | Other |
| Investment | | Transfer Agent and Fund | | | | Expenses |
| Management | | Accounting Oversight | | Distribution | | Payable |
| | Fee Payable to | | Fees and Other Expenses | | Fee Payable | | to DMC |
| DMC | | Payable to DSC | | to DDLP | | and Affiliates* |
| $33,460 | | $487 | | $6 | | $1,381 |
____________________
*DMC, as part of its administrative services, pays operating expenses on behalf of the Series and is reimbursed on a periodic basis. Expenses include items such as printing of shareholder reports, legal and tax services, custodian fees and trustees’ fees.
As provided in the investment management agreement, the Series bears the cost of certain legal and tax services, including internal legal and tax services provided to the Series by DMC and/or its affiliates’ employees. For the year ended December 31, 2012, the Series was charged $1,357 for internal legal and tax services provided by DMC and/or its affiliates’ employees.
Trustees’ fees include expenses accrued by the Series 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 Series.
3. Investments
For the year ended December 31, 2012, the Series made purchases and sales of investment securities other than short-term investments as follows:
| Purchases | $ | 16,140,404 |
| Sales | | 16,324,856 |
International Value Equity Series-13
Delaware VIP® International Value Equity Series
Notes to Financial Statements (continued)
3. Investments (continued)
At December 31, 2012, the cost of investments for federal income tax purposes and unrealized appreciation (depreciation) for the Series were as follows:
| | | Aggregate | | Aggregate | | |
| Cost of | | Unrealized | | Unrealized | | Net Unrealized |
| | Investments | | Appreciation | | Depreciation | | Appreciation |
| $46,534,867 | | $7,211,578 | | $(3,266,169) | | $3,945,409 |
U.S. GAAP defines fair value as the price that the Series 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. A three level hierarchy for fair value measurements has been established 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 that 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 Series’ investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three level hierarchy of inputs is summarized below.
| Level 1 – | inputs are quoted prices in active markets for identical investments (e.g., equity securities, open-end investment companies, futures contracts, exchange-traded options contracts) |
| Level 2 – | other observable inputs (including, but not limited to: quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs) (e.g., debt securities, government securities, swap contracts, foreign currency exchange contracts, foreign securities utilizing international fair value pricing, broker-quoted securities, fair valued securities) |
| Level 3 – | inputs are significant unobservable inputs (including the Series’ own assumptions used to determine the fair value of investments) (e.g., broker-quoted securities, fair valued securities) |
Level 3 investments are valued using significant unobservable inputs. The Series may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Valuations may also be based upon current market prices of securities that are comparable in coupon, rating, maturity and industry. The derived value of a Level 3 investment may not represent the value which is received upon disposition and this could impact the results of operations.
The following table summarizes the valuation of the Series’ investments by fair value hierarchy levels as of December 31, 2012:
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Common Stock | $ | 8,349,890 | | $ | 38,579,758 | | | | $ – | | | $ | 46,929,648 | |
| Short-Term Investments | | – | | | 618,101 | | | | – | | | | 618,101 | |
| Securities Lending Collateral | | – | | | 2,932,527 | | | | – | | | | 2,932,527 | |
| Total | $ | 8,349,890 | | $ | 42,130,386 | | | | $ – | | | $ | 50,480,276 | |
| |
| Foreign Currency Exchange Contracts | $ | – | | $ | (200 | ) | | | $ – | | | $ | (200 | ) |
The securities that have been deemed worthless on the statement of net assets are considered to be Level 3 securities in this table.
During the year ended December 31, 2012, there were no transfers between Level 1 investments, Level 2 investments or Level 3 investments that had a significant impact to the Series. This does not include transfers between Level 1 investments and Level 2 investments due to the Series utilizing international fair value pricing during the period. In accordance with the fair valuation procedures described in Note 1, international fair value pricing uses other observable market-based inputs in place of the closing exchange price due to the events occurring after the close of the exchange or market on which the investment is principally traded causing a change in classification between levels. The Series policy is to recognize transfers between levels at the beginning of the reporting period.
A reconciliation of Level 3 investments is presented when the Series has a significant amount of Level 3 investments at the beginning, interim or end of the period in relation to net assets. Management has determined not to provide additional disclosure on Level 3 inputs under ASU No. 2011-04 since the Level 3 investments are not considered significant to the Series’ net assets at the end of the period.
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. The tax character of dividends and distributions paid during the years ended December 31, 2012 and 2011 was as follows:
| Year | | Year |
| Ended | | Ended |
| | 12/31/12 | | 12/31/11 |
| Ordinary income | $1,123,177 | | $675,637 |
International Value Equity Series-14
Delaware VIP® International Value Equity Series
Notes to Financial Statements (continued)
5. Components of Net Assets on a Tax Basis
As of December 31, 2012, the components of net assets on a tax basis were as follows:
| Shares of beneficial interest | $ | 67,361,677 | |
| Undistributed ordinary income | | 786,587 | |
| Capital loss carryforwards | | (24,941,458 | ) |
| Unrealized appreciation | | 3,945,576 | |
| Net assets | $ | 47,152,382 | |
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales and passive foreign investment companies.
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 gain (loss) on foreign currency transactions. Results of operations and net assets were not affected by these reclassifications. For the year ended December 31, 2012, the Series recorded the following reclassifications.
| Undistributed | | Accumulated |
| Net Investment | | Net Realized |
| | Income | | Loss |
| $(82,757) | | $82,757 |
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. Capital loss carryforwards remaining at December 31, 2012 will expire as follows: $11,132,929 expires in 2016 and $12,723,821 expires in 2017.
On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (Act) was enacted, which changed various technical rules governing the tax treatment of regulated investment companies. The changes were generally effective for taxable years beginning after the date of enactment. Under the Act, the Series is permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered all short-term as permitted under previous regulation.
Losses incurred that will be carried forward under the Act are as follows:
| Loss carryforward character |
| | Short-term | | Long-term |
| $1,084,708 | | $– |
6. Capital Shares
Transactions in capital shares were as follows:
| | Year | | Year |
| | Ended | | Ended |
| | 12/31/12 | | 12/31/11 |
| Shares sold: | | | | | | | |
| Standard Class | | | 589,386 | | | 451,880 | |
| Service Class | | | 1,266 | | | 1,011 | |
| |
| Shares issued upon reinvestment of dividends and distributions: | | | | | | | |
| Standard Class | | | 119,177 | | | 57,884 | |
| Service Class | | | 56 | | | 11 | |
| | | | 709,885 | | | 510,786 | |
| Shares redeemed: | | | | | | | |
| Standard Class | | | (829,925 | ) | | (1,083,917 | ) |
| Service Class | | | (210 | ) | | (273 | ) |
| | | | (830,135 | ) | | (1,084,190 | ) |
| Net decrease | | | (120,250 | ) | | (573,404 | ) |
International Value Equity Series-15
Delaware VIP® International Value Equity Series
Notes to Financial Statements (continued)
7. Line of Credit
The Series, along with certain other funds in the Delaware Investments® Family of Funds (Participants), was a participant in a $125,000,000 revolving line of credit 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 were charged an annual commitment fee, which was allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants were permitted to borrow up to a maximum of one third of their net assets under the agreement. Each Participant was individually, and not jointly, liable for its particular advances, if any, under the line of credit. The line of credit available under the agreement expired on November 13, 2012.
On November 13, 2012, the Series, along with the other Participants, entered into an amendment to the agreement for a $125,000,000 revolving line of credit. The agreement is to be used as described above and operates in substantially the same manner as the original agreement. The line of credit under the agreement expires on November 13, 2013. The Series had no amounts outstanding as of December 31, 2012 or at any time during the year then ended.
8. Derivatives
U.S. GAAP requires disclosures that enable investors to understand: 1) how and why an entity uses derivatives; 2) how they are accounted for; and 3) how they affect an entity’s results of operations and financial position.
Foreign Currency Exchange Contracts
The Series may enter into foreign currency exchange contracts and foreign cross currency exchange contracts as a way of managing foreign exchange rate risk. The Series 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 Series 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 and foreign cross 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 an unfavorable change in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency change favorably. In addition, the Series could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts. The Series’ 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 Series and the counterparty and by the posting of collateral by the counterparty to the Series to cover the Series’ exposure to the counterparty.
See the Statement of Operations on page 9 for the realized and unrealized gain or loss on derivatives.
Derivatives Generally. The table below summarizes the average balance of derivative holdings by the Series during the year ended December 31, 2012.
| Long Derivative Volume | | |
| Foreign Currency | | |
| Exchange Contracts | | |
| (Average Cost) | $ | 96,986 |
| |
| Short Derivative Volume | | |
| Foreign Currency | | |
| Exchange Contracts | | |
| (Average Cost) | $ | 96,980 |
9. Securities Lending
The Series, along with other funds in the Delaware Investments® Family of Funds, may lend its securities pursuant to a security lending agreement (Lending Agreement) with The Bank of New York Mellon (BNY Mellon). At the time a security is loaned, the borrower must post collateral equal to the required percentage of the market value of the loaned security, including any accrued interest. The required percentage is: (i) 102% with respect to U.S. securities and foreign securities that are denominated and payable in U.S. dollars; and (ii) 105% with respect to foreign securities. With respect to each loan, if on any business day the aggregate market value of securities collateral plus cash collateral held 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 by the end of the following business day which, together with the collateral already held, will be not less than the applicable initial collateral requirements for such security loan. If the aggregate market value of securities collateral and cash collateral held with respect to a security loan exceeds the applicable initial collateral requirement, upon request of the borrower BNY Mellon must return enough collateral to the borrower by the end of the following business day to reduce the value of the remaining collateral to the applicable initial collateral requirement for such security loan. As a result of the foregoing, the value of the collateral held with respect to a loaned security may be temporarily more or less than the value of the security on loan.
Cash collateral received is generally invested in the Delaware Investments Collateral Fund No. 1 (Collective Trust) established by BNY Mellon for the purpose of investment on behalf of funds managed by DMC that participate in BNY Mellon’s securities lending program. The Collective Trust may invest in U.S. government securities and high quality corporate debt, asset-backed and other money market securities and in repurchase agreements collateralized by such securities, provided that the Collective Trust will generally have a dollar-weighted average portfolio maturity of 60 days or less. In October 2008, BNY Mellon transferred certain distressed securities from the Series’ previous collateral investment pool into the Mellon GSL Reinvestment Trust II. The Series 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 Series or, at the discretion of the lending agent,
International Value Equity Series-16
Delaware VIP® International Value Equity Series
Notes to Financial Statements (continued)
9. Securities Lending (continued)
replace the loaned securities. The Series continues to record dividends or interest, as applicable, on the securities loaned and is subject to changes in value of the securities loaned that may occur during the term of the loan. The Series 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 Series 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 Series, the security lending agent and the borrower. The Series records security lending income net of allocations to the security lending agent and the borrower.
The Collective Trust used for the investment of cash collateral received from borrowers of securities 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. The Series may incur investment losses as a result of investing securities lending collateral in the Collective Trust or another collateral investment pool. This could occur if an investment in a collateral investment pool defaulted or if it were necessary to liquidate assets in the collateral investment pool to meet returns on outstanding security loans at a time when the collateral investment pool’s net asset value per unit was less than $1.00. Under those circumstances, the Series may not receive an amount from the collateral investment pool that is equal in amount to the collateral the Series would be required to return to the borrower of the securities and the Series would be required to make up for this shortfall.
At December 31, 2012, the value of the securities on loan was $3,106,234, for which cash collateral was received and invested in accordance with the Lending Agreement. At December 31, 2012, the value of invested collateral was $2,932,527. These investments are presented on the Statement of Net Assets under the caption “Securities Lending Collateral.”
10. Credit and Market Risk
Some countries in which the Series 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 Series 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 Series.
The Series may invest up to 10% 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 Series 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 Series’ Board has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of the Series’ limitation on investments in illiquid securities. Securities eligible for resale pursuant to Rule 144A, which are determined to be liquid, are not subject to the Series’ limit on investments in illiquid securities. As of December 31, 2012, there were no Rule 144A securities. Illiquid securities have been identified on the Statement of Net Assets.
11. Contractual Obligations
The Series enters into contracts in the normal course of business that contain a variety of indemnifications. The Series’ maximum exposure under these arrangements is unknown. However, the Series has not had prior claims or losses pursuant to these contracts. Management has reviewed the Series’ existing contracts and expects the risk of loss to be remote.
12. Subsequent Events
Management has determined that no material events or transactions occurred subsequent to December 31, 2012 that would require recognition or disclosure in the Series’ financial statements.
International Value Equity Series-17
Delaware VIP® Trust — Delaware VIP International Value Equity Series
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Delaware VIP Trust
and the Shareholders of Delaware VIP International Value Equity Series:
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Delaware VIP International Value Equity Series (one of the series constituting Delaware VIP Trust, hereafter referred to as the “Series”) at December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2012 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the two years in the period ended December 31, 2009 were audited by other independent accountants whose report dated February 17, 2010 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 15, 2013
International Value Equity Series-18
Delaware VIP® Trust — Delaware VIP International Value Equity Series
Other Series Information (Unaudited)
Board Consideration of Delaware VIP International Value Equity Series Investment Advisory Agreement
At a meeting held on August 21-23, 2012 (“Annual Meeting”), the Board of Trustees (“Board”), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreement for Delaware VIP International Value Equity Series (“Series”). In making its decision, the Board considered information furnished at regular quarterly Board meetings, including reports detailing Series performance, investment strategies and expenses, as well as information prepared specifically in connection with the renewal of the investment advisory contract. Information furnished specifically in connection with the renewal of the Investment Advisory Agreement with Delaware Management Company (“DMC”) included materials provided by DMC and its affiliates (“Delaware Investments”) concerning, among other things, the nature, extent and quality of services provided to the Series, the costs of such services to the Series, economies of scale and the financial condition and profitability of Delaware Investments. In addition, in connection with the Annual Meeting, reports were provided in May 2012 and included independent historical and comparative reports provided by Lipper, Inc., an independent statistical compilation organization (“Lipper”). The Lipper reports compared the Series’ investment performance and expenses with those of other comparable mutual funds. The Independent Trustees reviewed and discussed the Lipper reports with independent legal 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; comparative client fee information; 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 the Series’ policies.
In considering information relating to the approval of the Series’ advisory agreement, the Independent Trustees received assistance and advice from and met separately with independent legal 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 Series 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 Series, compliance of portfolio managers with the investment policies, strategies and restrictions for the Series, 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 Series’ investment advisor and the emphasis placed on research in the investment process. The Board recognized DMC’s receipt of several industry distinctions. The Board gave favorable consideration to DMC’s efforts to control expenditures while maintaining service levels committed to fund matters. The Board noted that in July 2011, Management implemented measures to reduce overall costs and improve transfer agent and shareholder servicing functions through outsourcing. 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 Series in view of the importance of investment performance 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 Series showed the investment performance of its Standard Class 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 Series was shown for the past one-, three-, five- and ten-year periods, as applicable, ended March 31, 2012. The Board’s objective is that the Series’ performance for the periods considered be at or above the median of its Performance Universe. The following paragraph summarizes the performance results for the Series and the Board’s view of such performance.
The Performance Universe for the Series consisted of the Series and all international value funds underlying variable insurance products as selected by Lipper. The Lipper report comparison showed that the Series’ total return for the one-year period was in the fourth quartile of its Performance Universe. The report further showed that the Series’ total return for the three- and five-year periods was in the second quartile and the Series’ total return for the ten-year period was in the first quartile. The Board determined that the Series’ short-term performance results were not in line with the Board’s objective. In evaluating the Series’ performance, the Board considered the numerous investment and performance reports delivered by Management personnel to the Board’s Investments Committee. The Board was satisfied that Management was taking action to improve Series 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 Series as of its most recently completed fiscal year. The Board also focused on the comparative analysis of effective management fees and total expense ratios of the Series versus effective management fees and expense ratios of a group of similar funds as selected by Lipper (“Expense Group”). In reviewing comparative costs, the Series’ contractual management fee and the actual management fee incurred by the Series were compared with the contractual management fees (assuming all funds in the Expense Group were similar in size to the Series) and actual management fees (as reported by each fund) within the Expense Group, taking into account any applicable breakpoints and fee waivers. The Series’ total expenses were also compared with those of its Expense Group. The Lipper total expenses, for comparative consistency, were shown by Lipper for Standard Class shares which do not charge 12b-1 and non 12b-1 service fees. The Board considered fees paid to Delaware Investments for non-management services. The Board’s objective is to limit the Series’ total expense ratio to be competitive with that of the Expense Group. The following paragraph summarizes the expense results for the Series and the Board’s view of such expenses.
The expense comparisons for the Series showed that its actual management fee and total expenses were in the quartile with the second highest expenses of its Expense Group. The Series’ total expenses were not in line with the Board’s objective. In evaluating total expenses, the Board considered various initiatives implemented by Management. The Board was satisfied with Management’s efforts to improve the Series’ total expense ratio and bring it in line with the Board’s objective and noted 12b-1 waivers in place through April 2013.
International Value Equity Series-19
Delaware VIP® International Value Equity Series
Other Series Information (Unaudited) (continued)
MANAGEMENT PROFITABILITY. The Board considered the level of profits realized by Delaware Investments in connection with the operation of the Series. 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, reflects 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 profitability of Delaware Investments.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are realized by Delaware Investments as the Series’ 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 Series’ management contract fell within the standard structure. Although the Series has not reached a size at which the advantages of breakpoints would be realized, the Board recognized that the fee was structured so that when the Series grows, economies of scale may be shared.
Tax Information
For the fiscal year ended December 31, 2012, the Series designates distributions paid during the year as follows:
| (A)
Ordinary Income
Distributions
(Tax Basis) |
| | 100% |
____________________
(A) is based on a percentage of the Series’ total distributions.
The Series intends to pass through foreign tax credits in the maximum amount of $40,863. The gross foreign source income earned during the fiscal year 2012 by the Series was $1,394,118.
International Value Equity Series-20
Delaware Investments® Family of Funds
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors (“Trustees”), which has oversight responsibility for the management of a fund’s business affairs. Trustees establish procedures and oversee and review the performance of the investment manager, the distributor, and others who perform services for the fund. The independent fund trustees, in particular, are advocates for shareholder interests. Each trustee has served in that capacity since he or she was elected to or appointed to the Board of Trustees, and will continue to serve until his or her retirement or the election of a new trustee in his or her place. The following is a list of the Trustees and Officers with certain background and related information.
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INTERESTED TRUSTEES | | | | | |
| Patrick P. Coyne1 | Chairman, | Chairman and Trustee | Patrick P. Coyne has served in | 71 | Director and Audit |
| 2005 Market Street | President, | since August 16, 2006 | various executive capacities | | Committee Member — |
| Philadelphia, PA | Chief Executive | | at different times at | | Kaydon Corp. |
| 19103 | Officer, and | President and | Delaware Investments.2 | | |
| Trustee | Chief Executive Officer | | | Board of Governors |
| April 1963 | | since August 1, 2006 | | | Member — Investment |
| | | | | Company Institute (ICI) |
| | | | | |
| INDEPENDENT TRUSTEES | | | | | |
| Thomas L. Bennett | Trustee | Since | Private Investor — | 71 | Director — |
| 2005 Market Street | | March 2005 | (March 2004–Present) | | Bryn Mawr |
| Philadelphia, PA | | | | | Bank Corp. (BMTC) |
| 19103 | | | Investment Manager — | | (2007–2011) |
| | | Morgan Stanley & Co. | | |
| October 1947 | | | (January 1984–March 2004) | | |
| Joseph W. Chow | Trustee | Since | Executive Vice President | 71 | Director and Audit |
| 2005 Market Street | | January 2013 | (Emerging Economies Strategies, | | Committee |
| Philadelphia, PA 19103 | | | Risk and Corporate Administration) | | Member — Hercules |
| | | State Street Corporation | | Technology Growth |
| January 1953 | | | (July 2004–March 2011) | | Capital, Inc. |
| John A. Fry | Trustee | Since | President | 71 | Board of Governors |
| 2005 Market Street | | January 2001 | Drexel University | | Member — NASDAQ |
| Philadelphia, PA | | | (August 2010–Present) | | OMX PHLX LLC |
| 19103 | | | | | |
| | | President — | | Director and Audit |
| May 1960 | | | Franklin & Marshall College | | Committee Member — |
| | | (June 2002–July 2010) | | Community Health |
| | | | | Systems |
| | | | | | |
| | | | | Director — Ecore |
| | | | | International |
| | | | | (2009–2010) |
| Anthony D. Knerr | Trustee | Since | Managing Director — | 71 | None |
| 2005 Market Street | | April 1990 | Anthony Knerr & Associates | | |
| Philadelphia, PA | | | (Strategic Consulting) | | |
| 19103 | | | (1990–Present) | | |
| | | | | | |
| December 1938 | | | | | |
| Lucinda S. Landreth | Trustee | Since | Private Investor | 71 | None |
| 2005 Market Street | | March 2005 | (2004–Present) | | |
| Philadelphia, PA | | | | | |
| 19103 | | | | | |
| | | | | | |
| June 1947 | | | | | |
International Value Equity Series-21
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INDEPENDENT TRUSTEES (continued) | | | | |
| Frances A. Sevilla-Sacasa | Trustee | Since | Chief Executive Officer — | 71 | Trust Manager — |
| 2005 Market Street | | September 2011 | Banco Itaú Europa | | Camden Property Trust |
| Philadelphia, PA | | | International | | (2011–Present) |
| 19103 | | | (April 2012–Present) | | |
| |
| January 1956 | | | Executive Advisor to Dean | | |
| | | (August 2011–March 2012) | | |
| | | and Interim Dean | | |
| | | (January 2011–July 2011) — | | |
| | | University of Miami School of | | |
| | | Business Administration | | |
| |
| | | President — U.S. Trust, | | |
| | | Bank of America Private | | |
| | | Wealth Management | | |
| | | (Private Banking) | | |
| | | (July 2007–December 2008) | | |
| Thomas K. Whitford | Trustee | Since | Vice Chairman | 71 | None |
| 2005 Market Street | | January 2013 | (2010–Present) | | |
| Philadelphia, PA 19103 | | | Chief Administrative | | |
| | | Officer (2008–2010) | | |
| March 1956 | | | and Executive Vice | | |
| | | President and Chief | | |
| | | Administrative Officer | | |
| | | (2007–2009) — | | |
| | | PNC Financial | | |
| | | Services Group | | |
| Janet L. Yeomans | Trustee | Since | Vice President and Treasurer | 71 | Director, Audit |
| 2005 Market Street | | April 1999 | (January 2006–Present) | | Committee Member |
| Philadelphia, PA | | | Vice President — Mergers | | and Investment |
| 19103 | | | & Acquisitions | | Committee Member |
| | | (January 2003–January 2006), | | Okabena Company |
| July 1948 | | | and | | |
| | | Vice President and Treasurer | | Chair — 3M |
| | | (July 1995–January 2003) | | Investment Management |
| | | 3M Corporation | | Company |
| | | | | (January 2005–July 2012) |
| J. Richard Zecher | Trustee | Since | Founder — | 71 | Director and Compensation |
| 2005 Market Street | | March 2005 | Investor Analytics | | Committee Member — |
| Philadelphia, PA | | | (Risk Management) | | Investor Analytics |
| 19103 | | | (May 1999–Present) | | |
| | | | | Director — |
| July 1940 | | | Founder — | | P/E Investments |
| | | P/E Investments | | |
| | | (Hedge Fund) | | |
| | | (September 1996–Present) | | |
| |
| OFFICERS | | | | | |
| David F. Connor | Vice President, | Vice President since | David F. Connor has served as | 71 | None3 |
| 2005 Market Street | Deputy General | September 2000 | Vice President and Deputy | | |
| Philadelphia, PA | Counsel, and Secretary | and Secretary | General Counsel of | | |
| 19103 | | since | Delaware Investments | | |
| | October 2005 | since 2000. | | |
| December 1963 | | | | | |
| Daniel V. Geatens | Vice President | Treasurer | Daniel V. Geatens has served | 71 | None3 |
| 2005 Market Street | and Treasurer | since | in various capacities at | | |
| Philadelphia, PA | | October 2007 | different times at | | |
| 19103 | | | Delaware Investments. | | |
| |
| October 1972 | | | | | |
International Value Equity Series-22
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| OFFICERS (continued) | | | | | |
| David P. O’Connor | Executive Vice | Executive Vice President | David P. O’Connor has served in | 71 | None3 |
| 2005 Market Street | President, | since February 2012; | various executive and legal | | |
| Philadelphia, PA | General Counsel, | Senior Vice President | capacities at different times | | |
| 19103 | and Chief | October 2005–February 2012; | at Delaware Investments. | | |
| Legal Officer | General Counsel and | | | |
| February 1966 | | Chief Legal Officer | | | |
| | since October 2005 | | | |
| Richard Salus | Senior | Chief Financial | Richard Salus has served in | 71 | None3 |
| 2005 Market Street | Vice President | Officer since | various executive capacities | | |
| Philadelphia, PA | and | November 2006 | at different times at | | |
| 19103 | Chief Financial | | Delaware Investments. | | |
| Officer | | | | |
| October 1963 | | | | | |
1 Patrick P. Coyne is considered to be an “Interested Trustee” because he is an executive officer of the Fund’s(s’) investment advisor. |
2 Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund’s(s’) investment advisor, principal underwriter, and its transfer agent. |
3 David F. Connor, Daniel V. Geatens, David P. O’Connor, and Richard Salus serve in similar capacities for the six portfolios of the Optimum Fund Trust, which have the same investment advisor, principal underwriter, and transfer agent as the registrant. |
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is available, without charge, upon request by calling 800 523-1918.
The Series files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q. The Series’ Forms N-Q, as well as a description of the policies and procedures that the Series 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 website at sec.gov. In addition, a description of the policies and procedures that the Series uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge on the Delaware Investments® Funds’ website at delawareinvestments.com. The Series’ Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Series voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the Delaware Investments Funds’ website at delawareinvestments.com; and (ii) on the Commission’s website at sec.gov. |
| AR-VIPEM [12/12] DG3 18579 (2/13) | | (10125) | | International Value Equity Series-23 |
| Delaware VIP® Trust |
| Delaware VIP Limited-Term Diversified Income Series |
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| December 31, 2012 |
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Table of contents
| > Portfolio management review | 1 |
| | |
| > Performance summary | 2 |
| | |
| > Disclosure of Series expenses | 4 |
| | |
| > Security type/sector allocation | 5 |
| | |
| > Statement of net assets | 6 |
| | |
| > Statement of operations | 14 |
| | |
| > Statements of changes in net assets | 14 |
| | |
| > Financial highlights | 15 |
| | |
| > Notes to financial statements | 17 |
| | |
| > Report of independent registered public accounting firm | 25 |
| | |
| > Other Series information | 26 |
| | |
| > Board of trustees/directors and officers addendum | 28 |
Investments in Delaware VIP® Limited-Term Diversified Income Series 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 (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 Series, the repayment of capital from the Series, or any particular rate of return.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
The Series is not FDIC insured and is 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 and member of Macquarie Group. Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries, including the Series’ distributor, Delaware Distributors, L.P. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide.
This material may be used in conjunction with the offering of shares in the Delaware VIP Limited-Term Diversified Income Series only if preceded or accompanied by the Series’ current prospectus, and if available, the summary prospectus.
© 2013 Delaware Management Holdings, Inc.
All third-party marks cited are the property of their respective owners.
| Delaware VIP® Trust — Delaware VIP Limited-Term Diversified Income Series | |
| Portfolio management review | Jan. 8, 2013 |
For the fiscal year ended Dec. 31, 2012, Delaware VIP Limited-Term Diversified Income Series Standard Class shares returned +2.78% and Service Class shares returned +2.53% (both figures assume reinvestment of all income distributions). For the same period, the Series’ benchmark, the Barclays 1–3 Year Government/Credit Index, returned +1.26%.
The Series’ commitment to seek broad diversification gives us the flexibility to shift the portfolio’s makeup across several fixed income asset classes based on our assessment of where the best potential opportunities may lie. In light of this mandate, the bulk of the Series’ relative performance was generated by returns from four major sectors: U.S. investment grade bonds, U.S. high yield debt, emerging market debt, and non-dollar developed market securities.
The Series’ continued overweight to U.S. investment-grade corporate bonds was a contributor to its relative performance for the fiscal year, as was its emphasis on intermediate-term BBB-rated issues. Though small, an allocation to high yield bonds also aided the Series’ relative performance. It is important to note, however, that we generally maintained a focus on what we viewed as higher-quality bonds within the high yield market. At times, this focus muted the Series’ potential returns from this sector.
The Series’ exposure to structured-product securities benefited performance for the period. More specifically, within the asset-backed securities (ABS) sector, we favored AAA (investment grade) floating-rate debt, which has historically provided protection during periods of volatility. This sector was supported by strong collateral performance as well as significant investor demand for low-volatility, higher-quality assets. Mortgage-backed securities (MBS) also contributed to performance, benefiting from both the support of the Federal Reserve and investor purchases. Lower-coupon mortgages performed stronger than their higher-coupon counterparts as the enhanced Home Affordable Refinance Program (HARP) has been more effective helping troubled borrowers refinance than expected. Higher-coupon prepayment speeds have remained elevated and, as a result, many investors have migrated into lower-coupon 30-year and 15-year mortgages. The Series’ exposure to what we view as high-quality commercial mortgage-backed securities (CMBS) influenced outperformance as these securities benefited from a stabilizing commercial property market. A combination of strong investor demand and net negative supply within this market provided a positive technical environment. As such, credit spreads compressed, and bond prices rose, across the entire CMBS credit curve.
It is important to bear in mind that two of the bond sectors discussed thus far — high yield and structured product markets — are not included in the Series’ benchmark index, and that the Series’ positive performances in these sectors contributed notably to outperformance versus the index.
Overseas, the Series’ small position in emerging market bonds (U.S. dollar–based as well as local-currency) helped relative performance; however, positions within the non-dollar developed market and currency hedge positions detracted for the period. Finally, the Series’ limited allocation to Treasury securities over the course of the fiscal year contributed to its relative performance as this sector underperformed riskier assets (non-Treasurys).
At the end of the fiscal year, the Series held an overweight allocation to U.S. investment grade bonds, while more than a quarter of its assets were invested in a combination of domestic high yield and emerging market debt. We also entered the Series’ new fiscal year with a modest overweight to CMBS and ABS. Conversely, we are currently maintaining a significant underweight to U.S. Treasury debt, a sector that continued to offer historically low nominal yields that are sometimes negative when inflation is accounted for.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
Limited-Term Diversified Income Series-1
Delaware VIP® Trust — Delaware VIP Limited-Term Diversified Income Series
Performance summary
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
Carefully consider the Series’ investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Series’ prospectuses and, if available, their summary prospectuses, which may be obtained by calling 800 523-1918. Investors should read the prospectuses and, if available, the summary prospectuses carefully before investing.
| Delaware VIP Limited-Term Diversified Income Series | | | | | | | | | | |
| Average annual total returns | | | | | | | | | | |
| For periods ended Dec. 31, 2012 | | 1 year | | 3 years | | 5 years | | 10 years | | Lifetime |
| Standard Class shares (commenced operations on July 28, 1988) | | +2.78% | | +3.38% | | +4.44% | | +4.13% | | +5.65% |
| Service Class shares (commenced operations on May 1, 2000) | | +2.53% | | +3.13% | | +4.17% | | +3.82% | | +4.81% |
Returns reflect the reinvestment of all distributions and any applicable sales charges as noted in the following paragraphs.
As described in the Series’ most recent prospectus, the net expense ratio for Service Class shares of the Series was 0.83%, while total operating expenses for Standard Class and Service Class shares were 0.58% and 0.88%, respectively. The management fee for Standard Class and Service Class shares was 0.49%.
The Series’ distributor has contracted to limit the 12b-1 fees for Service Class shares to 0.25% of average daily net assets from April 30, 2012 through April 30, 2013.
Earnings from a variable annuity or variable life investment compound tax-free until withdrawal, and as a result, no adjustments were made for income taxes.
Expense limitations were in effect for all classes during certain periods shown in the Series’ performance table above and in the Performance of a $10,000 Investment chart on the next page.
Performance data do not reflect other costs incurred by beneficial owners such as insurance company separate account fees and variable annuity or variable life contract charges or deferred sales charges. Performance shown here would have been reduced if such fees were included and the expense limitation removed. For more information about fees, consult your variable annuity or variable life prospectus.
Investments in variable products involve risk.
Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt.
The Series may also be subject to prepayment risk, the risk that the principal of a fixed income security that is held by the Series may be prepaid prior to maturity, potentially forcing the Series to reinvest that money at a lower interest rate.
The Series may invest in derivatives, which may involve additional expenses and are subject to risk, including the risk that an underlying security or securities index moves in the opposite direction from what the portfolio manager anticipated. A derivative transaction depends upon the counterparties’ ability to fulfill their contractual obligations.
High yielding, noninvestment grade bonds (junk bonds) involve higher risk than investment grade bonds.
The Series may experience portfolio turnover in excess of 100%, which could result in higher transaction costs and tax liability.
International investments entail risks not ordinarily associated with U.S. investments including fluctuation in currency values, differences in accounting principles, or economic or political instability in other nations. Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.
If and when the Series invests in forward foreign currency contracts or uses other investments to hedge against currency risks, the Series will be subject to special risks, including counterparty risk.
Please read both the contract and underlying prospectus for specific details regarding the product’s risk profile.
Limited-Term Diversified Income Series-2
Delaware VIP® Limited-Term Diversified Income Series
Performance summary (continued)
| For period beginning Dec. 31, 2002, through Dec. 31, 2012 | | Starting value | | Ending value |
| –– | Delaware VIP Limited-Term Diversified Income Series (Standard Class shares) | | $10,000 | | $14,977 |
| – – | Barclays 1–3 Year U.S. Government/Credit Index | | $10,000 | | $13,609 |
The chart shows a $10,000 investment in the Delaware VIP Limited-Term Diversified Income Series Standard Class shares for the period from Dec. 31, 2002 through Dec. 31, 2012.
The chart also shows $10,000 invested in the Barclays 1–3 Year Government/Credit Index for the period from Dec. 31, 2002 through Dec. 31, 2012. The Barclays 1–3 Year U.S. Government/Credit Index is a market value-weighted index of government fixed-rate debt securities and investment grade U.S. and foreign fixed-rate debt securities with average maturities of one to three years.
Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
Performance of Service Class shares will vary due to different charges and expenses.
Past performance is not a guarantee of future results.
Limited-Term Diversified Income Series-3
Delaware VIP® Trust — Delaware VIP Limited-Term Diversified Income Series
Disclosure of Series Expenses
For the Six-Month Period July 1, 2012 to December 31, 2012 (Unaudited)
As a shareholder of the Series, you incur ongoing costs, which may include management fees; distribution and/or service (12b-1) fees; and other Series expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Series 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 six-month period from July 1, 2012 to December 31, 2012.
Actual Expenses
The first section of the table shown, “Actual Series 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 the 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 Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ 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 Series and other funds. To do so, compare the 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. As a shareholder of the Series, you do not incur any transaction costs, such as sales charges (loads), redemption fees or exchange fees, but shareholders of other funds may incur such costs. Also, the fees related to the variable annuity investment or the deferred sales charge that could apply have not been included. 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. The Series’ actual expenses shown in the table reflect fee waivers in effect for Service Class shares. The expenses shown in the table assume reinvestment of all dividends and distributions.
Expense Analysis of an Investment of $1,000
| | | | | | | | | | | | Expenses |
| | Beginning | | Ending | | | | Paid During |
| | Account | | Account | | Annualized | | Period |
| | Value | | Value | | Expense | | 7/1/12 to |
| | 7/1/12 | | 12/31/12 | | Ratio | | 12/31/12* |
| Actual Series Return† | | | | | | | | | | | | | | | |
| Standard Class | | | $ | 1,000.00 | | | $ | 1,006.70 | | 0.57% | | | $ | 2.88 | |
| Service Class | | | | 1,000.00 | | | | 1,005.40 | | 0.82% | | | | 4.13 | |
| Hypothetical 5% Return (5% return before expenses) |
| Standard Class | | | $ | 1,000.00 | | | $ | 1,022.27 | | 0.57% | | | $ | 2.90 | |
| Service Class | | | | 1,000.00 | | | | 1,021.01 | | 0.82% | | | | 4.17 | |
*“Expenses Paid During Period” are equal to the Series’ annualized expense ratio, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period).
†Because actual returns reflect only the most recent six-month period, the returns shown may differ significantly from fiscal year returns.
Limited-Term Diversified Income Series-4
Delaware VIP® Trust — Delaware VIP Limited-Term Diversified Income Series
Security Type/Sector Allocation
As of December 31, 2012 (Unaudited)
Sector designations may be different than the sector designations presented in other Series materials. The sector designations may represent the investment manager’s internal sector classifications, which may result in the sector designations for one series being different than another series’ sector designations.
| Percentage |
| Security Type/Sector Allocation | of Net Assets |
| Agency Asset-Backed Securities | 0.00 | % |
| Agency Collateralized Mortgage Obligations | 1.20 | % |
| Agency Mortgage-Backed Securities | 19.42 | % |
| Commercial Mortgage-Backed Securities | 1.66 | % |
| Convertible Bonds | 0.59 | % |
| Corporate Bonds | 48.73 | % |
| Banking | 6.40 | % |
| Basic Industry | 4.25 | % |
| Brokerage | 0.24 | % |
| Capital Goods | 1.97 | % |
| Communications | 5.14 | % |
| Consumer Cyclical | 5.20 | % |
| Consumer Non-Cyclical | 7.52 | % |
| Electric | 1.71 | % |
| Energy | 5.98 | % |
| Finance Companies | 2.39 | % |
| Insurance | 2.04 | % |
| Natural Gas | 1.37 | % |
| Real Estate | 0.95 | % |
| Technology | 3.01 | % |
| Transportation | 0.56 | % |
| Municipal Bonds | 1.37 | % |
| Non-Agency Asset Backed Securities | 20.81 | % |
| Non-Agency Collateralized Mortgage Obligations | 0.02 | % |
| U.S. Treasury Obligations | 4.63 | % |
| Preferred Stock | 0.24 | % |
| Sovereign Bond | 0.15 | % |
| Short-Term Investments | 13.37 | % |
| Securities Lending Collateral | 0.01 | % |
| Total Value of Securities | 112.20 | % |
| Obligation to Return Securities Lending Collateral | (0.01 | %) |
| Other Liabilities Net of Receivables and Other Assets | (12.19 | %) |
| Total Net Assets | 100.00 | % |
Limited-Term Diversified Income Series-5
Delaware VIP® Trust — Delaware VIP Limited-Term Diversified Income Series
Statement of Net Assets
December 31, 2012
| | | | Principal | | Market |
| | | Amount | | Value |
| | | | (U.S. $) | | (U.S. $) |
| AGENCY ASSET-BACKED SECURITIES–0.00% | | | | | | |
| Fannie Mae Grantor Trust | | | | | | |
| Series 2003-T4 2A5 5.407% 9/26/33 | | $ | 22,008 | | $ | 23,512 |
| Total Agency Asset-Backed Securities | | | | | | |
| (cost $21,830) | | | | | | 23,512 |
| |
| AGENCY COLLATERALIZED | | | | | | |
| MORTGAGE OBLIGATIONS–1.20% | | | | | | |
| •Fannie Mae Grantor Trust | | | | | | |
| Series 2001-T5 A2 6.991% 2/19/30 | | | 21,295 | | | 25,314 |
| Fannie Mae REMICs | | | | | | |
| Series 2002-90 A1 6.50% 6/25/42 | | | 668 | | | 785 |
| Series 2003-32 PH 5.50% 3/25/32 | | | 129,725 | | | 132,845 |
| Series 2003-52 NA 4.00% 6/25/23 | | | 156,529 | | | 167,258 |
| Series 2003-120 BL 3.50% 12/25/18 | | | 434,933 | | | 458,780 |
| Series 2004-49 EB 5.00% 7/25/24 | | | 33,469 | | | 36,951 |
| • | Series 2005-66 FD 0.51% 7/25/35 | | | 497,088 | | | 497,995 |
| Series 2005-110 MB 5.50% 9/25/35 | | | 11,130 | | | 12,216 |
| Series 2011-88 AB 2.50% 9/25/26 | | | 296,985 | | | 305,607 |
| Fannie Mae Whole Loan | | | | | | |
| Series 2004-W9 2A1 6.50% 2/25/44 | | | 23,939 | | | 27,366 |
| Freddie Mac REMICs | | | | | | |
| Series 2326 ZQ 6.50% 6/15/31 | | | 38,659 | | | 44,198 |
| Series 2931 GC 5.00% 1/15/34 | | | 145,000 | | | 151,573 |
| • | Series 3016 FL 0.599% 8/15/35 | | | 300,199 | | | 301,091 |
| Series 3027 DE 5.00% 9/15/25 | | | 37,095 | | | 40,723 |
| • | Series 3067 FA 0.559% 11/15/35 | | | 2,609,532 | | | 2,620,336 |
| Series 3173 PE 6.00% 4/15/35 | | | 15,644 | | | 16,250 |
| • | Series 3232 KF 0.659% 10/15/36 | | | 136,749 | | | 137,855 |
| • | Series 3297 BF 0.449% 4/15/37 | | | 846,485 | | | 846,899 |
| Series 3416 GK 4.00% 7/15/22 | | | 39,855 | | | 40,954 |
| Series 3737 NA 3.50% 6/15/25 | | | 215,048 | | | 225,028 |
| • | Series 3780 LF 0.609% 3/15/29 | | | 639,602 | | | 640,486 |
| • | Series 3800 AF 0.709% 2/15/41 | | | 6,654,716 | | | 6,710,821 |
| • | Series 3803 TF 0.609% 11/15/28 | | | 642,393 | | | 645,190 |
| •Freddie Mac Strip Series 19 F 1.048% 6/1/28 | | | 6,840 | | | 6,511 |
| tFreddie Mac Structured Pass Through Securities | | | | | | |
| Series T-54 2A 6.50% 2/25/43 | | | 1,274 | | | 1,499 |
| Series T-58 2A 6.50% 9/25/43 | | | 30,237 | | | 35,241 |
| Total Agency Collateralized Mortgage | | | | | | |
| Obligations (cost $14,004,819) | | | | | | 14,129,772 |
| |
| AGENCY MORTGAGE-BACKED | | | | | | |
| SECURITIES–19.42% | | | | | | |
| Fannie Mae | | | | | | |
| 4.00% 9/1/20 | | | 3,012,618 | | | 3,229,871 |
| 6.50% 8/1/17 | | | 5,578 | | | 6,173 |
| 7.00% 11/15/16 | | | 3,742 | | | 3,833 |
| •Fannie Mae ARM | | | | | | |
| 1.871% 8/1/37 | | | 326,415 | | | 350,351 |
| 2.272% 1/1/35 | | | 1,045,902 | | | 1,110,196 |
| 2.28% 12/1/33 | | | 14,730 | | | 15,522 |
| 2.402% 10/1/33 | | | 7,875 | | | 8,187 |
| 2.629% 8/1/34 | | | 20,630 | | | 21,887 |
| 2.692% 8/1/37 | | | 192,715 | | | 205,094 |
| 2.775% 4/1/36 | | | 257,433 | | | 274,655 |
| 2.777% 6/1/34 | | | 17,817 | | | 18,948 |
| 2.781% 9/1/35 | | | 303,367 | | | 322,046 |
| 2.803% 11/1/35 | | | 120,770 | | | 129,061 |
| 2.811% 11/1/35 | | | 3,929 | | | 4,190 |
| 3.463% 1/1/41 | | | 199,608 | | | 211,203 |
| 3.789% 3/1/38 | | | 6,301 | | | 6,687 |
| 4.984% 9/1/38 | | | 967,615 | | | 1,034,125 |
| 5.155% 8/1/35 | | | 4,827 | | | 5,188 |
| 5.843% 8/1/37 | | | 104,717 | | | 113,666 |
| 6.035% 6/1/36 | | | 46,442 | | | 49,976 |
| 6.048% 7/1/36 | | | 33,336 | | | 36,063 |
| 6.176% 4/1/36 | | | 12,770 | | | 13,660 |
| 6.281% 8/1/36 | | | 37,002 | | | 39,449 |
| 6.326% 7/1/36 | | | 32,566 | | | 34,767 |
| Fannie Mae Relocation 30 yr | | | | | | |
| Pool 763656 5.00% 1/1/34 | | | 8,506 | | | 9,129 |
| Pool 763742 5.00% 1/1/34 | | | 29,392 | | | 31,545 |
| Fannie Mae S.F. 15 yr | | | | | | |
| 2.50% 12/1/27 | | | 2,363,000 | | | 2,472,781 |
| 3.00% 11/1/27 | | | 33,746 | | | 35,886 |
| 4.00% 11/1/25 | | | 5,634,985 | | | 6,132,566 |
| 4.00% 4/1/27 | | | 762,328 | | | 820,353 |
| 4.50% 9/1/20 | | | 1,141,656 | | | 1,231,228 |
| 5.00% 9/1/18 | | | 95,993 | | | 104,319 |
| 5.00% 10/1/18 | | | 1,609 | | | 1,748 |
| 5.00% 2/1/19 | | | 2,946 | | | 3,245 |
| 5.00% 5/1/21 | | | 17,287 | | | 18,787 |
| 5.00% 9/1/25 | | | 6,785,051 | | | 7,347,080 |
| 5.50% 1/1/23 | | | 10,267 | | | 11,104 |
| 5.50% 4/1/23 | | | 27,065 | | | 29,271 |
| 6.00% 3/1/18 | | | 521,202 | | | 553,918 |
| 6.00% 8/1/22 | | | 29,033 | | | 31,905 |
| 7.00% 11/1/14 | | | 89 | | | 93 |
| 7.50% 3/1/15 | | | 236 | | | 238 |
| 8.00% 10/1/16 | | | 5,143 | | | 5,500 |
| Fannie Mae S.F. 15 yr TBA | | | | | | |
| 2.50% 1/1/27 | | | 21,770,000 | | | 22,763,255 |
| 3.00% 1/1/27 | | | 89,134,000 | | | 94,078,155 |
| Fannie Mae S.F. 30 yr | | | | | | |
| 3.50% 8/1/42 | | | 2,754,736 | | | 2,972,001 |
| 4.50% 8/1/41 | | | 26,339 | | | 28,592 |
| 5.00% 3/1/34 | | | 4,179 | | | 4,553 |
| 5.50% 4/1/34 | | | 4,417,574 | | | 4,861,536 |
| 6.00% 11/1/34 | | | 2,972 | | | 3,305 |
| 6.00% 4/1/36 | | | 12,117 | | | 13,266 |
| 6.00% 8/1/36 | | | 470,436 | | | 515,039 |
| 6.00% 10/1/36 | | | 793,761 | | | 869,018 |
| 6.00% 3/1/37 | | | 238,257 | | | 262,522 |
| 6.00% 1/1/38 | | | 277,134 | | | 303,410 |
| 6.00% 12/1/38 | | | 152,512 | | | 166,639 |
| 6.00% 10/1/39 | | | 3,361,140 | | | 3,679,812 |
| 6.00% 11/1/39 | | | 765,192 | | | 837,740 |
| 6.00% 6/1/40 | | | 6,857,719 | | | 7,507,903 |
Limited-Term Diversified Income Series-6
Delaware VIP® Limited-Term Diversified Income Series
Statement of Net Assets (continued)
| | | | Principal | | Market |
| | | | Amount | | Value |
| | | (U.S. $) | | (U.S. $) |
| AGENCY MORTGAGE-BACKED | | | | | | |
| SECURITIES (continued) | | | | | | |
| Fannie Mae S.F. 30 yr (continued) | | | | | | |
| 6.00% 7/1/40 | | $ | 956,345 | | $ | 1,047,016 |
| 6.00% 2/1/41 | | | 4,401,422 | | | 4,855,999 |
| 6.50% 6/1/29 | | | 802 | | | 941 |
| 6.50% 1/1/34 | | | 1,347 | | | 1,595 |
| 6.50% 4/1/36 | | | 2,602 | | | 2,963 |
| 6.50% 6/1/36 | | | 8,216 | | | 9,284 |
| 6.50% 10/1/36 | | | 5,906 | | | 6,636 |
| 6.50% 8/1/37 | | | 1,625 | | | 1,827 |
| 6.50% 12/1/37 | | | 9,817 | | | 11,096 |
| 7.00% 12/1/34 | | | 1,075 | | | 1,279 |
| 7.00% 12/1/35 | | | 1,014 | | | 1,204 |
| 7.00% 4/1/37 | | | 742,181 | | | 855,057 |
| 7.00% 12/1/37 | | | 8,165 | | | 9,719 |
| 7.50% 6/1/31 | | | 9,877 | | | 12,065 |
| 7.50% 4/1/32 | | | 504 | | | 618 |
| 7.50% 5/1/33 | | | 2,369 | | | 2,603 |
| 7.50% 6/1/34 | | | 801 | | | 986 |
| 9.00% 7/1/20 | | | 14,140 | | | 16,044 |
| 10.00% 8/1/19 | | | 7,835 | | | 8,772 |
| Fannie Mae S.F. 30 yr TBA | | | | | | |
| 3.00% 1/1/42 | | | 22,165,000 | | | 23,224,763 |
| 3.50% 1/1/42 | | | 8,075,000 | | | 8,609,021 |
| •Freddie Mac ARM | | | | | | |
| 2.362% 4/1/33 | | | 6,991 | | | 7,049 |
| 2.764% 7/1/36 | | | 86,292 | | | 91,978 |
| 2.787% 4/1/34 | | | 4,103 | | | 4,379 |
| 5.046% 8/1/38 | | | 24,002 | | | 25,845 |
| 5.074% 7/1/38 | | | 1,385,130 | | | 1,484,533 |
| 5.679% 6/1/37 | | | 228,355 | | | 246,859 |
| 5.812% 10/1/36 | | | 7,682 | | | 8,305 |
| 6.15% 10/1/37 | | | 154,262 | | | 168,203 |
| Freddie Mac S.F. 15 yr | | | | | | |
| 4.00% 11/1/13 | | | 5,504 | | | 5,542 |
| 4.00% 4/1/26 | | | 3,651,254 | | | 3,861,277 |
| 5.00% 4/1/20 | | | 85,061 | | | 91,515 |
| 5.00% 12/1/22 | | | 15,483 | | | 16,666 |
| 5.50% 7/1/24 | | | 1,335,914 | | | 1,450,121 |
| 8.00% 5/1/15 | | | 6,553 | | | 6,885 |
| Freddie Mac S.F. 30 yr | | | | | | |
| 5.50% 7/1/38 | | | 53,781 | | | 58,065 |
| 5.50% 7/1/40 | | | 1,288,075 | | | 1,393,896 |
| 6.00% 2/1/36 | | | 1,776,832 | | | 1,936,411 |
| 6.00% 1/1/38 | | | 844,502 | | | 919,028 |
| 6.00% 8/1/38 | | | 3,394,383 | | | 3,729,784 |
| 6.00% 10/1/38 | | | 4,988,122 | | | 5,487,549 |
| 6.00% 5/1/40 | | | 2,549,828 | | | 2,774,846 |
| 7.00% 11/1/33 | | | 8,712 | | | 10,269 |
| 9.00% 4/1/17 | | | 718 | | | 799 |
| GNMA I S.F. 15 yr 6.00% 1/15/22 | | | 1,209,900 | | | 1,325,779 |
| GNMA I S.F. 30 yr | | | | | | |
| 7.00% 12/15/34 | | | 31,957 | | | 37,498 |
| 7.50% 1/15/32 | | | 949 | | | 1,161 |
| GNMA II S.F. 30 yr | | | | | | |
| 12.00% 6/20/14 | | | 394 | | | 400 |
| 12.00% 2/20/16 | | | 218 | | | 219 |
| Total Agency Mortgage-Backed Securities | | | | | | |
| (cost $227,648,096) | | | | | | 228,776,589 |
| |
| COMMERCIAL MORTGAGE-BACKED | | | | | | |
| SECURITIES–1.66% | | | | | | |
| •Bear Stearns Commercial Mortgage Securities | | | | | | |
| Series 2005-PWR7 A3 5.116% 2/11/41 | | | 600,000 | | | 651,742 |
| Series 2005-T20 A4A 5.149% 10/12/42 | | | 455,000 | | | 504,810 |
| t•Commercial Mortgage Pass Through Certificates | | | | | | |
| Series 2005-C6 A5A 5.116% 6/10/44 | | | 1,665,000 | | | 1,837,377 |
| •Credit Suisse First Boston Mortgage Securities | | | | | | |
| Series 2004-C1 A4 4.75% 1/15/37 | | | 1,420,526 | | | 1,465,493 |
| #DBUBS Mortgage Trust | | | | | | |
| Series 2011-LC1A A3 144A | | | | | | |
| 5.002% 11/10/46 | | | 725,000 | | | 863,638 |
| Goldman Sachs Mortgage Securities II | | | | | | |
| • | Series 2004-GG2 A6 5.396% 8/10/38 | | | 1,470,000 | | | 1,553,318 |
| Series 2005-GG4 A4 4.761% 7/10/39 | | | 1,370,000 | | | 1,476,490 |
| Series 2005-GG4 A4A 4.751% 7/10/39 | | | 2,905,000 | | | 3,133,182 |
| • | Series 2006-GG6 A4 5.553% 4/10/38 | | | 915,000 | | | 1,030,144 |
| •JPMorgan Chase Commercial Mortgage Securities | | | | | | |
| Series 2005-LDP5 A4 5.20% 12/15/44 | | | 3,558,000 | | | 3,965,640 |
| Morgan Stanley Capital I | | | | | | |
| Series 2005-HQ6 A4A 4.989% 8/13/42 | | | 1,205,000 | | | 1,316,485 |
| • | Series 2007-T27 A4 5.651% 6/11/42 | | | 1,520,000 | | | 1,799,952 |
| Total Commercial Mortgage-Backed Securities | | | | | | |
| (cost $17,711,221) | | | | | | 19,598,271 |
| |
| CONVERTIBLE BONDS–0.59% | | | | | | |
| L-3 Communications Holdings 3.00% | | | | | | |
| exercise price $91.21, | | | | | | |
| expiration date 8/1/35 | | | 2,765,000 | | | 2,813,388 |
| Medtronic 1.625% exercise price $53.13, | | | | | | |
| expiration date 4/15/13 | | | 1,250,000 | | | 1,255,469 |
| NuVasive 2.25% exercise price $44.74, | | | | | | |
| expiration date 3/15/13 | | | 2,914,000 | | | 2,917,642 |
| Total Convertible Bonds | | | | | | |
| (cost $6,722,669) | | | | | | 6,986,499 |
| |
| CORPORATE BONDS–48.73% | | | | | | |
| Banking – 6.40% | | | | | | |
| Abbey National Treasury Services | | | | | | |
| 4.00% 4/27/16 | | | 2,325,000 | | | 2,460,315 |
| #Bank Nederlandse Gemeenten 144A | | | | | | |
| 1.375% 9/27/17 | | | 1,308,000 | | | 1,315,650 |
| 1.75% 10/6/15 | | | 1,000 | | | 1,028 |
| Bank of America 1.50% 10/9/15 | | | 6,115,000 | | | 6,150,418 |
| Bank of New York Mellon 1.969% 6/20/17 | | | 1,830,000 | | | 1,889,288 |
| BB&T 5.20% 12/23/15 | | | 1,670,000 | | | 1,863,115 |
| •Branch Banking & Trust 0.63% 9/13/16 | | | 4,500,000 | | | 4,434,030 |
| BVA US Senior 4.664% 10/9/15 | | | 1,420,000 | | | 1,456,892 |
Limited-Term Diversified Income Series-7
Delaware VIP® Limited-Term Diversified Income Series
Statement of Net Assets (continued)
| | | | Principal | | Market |
| | | Amount | | Value |
| | | (U.S. $) | | (U.S. $) |
| CORPORATE BONDS (continued) | | | | | | |
| Banking (continued) | | | | | | |
| Comerica 3.00% 9/16/15 | | $ | 2,185,000 | | $ | 2,308,675 |
| #•Commonwealth Bank of Australia 144A | | | | | | |
| 0.588% 9/17/14 | | | 13,340,000 | | | 13,390,785 |
| Fifth Third Bancorp 3.625% 1/25/16 | | | 1,860,000 | | | 1,988,718 |
| Goldman Sachs Group 3.30% 5/3/15 | | | 2,995,000 | | | 3,123,318 |
| #HSBC Bank 144A 3.10% 5/24/16 | | | 3,440,000 | | | 3,639,947 |
| JPMorgan Chase | | | | | | |
| 2.00% 8/15/17 | | | 1,245,000 | | | 1,273,163 |
| 3.45% 3/1/16 | | | 7,105,000 | | | 7,551,258 |
| •JPMorgan Chase Bank 0.64% 6/13/16 | | | 605,000 | | | 588,658 |
| KeyBank 5.45% 3/3/16 | | | 1,780,000 | | | 1,991,277 |
| PNC Financial Services Group 2.854% 11/9/22 | | | 555,000 | | | 559,425 |
| Santander Holdings USA | | | | | | |
| 3.00% 9/24/15 | | | 2,385,000 | | | 2,430,325 |
| 4.625% 4/19/16 | | | 795,000 | | | 831,799 |
| •SunTrust Bank 0.602% 8/24/15 | | | 585,000 | | | 568,703 |
| SunTrust Banks 3.60% 4/15/16 | | | 1,505,000 | | | 1,608,812 |
| •UBS 1.313% 1/28/14 | | | 2,195,000 | | | 2,209,039 |
| US Bancorp | | | | | | |
| 3.15% 3/4/15 | | | 750,000 | | | 790,775 |
| 4.20% 5/15/14 | | | 1,860,000 | | | 1,953,450 |
| •USB Capital IX 3.50% 10/29/49 | | | 2,220,000 | | | 2,009,477 |
| #•USB Realty 144A 1.487% 12/22/49 | | | 200,000 | | | 172,028 |
| Wachovia | | | | | | |
| • | 0.71% 10/15/16 | | | 10,000 | | | 9,832 |
| 5.625% 10/15/16 | | | 20,000 | | | 22,950 |
| Wachovia Bank 5.60% 3/15/16 | | | 1,655,000 | | | 1,863,924 |
| Wells Fargo 2.625% 12/15/16 | | | 1,450,000 | | | 1,531,721 |
| Wells Fargo Bank | | | | | | |
| • | 0.52% 5/16/16 | | | 545,000 | | | 533,859 |
| 4.75% 2/9/15 | | | 500,000 | | | 537,280 |
| Zions Bancorporation | | | | | | |
| 4.50% 3/27/17 | | | 1,695,000 | | | 1,772,556 |
| 7.75% 9/23/14 | | | 475,000 | | | 518,985 |
| | | | | | | 75,351,475 |
| Basic Industry – 4.25% | | | | | | |
| #Anglo American Capital 144A | | | | | | |
| 2.15% 9/27/13 | | | 1,095,000 | | | 1,102,965 |
| 2.625% 9/27/17 | | | 1,750,000 | | | 1,787,903 |
| ArcelorMittal 5.00% 2/25/17 | | | 8,070,000 | | | 8,153,372 |
| Barrick Gold 2.90% 5/30/16 | | | 5,025,000 | | | 5,276,521 |
| BHP Billiton Finance USA 1.875% 11/21/16 | | | 6,860,000 | | | 7,079,815 |
| Cabot 2.55% 1/15/18 | | | 2,675,000 | | | 2,760,549 |
| CF Industries 6.875% 5/1/18 | | | 4,740,000 | | | 5,797,086 |
| Dow Chemical | | | | | | |
| 3.00% 11/15/22 | | | 5,300,000 | | | 5,299,428 |
| 5.90% 2/15/15 | | | 3,415,000 | | | 3,769,426 |
| Ecolab 1.45% 12/8/17 | | | 1,320,000 | | | 1,315,562 |
| #Georgia-Pacific 144A 5.40% 11/1/20 | | | 2,365,000 | | | 2,818,082 |
| Lubrizol 5.50% 10/1/14 | | | 790,000 | | | 856,692 |
| #NewMarket 144A 4.10% 12/15/22 | | | 570,000 | | | 581,162 |
| Rio Tinto Finance USA | | | | | | |
| 1.625% 8/21/17 | | | 2,370,000 | | | 2,402,265 |
| 2.875% 8/21/22 | | | 1,065,000 | | | 1,074,288 |
| | | | | | | 50,075,116 |
| Brokerage–0.24% | | | | | | |
| Jefferies Group 5.875% 6/8/14 | | | 820,000 | | | 867,150 |
| Lazard Group | | | | | | |
| 6.85% 6/15/17 | | | 733,000 | | | 848,039 |
| 7.125% 5/15/15 | | | 949,000 | | | 1,055,569 |
| | | | | | | 2,770,758 |
| Capital Goods–1.97% | | | | | | |
| Caterpillar 1.50% 6/26/17 | | | 3,665,000 | | | 3,715,874 |
| John Deere Capital 1.70% 1/15/20 | | | 2,255,000 | | | 2,235,589 |
| Precision Castparts 1.25% 1/15/18 | | | 6,560,000 | | | 6,578,827 |
| United Technologies 1.80% 6/1/17 | | | 4,425,000 | | | 4,559,741 |
| #URS 144A 3.85% 4/1/17 | | | 3,585,000 | | | 3,696,655 |
| Waste Management 2.60% 9/1/16 | | | 2,365,000 | | | 2,479,667 |
| | | | | | | 23,266,353 |
| Communications–5.14% | | | | | | |
| AT&T 1.70% 6/1/17 | | | 6,715,000 | | | 6,817,894 |
| #CC Holdings GS V 144A 3.849% 4/15/23 | | | 4,695,000 | | | 4,786,379 |
| Comcast 5.85% 11/15/15 | | | 3,300,000 | | | 3,758,591 |
| #COX Communications 144A 5.875% 12/1/16 | | | 1,550,000 | | | 1,811,074 |
| #Crown Castle Towers 144A 3.214% 8/15/15 | | | 795,000 | | | 829,401 |
| #Deutsche Telekom International Finance 144A | | | | | | |
| 2.25% 3/6/17 | | | 2,975,000 | | | 3,053,858 |
| 3.125% 4/11/16 | | | 2,705,000 | | | 2,863,418 |
| DIRECTV Holdings | | | | | | |
| 2.40% 3/15/17 | | | 1,980,000 | | | 2,030,171 |
| 3.50% 3/1/16 | | | 1,510,000 | | | 1,600,904 |
| Discovery Communications 3.70% 6/1/15 | | | 2,650,000 | | | 2,824,863 |
| eBay 1.35% 7/15/17 | | | 675,000 | | | 683,611 |
| Interpublic Group | | | | | | |
| 2.25% 11/15/17 | | | 1,155,000 | | | 1,139,685 |
| 3.75% 2/15/23 | | | 1,500,000 | | | 1,507,151 |
| Rogers Communications 7.50% 3/15/15 | | | 1,262,000 | | | 1,438,059 |
| Symantec 2.75% 6/15/17 | | | 1,600,000 | | | 1,647,166 |
| Telecom Italia Capital | | | | | | |
| 4.95% 9/30/14 | | | 345,000 | | | 361,043 |
| 5.25% 11/15/13 | | | 300,000 | | | 309,000 |
| Time Warner Cable | | | | | | |
| 5.85% 5/1/17 | | | 6,205,000 | | | 7,337,233 |
| 7.50% 4/1/14 | | | 1,420,000 | | | 1,539,112 |
| 8.25% 2/14/14 | | | 495,000 | | | 536,354 |
| Verizon Communications | | | | | | |
| • | 0.92% 3/28/14 | | | 2,200,000 | | | 2,213,697 |
| 2.00% 11/1/16 | | | 8,835,000 | | | 9,152,079 |
| Virgin Media Secured Finance 6.50% 1/15/18 | | | 2,200,000 | | | 2,378,750 |
| | | | | | | 60,619,493 |
| Consumer Cyclical–5.20% | | | | | | |
| Amazon.com 2.50% 11/29/22 | | | 3,830,000 | | | 3,783,155 |
| *Brinker International 5.75% 6/1/14 | | | 1,000,000 | | | 1,058,152 |
| Costco Wholesale 1.70% 12/15/19 | | | 7,215,000 | | | 7,276,010 |
| Dollar General 4.125% 7/15/17 | | | 465,000 | | | 490,575 |
| Ford Motor Credit | | | | | | |
| 3.984% 6/15/16 | | | 1,200,000 | | | 1,275,221 |
| 4.25% 2/3/17 | | | 4,285,000 | | | 4,594,797 |
| Historic TW 6.875% 6/15/18 | | | 1,340,000 | | | 1,690,632 |
| #Hyundai Capital America 144A | | | | | | |
| 2.125% 10/2/17 | | | 260,000 | | | 262,156 |
| 4.00% 6/8/17 | | | 1,445,000 | | | 1,561,130 |
Limited-Term Diversified Income Series-8
Delaware VIP® Limited-Term Diversified Income Series
Statement of Net Assets (continued)
| | | Principal | | Market |
| | | Amount | | Value |
| | | | (U.S. $) | | (U.S. $) |
| CORPORATE BONDS (continued) | | | | | | |
| Consumer Cyclical (continued) | | | | | | |
| Lowe’s 1.625% 4/15/17 | | $ | 5,440,000 | | $ | 5,572,475 |
| •Target 0.495% 7/18/14 | | | 8,700,000 | | | 8,729,346 |
| Time Warner | | | | | | |
| 3.15% 7/15/15 | | | 2,200,000 | | | 2,327,912 |
| 5.875% 11/15/16 | | | 2,145,000 | | | 2,513,775 |
| Viacom 2.50% 12/15/16 | | | 4,960,000 | | | 5,176,524 |
| Walgreen 1.80% 9/15/17 | | | 7,175,000 | | | 7,223,087 |
| Wal-Mart Stores 1.50% 10/25/15 | | | 1,970,000 | | | 2,029,057 |
| Walt Disney 2.35% 12/1/22 | | | 1,705,000 | | | 1,724,452 |
| Wyndham Worldwide 2.95% 3/1/17 | | | 3,880,000 | | | 3,971,358 |
| | | | | | | 61,259,814 |
| Consumer Non-Cyclical–7.52% | | | | | | |
| #AbbVie 144A 1.75% 11/6/17 | | | 5,475,000 | | | 5,540,962 |
| #ADT 144A 2.25% 7/15/17 | | | 1,650,000 | | | 1,638,648 |
| Anheuser-Busch 5.60% 3/1/17 | | | 1,990,000 | | | 2,345,125 |
| Anheuser-Busch InBev Worldwide | | | | | | |
| 1.375% 7/15/17 | | | 5,450,000 | | | 5,513,433 |
| Brown-Forman 1.00% 1/15/18 | | | 2,920,000 | | | 2,907,009 |
| CareFusion 6.375% 8/1/19 | | | 980,000 | | | 1,170,206 |
| CR Bard 1.375% 1/15/18 | | | 5,465,000 | | | 5,500,528 |
| Dr. Pepper Snapple Group 2.00% 1/15/20 | | | 4,395,000 | | | 4,388,851 |
| #Express Scripts Holding 144A | | | | | | |
| 2.65% 2/15/17 | | | 960,000 | | | 998,787 |
| | 3.50% 11/15/16 | | | 3,660,000 | | | 3,916,698 |
| #Heineken 144A 1.40% 10/1/17 | | | 7,635,000 | | | 7,620,653 |
| Ingredion 1.80% 9/25/17 | | | 2,460,000 | | | 2,446,581 |
| #Korea Expressway 144A 1.875% 10/22/17 | | | 1,855,000 | | | 1,843,495 |
| Kraft Foods 2.625% 5/8/13 | | | 1,750,000 | | | 1,761,247 |
| #Kraft Foods Group 144A 2.25% 6/5/17 | | | 5,115,000 | | | 5,296,097 |
| Laboratory Corporation of America Holdings | | | | | | |
| 2.20% 8/23/17 | | | 2,055,000 | | | 2,111,663 |
| Molson Coors Brewing 2.00% 5/1/17 | | | 4,240,000 | | | 4,348,056 |
| Newell Rubbermaid 2.05% 12/1/17 | | | 1,160,000 | | | 1,176,796 |
| #Pernod-Ricard 144A 2.95% 1/15/17 | | | 3,560,000 | | | 3,747,708 |
| Quest Diagnostics | | | | | | |
| 3.20% 4/1/16 | | | 3,325,000 | | | 3,509,694 |
| 5.45% 11/1/15 | | | 2,200,000 | | | 2,444,455 |
| #SABMiller Holdings 144A 2.45% 1/15/17 | | | 4,980,000 | | | 5,196,122 |
| Stryker 2.00% 9/30/16 | | | 5,005,000 | | | 5,216,316 |
| Western Union | | | | | | |
| 2.875% 12/10/17 | | | 1,595,000 | | | 1,582,207 |
| 3.65% 8/22/18 | | | 610,000 | | | 624,321 |
| #Woolworths 144A | | | | | | |
| 2.55% 9/22/15 | | | 4,385,000 | | | 4,557,730 |
| 3.15% 4/12/16 | | | 15,000 | | | 15,743 |
| Yale University 2.90% 10/15/14 | | | 1,105,000 | | | 1,153,527 |
| | | | | | | 88,572,658 |
| Electric–1.71% | | | | | | |
| *American Electric Power 1.65% 12/15/17 | | | 2,770,000 | | | 2,783,000 |
| Appalachian Power 3.40% 5/24/15 | | | 1,445,000 | | | 1,527,593 |
| CenterPoint Energy 5.95% 2/1/17 | | | 1,675,000 | | | 1,947,742 |
| Duke Energy Carolinas 1.75% 12/15/16 | | | 4,890,000 | | | 5,018,069 |
| #GDF Suez 144A 1.625% 10/10/17 | | | 5,370,000 | | | 5,374,870 |
| Jersey Central Power & Light 5.625% 5/1/16 | | | 1,825,000 | | | 2,072,196 |
| Public Service Electric & Gas 2.70% 5/1/15 | | | 1,400,000 | | | 1,462,010 |
| | | | | | | 20,185,480 |
| Energy–5.98% | | | | | | |
| Apache | | | | | | |
| 1.75% 4/15/17 | | | 3,490,000 | | | 3,587,451 |
| 2.625% 1/15/23 | | | 1,500,000 | | | 1,500,473 |
| #BG Energy Capital 144A 2.875% 10/15/16 | | | 3,535,000 | | | 3,734,349 |
| Chevron 2.355% 12/5/22 | | | 2,215,000 | | | 2,223,415 |
| EOG Resources 2.625% 3/15/23 | | | 1,405,000 | | | 1,418,040 |
| Murphy Oil | | | | | | |
| 2.50% 12/1/17 | | | 1,975,000 | | | 1,989,467 |
| 3.70% 12/1/22 | | | 1,190,000 | | | 1,187,913 |
| National Oilwell Varco 1.35% 12/1/17 | | | 7,130,000 | | | 7,183,888 |
| Noble Holding International 3.05% 3/1/16 | | | 6,710,000 | | | 7,006,334 |
| Occidental Petroleum | | | | | | |
| 1.50% 2/15/18 | | | 3,630,000 | | | 3,681,060 |
| 2.70% 2/15/23 | | | 595,000 | | | 608,435 |
| Petrobras International Finance 3.50% 2/6/17 | | | 5,455,000 | | | 5,734,552 |
| Petrohawk Energy 7.875% 6/1/15 | | | 5,135,000 | | | 5,364,560 |
| #Schlumberger Investment 144A 1.95% 9/14/16 | | | 2,875,000 | | | 2,953,677 |
| #Schlumberger Norge 144A 1.95% 9/14/16 | | | 3,675,000 | | | 3,775,570 |
| Sempra Energy 2.30% 4/1/17 | | | 3,460,000 | | | 3,596,428 |
| Shell International Finance | | | | | | |
| 2.25% 1/6/23 | | | 1,920,000 | | | 1,901,061 |
| 3.10% 6/28/15 | | | 980,000 | | | 1,038,799 |
| Statoil 1.80% 11/23/16 | | | 5,225,000 | | | 5,377,758 |
| Transocean | | | | | | |
| 2.50% 10/15/17 | | | 2,025,000 | | | 2,048,601 |
| 5.05% 12/15/16 | | | 2,735,000 | | | 3,047,963 |
| Weatherford Bermuda 5.15% 3/15/13 | | | 16,000 | | | 16,128 |
| #Woodside Finance 144A | | | | | | |
| 4.50% 11/10/14 | | | 1,100,000 | | | 1,164,010 |
| 8.125% 3/1/14 | | | 290,000 | | | 312,988 |
| | | | | | | 70,452,920 |
| Finance Companies–2.39% | | | | | | |
| #CDP Financial 144A 3.00% 11/25/14 | | | 2,065,000 | | | 2,159,170 |
| #ERAC USA Finance 144A | | | | | | |
| 1.40% 4/15/16 | | | 4,160,000 | | | 4,191,246 |
| 2.25% 1/10/14 | | | 3,120,000 | | | 3,152,582 |
| 2.75% 7/1/13 | | | 585,000 | | | 591,293 |
| General Electric Capital | | | | | | |
• | 0.568% 9/15/14 | | | 1,390,000 | | | 1,388,917 |
# | 144A 3.80% 6/18/19 | | | 1,605,000 | | | 1,712,707 |
| 5.625% 5/1/18 | | | 12,605,000 | | | 14,986,451 |
| | | | | | | 28,182,366 |
| Insurance–2.04% | | | | | | |
| American International Group 8.25% 8/15/18 | | | 2,935,000 | | | 3,865,336 |
| •Chubb 6.375% 3/29/67 | | | 1,190,000 | | | 1,303,050 |
| MetLife | | | | | | |
| 1.756% 12/15/17 | | | 3,605,000 | | | 3,666,094 |
| 6.75% 6/1/16 | | | 2,015,000 | | | 2,388,317 |
| #Metropolitan Life Global Funding I 144A | | | | | | |
| 3.125% 1/11/16 | | | 2,965,000 | | | 3,145,174 |
| Principal Financial Group 1.85% 11/15/17 | | | 3,665,000 | | | 3,688,665 |
| Prudential Financial 3.875% 1/14/15 | | | 30,000 | | | 31,757 |
| WellPoint 1.875% 1/15/18 | | | 5,925,000 | | | 6,005,776 |
| | | | | | | 24,094,169 |
Limited-Term Diversified Income Series-9
Delaware VIP® Limited-Term Diversified Income Series
Statement of Net Assets (continued)
| | | | Principal | | Market |
| | | Amount | | Value |
| | | (U.S. $) | | (U.S. $) |
| CORPORATE BONDS (continued) | | | | | | |
| Natural Gas–1.37% | | | | | | |
| Energy Transfer Partners 8.50% 4/15/14 | | $ | 93,000 | | $ | 101,158 |
| Enterprise Products Operating | | | | | | |
| 3.20% 2/1/16 | | | 2,500,000 | | | 2,643,538 |
| 9.75% 1/31/14 | | | 805,000 | | | 880,980 |
| ONEOK Partners 2.00% 10/1/17 | | | 5,785,000 | | | 5,839,667 |
| TransCanada Pipelines | | | | | | |
| 3.40% 6/1/15 | | | 1,480,000 | | | 1,572,580 |
| • | 6.35% 5/15/67 | | | 415,000 | | | 445,256 |
| Williams Partners 7.25% 2/1/17 | | | 3,821,000 | | | 4,646,069 |
| | | | | | | 16,129,248 |
| Real Estate–0.95% | | | | | | |
| Health Care REIT 3.625% 3/15/16 | | | 2,490,000 | | | 2,631,362 |
| MACK-CALI Realty 2.50% 12/15/17 | | | 2,610,000 | | | 2,640,965 |
| Simon Property Group 2.80% 1/30/17 | | | 5,650,000 | | | 5,967,225 |
| | | | | | | 11,239,552 |
| Technology–3.01% | | | | | | |
| Autodesk 1.95% 12/15/17 | | | 1,305,000 | | | 1,300,038 |
| Corning 1.45% 11/15/17 | | | 2,730,000 | | | 2,743,953 |
| Hewlett-Packard | | | | | | |
| 3.00% 9/15/16 | | | 1,830,000 | | | 1,843,311 |
| 3.30% 12/9/16 | | | 1,565,000 | | | 1,594,460 |
| Intel 2.70% 12/15/22 | | | 2,080,000 | | | 2,081,600 |
| International Business Machines 1.25% 2/6/17 | | | 6,800,000 | | | 6,878,648 |
| Microsoft 2.125% 11/15/22 | | | 1,925,000 | | | 1,910,368 |
| National Semiconductor 6.60% 6/15/17 | | | 925,000 | | | 1,143,482 |
| NetApp | | | | | | |
| 2.00% 12/15/17 | | | 1,900,000 | | | 1,895,450 |
| 3.25% 12/15/22 | | | 1,335,000 | | | 1,316,972 |
| Oracle | | | | | | |
| 2.50% 10/15/22 | | | 3,465,000 | | | 3,503,777 |
| 5.75% 4/15/18 | | | 185,000 | | | 225,409 |
| #Seagate Technology International 144A | | | | | | |
| 10.00% 5/1/14 | | | 1,205,000 | | | 1,302,906 |
| Xerox | | | | | | |
| • | 1.13% 5/16/14 | | | 1,410,000 | | | 1,407,525 |
| 4.25% 2/15/15 | | | 3,500,000 | | | 3,682,781 |
| 6.35% 5/15/18 | | | 2,250,000 | | | 2,597,927 |
| | | | | | | 35,428,607 |
| Transportation – 0.56% | | | | | | |
| Burlington Northern Santa Fe 7.00% 2/1/14 | | | 1,585,000 | | | 1,692,446 |
| CSX 5.60% 5/1/17 | | | 950,000 | | | 1,110,817 |
| #Penske Truck Leasing 144A | | | | | | |
| 3.375% 3/15/18 | | | 1,720,000 | | | 1,737,480 |
| 3.75% 5/11/17 | | | 1,950,000 | | | 2,042,473 |
| | | | | | | 6,583,216 |
| Total Corporate Bonds | | | | | | |
| (cost $558,067,643) | | | | | | 574,211,225 |
| |
| MUNICIPAL BONDS–1.37% | | | | | | |
| California State Department of Water Resources | | | | | | |
| Power Supply Revenue 5.00% 5/1/13 | | | 4,370,000 | | | 4,440,488 |
| Railsplitter Tobacco Settlement Authority, | | | | | | |
| Illinois Revenue 5.00% 6/1/15 | | | 1,475,000 | | | 1,605,597 |
| State of California 2.50% 6/20/13 | | | 10,000,000 | | | 10,102,500 |
| Total Municipal Bonds | | | | | | |
| (cost $16,043,380) | | | | | | 16,148,585 |
| | | | | | | |
| NON-AGENCY ASSET-BACKED | | | | | | |
| SECURITIES–20.81% | | | | | | |
| •Ally Master Owner Trust | | | | | | |
| Series 2010-4 A 1.279% 8/15/17 | | | 3,465,000 | | | 3,522,637 |
| Series 2011-1 A1 1.079% 1/15/16 | | | 8,470,000 | | | 8,525,283 |
| Series 2012-3 A1 0.909% 6/15/17 | | | 6,500,000 | | | 6,540,105 |
| •American Express Credit Account Master Trust | | | | | | |
| Series 2011-1 A 0.379% 4/17/17 | | | 3,270,000 | | | 3,277,093 |
| Series 2011-1 B 0.909% 4/17/17 | | | 1,250,000 | | | 1,258,051 |
| Series 2011-2 A 0.329% 6/15/16 | | | 2,310,000 | | | 2,311,361 |
| Series 2012-4 A 0.449% 5/15/20 | | | 4,500,000 | | | 4,508,663 |
| •Ameriquest Mortgage Securities | | | | | | |
| Series 2003-11 AF6 5.64% 12/25/33 | | | 28,014 | | | 28,558 |
| #•ARI Fleet Lease Trust 144A | | | | | | |
| Series 2012-A A 0.759% 3/15/20 | | | 3,439,079 | | | 3,448,695 |
| Series 2012-B A 0.509% 1/15/21 | | | 5,758,080 | | | 5,759,629 |
| •Bank of America Credit Card Trust | | | | | | |
| Series 2007-A4 A4 0.249% 11/15/19 | | | 2,150,000 | | | 2,128,631 |
| Series 2007-A6 A6 0.269% 9/15/16 | | | 2,115,000 | | | 2,115,034 |
| Series 2008-C5 C5 4.959% 3/15/16 | | | 7,550,000 | | | 7,813,812 |
| BMW Vehicle Lease Trust | | | | | | |
| Series 2012-1 A3 0.75% 2/20/15 | | | 3,075,000 | | | 3,085,526 |
| #•Cabela’s Master Credit Card Trust 144A | | | | | | |
| Series 2010-2A A2 0.909% 9/17/18 | | | 2,295,000 | | | 2,317,154 |
| Series 2012-2A A2 0.689% 6/15/20 | | | 9,000,000 | | | 9,020,042 |
| Capital One Multi-Asset Execution Trust | | | | | | |
| • | Series 2004-A1 A1 0.419% 12/15/16 | | | 2,860,000 | | | 2,864,925 |
| • | Series 2006-A5 A5 0.269% 1/15/16 | | | 2,445,000 | | | 2,444,949 |
| • | Series 2007-A5 A5 0.249% 7/15/20 | | | 5,250,000 | | | 5,209,790 |
| Series 2007-A7 A7 5.75% 7/15/20 | | | 665,000 | | | 808,663 |
| Chase Funding Mortgage Loan | | | | | | |
| Asset-Backed Certificates | | | | | | |
| Series 2002-3 1A6 4.707% 6/25/32 | | | 28,872 | | | 29,088 |
| •Chase Issuance Trust | | | | | | |
| Series 2012-A6 A 0.339% 8/15/17 | | | 6,000,000 | | | 6,004,776 |
| Series 2012-A9 A9 0.359% 10/16/17 | | | 5,000,000 | | | 5,002,815 |
| Series 2012-A10 A10 0.47% 12/16/19 | | | 5,580,000 | | | 5,580,000 |
| #•Chesapeake Funding 144A | | | | | | |
| Series 2009-2A A 1.959% 9/15/21 | | | 7,141,336 | | | 7,186,084 |
| Series 2012-1A A 0.963% 11/7/23 | | | 4,080,000 | | | 4,089,221 |
| Series 2012-2A A 0.658% 5/7/24 | | | 4,030,000 | | | 4,030,000 |
| #•Citibank Omni Master Trust | | | | | | |
| Series 2009-A14A A14 144A | | | | | | |
| 2.959% 8/15/18 | | | 7,875,000 | | | 8,192,252 |
| Conseco Financial | | | | | | |
| Series GT 1997-6 A8 7.07% 1/15/29 | | | 213,679 | | | 230,318 |
| Discover Card Master Trust | | | | | | |
| Series 2007-A1 A1 5.65% 3/16/20 | | | 235,000 | | | 284,377 |
| • | Series 2010-A1 A1 0.859% 9/15/15 | | | 4,000,000 | | | 4,004,356 |
| • | Series 2011-A1 A1 0.559% 8/15/16 | | | 1,495,000 | | | 1,499,016 |
| • | Series 2011-A3 A 0.419% 3/15/17 | | | 4,580,000 | | | 4,593,680 |
| • | Series 2011-A4 A4 0.559% 5/15/19 | | | 1,000,000 | | | 1,005,652 |
| • | Series 2012-A4 A4 0.579% 11/15/19 | | | 5,135,000 | | | 5,167,238 |
| • | Series 2012-A5 A5 0.409% 1/16/18 | | | 4,350,000 | | | 4,354,898 |
| #Enterprise Fleet Financing 144A | | | | | | |
| Series 2011-3 A2 1.62% 5/20/17 | | | 3,018,807 | | | 3,039,945 |
| Series 2012-1 A2 1.14% 11/20/17 | | | 470,000 | | | 472,482 |
Limited-Term Diversified Income Series-10
Delaware VIP ® Limited-Term Diversified Income Series
Statement of Net Assets (continued)
| | | | Principal | | Market |
| | | Amount | | Value |
| | | (U.S. $) | | (U.S. $) |
| NON-AGENCY ASSET-BACKED | | | | | | |
| SECURITIES (continued) | | | | | | |
| •Ford Credit Floorplan Master Owner Trust | | | | | | |
| # | Series 2010-3 A2 144A 1.909% 2/15/17 | | $ | 7,375,000 | | $ | 7,588,823 |
| Series 2011-1 A2 0.809% 2/15/16 | | | 3,485,000 | | | 3,499,390 |
| GE Capital Credit Card Master Note Trust | | | | | | |
| • | Series 2011-1 A 0.759% 1/15/17 | | | 1,100,000 | | | 1,105,524 |
| • | Series 2011-2 A 0.689% 5/15/19 | | | 1,750,000 | | | 1,764,634 |
| • | Series 2011-3 A 0.439% 9/15/16 | | | 3,600,000 | | | 3,603,247 |
| Series 2012-6 A 1.36% 8/17/20 | | | 1,005,000 | | | 1,015,109 |
| •GE Dealer Floorplan Master Note Trust | | | | | | |
| Series 2012-1 A 0.781% 2/20/17 | | | 3,605,000 | | | 3,622,884 |
| Series 2012-2 A 0.961% 4/22/19 | | | 12,920,000 | | | 13,042,015 |
| Series 2012-3 A 0.701% 6/20/17 | | | 8,355,000 | | | 8,392,472 |
| #Golden Credit Card Trust 144A | | | | | | |
| • | Series 2011-2A A 0.609% 10/15/15 | | | 2,665,000 | | | 2,666,799 |
| Series 2012-2A A1 1.77% 1/15/19 | | | 940,000 | | | 968,054 |
| • | Series 2012-3A A 0.659% 7/17/17 | | | 7,725,000 | | | 7,760,883 |
| Series 2012-5A A 0.79% 9/15/17 | | | 1,035,000 | | | 1,037,650 |
| #•Gracechurch Card Funding | | | | | | |
| Series 2012-1A A1 144A 0.909% 2/15/17 | | | 7,315,000 | | | 7,385,604 |
| #•MASTR Specialized Loan Trust | | | | | | |
| Series 2005-2 A2 144A 5.006% 7/25/35 | | | 6,657 | | | 6,748 |
| MBNA Credit Card Master Note Trust | | | | | | |
| Series 2004-B1 B1 4.45% 8/15/16 | | | 2,525,000 | | | 2,638,981 |
| #•Mercedes-Benz Master Owner Trust | | | | | | |
| Series 2012-BA A 144A 0.482% 11/15/16 | | | 3,450,000 | | | 3,450,000 |
| #•Navistar Financial Dealer Note Master Trust | | | | | | |
| Series 2011-1 A 144A 1.36% 10/25/16 | | | 1,390,000 | | | 1,400,564 |
| #Navistar Financial Owner Trust | | | | | | |
| Series 2012-A A2 144A 0.85% 3/18/15 | | | 1,745,000 | | | 1,746,913 |
| •Nissan Master Owner Trust Receivables | | | | | | |
| # | Series 2010-AA A 144A 1.359% 1/15/15 | | | 4,165,000 | | | 4,166,683 |
| Series 2012-A A 0.679% 5/15/17 | | | 9,340,000 | | | 9,362,284 |
| #•Penarth Master Issuer | | | | | | |
| Series 2011-2A A1 144A 0.959% 11/18/15 | | | 3,100,000 | | | 3,112,298 |
| #•PFS Financing | | | | | | |
| Series 2010-DA A 1.659% 2/15/15 | | | 3,075,000 | | | 3,074,616 |
| Series 2012-AA A 1.409% 2/15/16 | | | 3,295,000 | | | 3,322,003 |
| •Residential Asset Securities | | | | | | |
| Series 2006-KS3 AI3 0.38% 4/25/36 | | | 50,771 | | | 48,806 |
| Residential Funding Mortgage Securities II | | | | | | |
| Series 2001-HS2 A5 7.42% 4/25/31 | | | 830 | | | 828 |
| #•Trafigura Securitisation Finance | | | | | | |
| Series 2012-1A A 144A 2.609% 10/15/15 | | | 1,977,000 | | | 2,004,493 |
| #•Volkswagen Credit Auto Master Trust | | | | | | |
| Series 2011-1A Note 144A 0.891% 9/20/16 | | | 5,640,000 | | | 5,679,508 |
| Total Non-Agency Asset-Backed | | | | | | |
| Securities (cost $244,926,227) | | | | | | 245,222,612 |
| | | | | | | |
| NON-AGENCY COLLATERALIZED | | | | | | |
| MORTGAGE OBLIGATIONS–0.02% | | | | | | |
| •American Home Mortgage Investment Trust | | | | | | |
| Series 2005-2 5A1 5.064% 9/25/35 | | | 47,654 | | | 48,230 |
| Bank of America Alternative Loan Trust | | | | | | |
| Series 2005-3 2A1 5.50% 4/25/20 | | | 55,554 | | | 58,256 |
| Series 2005-6 7A1 5.50% 7/25/20 | | | 42,231 | | | 43,948 |
| Citicorp Mortgage Securities | | | | | | |
| Series 2006-4 3A1 5.50% 8/25/21 | | | 27,683 | | | 28,797 |
| t•Countrywide Home Loan Mortgage | | | | | | |
| Pass Through Trust | | | | | | |
| Series 2003-21 A1 3.105% 5/25/33 | | | 9,219 | | | 9,253 |
| Series 2003-46 1A1 3.04% 1/19/34 | | | 8,675 | | | 8,722 |
| #•GSMPS Mortgage Loan Trust | | | | | | |
| Series 1998-3 A 144A 7.75% 9/19/27 | | | 12,006 | | | 12,704 |
| •MASTR ARM Trust | | | | | | |
| Series 2003-6 1A2 2.825% 12/25/33 | | | 7,860 | | | 7,830 |
| Series 2005-6 7A1 5.316% 6/25/35 | | | 34,676 | | | 34,044 |
| tWashington Mutual Mortgage Pass | | | | | | |
| Through Certificates | | | | | | |
| Series 2003-S10 A2 5.00% 10/25/18 | | | 26,584 | | | 27,442 |
| Total Non-Agency Collateralized | | | | | | |
| Mortgage Obligations (cost $251,759) | | | | | | 279,226 |
| |
| U.S. TREASURY OBLIGATIONS–4.63% | | | | | | |
| U.S. Treasury Notes | | | | | | |
| 0.625% 11/30/17 | | | 6,805,000 | | | 6,783,204 |
| 0.75% 12/31/17 | | | 1,640,000 | | | 1,642,947 |
| ∞ | 3.125% 8/31/13 | | | 45,225,000 | | | 46,111,931 |
| Total U.S. Treasury Obligations | | | | | | |
| (cost $54,988,025) | | | | | | 54,538,082 |
| |
| | | Number of | | | |
| | | Shares | | | |
| PREFERRED STOCK–0.24% | | | | | | |
| •PNC Financial Services Group 8.25% | | | 2,765,000 | | | 2,827,213 |
| Total Preferred Stock | | | | | | |
| (cost $2,587,573) | | | | | | 2,827,213 |
| |
| | | Principal | | | |
| | | Amount | | | |
| | | (U.S. $) | | | |
| ΔSOVEREIGN BOND–0.15% | | | | | | |
| Norway–0.15% | | | | | | |
| #Kommunalbanken 144A 1.00% 9/26/17 | | $1,726,000 | | | 1,727,300 |
| Total Sovereign Bond | | | | | | |
| (cost $1,720,045) | | | | | | 1,727,300 |
Limited-Term Diversified Income Series-11
Delaware VIP® Limited-Term Diversified Income Series
Statement of Net Assets (continued)
| | | | Principal | | Market | |
| | | Amount | | Value | |
| | | (U.S. $) | | (U.S. $) | |
| SHORT-TERM INVESTMENTS–13.37% | | | | | | | |
| ≠Discount Note–4.65% | | | | | | | |
| Federal Home Loan Bank Discount Notes | | | | | | | |
| 0.075% 1/4/13 | | $ | 5,726,546 | | $ | 5,726,541 | |
| 0.10% 1/18/13 | | | 4,142,814 | | | 4,142,798 | |
| | 0.10% 1/23/13 | | | 16,170,509 | | | 16,170,411 | |
| 0.12% 4/2/13 | | | 1,360,293 | | | 1,360,089 | |
| 0.125% 3/6/13 | | | 14,039,789 | | | 14,038,806 | |
| 0.13% 2/6/13 | | | 10,902,143 | | | 10,901,827 | |
| 0.135% 2/15/13 | | | 2,398,471 | | | 2,398,383 | |
| | | | | | | 54,738,855 | |
| Repurchase Agreements–0.95% | | | | | | | |
| Bank of America 0.11%, dated 12/31/12, to be | | | | | | | |
| repurchased on 1/2/13, repurchase price | | | | | | | |
| $7,555,110 (collateralized by U.S. Government | | | | | | | |
| obligations 0.25%-2.375% 2/28/15-12/15/15; | | | | | | | |
| market value $7,706,165) | | | 7,555,064 | | | 7,555,064 | |
| BNP Paribas 0.15%, dated 12/31/12, to be | | | | | | | |
| repurchased on 1/2/13, repurchase price | | | | | | | |
| $3,653,761 (collateralized by U.S. Government | | | | | | | |
| obligations 0.125%-0.25% 12/31/14-5/15/15; | | | | | | | |
| market value $3,726,805) | | | 3,653,730 | | | 3,653,730 | |
| | | | | | | 11,208,794 | |
| ≠U.S. Treasury Obligations–7.77% | | | | | | | |
| U.S. Treasury Bills | | | | | | | |
| 0.04% 1/17/13 | | | 73,910,000 | | | 73,909,484 | |
| 0.04% 3/21/13 | | | 10,485,195 | | | 10,484,461 | |
| 0.04% 3/28/13 | | | 7,145,027 | | | 7,144,477 | |
| | | | | | | 91,538,422 | |
| Total Short-Term Investments | | | | | | | |
| (cost $157,480,092) | | | | | | 157,486,071 | |
| | |
| Total Value of Securities Before Securities | | | | | | | |
| Lending Collateral–112.19% | | | | | | | |
| (cost $1,302,173,379) | | | | | | 1,321,954,957 | |
| | |
| | | Number of | | | | |
| | | Shares | | | | |
| **SECURITIES LENDING COLLATERAL–0.01% | | | | | | | |
| Investment Companies | | | | | | | |
| Delaware Investments Collateral Fund No. 1 | | | 64,124 | | | 64,124 | |
| †@ | Mellon GSL Reinvestment Trust II | | | 66,475 | | | 0 | |
| Total Securities Lending Collateral | | | | | | | |
| (cost $130,599) | | | | | | 64,124 | |
| | | | | | | | |
| TOTAL VALUE OF SECURITIES–112.20% (cost $1,302,303,978) | | | 1,322,019,081 | © |
| **OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL–(0.01%) | | | (130,599 | ) |
| z«OTHER LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS–(12.19%) | | | (143,608,289 | ) |
| NET ASSETS APPLICABLE TO 117,235,057 SHARES OUTSTANDING–100.00% | | $ | 1,178,280,193 | |
| NET ASSET VALUE–DELAWARE VIP LIMITED-TERM DIVERSIFIED INCOME SERIES | | | | |
| STANDARD CLASS ($51,193,669 / 5,060,865 Shares) | | | | $10.12 | |
| NET ASSET VALUE–DELAWARE VIP LIMITED-TERM DIVERSIFIED INCOME SERIES | | | | | |
| SERVICE CLASS ($1,127,086,524 / 112,174,192 Shares) | | | | $10.05 | |
| COMPONENTS OF NET ASSETS AT DECEMBER 31, 2012: | | | | |
| Shares of beneficial interest (unlimited authorization–no par) | | $ | 1,161,605,517 | |
| Undistributed net investment income | | | 3,900,166 | |
| Accumulated net realized loss on investments | | | (2,850,578 | ) |
| Unrealized appreciation of investments and derivatives | | | 15,625,088 | |
| Total net assets | | $ | 1,178,280,193 | |
____________________
| • | Variable rate security. The rate shown is the rate as of December 31, 2012. Interest rates reset periodically. |
| t | Pass Through Agreement. Security represents the contractual right to receive a proportionate amount of underlying payments due to the counterparty pursuant to various agreements related to the rescheduling of obligations and the exchange of certain notes. |
| # | Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. At December 31, 2012, the aggregate value of Rule 144A securities was $226,927,544, which represented 19.26% of the Series’ net assets. See Note 10 in “Notes to Financial Statements.” |
| * | Fully or partially on loan. |
| ∞ | Fully or partially pledged as collateral for futures contracts. |
| Δ | Securities have been classified by country of origin. |
| ≠ | The rate shown is the effective yield at the time of purchase. |
| ** | See Note 9 in “Notes to Financial Statements” for additional information on securities lending collateral. |
| @ | Illiquid security. At December 31, 2012, the aggregate value of illiquid securities was $0, which represented 0.00% of the Series’ net assets. See Note 10 in “Notes to Financial Statements.” |
| † | Non income producing security. |
| © | Includes $126,803 of securities loaned. |
| z | Of this amount, $151,027,470 represents payable for securities purchased as of December 31, 2012. |
| « | Includes foreign currency valued at $1,395,746 with a cost of $1,361,676. |
Limited-Term Diversified Income Series-12
Delaware VIP® Limited-Term Diversified Income Series
Statement of Net Assets (continued)
The following foreign currency exchange contracts, futures contracts and swap contracts were outstanding at December 31, 2012:1
Foreign Currency Exchange Contracts
| | | | | | | | | Unrealized |
| | | | | | | Settlement | | Appreciation |
| Counterparty | | | Contracts to Receive (Deliver) | | In Exchange For | | Date | | (Depreciation) |
| JPMC | | EUR | 2,356,003 | | USD (3,047,725) | | 2/1/13 | | $62,157 |
Futures Contracts
| | | | | | | | Unrealized |
| | Notional | | Notional | | | | Appreciation |
| Contracts to Buy | | | Cost | | Value | | Expiration Date | | (Depreciation) |
| 215 U.S. Treasury 10 yr Notes | | $28,644,319 | | $28,547,969 | | 3/29/13 | | $(96,350) |
Swap Contracts
CDS Contracts
| | | | | | | Annual | | | | Unrealized |
| | | | Notional | | Protection | | Termination | | Appreciation |
| Counterparty | | Swap Referenced Obligation | | Value | | Payments | | Date | | (Depreciation) |
| | Protection Purchased: | | | | | | | | | | | | | |
| BAML | | CDX.NA.HY.19 | | USD | 4,000,000 | | 5.00% | | 12/20/17 | | | $ | 19,969 | | |
| BAML | | ITRAXX Europe Subordinate 18.1 5 yr CDS | | EUR | 11,385,000 | | 5.00% | | 12/20/17 | | | | (814,497 | ) | |
| BCLY | | ITRAXX Europe Subordinate 18.1 5 yr CDS | | EUR | 15,290,000 | | 5.00% | | 12/20/17 | | | | (1,120,368 | ) | |
| HSBC | | ITRAXX Europe Subordinate 18.1 5 yr CDS | | EUR | 3,830,000 | | 5.00% | | 12/20/17 | | | | (280,641 | ) | |
| JPMC | | CDX.NA.HY.19 | | USD | 4,000,000 | | 5.00% | | 12/20/17 | | | | 17,493 | | |
| JPMC | | ITRAXX Europe Subordinate 18.1 5 yr CDS | | EUR | 24,360,000 | | 5.00% | | 12/20/17 | | | | (1,787,630 | ) | |
| MSC | | CDX.NA.HY.19 | | USD | 3,725,000 | | 5.00% | | 12/20/17 | | | | 16,291 | | |
| | | | | | | | | | | | $ | (3,949,383 | ) | |
The use of foreign currency exchange contracts, futures contracts and swap contracts involves elements of market risk and risks in excess of the amounts disclosed in the financial statements. The notional values and foreign currency exchange contracts presented above represent the Series’ total exposure in such contracts, whereas only the net unrealized appreciation (depreciation) is reflected in the Series’ net assets.
____________________
1See Note 8 in “Notes to Financial Statements.”
Summary of Abbreviations:
ARM – Adjustable Rate Mortgage
BAML – Bank of America Merrill Lynch
BCLY – Barclays Bank
CDS – Credit Default Swap
EUR – European Monetary Unit
GNMA – Government National Mortgage Association
GSMPS – Goldman Sachs Reperforming Mortgage Securities
HSBC – Hong Kong Shanghai Bank
JPMC – JPMorgan Chase Bank
MASTR – Mortgage Asset Securitization Transactions, Inc.
MSC – Morgan Stanley Capital
REIT – Real Estate Investment Trust
REMIC – Real Estate Mortgage Investment Conduit
S.F. – Single Family
TBA – To be announced
USD – United States Dollar
yr – Year
See accompanying notes, which are an integral part of the financial statements.
Limited-Term Diversified Income Series-13
Delaware VIP® Trust —
Delaware VIP Limited-Term Diversified Income Series
Statement of Operations
Year Ended December 31, 2012
| INVESTMENT INCOME: | | | |
| Interest | $ | 16,316,098 | |
| Dividends | | 228,112 | |
| Securities lending income | | 5,481 | |
| | 16,549,691 | |
| |
| EXPENSES: | | | |
| Management fees | | 5,336,588 | |
| Distribution expenses – Service Class | | 3,163,098 | |
| Accounting and administration expenses | | 430,288 | |
| Reports and statements to shareholders | | 121,533 | |
| Dividend disbursing and transfer agent fees and expenses | | 95,272 | |
| Legal fees | | 81,883 | |
| Audit and tax | | 51,801 | |
| Trustees’ fees | | 48,501 | |
| Custodian fees | | 28,428 | |
| Registration fees | | 24,977 | |
| Pricing fees | | 21,376 | |
| Insurance fees | | 18,135 | |
| Consulting fees | | 12,152 | |
| Dues and services | | 5,794 | |
| Trustees’ expenses | | 3,392 | |
| | | 9,443,218 | |
| Less waived distribution expenses – Service Class | | (527,183 | ) |
| Less expense paid indirectly | | (1 | ) |
| Total operating expenses | | 8,916,034 | |
| |
| NET INVESTMENT INCOME | | 7,633,657 | |
| |
| NET REALIZED AND UNREALIZED GAIN (LOSS) ON: | | | |
| Net realized gain (loss) on: | | | |
| Investments | | 13,759,843 | |
| Futures contracts | | (1,383,819 | ) |
| Foreign currencies | | (239,880 | ) |
| Foreign currency exchange contracts | | 165,053 | |
| Swap contracts | | (1,345,445 | ) |
| Net realized gain | | 10,955,752 | |
| Net change in unrealized appreciation (depreciation) of: | | | |
| Investments | | 11,165,165 | |
| Futures contracts | | 444,396 | |
| Foreign currencies | | 34,359 | |
| Foreign currency exchange contracts | | 62,157 | |
| Swap contracts | | (4,100,967 | ) |
| Net change in unrealized appreciation (depreciation) | | 7,605,110 | |
| |
| NET REALIZED AND UNREALIZED GAIN | | 18,560,862 | |
| |
| NET INCREASE IN NET ASSETS RESULTING | | | |
| FROM OPERATIONS | $ | 26,194,519 | |
Delaware VIP Trust —
Delaware VIP Limited-Term Diversified Income Series
Statements of Changes in Net Assets
| | Year Ended |
| | 12/31/12 | | 12/31/11 |
| INCREASE IN NET ASSETS | | | | | | | | |
| FROM OPERATIONS: | | | | | | | | |
| Net investment income | | $ | 7,633,657 | | | $ | 8,013,866 | |
| Net realized gain | | | 10,955,752 | | | | 11,467,999 | |
| Net change in unrealized | | | | | | | | |
| appreciation (depreciation) | | | 7,605,110 | | | | 1,843,822 | |
| Net increase in net assets resulting | | | | | | | | |
| from operations | | | 26,194,519 | | | | 21,325,687 | |
| |
| DIVIDENDS AND DISTRIBUTIONS TO | | | | | | | | |
| SHAREHOLDERS FROM: | | | | | | | | |
| Net investment income: | | | | | | | | |
| �� Standard Class | | | (812,024 | ) | | | (782,497 | ) |
| Service Class | | | (15,128,129 | ) | | | (13,210,609 | ) |
| Net realized gain: | | | | | | | | |
| Standard Class | | | (365,451 | ) | | | (619,137 | ) |
| Service Class | | | (7,897,175 | ) | | | (11,744,538 | ) |
| | | (24,202,779 | ) | | | (26,356,781 | ) |
| |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | | |
| Proceeds from shares sold: | | | | | | | | |
| Standard Class | | | 18,076,237 | | | | 16,955,952 | |
| Service Class | | | 226,323,904 | | | | 361,530,947 | |
| Net asset value of shares issued upon | | | | | | | | |
| reinvestment of dividends and distributions: | | | | | | | | |
| Standard Class | | | 1,172,488 | | | | 1,407,657 | |
| Service Class | | | 22,917,280 | | | | 25,009,877 | |
| | | | 268,489,909 | | | | 404,904,433 | |
| Cost of shares redeemed: | | | | | | | | |
| Standard Class | | | (11,587,487 | ) | | | (14,048,159 | ) |
| Service Class | | | (61,915,226 | ) | | | (119,533,536 | ) |
| | | | (73,502,713 | ) | | | (133,581,695 | ) |
| Increase in net assets derived from capital | | | | | | | | |
| share transactions | | | 194,987,196 | | | | 271,322,738 | |
| |
| NET INCREASE IN NET ASSETS | | | 196,978,936 | | | | 266,291,644 | |
| |
| NET ASSETS: | | | | | | | | |
| Beginning of year | | | 981,301,257 | | | | 715,009,613 | |
| End of year (including undistributed | | | | | | | | |
| (distributions in excess of) net | | | | | | | | |
| investment income of $3,900,166 and | | | | | | | | |
| $(10,786), respectively) | | $ | 1,178,280,193 | | | $ | 981,301,257 | |
See accompanying notes, which are an integral part of the financial statements.
Limited-Term Diversified Income Series-14
Delaware VIP® Trust — Delaware VIP Limited-Term Diversified Income Series
Financial Highlights
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP Limited-Term Diversified Income Series
Standard Class |
| | Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $10.090 | | | $10.150 | | | $10.010 | | | $9.190 | | | $9.670 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.095 | | | 0.119 | | | 0.193 | | | 0.358 | | | 0.418 | |
| Net realized and unrealized gain (loss) | | 0.183 | | | 0.171 | | | 0.248 | | | 0.809 | | | (0.451 | ) |
| Total from investment operations | | 0.278 | | | 0.290 | | | 0.441 | | | 1.167 | | | (0.033 | ) |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.171 | ) | | (0.193 | ) | | (0.240 | ) | | (0.347 | ) | | (0.447 | ) |
| Net realized gain | | (0.077 | ) | | (0.157 | ) | | (0.061 | ) | | – | | | – | |
| Total dividends and distributions | | (0.248 | ) | | (0.350 | ) | | (0.301 | ) | | (0.347 | ) | | (0.447 | ) |
| |
| Net asset value, end of period | | $10.120 | | | $10.090 | | | $10.150 | | | $10.010 | | | $9.190 | |
| |
| Total return2 | | 2.78% | | | 2.91% | | | 4.45% | | | 12.77% | | | (0.28% | ) |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $51,194 | | | $43,427 | | | $39,362 | | | $30,513 | | | $25,357 | |
| Ratio of expenses to average net assets | | 0.57% | | | 0.58% | | | 0.60% | | | 0.62% | | | 0.63% | |
Ratio of expenses to average net assets
prior to fees waived | | 0.57% | | | 0.58% | | | 0.60% | | | 0.62% | | | 0.67% | |
| Ratio of net investment income to average net assets | | 0.93% | | | 1.17% | | | 1.90% | | | 3.69% | | | 4.46% | |
Ratio of net investment income to average net assets
prior to fees waived | | 0.93% | | | 1.17% | | | 1.90% | | | 3.69% | | | 4.42% | |
| Portfolio turnover | | 284% | | | 432% | | | 443% | | | 358% | | | 339% | |
____________________
1The average shares outstanding method has been applied for per share information. |
2Total 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 during some of the periods shown reflects a waiver by the manager. Performance would have been lower had the waiver not been in effect. Total investment return does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
Limited-Term Diversified Income Series-15
Delaware VIP® Limited-Term Diversified Income Series
Financial Highlights (continued)
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP Limited-Term Diversified Income Series
Service Class |
| | Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
|
| Net asset value, beginning of period | | $10.020 | | | $10.090 | | | $9.940 | | | $9.130 | | | $9.610 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.069 | | | 0.093 | | | 0.167 | | | 0.334 | | | 0.395 | |
| Net realized and unrealized gain (loss) | | 0.182 | | | 0.161 | | | 0.257 | | | 0.798 | | | (0.452 | ) |
| Total from investment operations | | 0.251 | | | 0.254 | | | 0.424 | | | 1.132 | | | (0.057 | ) |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.144 | ) | | (0.167 | ) | | (0.213 | ) | | (0.322 | ) | | (0.423 | ) |
| Net realized gain | | (0.077 | ) | | (0.157 | ) | | (0.061 | ) | | – | | | – | |
| Total dividends and distributions | | (0.221 | ) | | (0.324 | ) | | (0.274 | ) | | (0.322 | ) | | (0.423 | ) |
| |
| Net asset value, end of period | | $10.050 | | | $10.020 | | | $10.090 | | | $9.940 | | | $9.130 | |
| |
| Total return2 | | 2.53% | | | 2.56% | | | 4.31% | | | 12.57% | | | (0.64% | ) |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $1,127,086 | | | $937,874 | | | $675,648 | | | $371,429 | | | $84,412 | |
| Ratio of expenses to average net assets | | 0.82% | | | 0.83% | | | 0.85% | | | 0.87% | | | 0.88% | |
Ratio of expenses to average net assets
prior to fees waived | | 0.87% | | | 0.88% | | | 0.90% | | | 0.92% | | | 0.97% | |
| Ratio of net investment income to average net assets | | 0.68% | | | 0.92% | | | 1.65% | | | 3.44% | | | 4.21% | |
Ratio of net investment income to average net assets
prior to fees waived | | 0.63% | | | 0.87% | | | 1.60% | | | 3.39% | | | 4.12% | |
| Portfolio turnover | | 284% | | | 432% | | | 443% | | | 358% | | | 339% | |
____________________
1The average shares outstanding method has been applied for per share information. |
2Total 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 during all of the periods shown reflects waivers by the manager and/or distributor. Performance would have been lower had the waivers not been in effect. Total investment return does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
Limited-Term Diversified Income Series-16
Delaware VIP® Trust — Delaware VIP Limited-Term Diversified Income Series
Notes to Financial Statements
December 31, 2012
Delaware VIP Trust (Trust) is organized as a Delaware statutory trust and offers 10 series: Delaware VIP Diversified Income Series, Delaware VIP Emerging Markets Series, Delaware VIP High Yield Series, Delaware VIP International Value Equity Series, Delaware VIP Limited-Term Diversified Income Series, Delaware VIP REIT Series, Delaware VIP Small Cap Value Series, Delaware VIP Smid Cap Growth Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series. These financial statements and the related notes pertain to Delaware VIP Limited-Term Diversified Income Series (Series). The Trust is an open-end investment company. The Series is considered diversified under the Investment Company Act of 1940, as amended, and offers Standard Class and Service Class shares. The Standard Class shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee. The shares of the Series are sold only to separate accounts of life insurance companies.
The investment objective of the Series is to seek maximum total return, consistent with reasonable risk.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and are consistently followed by the Series.
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, which approximates fair value. Debt securities and credit default swap (CDS) contracts are valued based upon valuations provided by an independent pricing service or broker/counterparty and reviewed by management. To the extent current market prices are not available, the pricing service may take into account developments related to the specific security, as well as transactions in comparable securities. U.S. government and agency securities are valued at the mean between the bid and ask prices, which approximates fair value. Valuations for fixed income securities utilize matrix systems, which reflect such factors as security prices, yields, maturities, and ratings, and are supplemented by dealer and exchange quotations. Swap prices are derived using daily swap curves and models that incorporate a number of market date factors, such as discounted cash flows, trades and values of the underlying reference instruments. Investment company securities are valued at net asset value per share, as reported by the underlying investment company. Foreign currency exchange contracts are valued at the mean between the bid and ask prices of the contracts, which approximates fair value. Interpolated values are derived when the settlement date of the contract is an interim date for which quotations are not available. Futures contracts are valued at the daily quoted settlement prices. 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 Series’ 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 Series 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 Series values its securities, generally as of 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 Series may frequently value foreign securities using fair value prices based on third-party vendor modeling tools (international fair value pricing).
Federal & Foreign Income Taxes—No provision for federal income taxes has been made as the Series 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 Series evaluates tax positions taken or expected to be taken in the course of preparing the Series’ tax returns 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 analyzed the Series’ tax positions taken for all open federal income tax years (December 31, 2009 – December 31, 2012), and has concluded that no provision for federal income tax is required in the Series’ financial statements. In regards to foreign taxes, the Series only has open tax years in certain foreign countries it invests in that may date back to the inception of the Series.
Class Accounting—Investment income and common expenses are allocated to the classes of the Series on the basis of “settled shares” of each class in relation to the net assets of the Series. Realized and unrealized gain (loss) on investments is allocated to the classes of the Series 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 Series may purchase certain U.S. government securities subject to the counterparty’s agreement to repurchase them at an agreed upon date and price. The counterparty will be required on a daily basis to maintain the value of the collateral subject to the agreement at not less than the repurchase price (including accrued interest). The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system with the Series’ custodian or a third-party sub-custodian. In the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. All open repurchase agreements as of the date of this report were entered into on December 31, 2012.
To Be Announced Trades—The Series may contract to purchase securities for a fixed price at a transaction date beyond the customary settlement period (e.g., “when issued,” “delayed delivery,” “forward commitment,” or “TBA transactions”) consistent with the Series’ ability to manage its investment portfolio and meet redemption requests. These transactions involve a commitment by the Series to purchase securities for a predetermined price or yield with payment and delivery taking place more than three days in the future, or after a period longer than the customary settlement period for that type of security. No interest will be earned by the Series on such purchases until the securities are delivered; however, the market value may change prior to delivery.
Foreign Currency Transactions—Transactions denominated in foreign currencies are recorded at the prevailing exchange rates on the valuation date in accordance with the Series’ prospectus. The value of all assets and liabilities denominated in foreign currencies is translated into U.S. dollars at the exchange rate of such currencies against the U.S. dollar daily. Transaction gains or losses resulting from changes in exchange rates during the reporting period or upon settlement of the foreign currency transaction are reported in operations for the current period. The Series generally isolates that portion of realized gains and losses on investments in debt securities which are due to changes in the foreign exchange rates from that which are due to changes in market prices of debt securities. The Series reports certain foreign currency related transactions as components of realized gains (losses) for financial reporting purposes, whereas such components are treated as ordinary income (loss) for federal income tax purposes.
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments, the reported amounts of assets and liabilities and disclosure of contingent 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 and the differences could be material.
Limited-Term Diversified Income Series-17
Delaware VIP® Limited-Term Diversified Income Series
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
Other—Expenses directly attributable to the Series are charged directly to the Series. Other expenses common to various funds within the Delaware Investments® Family of Funds are generally allocated among 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. Discounts and premiums on debt securities are amortized to interest income over the lives of the respective securities using the effective interest method. Realized gains (losses) on paydowns of mortgage- and asset-backed securities are classified as interest income. The Series declares dividends daily from net investment income and pays such dividends monthly and declares and pays distributions from net realized gain on investments, if any, following the close of the fiscal year. The Series may distribute income dividends and capital gains more frequently, if necessary for tax purposes. Dividends and distributions, if any, are recorded on the ex-dividend date.
The Series 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 year ended December 31, 2012.
The Series receives earnings credits from its transfer agent when positive cash balances are maintained, which are used to offset transfer agent fees. The expense paid under this arrangement is included in dividend disbursing and transfer agent fees and expenses on the Statement of Operations with the corresponding expense offset shown as “expense paid indirectly.” For the year ended December 31, 2012, the Series earned $1 under this agreement.
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Series 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 0.50% on the first $500 million of average daily net assets of the Series, 0.475% on the next $500 million, 0.45% on the next $1.5 billion, and 0.425% on average daily net assets in excess of $2.5 billion.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to the Series. For these services, the Series 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 year ended December 31, 2012, the Series was charged $53,938 for these services.
DSC is also the transfer agent and dividend disbursing agent of the Series. The Series pays DSC a monthly asset-based fee for these services. Pursuant to a sub-transfer agency agreement between DSC and BNY Mellon Investment Servicing (US) Inc. (BNYMIS), BNYMIS provides certain sub-transfer agency services to the Series. Sub-transfer agency fees are passed on to and paid directly by the Series.
Pursuant to a distribution agreement and distribution plan, the Series pays Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an annual distribution and service fee of 0.30% of the average daily net assets of the Service Class shares. DDLP has contracted to waive distribution and service fees through April 30, 2013 in order to prevent distribution and service fees of the Service Class shares from exceeding 0.25% of average daily net assets. Standard Class shares pay no distribution and service expenses.
At December 31, 2012, the Series had liabilities payable to affiliates as follows:
| | | Dividend Disbursing, | | | | Other |
| Investment | | Transfer Agent and Fund | | | | Expenses |
| Management | | Accounting Oversight | | Distribution | | Payable |
| Fee Payable to | | Fees and Other Expenses | | Fee Payable | | to DMC |
| DMC | | Payable to DSC | | to DDLP | | and Affiliates* |
| $478,660 | | $12,288 | | $237,585 | | $31,726 |
____________________
*DMC, as part of its administrative services, pays operating expenses on behalf of the Series and is reimbursed on a periodic basis. Expenses include items such as printing of shareholder reports, legal and tax services, custodian fees and trustees’ fees.
As provided in the investment management agreement, the Series bears the cost of certain legal and tax services, including internal legal and tax services provided to the Series by DMC and/or its affiliates’ employees. For the year ended December 31, 2012, the Series was charged $33,002 for internal legal and tax services provided by DMC and/or its affiliates’ employees.
Trustees’ fees include expenses accrued by the Series 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 Series.
Limited-Term Diversified Income Series-18
Delaware VIP® Limited-Term Diversified Income Series
Notes to Financial Statements (continued)
3. Investments
For the year ended December 31, 2012, the Series made purchases and sales of investment securities other than short-term investments as follows:
| Purchases other than U.S. government securities | $ | 2,838,696,542 |
| Purchases of U.S. government securities | | 303,596,137 |
| Sales other than U.S. government securities | | 2,654,737,406 |
| Sales of U.S. government securities | | 288,112,195 |
At December 31, 2012, the cost of investments for federal income tax purposes and unrealized appreciation (depreciation) for the Series were as follows:
| | | Aggregate | | Aggregate | | |
| Cost of | | Unrealized | | Unrealized | | Net Unrealized |
| Investments | | Appreciation | | Depreciation | | Appreciation |
| $1,306,250,172 | | $22,178,560 | | $(6,409,651) | | $15,768,909 |
U.S. GAAP defines fair value as the price that the Series 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. A three level hierarchy for fair value measurements has been established 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 Series’ investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three level hierarchy of inputs is summarized below.
| Level 1 – | inputs are quoted prices in active markets for identical investments (e.g., equity securities, open-end investment companies, futures contracts, exchange-traded options contracts) |
| Level 2 – | other observable inputs (including, but not limited to: quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs) (e.g., debt securities, government securities, swap contracts, foreign securities utilizing international fair value pricing, broker-quoted securities, fair valued securities) |
| Level 3 – | inputs are significant unobservable inputs (including the Series’ own assumptions used to determine the fair value of investments) (e.g., broker-quoted securities, fair valued securities) |
Level 3 investments are valued using significant unobservable inputs. The Series may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Valuations may also be based upon current market prices of securities that are comparable in coupon, rating, maturity and industry. The derived value of a Level 3 investment may not represent the value which is received upon disposition and this could impact the results of operations.
The following table summarizes the valuation of the Series’ investments by fair value hierarchy levels as of December 31, 2012:
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Agency, Asset-Backed and Mortgage-Backed Securities | | $ | – | | | $ | 500,445,490 | | | $ | 7,584,492 | | $ | 508,029,982 | |
| Corporate Debt | | | – | | | | 581,197,724 | | | | – | | | 581,197,724 | |
| Foreign Debt | | | – | | | | 1,727,300 | | | | – | | | 1,727,300 | |
| Municipal Bonds | | | – | | | | 16,148,585 | | | | – | | | 16,148,585 | |
| Preferred Stock | | | – | | | | 2,827,213 | | | | – | | | 2,827,213 | |
| Short-Term Investments | | | – | | | | 157,486,071 | | | | – | | | 157,486,071 | |
| U.S. Treasury Obligations | | | – | | | | 54,538,082 | | | | – | | | 54,538,082 | |
| Securities Lending Collateral | | | – | | | | 64,124 | | | | – | | | 64,124 | |
| Total | | $ | – | | | $ | 1,314,434,589 | | | $ | 7,584,492 | | $ | 1,322,019,081 | |
| |
| Foreign Currency Exchange Contracts | | $ | – | | | $ | 62,157 | | | $ | – | | $ | 62,157 | |
| Futures Contracts | | | (96,350 | ) | | | – | | | | – | | | (96,350 | ) |
| Swap Contracts | | | – | | | | (3,949,383 | ) | | | – | | | (3,949,383 | ) |
The securities that have been deemed worthless on the statement of net assets are considered to be Level 3 securities in this table.
During the year ended December 31, 2012, there were no transfers between Level 1 investments, Level 2 investments or Level 3 investments that had a significant impact to the Series. The Series policy is to recognize transfers between levels at the beginning of the reporting period.
A reconciliation of Level 3 investments is presented when the Series has a significant amount of Level 3 investments at the beginning, interim or end of the period in relation to net assets. Management has determined not to provide additional disclosure on Level 3 inputs under ASU No. 2011-04 since the Level 3 investments are not considered significant to the Series’ net assets at the end of the period.
Limited-Term Diversified Income Series-19
Delaware VIP® Limited-Term Diversified Income Series
Notes to Financial Statements (continued)
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. The tax character of dividends and distributions paid during the years ended December 31, 2012 and 2011 was as follows:
| | Year | | Year |
| | Ended | | Ended |
| | 12/31/12 | | 12/31/11 |
| Ordinary income | | $ | 22,170,775 | | $ | 22,025,557 |
| Long-term capital gain | | | 2,032,004 | | | 4,331,224 |
| | | $ | 24,202,779 | | $ | 26,356,781 |
5. Components of Net Assets on a Tax Basis
As of December 31, 2012, the components of net assets on a tax basis were as follows:
| Shares of beneficial interest | | $ | 1,161,605,517 |
| Undistributed ordinary income | | | 871,409 |
| Other temporary differences | | | 4,090,180 |
| Unrealized appreciation | | | 11,713,087 |
| Net assets | | $ | 1,178,280,193 |
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales, tax treatment of CDS contracts, contingent payment debt instruments, mark-to market of futures and forwards contracts, and market discount and premium on debt instruments.
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 foreign currency gain (loss), dividends and distributions, CDS contracts, market discount and premium on debt instruments and paydown gains (losses) on mortgage- and asset-backed securities. Results of operations and net assets were not affected by these reclassifications. For the year ended December 31, 2012, the Series recorded the following reclassifications.
| Undistributed | | Accumulated |
| Net Investment | | Net Realized |
| | Income | | Loss |
| $12,217,448 | | $(12,217,448) |
6. Capital Shares
Transactions in capital shares were as follows:
| | Year | | Year |
| | Ended | | Ended |
| | 12/31/12 | | 12/31/11 |
| Shares sold: | | | | | | |
| Standard Class | | 1,782,404 | | | 1,677,412 | |
| Service Class | | 22,457,572 | | | 35,986,137 | |
| |
| Shares issued upon reinvestment of dividends and distributions: | | | | | | |
| Standard Class | | 115,711 | | | 140,035 | |
| Service Class | | 2,276,542 | | | 2,504,610 | |
| | 26,632,229 | | | 40,308,194 | |
| |
| Shares redeemed: | | | | | | |
| Standard Class | | (1,141,836 | ) | | (1,389,909 | ) |
| Service Class | | (6,142,348 | ) | | (11,895,792 | ) |
| | | (7,284,184 | ) | | (13,285,701 | ) |
| Net increase | | 19,348,045 | | | 27,022,493 | |
Limited-Term Diversified Income Series-20
Delaware VIP® Limited-Term Diversified Income Series
Notes to Financial Statements (continued)
7. Line of Credit
The Series, along with certain other funds in the Delaware Investments® Family of Funds (Participants), was a participant in a $125,000,000 revolving line of credit 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 were charged an annual commitment fee, which was allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants were permitted to borrow up to a maximum of one third of their net assets under the agreement. Each Participant was individually, and not jointly, liable for its particular advances, if any, under the line of credit. The line of credit available under the agreement expired on November 13, 2012.
On November 13, 2012, the Series, along with the other Participants, entered into an amendment to the agreement for a $125,000,000 revolving line of credit. The agreement is to be used as described above and operates in substantially the same manner as the original agreement. The line of credit under the agreement expires on November 12, 2013. The Series had no amounts outstanding as of December 31, 2012 or at any time during the year then ended.
8. Derivatives
U.S. GAAP requires disclosures that enable investors to understand: 1) how and why an entity uses derivatives; 2) how they are accounted for; and 3) how they affect an entity’s results of operations and financial position.
Foreign Currency Exchange Contracts
The Series may enter into foreign currency exchange contracts and foreign cross currency exchange contracts as a way of managing foreign exchange rate risk. The Series 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 Series 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 and foreign cross 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 an unfavorable change in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency change favorably. In addition, the Series could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts. The Series’ 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 Series and the counterparty and by the posting of collateral by the counterparty to the Series to cover the Series’ exposure to the counterparty.
Futures Contracts
A futures contract is an agreement in which the writer (or seller) of the contract agrees to deliver to the buyer an amount of cash or securities equal to a specific dollar amount times the difference between the value of a specific security or index at the close of the last trading day of the contract and the price at which the agreement is made. The Series may use futures in the normal course of pursuing its investment objectives. The Series may invest in financial futures contracts to hedge its existing portfolio securities against fluctuations in fair value caused by changes in prevailing market interest rates. Upon entering into a futures contract, the Series deposits cash or pledges U.S. government securities to a broker, equal to the minimum “initial margin” requirements of the exchange on which the contract is traded. Subsequent payments are received from the broker or paid to the broker each day, based on the daily fluctuation in the market value of the contract. These receipts or payments are known as “variation margin” and are recorded daily by the Series as unrealized gains or losses until the contracts are closed. When the contracts are closed, the Series records a realized gain or loss 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. Risks of entering into futures contracts include potential imperfect correlation between the financial futures contracts and the underlying securities and the possibility of an illiquid secondary market for these instruments. When investing in futures, there is reduced counterparty credit risk to the Series because futures are exchange-traded and the exchange’s clearinghouse, as counterparty to all exchange-traded futures, guarantees against default.
Options Contracts
During the year ended December 31, 2012, the Series entered into options contracts in the normal course of pursuing its investment objective. The Series may buy or write options contracts for any number of reasons, including without limitation: to manage the Series’ exposure to changes in securities prices and foreign currencies; as an efficient means of adjusting the Series’ overall exposure to certain markets; to protect the value of portfolio securities; and as a cash management tool. The Series may buy or write call or put options on securities, futures, swaps “swaptions”, financial indices, and foreign currencies. When the Series buys an option, a premium is paid and an asset is recorded and adjusted on a daily basis to reflect the current market value of the options purchased. When the Series writes an option, a premium is received and a liability is recorded and adjusted on a daily basis to reflect the current market value of the options written. Premiums received from writing options that expire unexercised are treated by the Series on the expiration date as realized gains. The difference between the premium received and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is treated as realized gain or loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Series has a realized gain or loss. If a put option is exercised, the premium reduces the cost basis of the securities purchased by the Series. The Series, as writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. When writing options, the Series is subject to minimal counterparty risk because the counterparty is only obligated to pay premiums and does not bear the market risk of an unfavorable market change. There were no transactions in options written during the year ended December 31, 2012.
Swap Contracts
The Series may enter into CDS contracts in the normal course of pursuing its investment objectives. The Series may enter into CDS contracts in order to hedge against a credit event, to enhance total return or to gain exposure to certain securities or markets.
Credit Default Swaps. A CDS contract is a risk-transfer instrument through which one party (purchaser of protection) transfers to another party (seller of protection) the financial risk of a credit event (as defined in the CDS agreement), as it relates to a particular reference security or basket of securities (such as an index). In exchange for the protection offered by the seller of protection, the purchaser of protection agrees to pay the seller of protection a periodic amount at a stated rate that is applied to the notional amount of the CDS contract. In addition, an upfront payment may be made or received by the Series in connection with an unwinding or assignment of a CDS contract. Upon the occurrence of a credit event, the seller of protection would pay the par (or other agreed-upon) value of the reference security (or basket of securities) to the counterparty. Credit events generally include, among others, bankruptcy, failure to pay, and obligation default.
Limited-Term Diversified Income Series-21
Delaware VIP® Limited-Term Diversified Income Series
Notes to Financial Statements (continued)
8. Derivatives (continued)
During the year ended December 31, 2012, the Series entered into CDS contracts as a purchaser and seller of protection. Periodic payments (receipts) on such contracts are accrued daily and recorded as unrealized losses (gains) on swap contracts. Upon payment (receipt), such amounts are recorded as realized losses (gains) on swap contracts. Upfront payments made or received in connection with CDS contracts are amortized over the expected life of the CDS contracts as unrealized losses (gains) on swap contracts. The change in value of CDS contracts is recorded as unrealized appreciation or depreciation daily. A realized gain or loss is recorded upon a credit event (as defined in the CDS agreement) or the maturity or termination of the agreement. The Series had posted $9,520,000 cash collateral for certain open derivatives.
CDS contracts may involve greater risks than if the Series had invested in the reference obligation directly. CDS contracts are subject to general market risk, liquidity risk, counterparty risk and credit risk. The Series’ maximum risk of loss from counterparty credit risk, either as the seller of protection or the buyer of protection, is the fair value of the contract. This risk is mitigated by having a netting arrangement between the Series and the counterparty and by the posting of collateral by the counterparty to the Series to cover the Series’ exposure to the counterparty.
Swaps Generally. The value of open swaps may differ from that which would be realized in the event the Series terminated its position in the agreement. Risks of entering into these contracts include the potential inability of the counterparty to meet the terms of the contracts. This type of risk is generally limited to the amount of favorable movement in the value of the underlying security, instrument or basket of instruments, if any, at the day of default. Risks also arise from potential losses from adverse market movements and such losses could exceed the unrealized amounts shown on the Statement of Net Assets.
Fair values of derivative instruments as of December 31, 2012 were as follows:
| | Asset Derivatives | | Liability Derivatives |
| | Statement of Net Assets | | | | | | | Statement of | | | | |
| | Location | | Fair Value | | Net Assets Location | | Fair Value |
| Forward currency exchange contracts (Foreign currency exchange contracts) | �� | Other liabilities net of receivables and other assets | | | $ | 62,157 | | | Other liabilities net of receivables and other assets | | $ | – | |
| |
| Interest rate contracts (Futures contracts) | | Other liabilities net of receivables and other assets | | | | – | | | Other liabilities net of receivables and other assets | | | (96,350 | ) |
| | | | | | | | | | | | | |
| Credit contracts (Swap contracts) | | Other liabilities net of receivables and other assets | | | | 53,753 | | | Other liabilities net of receivables and other assets | | | (4,003,136 | ) |
| Total | | | | | $ | 115,910 | | | | | $ | (4,099,486 | ) |
The effect of derivative instruments on the statement of operations for the year ended December 31, 2012 was as follows:
| | | | | | | | | | Change in Unrealized |
| | Location of Gain or | | Realized Gain or | | Appreciation or Depreciation |
| | Loss on Derivatives | | Loss on Derivatives | | on Derivatives Recognized |
| | Recognized in Income | | Recognized in Income | | in Income |
| Forward currency exchange contracts (Foreign currency exchange contracts) | | Net realized gain on foreign currency exchange contracts and net change in unrealized appreciation (depreciation) of foreign currency exchange contracts | | | $ | 165,053 | | | | | $ | 62,157 | | |
| | |
| Interest rate contracts (Futures contracts) | | Net realized loss on futures contracts and net change in unrealized appreciation (depreciation) of futures contracts | | | | (1,383,819 | ) | | | | | 444,396 | | |
| | |
| Credit contracts (Swap contracts) | | Net realized loss on swap contracts and net change in unrealized appreciation (depreciation) of swap contracts | | | | (1,345,445 | ) | | | | | (4,100,967 | ) | |
| Total | | | | | $ | (2,564,211 | ) | | | | $ | (3,594,414 | ) | |
Limited-Term Diversified Income Series-22
Delaware VIP® Limited-Term Diversified Income Series
Notes to Financial Statements (continued)
8. Derivatives (continued)
Derivatives Generally. The table below summarizes the average balance of derivative holdings by the Series during the year ended December 31, 2012.
| | Long | | Short |
| | Derivative | | Derivative |
| | Volume | | Volume |
| Forward foreign currency exchange contracts (Average cost) | | USD | 1,430,984 | | USD | 22,906 |
| Futures contracts (Average notional value) | | | 4,703,055 | | | 7,586,589 |
| Options contracts (Average notional value) | | | 5,357 | | | – |
| Swap contracts (Average notional value)* | | | 13,835,075 | | | 2,371,353 |
| | EUR | 39,356,448 | | | – |
____________________
*Long represents buying protection and short represents selling protection.
9. Securities Lending
The Series, along with other funds in the Delaware Investments® Family of Funds, may lend its securities pursuant to a security lending agreement (Lending Agreement) with The Bank of New York Mellon (BNY Mellon). At the time a security is loaned, the borrower must post collateral equal to the required percentage of the market value of the loaned security, including any accrued interest. The required percentage is: (i) 102% with respect to U.S. securities and foreign securities that are denominated and payable in U.S. dollars; and (ii) 105% with respect to foreign securities. With respect to each loan, if on any business day the aggregate market value of securities collateral plus cash collateral held 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 by the end of the following business day which, together with the collateral already held, will be not less than the applicable initial collateral requirements for such security loan. If the aggregate market value of securities collateral and cash collateral held with respect to a security loan exceeds the applicable initial collateral requirement, upon request of the borrower BNY Mellon must return enough collateral to the borrower by the end of the following business day to reduce the value of the remaining collateral to the applicable initial collateral requirement for such security loan. As a result of the foregoing, the value of the collateral held with respect to a loaned security may be temporarily more or less than the value of the security on loan.
Cash collateral received is generally invested in the Delaware Investments Collateral Fund No. 1 (Collective Trust) established by BNY Mellon for the purpose of investment on behalf of funds managed by DMC that participate in BNY Mellon’s securities lending program. The Collective Trust may invest in U.S. government securities and high quality corporate debt, asset-backed and other money market securities and in repurchase agreements collateralized by such securities, provided that the Collective Trust will generally have a dollar-weighted average portfolio maturity of 60 days or less. In October 2008, BNY Mellon transferred certain distressed securities from the Series’ previous collateral investment pool into the Mellon GSL Reinvestment Trust II. The Series 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 Series or, at the discretion of the lending agent, replace the loaned securities. The Series continues to record dividends or interest, as applicable, on the securities loaned and is subject to changes in value of the securities loaned that may occur during the term of the loan. The Series 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 Series 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 Series, the security lending agent and the borrower. The Series records security lending income net of allocations to the security lending agent and the borrower.
The Collective Trust used for the investment of cash collateral received from borrowers of securities 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. The Series may incur investment losses as a result of investing securities lending collateral in the Collective Trust or another collateral investment pool. This could occur if an investment in a collateral investment pool defaulted or if it were necessary to liquidate assets in the collateral investment pool to meet returns on outstanding security loans at a time when the collateral investment pool’s net asset value per unit was less than $1.00. Under those circumstances, the Series may not receive an amount from the collateral investment pool that is equal in amount to the collateral the Series would be required to return to the borrower of the securities and the Series would be required to make up for this shortfall.
At December 31, 2012, the value of securities on loan was $126,803, for which cash collateral was received and invested in accordance with the Lending Agreement. At December 31, 2012, the value of invested collateral was $64,124. These investments are presented on the Statement of Net Assets under the caption “Securities Lending Collateral.”
10. Credit and Market Risk
The Series invests in fixed income securities whose value is derived from an underlying pool of mortgages or consumer loans. The value of these securities is sensitive to changes in economic conditions, including delinquencies and/or defaults, and may be adversely affected by shifts in the market’s perception of the issuers and changes in interest rates. Investors receive principal and interest payments as the underlying mortgages and consumer loans are paid back. Some of these securities are collateralized mortgage obligations (CMOs). CMOs are debt securities issued by U.S. government agencies or by financial institutions and other mortgage lenders, which are collateralized by a pool of mortgages held under an indenture. Prepayment of mortgages may shorten the stated maturity of the obligations and can result in a loss of premium, if any has been paid. Certain of these securities may be stripped (securities which provide only the principal or interest feature of the underlying security). The yield to maturity on an interest-only CMO is extremely sensitive not only to changes in prevailing interest rates, but also to the rate of principal payments (including prepayments) on the related underlying mortgage assets. A rapid rate of principal payments may have a material adverse affect on the Series’ yield to maturity. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Series may fail to recoup its initial investment in these securities even if the securities are rated in the highest rating categories.
The Series invests in high yield fixed income securities, which are securities rated lower than BBB- by Standard & Poor’s and Baa3 by Moody’s Investor Services, or similarly rated by another nationally recognized statistical rating organization. Investments in these higher yielding securities are generally accompanied by a greater degree of credit risk than higher rated securities. Additionally, lower rated securities may be more susceptible to adverse economic and competitive industry conditions than investment grade securities.
Limited-Term Diversified Income Series-23
Delaware VIP® Limited-Term Diversified Income Series
Notes to Financial Statements (continued)
10. Credit and Market Risk (continued)
The Series 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 Series 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 Series’ Board has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of the Series’ limitation on investments in illiquid securities. Securities eligible for resale pursuant to Rule 144A, which are determined to be liquid, are not subject to the Series’ 15% limit on investments in illiquid securities. Rule 144A and illiquid securities have been identified on the statement of net assets.
11. Contractual Obligations
The Series enters into contracts in the normal course of business that contain a variety of indemnifications. The Series’ maximum exposure under these arrangements is unknown. However, the Series has not had prior claims or losses pursuant to these contracts. Management has reviewed the Series’ existing contracts and expects the risk of loss to be remote.
12. Subsequent Events
Management has determined that no material events or transactions occurred subsequent to December 31, 2012 that would require recognition or disclosure in the Series’ financial statements.
Limited-Term Diversified Income Series-24
Delaware VIP® Trust — Delaware VIP Limited-Term Diversified Income Series
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Delaware VIP Trust
and the Shareholders of Delaware VIP Limited-Term Diversified Income Series:
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Delaware VIP Limited-Term Diversified Income Series (one of the series constituting Delaware VIP Trust, hereafter referred to as the “Series”) at December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2012 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the two years in the period ended December 31, 2009 were audited by other independent accountants whose report dated February 17, 2010 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 15, 2013
Limited-Term Diversified Income Series-25
Delaware VIP® Trust — Delaware VIP Limited-Term Diversified Income Series
Other Series Information (Unaudited)
Board Consideration of Delaware VIP Limited-Term Diversified Income Series Investment Advisory Agreement
At a meeting held on August 21-23, 2012 (“Annual Meeting”), the Board of Trustees (“Board”), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreement for Delaware VIP Limited-Term Diversified Income Series (“Series”). In making its decision, the Board considered information furnished at regular quarterly Board meetings, including reports detailing Series performance, investment strategies and expenses, as well as information prepared specifically in connection with the renewal of the investment advisory contract. Information furnished specifically in connection with the renewal of the Investment Advisory Agreement with Delaware Management Company (“DMC”) included materials provided by DMC and its affiliates (“Delaware Investments”) concerning, among other things, the nature, extent and quality of services provided to the Series, the costs of such services to the Series, economies of scale and the financial condition and profitability of Delaware Investments. In addition, in connection with the Annual Meeting, reports were provided in May 2012 and included independent historical and comparative reports provided by Lipper, Inc., an independent statistical compilation organization (“Lipper”). The Lipper reports compared the Series’ investment performance and expenses with those of other comparable mutual funds. The Independent Trustees reviewed and discussed the Lipper reports with independent legal 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; comparative client fee information; 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 the Series’ policies.
In considering information relating to the approval of the Series’ advisory agreement, the Independent Trustees received assistance and advice from and met separately with independent legal 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 Series 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 Series, compliance of portfolio managers with the investment policies, strategies and restrictions for the Series, 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 Series’ investment advisor and the emphasis placed on research in the investment process. The Board recognized DMC’s receipt of several industry distinctions. The Board gave favorable consideration to DMC’s efforts to control expenditures while maintaining service levels committed to fund matters. The Board noted that in July 2011, Management implemented measures to reduce overall costs and improve transfer agent and shareholder servicing functions through outsourcing. 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 Series in view of the importance of investment performance 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 Series showed the investment performance of its Standard Class 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 Series was shown for the past one-, three-, five- and ten-year periods, as applicable, ended March 31, 2012. The Board’s objective is that the Series’ performance for the periods considered be at or above the median of its Performance Universe. The following paragraph summarizes the performance results for the Series and the Board’s view of such performance.
The Performance Universe for the Series consisted of the Series and all short-intermediate investment-grade debt funds underlying variable insurance products as selected by Lipper. The Lipper report comparison showed that the Series’ total return for the one-, three-, five- and ten-year periods was in the first quartile of its Performance Universe. The Board was satisfied with performance.
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 Series as of its most recently completed fiscal year. The Board also focused on the comparative analysis of effective management fees and total expense ratios of the Series versus effective management fees and expense ratios of a group of similar funds as selected by Lipper (“Expense Group”). In reviewing comparative costs, the Series’ contractual management fee and the actual management fee incurred by the Series were compared with the contractual management fees (assuming all funds in the Expense Group were similar in size to the Series) and actual management fees (as reported by each fund) within the Expense Group, taking into account any applicable breakpoints and fee waivers. The Series’ total expenses were also compared with those of its Expense Group. The Lipper total expenses, for comparative consistency, were shown by Lipper for Standard Class shares which do not charge 12b-1 and non 12b-1 service fees. The Board considered fees paid to Delaware Investments for non-management services. The Board’s objective is to limit the Series’ total expense ratio to be competitive with that of the Expense Group. The following paragraph summarizes the expense results for the Series and the Board’s view of such expenses.
The expense comparisons for the Series showed that the actual management fee was in the quartile with the second highest expenses of its Expense Group and the total expenses were in the quartile with the highest expenses of its Expense Group. The Series’ total expenses were not in line with the Board’s objective. In evaluating total expenses, the Board considered various initiatives implemented by Management. The Board was satisfied with Management’s efforts to improve the Series’ total expense ratio and bring it in line with the Board’s objective and noted 12b-1 waivers in place through April 2013.
MANAGEMENT PROFITABILITY. The Board considered the level of profits realized by Delaware Investments in connection with the operation of the Series. 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, reflects 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
Limited-Term Diversified Income Series-26
Delaware VIP® Limited-Term Diversified Income Series
Other Series Information (Unaudited) (continued)
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 profitability of Delaware Investments.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are realized by Delaware Investments as the Series’ 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 Series’ management contract fell within the standard structure. The Board also noted that the Series’ assets exceeded the second breakpoint level. The Board believed that, given the extent to which economies of scale might be realized by the advisor and its affiliates, the schedule of fees under the Investment Advisory Agreement provides a sharing of benefits with the Series and its shareholders. |
| |
Tax Information
For the fiscal year ended December 31, 2012, the Series designates distributions paid during the year as follows:
| (A) | | (B) | | |
| | Long-Term | | Ordinary | | |
| Capital Gain | | Income | | Total |
| Distributions | | Distributions | | Distributions |
| (Tax Basis) | | (Tax Basis) | | (Tax Basis) |
| 8.40% | | 91.60% | | 100.00% |
____________________
(A) and (B) are based on a percentage of the Series’ total distributions.
Limited-Term Diversified Income Series-27
Delaware Investments® Family of Funds
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors (“Trustees”), which has oversight responsibility for the management of a fund’s business affairs. Trustees establish procedures and oversee and review the performance of the investment manager, the distributor, and others who perform services for the fund. The independent fund trustees, in particular, are advocates for shareholder interests. Each trustee has served in that capacity since he or she was elected to or appointed to the Board of Trustees, and will continue to serve until his or her retirement or the election of a new trustee in his or her place. The following is a list of the Trustees and Officers with certain background and related information.
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INTERESTED TRUSTEES | | | | | |
| Patrick P. Coyne1 | Chairman, | Chairman and Trustee | Patrick P. Coyne has served in | 71 | Director and Audit |
| 2005 Market Street | President, | since August 16, 2006 | various executive capacities | | Committee Member — |
| Philadelphia, PA | Chief Executive | | at different times at | | Kaydon Corp. |
| 19103 | Officer, and | President and | Delaware Investments.2 | | |
| Trustee | Chief Executive Officer | | | Board of Governors |
| April 1963 | | since August 1, 2006 | | | Member — Investment |
| | | | | Company Institute (ICI) |
| | | | | |
| INDEPENDENT TRUSTEES | | | | | |
| Thomas L. Bennett | Trustee | Since | Private Investor — | 71 | Director — |
| 2005 Market Street | | March 2005 | (March 2004–Present) | | Bryn Mawr |
| Philadelphia, PA | | | | | Bank Corp. (BMTC) |
| 19103 | | | Investment Manager — | | (2007–2011) |
| | | Morgan Stanley & Co. | | |
| October 1947 | | | (January 1984–March 2004) | | |
| Joseph W. Chow | Trustee | Since | Executive Vice President | 71 | Director and Audit |
| 2005 Market Street | | January 2013 | (Emerging Economies Strategies, | | Committee |
| Philadelphia, PA 19103 | | | Risk and Corporate Administration) | | Member — Hercules |
| | | State Street Corporation | | Technology Growth |
| January 1953 | | | (July 2004–March 2011) | | Capital, Inc. |
| John A. Fry | Trustee | Since | President | 71 | Board of Governors |
| 2005 Market Street | | January 2001 | Drexel University | | Member — NASDAQ |
| Philadelphia, PA | | | (August 2010–Present) | | OMX PHLX LLC |
| 19103 | | | | | |
| | | President — | | Director and Audit |
| May 1960 | | | Franklin & Marshall College | | Committee Member — |
| | | (June 2002–July 2010) | | Community Health |
| | | | | Systems |
| | | | | | |
| | | | | Director — Ecore |
| | | | | International |
| | | | | (2009–2010) |
| Anthony D. Knerr | Trustee | Since | Managing Director — | 71 | None |
| 2005 Market Street | | April 1990 | Anthony Knerr & Associates | | |
| Philadelphia, PA | | | (Strategic Consulting) | | |
| 19103 | | | (1990–Present) | | |
| | | | | | |
| December 1938 | | | | | |
| Lucinda S. Landreth | Trustee | Since | Private Investor | 71 | None |
| 2005 Market Street | | March 2005 | (2004–Present) | | |
| Philadelphia, PA | | | | | |
| 19103 | | | | | |
| | | | | | |
| June 1947 | | | | | |
Limited-Term Diversified Income Series-28
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INDEPENDENT TRUSTEES (continued) | | | | |
| Frances A. Sevilla-Sacasa | Trustee | Since | Chief Executive Officer — | 71 | Trust Manager — |
| 2005 Market Street | | September 2011 | Banco Itaú Europa | | Camden Property Trust |
| Philadelphia, PA | | | International | | (2011–Present) |
| 19103 | | | (April 2012–Present) | | |
| |
| January 1956 | | | Executive Advisor to Dean | | |
| | | (August 2011–March 2012) | | |
| | | and Interim Dean | | |
| | | (January 2011–July 2011) — | | |
| | | University of Miami School of | | |
| | | Business Administration | | |
| |
| | | President — U.S. Trust, | | |
| | | Bank of America Private | | |
| | | Wealth Management | | |
| | | (Private Banking) | | |
| | | (July 2007–December 2008) | | |
| Thomas K. Whitford | Trustee | Since | Vice Chairman | 71 | None |
| 2005 Market Street | | January 2013 | (2010–Present) | | |
| Philadelphia, PA 19103 | | | Chief Administrative | | |
| | | Officer (2008–2010) | | |
| March 1956 | | | and Executive Vice | | |
| | | President and Chief | | |
| | | Administrative Officer | | |
| | | (2007–2009) — | | |
| | | PNC Financial | | |
| | | Services Group | | |
| Janet L. Yeomans | Trustee | Since | Vice President and Treasurer | 71 | Director, Audit |
| 2005 Market Street | | April 1999 | (January 2006–Present) | | Committee Member |
| Philadelphia, PA | | | Vice President — Mergers | | and Investment |
| 19103 | | | & Acquisitions | | Committee Member |
| | | (January 2003–January 2006), | | Okabena Company |
| July 1948 | | | and | | |
| | | Vice President and Treasurer | | Chair — 3M |
| | | (July 1995–January 2003) | | Investment Management |
| | | 3M Corporation | | Company |
| | | | | (January 2005–July 2012) |
| J. Richard Zecher | Trustee | Since | Founder — | 71 | Director and Compensation |
| 2005 Market Street | | March 2005 | Investor Analytics | | Committee Member — |
| Philadelphia, PA | | | (Risk Management) | | Investor Analytics |
| 19103 | | | (May 1999–Present) | | |
| | | | | Director — |
| July 1940 | | | Founder — | | P/E Investments |
| | | P/E Investments | | |
| | | (Hedge Fund) | | |
| | | (September 1996–Present) | | |
| |
| OFFICERS | | | | | |
| David F. Connor | Vice President, | Vice President since | David F. Connor has served as | 71 | None3 |
| 2005 Market Street | Deputy General | September 2000 | Vice President and Deputy | | |
| Philadelphia, PA | Counsel, and Secretary | and Secretary | General Counsel of | | |
| 19103 | | since | Delaware Investments | | |
| | October 2005 | since 2000. | | |
| December 1963 | | | | | |
| Daniel V. Geatens | Vice President | Treasurer | Daniel V. Geatens has served | 71 | None3 |
| 2005 Market Street | and Treasurer | since | in various capacities at | | |
| Philadelphia, PA | | October 2007 | different times at | | |
| 19103 | | | Delaware Investments. | | |
| |
| October 1972 | | | | | |
Limited-Term Diversified Income Series-29
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| OFFICERS (continued) | | | | | |
| David P. O’Connor | Executive Vice | Executive Vice President | David P. O’Connor has served in | 71 | None3 |
| 2005 Market Street | President, | since February 2012; | various executive and legal | | |
| Philadelphia, PA | General Counsel, | Senior Vice President | capacities at different times | | |
| 19103 | and Chief | October 2005–February 2012; | at Delaware Investments. | | |
| Legal Officer | General Counsel and | | | |
| February 1966 | | Chief Legal Officer | | | |
| | since October 2005 | | | |
| Richard Salus | Senior | Chief Financial | Richard Salus has served in | 71 | None3 |
| 2005 Market Street | Vice President | Officer since | various executive capacities | | |
| Philadelphia, PA | and | November 2006 | at different times at | | |
| 19103 | Chief Financial | | Delaware Investments. | | |
| Officer | | | | |
| October 1963 | | | | | |
1 Patrick P. Coyne is considered to be an “Interested Trustee” because he is an executive officer of the Fund’s(s’) investment advisor. |
2 Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund’s(s’) investment advisor, principal underwriter, and its transfer agent. |
3 David F. Connor, Daniel V. Geatens, David P. O’Connor, and Richard Salus serve in similar capacities for the six portfolios of the Optimum Fund Trust, which have the same investment advisor, principal underwriter, and transfer agent as the registrant. |
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is available, without charge, upon request by calling 800 523-1918.
The Series files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q. The Series’ Forms N-Q, as well as a description of the policies and procedures that the Series 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 website at sec.gov. In addition, a description of the policies and procedures that the Series uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge on the Delaware Investments® Funds’ website at delawareinvestments.com. The Series’ Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Series voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the Delaware Investments Funds’ website at delawareinvestments.com; and (ii) on the Commission’s website at sec.gov. |
| AR-VIPLTD [12/12] DG3 18582 (2/13) | | (10125) | | Limited-Term Diversified Income Series-30 |
| Delaware VIP® Trust |
| Delaware VIP REIT Series |
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| December 31, 2012 |
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Table of contents
| > Portfolio management review | | 1 |
| | | |
| > Performance summary | | 2 |
| | | |
| > Disclosure of Series expenses | | 4 |
| | | |
| > Security type/sector allocation and top 10 equity holdings | | 5 |
| | | |
| > Statement of net assets | | 6 |
| | | |
| > Statement of operations | | 8 |
| | | |
| > Statements of changes in net assets | | 8 |
| | | |
| > Financial highlights | | 9 |
| | | |
| > Notes to financial statements | | 11 |
| | | |
| > Report of independent registered public accounting firm | | 16 |
| | | |
| > Other Series information | | 17 |
| | | |
| > Board of trustees/directors and officers addendum | | 19 |
Investments in Delaware VIP® REIT Series 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 (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 Series, the repayment of capital from the Series, or any particular rate of return.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
The Series is not FDIC insured and is 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 and member of Macquarie Group. Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries, including the Series’ distributor, Delaware Distributors, L.P. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide.
This material may be used in conjunction with the offering of shares in the Delaware VIP REIT Series only if preceded or accompanied by the Series’ current prospectus, and if available, the summary prospectus.
© 2013 Delaware Management Holdings, Inc.
All third-party marks cited are the property of their respective owners.
| Delaware VIP® Trust — Delaware VIP REIT Series | |
| Portfolio management review | Jan. 8, 2013 |
For the fiscal year ended Dec. 31, 2012, Delaware VIP REIT Series Standard Class shares returned +16.94%, and Service Class shares returned +16.61% (both figures reflect returns with dividends reinvested). The Series’ benchmark, the FTSE NAREIT Equity REITs Index, returned +18.06%.
For the Series’ fiscal year, real estate investment trusts (REITs) generated strong gains overall. REIT prices generally rose in tandem with increased optimism about global economic conditions, fueled by the aggressive actions taken by central banks around the world to boost economic performance by lowering the cost of credit. (As leveraged investments, REITs generally benefit directly when financing is readily available and relatively inexpensive.)
In this favorable environment, each REIT sector enjoyed positive absolute returns. Malls and shopping center companies were among the strongest-performing sectors in the FTSE NAREIT Equity REITs Index during the fiscal year, bolstered by growing strength in consumer spending and tight supplies relative to demand, which resulted in rising rents and strong tenant occupancy levels. In contrast, apartment REITs generated only sluggish gains, in part because the sector had peaked in the previous year, but also because other areas of the market that had previously underperformed began to draw more investor attention.
Hurt by modest small-cap exposure
The Series provided solid absolute returns during the fiscal year. Series performance was hampered, however, by holdings that included BRE Properties, an apartment owner and operator focused on the California market, whose stock price fluctuated widely before ending the period with a gain of nearly 4%. The company’s shares trailed the gains posted by broader REIT markets, and the Series’ overweight in the stock was therefore detrimental versus the benchmark index.
On a relative basis, the Series’ results were also dampened by its exposure to smaller-cap real estate securities, which was more limited than the benchmark’s allocation. A number of these smaller-cap stocks with heightened growth potential benefited amid the highly favorable market conditions for REITs. The Series, for example, lacked any exposure to healthcare property company Sabra Health Care REIT and regional mall operator Pennsylvania Real Estate Investment Trust (PREIT), two benchmark constituents whose shares were up sharply.
Effective stock picking among mall operators, office REITs
The negative results mentioned earlier were offset somewhat by positive factors that included the Series’ exposure to mall companies including CBL & Associates Properties, a high-quality regional mall operator with a higher degree of leverage than some of its peers. The added level of debt on its balance sheet, made possible by lower capital costs, helped boost its performance relative to less-leveraged mall companies.
The Series’ position in self-storage operator Extra Space Storage also proved helpful. As one of the leading companies in its industry, it continued to gain market share, while tight supply within the industry helped the company maintain pricing power.
The Series also benefited from maintaining relatively limited exposure (compared with the benchmark) to suburban office REITs, a category that did not perform well.
Maintaining our approach
We did not make significant changes to our overall management approach during the Series’ fiscal year. We again concentrated on what we viewed as the high-quality, attractively valued REITs that we always seek to emphasize within the Series, while selling stocks whose prices we believed had become too expensive relative to the underlying companies’ growth prospects. While our basic strategy remained the same, we positioned the Series’ portfolio somewhat more defensively than usual, with a smaller emphasis on REITs in the more economically sensitive sectors, such as hotel and industrial REITs, and a greater focus on REITs with, what we viewed as having, solid balance sheets and lower levels of debt. This was the positioning we adopted throughout the fiscal year, and one that we continued maintaining as the period came to a close.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
REIT Series-1
Delaware VIP® Trust — Delaware VIP REIT Series
Performance summary
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
Carefully consider the Series’ investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Series’ prospectuses and, if available, their summary prospectuses, which may be obtained by calling 800 523-1918. Investors should read the prospectuses and, if available, the summary prospectuses carefully before investing.
| Delaware VIP REIT Series | | | | | | | | | | |
| Average annual total returns | | | | | | | | | | |
| For periods ended Dec. 31, 2012 | | 1 year | | 3 years | | 5 years | | 10 years | | Lifetime |
| Standard Class shares (commenced operations on May 4, 1998) | | +16.94% | | +18.11% | | +5.70% | | +11.01% | | +9.46% |
| Service Class shares (commenced operations on May 1, 2000) | | +16.61% | | +17.76% | | +5.43% | | +10.73% | | +11.05% |
Returns reflect the reinvestment of all distributions and any applicable sales charges as noted in the following paragraphs.
As described in the Series’ most recent prospectus, the net expense ratio for Service Class shares of the Series was 1.10%, while total operating expenses for Standard Class and Service Class shares were 0.85% and 1.15%, respectively. The management fee for Standard Class and Service Class shares was 0.75%.
The Series’ distributor has contracted to limit the 12b-1 fees for Service Class shares to 0.25% of average daily net assets from April 30, 2012 through April 30, 2013.
Earnings from a variable annuity or variable life investment compound tax-free until withdrawal, and as a result, no adjustments were made for income taxes.
Expense limitations were in effect for all classes during certain periods shown in the Series’ performance table above and in the Performance of a $10,000 Investment chart on the next page.
Performance data do not reflect other costs incurred by beneficial owners such as insurance company separate account fees and variable annuity or variable life contract charges or deferred sales charges. Performance shown here would have been reduced if such fees were included and the expense limitation removed. For more information about fees, consult your variable annuity or variable life prospectus.
Investments in variable products involve risk.
Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors.
REIT investments are subject to many of the risks associated with direct real estate ownership, including changes in economic conditions, credit risk, and interest rate fluctuations. A REIT fund’s tax status as a regulated investment company could be jeopardized if it holds real estate directly, as a result of defaults, or receives rental income from real estate holdings.
The Series may invest in derivatives, which may involve additional expenses and are subject to risk, including the risk that an underlying security or securities index moves in the opposite direction from what the portfolio manager anticipated. A derivative transaction depends upon the counterparties’ ability to fulfill their contractual obligations.
The Series may experience portfolio turnover in excess of 100%, which could result in higher transaction costs and tax liability.
Please read both the contract and underlying prospectus for specific details regarding the product’s risk profile.
REIT Series-2
Delaware VIP® REIT Series
Performance summary (continued)
| For period beginning Dec. 31, 2002, through Dec. 31, 2012 | | Starting value | | Ending value |
| –– | Delaware VIP REIT Series (Standard Class shares) | | $10,000 | | $28,420 |
| – – | FTSE NAREIT Equity REITs Index | | $10,000 | | $30,049 |
The chart shows a $10,000 investment in the Delaware VIP REIT Series Standard Class shares for the period from Dec. 31, 2002 through Dec. 31, 2012.
The chart also shows $10,000 invested in the FTSE NAREIT Equity REITs Index for the period from Dec. 31, 2002 through Dec. 31, 2012. The FTSE NAREIT Equity REITs Index measures the performance of all publicly traded equity real estate investment trusts (REITs) traded on U.S. exchanges, excluding timber REITs.
Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
Performance of Service Class shares will vary due to different charges and expenses.
Past performance is not a guarantee of future results.
REIT Series-3
Delaware VIP® Trust — Delaware VIP REIT Series
Disclosure of Series Expenses
For the Six-Month Period from July 1, 2012 to December 31, 2012 (Unaudited)
As a shareholder of the Series, you incur ongoing costs, which may include management fees; distribution and/or service (12b-1) fees; and other Series expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Series 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 six-month period from July 1, 2012 to December 31, 2012.
Actual Expenses
The first section of the table shown, “Actual Series 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 the 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 Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ 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 Series and other funds. To do so, compare the 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. As a shareholder of the Series, you do not incur any transaction costs, such as sales charges (loads), redemption fees or exchange fees, but shareholders of other funds may incur such costs. Also, the fees related to the variable annuity investment or the deferred sales charge that could apply have not been included. 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. The Series’ actual expenses shown in the table reflect fee waivers in effect for Service Class shares. The expenses shown in the table assume reinvestment of all dividends and distributions.
Expense Analysis of an Investment of $1,000
| | | | | | | | | | | | Expenses |
| | Beginning | | Ending | | | | Paid During |
| | Account | | Account | | Annualized | | Period |
| | Value | | Value | | Expense | | 7/1/12 to |
| | 7/1/12 | | 12/31/12 | | Ratio | | 12/31/12* |
| Actual Series Return† | | | | | | | | | | | | | | | |
| Standard Class | | | $ | 1,000.00 | | | $ | 1,022.00 | | 0.83% | | | $ | 4.22 | |
| Service Class | | | | 1,000.00 | | | | 1,020.30 | | 1.08% | | | | 5.48 | |
| Hypothetical 5% Return (5% return before expenses) | | | | | | | |
| Standard Class | | | $ | 1,000.00 | | | $ | 1,020.96 | | 0.83% | | | $ | 4.22 | |
| Service Class | | | | 1,000.00 | | | | 1,019.71 | | 1.08% | | | | 5.48 | |
*“Expenses Paid During Period” are equal to the Series’ annualized expense ratio, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period).
†Because actual returns reflect only the most recent six-month period, the returns shown may differ significantly from fiscal year returns.
REIT Series-4
Delaware VIP® Trust — Delaware VIP REIT Series
Security Type/Sector Allocation and Top 10 Equity Holdings
As of December 31, 2012 (Unaudited)
Sector designations may be different than the sector designations presented in other Series materials. The sector designations may represent the investment manager’s internal sector classifications, which may result in the sector designations for one series being different than another series’ sector designations.
| Percentage |
| Security Type/Sector | of Net Assets |
| Common Stock | 98.58 | % |
| Diversified REITs | 4.04 | % |
| Healthcare REITs | 11.59 | % |
| Hotel REITs | 5.22 | % |
| Industrial REITs | 5.93 | % |
| Mall REITs | 19.58 | % |
| Manufactured Housing REIT | 0.89 | % |
| Multifamily REITs | 18.55 | % |
| Office REITs | 10.64 | % |
| Office/Industrial REITs | 5.66 | % |
| Self-Storage REITs | 5.35 | % |
| Shopping Center REITs | 8.03 | % |
| Single Tenant REIT | 1.00 | % |
| Specialty REITs | 2.10 | % |
| Short-Term Investments | 0.54 | % |
| Securities Lending Collateral | 1.31 | % |
| Total Value of Securities | 100.43 | % |
| Obligation to Return Securities Lending Collateral | (1.62 | %) |
| Receivables and Other Assets Net of Other Liabilities | 1.19 | % |
| 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.
| Percentage |
| Top 10 Equity Holdings | of Net Assets |
| Simon Property Group | 12.89 | % |
| Boston Properties | 4.75 | % |
| Equity Residential | 4.58 | % |
| AvalonBay Communities | 4.44 | % |
| Public Storage | 4.27 | % |
| ProLogis | 4.01 | % |
| HCP | 3.43 | % |
| Ventas | 3.28 | % |
| Vornado Realty Trust | 3.01 | % |
| Host Hotels & Resorts | 2.72 | % |
REIT Series-5
Delaware VIP® Trust — Delaware VIP REIT Series
Statement of Net Assets
December 31, 2012
| Number of | | | |
| Shares | | Value |
| COMMON STOCK–98.58% | | | | | |
| Diversified REITs–4.04% | | | | | |
| Lexington Realty Trust | | 417,029 | | $ | 4,357,953 |
| Vornado Realty Trust | | 157,493 | | | 12,612,039 |
| | | | | 16,969,992 |
| Healthcare REITs–11.59% | | | | | |
| HCP | | 318,935 | | | 14,409,484 |
| Health Care REIT | | 176,970 | | | 10,846,491 |
| Healthcare Realty Trust | | 271,500 | | | 6,518,715 |
| Senior Housing Properties Trust | | 130,000 | | | 3,073,200 |
| Ventas | | 212,774 | | | 13,770,733 |
| | | | | 48,618,623 |
| Hotel REITs–5.22% | | | | | |
| Host Hotels & Resorts | | 728,383 | | | 11,413,761 |
| RLJ Lodging Trust | | 113,450 | | | 2,197,527 |
| †Strategic Hotels & Resorts | | 519,539 | | | 3,325,050 |
| Summit Hotel Properties | | 211,500 | | | 2,009,250 |
| †Sunstone Hotel Investors | | 276,595 | | | 2,962,332 |
| | | | | 21,907,920 |
| Industrial REITs–5.93% | | | | | |
| *DCT Industrial Trust | | 450,683 | | | 2,924,933 |
| EastGroup Properties | | 11,730 | | | 631,191 |
| †First Industrial Realty Trust | | 317,275 | | | 4,467,232 |
| ProLogis | | 461,727 | | | 16,848,418 |
| | | | | 24,871,774 |
| Mall REITs–19.58% | | | | | |
| CBL & Associates Properties | | 309,262 | | | 6,559,447 |
| General Growth Properties | | 534,302 | | | 10,605,895 |
| Macerich | | 122,360 | | | 7,133,588 |
| Simon Property Group | | 342,078 | | | 54,079,112 |
| Taubman Centers | | 48,300 | | | 3,802,176 |
| | | | | 82,180,218 |
| Manufactured Housing REIT–0.89% | | | | | |
| Equity Lifestyle Properties | | 55,564 | | | 3,738,902 |
| | | | | 3,738,902 |
| Multifamily REITs–18.55% | | | | | |
| American Campus Communities | | 75,210 | | | 3,469,437 |
| Apartment Investment & Management | | 245,275 | | | 6,637,142 |
| AvalonBay Communities | | 137,270 | | | 18,612,439 |
| BRE Properties | | 116,529 | | | 5,923,169 |
| Camden Property Trust | | 164,176 | | | 11,198,445 |
| Colonial Properties Trust | | 242,200 | | | 5,175,814 |
| Education Realty Trust | | 179,825 | | | 1,913,338 |
| Equity Residential | | 339,500 | | | 19,239,465 |
| Essex Property Trust | | 38,820 | | | 5,692,953 |
| | | | | 77,862,202 |
| Office REITs–10.64% | | | | | |
| Boston Properties | | 188,265 | | | 19,920,320 |
| Corporate Office Properties Trust | | 239,325 | | | 5,978,339 |
| Kilroy Realty | | 134,365 | | | 6,364,870 |
| Parkway Properties | | 181,455 | | | 2,538,555 |
| SL Green Realty | | 128,263 | | | 9,831,359 |
| | | | | 44,633,443 |
| Office/Industrial REITs–5.66% | | | | | |
| *Digital Realty Trust | | 111,145 | | | 7,545,635 |
| Duke Realty | | 393,900 | | | 5,463,393 |
| Liberty Property Trust | | 187,855 | | | 6,719,573 |
| PS Business Parks | | 62,290 | | | 4,047,604 |
| | | | | 23,776,205 |
| Self-Storage REITs–5.35% | | | | | |
| Extra Space Storage | | 123,960 | | | 4,510,904 |
| Public Storage | | 123,707 | | | 17,932,567 |
| | | | | 22,443,471 |
| Shopping Center REITs–8.03% | | | | | |
| DDR | | 239,477 | | | 3,750,210 |
| Federal Realty Investment Trust | | 51,864 | | | 5,394,893 |
| Kimco Realty | | 495,244 | | | 9,568,114 |
| Ramco-Gershenson Properties Trust | | 285,875 | | | 3,804,996 |
| Regency Centers | | 110,889 | | | 5,225,090 |
| Tanger Factory Outlet Centers | | 174,000 | | | 5,950,800 |
| | | | | 33,694,103 |
| Single Tenant REIT–1.00% | | | | | |
| National Retail Properties | | 134,372 | | | 4,192,406 |
| | | | | 4,192,406 |
| Specialty REITs–2.10% | | | | | |
| American Tower | | 69,050 | | | 5,335,494 |
| *Rayonier | | 66,894 | | | 3,467,116 |
| | | | | 8,802,610 |
| Total Common Stock (cost $372,679,579) | | | | | 413,691,869 |
| |
| Principal | | | |
| Amount | | | |
| SHORT-TERM INVESTMENTS– 0.54% | | | | | |
| ≠Discount Notes–0.46% | | | | | |
| Federal Home Loan Bank | | | | | |
| 0.10% 1/18/13 | $ | 352,854 | | | 352,852 |
| 0.10% 1/23/13 | | 451,234 | | | 451,232 |
| 0.13% 2/6/13 | | 928,563 | | | 928,536 |
| 0.135% 2/15/13 | | 204,284 | | | 204,276 |
| | | | | 1,936,896 |
| Repurchase Agreements–0.05% | | | | | |
| Bank of America 0.11%, dated 12/31/12, | | | | | |
| to be repurchased on 1/2/13, repurchase price | | | | | |
| $134,871 (collateralized by U.S. government | | | | | |
| obligations 0.25%-2.375% 2/28/15-12/15/15; | | | | | |
| market value $137,567) | | 134,870 | | | 134,870 |
| BNP Paribas 0.15%, dated 12/31/12, | | | | | |
| to be repurchased on 1/2/13, repurchase price | | | | | |
| $65,226 (collateralized by U.S. government | | | | | |
| obligations 0.125%-0.25% 12/31/14-5/15/15; | | | | | |
| market value $66,529) | | 65,225 | | | 65,225 |
| | | | | 200,095 |
| ≠U.S. Treasury Obligations–0.03% | | | | | |
| U.S. Treasury Bill | | | | | |
| 0.04% 3/21/13 | | 33,471 | | | 33,468 |
| 0.04% 3/28/13 | | 89,914 | | | 89,907 |
| | | | | 123,375 |
| Total Short-Term Investments | | | | | |
| (cost $2,260,203) | | | | | 2,260,366 |
| |
| Total Value of Securities Before Securities | | | | | |
| Lending Collateral–99.12% (cost $374,939,782) | | | | | 415,952,235 |
REIT Series-6
Delaware VIP® REIT Series
Statement of Net Assets (continued)
| | Number of | | | |
| | Shares | | Value |
| **SECURITIES LENDING COLLATERAL–1.31% | | | | | |
| Investment Companies | | | | | |
| Delaware Investments Collateral Fund No. 1 | | 5,487,543 | | $ | 5,487,543 |
| †@Mellon GSL Reinvestment Trust II | | 1,318,978 | | | 0 |
| Total Securities Lending Collateral | | | | | |
| (cost $6,806,521) | | | | | 5,487,543 |
| TOTAL VALUE OF SECURITIES–100.43% (cost $381,746,303) | | $ | 421,439,778 | © |
| **OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL–(1.62%) | | | (6,806,521 | ) |
| RECEIVABLES AND OTHER ASSETS NET OF OTHER LIABILITIES–1.19% | | | 5,007,758 | |
| NET ASSETS APPLICABLE TO 34,828,164 SHARES OUTSTANDING–100.00% | | $ | 419,641,015 | |
| NET ASSET VALUE–DELAWARE VIP REIT SERIES | | | | |
| STANDARD CLASS ($210,617,735 / 17,469,241 Shares) | | | | $12.06 | |
| NET ASSET VALUE–DELAWARE VIP REIT SERIES | | | | |
| SERVICE CLASS ($209,023,280 / 17,358,923 Shares) | | | | $12.04 | |
| COMPONENTS OF NET ASSETS AT DECEMBER 31, 2012: | | | | |
| Shares of beneficial interest (unlimited authorization–no par) | | $ | 463,512,281 | |
| Undistributed net investment income | | | 6,281,836 | |
| Accumulated net realized loss on investments | | | (89,846,577 | ) |
| Net unrealized appreciation of investments | | | 39,693,475 | |
| Total net assets | | $ | 419,641,015 | |
____________________
| † | Non income producing security. |
| @ | Illiquid security. At December 31, 2012, the aggregate value of illiquid securities was $0, which represented 0.00% of the Series’ net assets. See Note 10 in “Notes to Financial Statements.” |
| * | Fully or partially on loan. |
| ≠ | The rate shown is the effective yield at the time of purchase. |
| ** | See Note 9 in “Notes to Financial Statements” for additional information on securities lending collateral. |
| © | Includes $6,728,305 of securities loaned. |
REIT – Real Estate Investment Trust
See accompanying notes, which are an integral part of the financial statements.
REIT Series-7
Delaware VIP® Trust —
Delaware VIP REIT Series
Statement of Operations
Year Ended December 31, 2012
| INVESTMENT INCOME: | | | | |
| Dividends | | $ | 9,978,662 | |
| Securities lending income | | | 25,661 | |
| Interest | | | 15,739 | |
| | | 10,020,062 | |
| |
| EXPENSES: | | | | |
| Management fees | | | 3,031,487 | |
| Distribution expenses – Service Class | | | 589,464 | |
| Accounting and administration expenses | | | 157,742 | |
| Reports and statements to shareholders | | | 82,305 | |
| Dividend disbursing and transfer agent fees and expenses | | | 35,004 | |
| Legal fees | | | 28,907 | |
| Audit and tax | | | 24,450 | |
| Trustees’ fees | | | 17,941 | |
| Custodian fees | | | 9,029 | |
| Insurance fees | | | 6,868 | |
| Consulting fees | | | 4,315 | |
| Dues and services | | | 3,122 | |
| Trustees’ expenses | | | 1,241 | |
| Registration fees | | | 869 | |
| Pricing fees | | | 452 | |
| | | 3,993,196 | |
| Less waiver of distribution expenses – Service Class | | | (98,244 | ) |
| Less expense paid indirectly | | | (1 | ) |
| Total operating expenses | | | 3,894,951 | |
| |
| NET INVESTMENT INCOME | | | 6,125,111 | |
| |
| NET REALIZED AND UNREALIZED GAIN: | | | | |
| Net realized gain on investments | | | 51,815,756 | |
| Net change in unrealized appreciation (depreciation) of: | | | | |
| Investments | | | 2,360,389 | |
| Options written | | | 16,650 | |
| Net change in unrealized appreciation (depreciation) | | | 2,377,039 | |
| |
| NET REALIZED AND UNREALIZED GAIN | | | 54,192,795 | |
| |
| NET INCREASE IN NET ASSETS RESULTING | | | | |
| FROM OPERATIONS | | $ | 60,317,906 | |
Delaware VIP Trust —
Delaware VIP REIT Series
Statements of Changes in Net Assets
| | Year Ended |
| | 12/31/12 | | 12/31/11 |
| INCREASE (DECREASE) IN NET ASSETS | | | | | | | | |
| FROM OPERATIONS: | | | | | | | | |
| Net investment income | | $ | 6,125,111 | | | $ | 5,458,434 | |
| Net realized gain | | | 51,815,756 | | | | 30,608,885 | |
| Net change in unrealized appreciation | | | | | | | | |
| (depreciation) | | | 2,377,039 | | | | (780,645 | ) |
| Net increase in net assets resulting | | | | | | | | |
| from operations | | | 60,317,906 | | | | 35,286,674 | |
| |
| DIVIDENDS AND DISTRIBUTIONS TO | | | | | | | | |
| SHAREHOLDERS FROM: | | | | | | | | |
| Net investment income: | | | | | | | | |
| Standard Class | | | (3,110,535 | ) | | | (2,998,659 | ) |
| Service Class | | | (2,486,567 | ) | | | (2,261,961 | ) |
| | | (5,597,102 | ) | | | (5,260,620 | ) |
| |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | | |
| Proceeds from shares sold: | | | | | | | | |
| Standard Class | | | 20,191,345 | | | | 22,512,582 | |
| Service Class | | | 31,452,330 | | | | 38,033,245 | |
| Net asset value of shares issued upon | | | | | | | | |
| reinvestment of dividends and distributions: | | | | | | | | |
| Standard Class | | | 3,110,535 | | | | 2,998,659 | |
| Service Class | | | 2,486,567 | | | | 2,261,961 | |
| | | 57,240,777 | | | | 65,806,447 | |
| Cost of shares redeemed: | | | | | | | | |
| Standard Class | | | (28,314,564 | ) | | | (41,204,062 | ) |
| Service Class | | | (27,582,057 | ) | | | (34,894,892 | ) |
| | | (55,896,621 | ) | | | (76,098,954 | ) |
| Increase (decrease) in net assets derived | | | | | | | | |
| from capital share transactions | | | 1,344,156 | | | | (10,292,507 | ) |
| |
| NET INCREASE IN NET ASSETS | | | 56,064,960 | | | | 19,733,547 | |
| |
| NET ASSETS: | | | | | | | | |
| Beginning of year | | | 363,576,055 | | | | 343,842,508 | |
| End of year (including undistributed | | | | | | | | |
| net investment income of $6,281,836 | | | | | | | | |
| and $5,753,827, respectively) | | $ | 419,641,015 | | | $ | 363,576,055 | |
See accompanying notes, which are an integral part of the financial statements.
REIT Series-8
Delaware VIP® Trust — Delaware VIP REIT Series
Financial Highlights
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP REIT Series Standard Class |
| | Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $10.470 | | | $9.580 | | | $7.750 | | | $6.640 | | | $15.830 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.189 | | | 0.165 | | | 0.189 | | | 0.189 | | | 0.244 | |
| Net realized and unrealized gain (loss) | | 1.576 | | | 0.883 | | | 1.880 | | | 1.211 | | | (3.678 | ) |
| Total from investment operations | | 1.765 | | | 1.048 | | | 2.069 | | | 1.400 | | | (3.434 | ) |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.175 | ) | | (0.158 | ) | | (0.239 | ) | | (0.290 | ) | | (0.348 | ) |
| Net realized gain | | – | | | – | | | – | | | – | | | (5.408 | ) |
| Total dividends and distributions | | (0.175 | ) | | (0.158 | ) | | (0.239 | ) | | (0.290 | ) | | (5.756 | ) |
| |
| Net asset value, end of period | | $12.060 | | | $10.470 | | | $9.580 | | | $7.750 | | | $6.640 | |
| |
| Total return2 | | 16.94% | | | 10.96% | | | 26.98% | | | 23.31% | | | (35.06% | ) |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $210,618 | | | $187,545 | | | $187,293 | | | $148,975 | | | $136,561 | |
| Ratio of expenses to average net assets | | 0.84% | | | 0.85% | | | 0.87% | | | 0.89% | | | 0.87% | |
| Ratio of net investment income to average net assets | | 1.64% | | | 1.64% | | | 2.19% | | | 3.13% | | | 2.37% | |
| Portfolio turnover | | 91% | | | 108% | | | 181% | | | 183% | | | 106% | |
____________________
1The average shares outstanding method has been applied for per share information. |
2Total 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 does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
REIT Series-9
Delaware VIP® REIT Series
Financial Highlights (continued)
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP REIT Series Service Class |
| | Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $10.460 | | | $9.580 | | | $7.760 | | | $6.620 | | | $15.790 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.160 | | | 0.140 | | | 0.167 | | | 0.174 | | | 0.218 | |
| Net realized and unrealized gain (loss) | | 1.570 | | | 0.876 | | | 1.877 | | | 1.230 | | | (3.680 | ) |
| Total from investment operations | | 1.730 | | | 1.016 | | | 2.044 | | | 1.404 | | | (3.462 | ) |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.150 | ) | | (0.136 | ) | | (0.224 | ) | | (0.264 | ) | | (0.300 | ) |
| Net realized gain | | – | | | – | | | – | | | – | | | (5.408 | ) |
| Total dividends and distributions | | (0.150 | ) | | (0.136 | ) | | (0.224 | ) | | (0.264 | ) | | (5.708 | ) |
| |
| Net asset value, end of period | | $12.040 | | | $10.460 | | | $9.580 | | | $7.760 | | | $6.620 | |
| |
| Total return2 | | 16.61% | | | 10.62% | | | 26.61% | | | 23.24% | | | (35.28% | ) |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $209,023 | | | $176,031 | | | $156,550 | | | $124,673 | | | $126,072 | |
| Ratio of expenses to average net assets | | 1.09% | | | 1.10% | | | 1.12% | | | 1.14% | | | 1.12% | |
| Ratio of expenses to average net assets prior to fees waived | | 1.14% | | | 1.15% | | | 1.17% | | | 1.19% | | | 1.17% | |
| Ratio of net investment income to average net assets | | 1.39% | | | 1.39% | | | 1.94% | | | 2.88% | | | 2.12% | |
Ratio of net investment income to average net assets
prior to fees waived | | 1.34% | | | 1.34% | | | 1.89% | | | 2.83% | | | 2.07% | |
| Portfolio turnover | | 91% | | | 108% | | | 181% | | | 183% | | | 106% | |
____________________
1The average shares outstanding method has been applied for per share information. |
2Total 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 during all of the periods shown reflects a waiver by the distributor. Performance would have been lower had the waiver not been in effect. Total investment return does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
REIT Series-10
Delaware VIP® Trust — Delaware VIP REIT Series
Notes to Financial Statements
December 31, 2012
Delaware VIP Trust (Trust) is organized as a Delaware statutory trust and offers 10 series: Delaware VIP Diversified Income Series, Delaware VIP Emerging Markets Series, Delaware VIP High Yield Series, Delaware VIP International Value Equity Series, Delaware VIP Limited-Term Diversified Income Series, Delaware VIP REIT Series, Delaware VIP Small Cap Value Series, Delaware VIP Smid Cap Growth Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series. These financial statements and the related notes pertain to Delaware VIP REIT Series (Series). The Trust is an open-end investment company. The Series is considered diversified under the Investment Company Act of 1940, as amended, and offers Standard Class and Service Class shares. The Standard Class shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee. The shares of the Series are sold only to separate accounts of life insurance companies.
The investment objectives of the Series are to seek maximum long-term total return, with capital appreciation as a secondary objective.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and are consistently followed by the Series.
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, which approximates fair value. U.S. government and agency securities are valued at the mean between the bid and ask prices, which approximates fair value. Investment company securities are valued at net asset value per share, as reported by the underlying investment company. 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 Series’ 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 Series 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 Series values its securities, generally as of 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 Series 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 Series 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 Series evaluates tax positions taken or expected to be taken in the course of preparing the Series’ tax returns 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 analyzed the Series’ tax positions taken for all open federal income tax years (December 31, 2009 – December 31, 2012), and has concluded that no provision for federal income tax is required in the Series’ financial statements.
Class Accounting—Investment income, common expenses and realized and unrealized gain (loss) on investments are allocated to the classes of the Series 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 Series may purchase certain U.S. government securities subject to the counterparty’s agreement to repurchase them at an agreed upon date and price. The counterparty will be required on a daily basis to maintain the value of the collateral subject to the agreement at not less than the repurchase price (including accrued interest). The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system with the Series’ custodian or a third party sub-custodian. In the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. All open repurchase agreements as of the date of this report were entered into on December 31, 2012.
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments, the reported amounts of assets and liabilities and disclosure of contingent 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 and the differences could be material.
Other—Expenses directly attributable to the Series are charged directly to the Series. Other expenses common to various funds within the Delaware Investments® Family of Funds are generally allocated among 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. Distributions received from investments in real estate investment trusts (REITs) are recorded as dividend income on the ex-dividend date, subject to reclassification upon notice of the character of such distributions by the issuer. The Series declares and pays dividends from net investment income and distributions from net realized gain on investments, if any, following the close of the fiscal year. The Series may distribute income dividends and capital gains more frequently, if necessary for tax purposes. Dividends and distributions, if any, are recorded on the ex-dividend date.
Subject to seeking best execution, the Series may direct certain security trades to brokers who have agreed to rebate a portion of the related brokerage commission to the Series in cash. 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 Series on the transaction. There were no commission rebates during the year ended December 31, 2012.
The Series 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 year ended December 31, 2012.
The Series receives earnings credits from its transfer agent when positive cash balances are maintained, which are used to offset transfer agent fees. The expense paid under this arrangement is included in dividend disbursing and transfer agent fees and expenses on the Statement of Operations with the corresponding expense offset shown as “expense paid indirectly.” For the year ended December 31, 2012, the Series earned $1 under this agreement.
REIT Series-11
Delaware VIP® REIT Series
Notes to Financial Statements (continued)
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Series 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 Series, 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.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to the Series. For these services, the Series 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 year ended December 31, 2012, the Series was charged $ 19,774 for these services.
DSC is also the transfer agent and dividend disbursing agent of the Series. The Series pays DSC a monthly asset-based fee for these services. Pursuant to a sub-transfer agency agreement between DSC and BNY Mellon Investment Servicing (US) Inc. (BNYMIS), BNYMIS provides certain sub-transfer agency services to the Series. Sub-transfer agency fees are passed on to and paid directly by the Series.
Pursuant to a distribution agreement and distribution plan, the Series pays Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an annual distribution and service fee of 0.30% of the average daily net assets of the Service Class shares. DDLP has contracted to waive distribution and service fees through April 30, 2013 in order to prevent distribution and service fees of the Service Class shares from exceeding 0.25% of average daily net assets. Standard Class shares pay no distribution and service expenses.
At December 31, 2012, the Series had liabilities payable to affiliates as follows:
| | | Dividend Disbursing, | | | | Other |
| Investment | | Transfer Agent and Fund | | | | Expenses |
| Management | | Accounting Oversight | | Distribution | | Payable |
| Fee Payable to | | Fees and Other Expenses | | Fee Payable | | to DMC |
| DMC | | Payable to DSC | | to DDLP | | and Affiliates* |
| $263,654 | | $4,350 | | $43,716 | | $9,724 |
____________________
*DMC, as part of its administrative services, pays operating expenses on behalf of the Series and is reimbursed on a periodic basis. Expenses include items such as printing of shareholder reports, legal and tax services, custodian fees and trustees’ fees.
As provided in the investment management agreement, the Series bears the cost of certain legal and tax services, including internal legal and tax services provided to the Series by DMC and/or its affiliates’ employees. For the year ended December 31, 2012, the Series was charged $12,140 for internal legal and tax services provided by DMC and/or its affiliates’ employees.
Trustees’ fees include expenses accrued by the Series 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 Series.
3. Investments
For the year ended December 31, 2012, the Series made purchases and sales of investment securities other than short-term investments as follows:
| Purchases | $ | 369,891,714 |
| Sales | | 357,292,157 |
At December 31, 2012, the cost of investments for federal income tax purposes and unrealized appreciation (depreciation) for the Series were as follows:
| | | Aggregate | | Aggregate | | |
| Cost of | | Unrealized | | Unrealized | | Net Unrealized |
| Investments | | Appreciation | | Depreciation | | Appreciation |
| $399,186,777 | | $42,611,505 | | $(20,358,504) | | $22,253,001 |
U.S. GAAP defines fair value as the price that the Series 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. A three level hierarchy for fair value measurements has been established 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 Series’ investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three level hierarchy of inputs is summarized below.
REIT Series-12
Delaware VIP® REIT Series
Notes to Financial Statements (continued)
3. Investments (continued)
| Level 1 – | inputs are quoted prices in active markets for identical investments (e.g., equity securities, open-end investment companies, futures contracts, exchange-traded options contracts) |
| Level 2 – | other observable inputs (including, but not limited to: quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs) (e.g., debt securities, government securities, swap contracts, foreign currency exchange contracts, foreign securities utilizing international fair value pricing, broker-quoted securities, fair valued securities) |
| Level 3 – | inputs are significant unobservable inputs (including the Series’ own assumptions used to determine the fair value of investments) (e.g., broker-quoted securities, fair valued securities) |
Level 3 investments are valued using significant unobservable inputs. The Series may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Valuations may also be based upon current market prices of securities that are comparable in coupon, rating, maturity and industry. The derived value of a Level 3 investment may not represent the value which is received upon disposition and this could impact the results of operations.
The following table summarizes the valuation of the Series’ investments by fair value hierarchy levels as of December 31, 2012:
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Common Stock | | $ | 413,691,869 | | $ | – | | | $ | – | | | $ | 413,691,869 |
| Short-Term Investments | | | – | | | 2,260,366 | | | | – | | | | 2,260,366 |
| Securities Lending Collateral | | | – | | | 5,487,543 | | | | – | | | | 5,487,543 |
| Total | | $ | 413,691,869 | | $ | 7,747,909 | | | $ | – | | | $ | 421,439,778 |
The securities that have been deemed worthless on the statement of net assets are considered to be Level 3 securities in this table.
During the year ended December 31, 2012, there were no transfers between Level 1 investments, Level 2 investments or Level 3 investments that had a significant impact to the Series. The Series’ policy is to recognize transfers between levels at the beginning of the reporting period.
A reconciliation of Level 3 investments is presented when the Series has a significant amount of Level 3 investments at the beginning, interim or the end of period in relation to net assets. Management has determined not to provide additional disclosure on Level 3 inputs under ASU No. 2011-04 since the Level 3 investments are not considered significant to the Series’ net assets at the end of the period.
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 years ended December 31, 2012 and 2011 was as follows:
| | Year | | Year |
| | Ended | | Ended |
| | 12/31/12 | | 12/31/11 |
| Ordinary income | | $5,597,102 | | $5,260,620 |
5. Components of Net Assets on a Tax Basis
As of December 31, 2012, the components of net assets on a tax basis were as follows:
| Shares of beneficial interest | | $ | 463,512,281 | |
| Undistributed ordinary income | | | 6,281,836 | |
| Capital loss carryforwards | | | (71,778,575 | ) |
| Qualified late year losses deferred | | | (627,528 | ) |
| Unrealized appreciation | | | 22,253,001 | |
| Net assets | | $ | 419,641,015 | |
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales.
Qualified late year losses represent losses realized on investment transactions from November 1, 2012 through December 31, 2012 that, in accordance with federal income tax regulations, the Series has elected to defer and treat as having arisen in the following fiscal year.
The undistributed earnings for the Series may be subject to reclassification upon notice of the tax character of distributions received from investments in REITs.
REIT Series-13
Delaware VIP® REIT Series
Notes to Financial Statements (continued)
5. Components of Net Assets on a Tax Basis (continued)
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. $36,407,413 was utilized in 2012. Capital loss carryforwards remaining at December 31, 2012 will expire as follows: $71,778,575 expires in 2017.
On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (Act) was enacted, which changed various technical rules governing the tax treatment of regulated investment companies. The changes were generally effective for taxable years beginning after the date of enactment. Under the Act, the Series is permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered all short-term as permitted under previous regulation.
6. Capital Shares
Transactions in capital shares were as follows:
| | Year | | Year |
| | Ended | | Ended |
| | 12/31/12 | | 12/31/11 |
| Shares sold: | | | | | | |
| Standard Class | | 1,744,415 | | | 2,209,061 | |
| Service Class | | 2,716,713 | | | 3,754,231 | |
| |
| Shares issued upon reinvestment of dividends and distributions: | | | | | | |
| Standard Class | | 270,716 | | | 289,726 | |
| Service Class | | 216,223 | | | 218,336 | |
| | | 4,948,067 | | | 6,471,354 | |
| Shares redeemed: | | | | | | |
| Standard Class | | (2,464,733 | ) | | (4,121,741 | ) |
| Service Class | | (2,408,176 | ) | | (3,480,956 | ) |
| | | (4,872,909 | ) | | (7,602,697 | ) |
| Net increase (decrease) | | 75,158 | | | (1,131,343 | ) |
7. Line of Credit
The Series, along with certain other funds in the Delaware Investments® Family of Funds (Participants), was a participant in a $125,000,000 revolving line of credit 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 were charged an annual commitment fee, which was allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants were permitted to borrow up to a maximum of one third of their net assets under the agreement. Each Participant was individually, and not jointly, liable for its particular advances, if any, under the line of credit. The line of credit under the agreement expired on November 13, 2012.
On November 13, 2012, the Series, along with the other Participants, entered into an amendment to the agreement for a $125,000,000 revolving line of credit. The agreement is to be used as described above and operates in substantially the same manner as the original agreement. The line of credit available under the agreement expires on November 12, 2013. The Series had no amounts outstanding as of December 31, 2012 or at any time during the year then ended.
8. Derivatives
U.S. GAAP requires disclosures that enable investors to understand: 1) how and why an entity uses derivatives; 2) how they are accounted for; and 3) how they affect an entity’s results of operations and financial position.
Options Contracts
The Series may buy or write options contracts for any number of reasons, including without limitation: to manage the Series’ exposure to changes in securities prices and foreign currencies; as an efficient means of adjusting the Series’ overall exposure to certain markets; to protect the value of portfolio securities; and as a cash management tool. The Series may buy or write call or put options on securities, futures, swaps, “swaptions”, financial indices, and foreign currencies. When the Series buys an option, a premium is paid and an asset is recorded and adjusted on a daily basis to reflect the current market value of the options purchased. When the Series writes an option, a premium is received and a liability is recorded and adjusted on a daily basis to reflect the current market value of the options written. Premiums received from writing options that expire unexercised are treated by the Series on the expiration date as realized gains. The difference between the premium received and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is treated as realized gain or loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Series has a realized gain or loss. If a put option is exercised, the premium reduces the cost basis of the securities purchased by the Series. The Series, as writer of an option, bears the market risk of an unfavorable change in the price of the security underlying the written option. When writing options, the Series is subject to minimal counterparty risk because the counterparty is only obligated to pay premiums and does not bear the market risk of an unfavorable market change.
REIT Series-14
Delaware VIP® REIT Series
Notes to Financial Statements (continued)
8. Derivatives (continued)
Transactions in options written during the year ended December 31, 2012 for the Series were as follows:
| | Number of | | |
| | Contracts | | Premiums |
| Options outstanding at December 31, 2011 | | | 135 | | | | | $ | 77,850 | | |
| Options terminated in closing purchase transactions | | | (135 | ) | | | | | (77,850 | ) | |
| Options outstanding at December 31, 2012 | | | – | | | | | $ | – | | |
The options terminated were the only derivative activity for the year ended December 31, 2012.
9. Securities Lending
The Series, along with other funds in the Delaware Investments® Family of Funds, may lend its securities pursuant to a security lending agreement (Lending Agreement) with The Bank of New York Mellon (BNY Mellon). At the time a security is loaned, the borrower must post collateral equal to the required percentage of the market value of the loaned security, including any accrued interest. The required percentage is: (i) 102% with respect to U.S. securities and foreign securities that are denominated and payable in U.S. dollars; and (ii) 105% with respect to foreign securities. With respect to each loan, if on any business day the aggregate market value of securities collateral plus cash collateral held 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 by the end of the following business day which, together with the collateral already held, will be not less than the applicable initial collateral requirements for such security loan. If the aggregate market value of securities collateral and cash collateral held with respect to a security loan exceeds the applicable initial collateral requirement, upon request of the borrower BNY Mellon must return enough collateral to the borrower by the end of the following business day to reduce the value of the remaining collateral to the applicable initial collateral requirement for such security loan. As a result of the foregoing, the value of the collateral held with respect to a loaned security may be temporarily more or less than the value of the security on loan.
Cash collateral received is generally invested in the Delaware Investments Collateral Fund No. 1 (Collective Trust) established by BNY Mellon for the purpose of investment on behalf of funds managed by DMC that participate in BNY Mellon’s securities lending program. The Collective Trust may invest in U.S. government securities and high quality corporate debt, asset-backed and other money market securities and in repurchase agreements collateralized by such securities, provided that the Collective Trust will generally have a dollar-weighted average portfolio maturity of 60 days or less. In October 2008, BNY Mellon transferred certain distressed securities from the previous collateral investment pool into the Mellon GSL Reinvestment Trust II. The Series 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 Series or, at the discretion of the lending agent, replace the loaned securities. The Series continues to record dividends or interest, as applicable, on the securities loaned and is subject to changes in value of the securities loaned that may occur during the term of the loan. The Series 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 Series 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 Series, the security lending agent and the borrower. The Series records security lending income net of allocations to the security lending agent and the borrower.
The Collective Trust used for the investment of cash collateral received from borrowers of securities 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. The Series may incur investment losses as a result of investing securities lending collateral in the Collective Trust or another collateral investment pool. This could occur if an investment in a collateral investment pool defaulted or if it were necessary to liquidate assets in the collateral investment pool to meet returns on outstanding security loans at a time when the collateral investment pool’s net asset value per unit was less than $1.00. Under those circumstances, the Series may not receive an amount from the collateral investment pool that is equal in amount to the collateral the Series would be required to return to the borrower of the securities and the Series would be required to make up for this shortfall.
At December 31, 2012, the value of securities on loan was $6,728,305, for which cash collateral was received and invested in accordance with the Lending Agreement. At December 31, 2012, the value of invested collateral was $5,487,543. These investments are presented on the Statement of Net Assets under the caption “Securities Lending Collateral”.
10. Credit and Market Risk
The Series concentrates its investments in the real estate industry and is subject to the risks associated with that industry. If the Series holds real estate directly as a result of defaults or receives rental income directly from real estate holdings, its tax status as a regulated investment company may be jeopardized. The Series is also affected by interest rate changes, particularly if the REITs it holds use floating rate debt to finance their ongoing operations. Its investments may also tend to fluctuate more in value than a portfolio that invests in a broader range of industries.
The Series may invest up to 10% 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 Series 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 Series’ Board has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of the Series’ limitation on investments in illiquid securities. Securities eligible for resale pursuant to Rule 144A, which are determined to be liquid, are not subject to the Series’ 10% limit on investments in illiquid securities. As of December 31, 2012, there were no Rule 144A securities. Illiquid securities have been identified on the Statement of Net Assets.
11. Contractual Obligations
The Series enters into contracts in the normal course of business that contain a variety of indemnifications. The Series’ maximum exposure under these arrangements is unknown. However, the Series has not had prior claims or losses pursuant to these contracts. Management has reviewed the Series’ existing contracts and expects the risk of loss to be remote.
12. Subsequent Events
Management has determined that no material events or transactions occurred subsequent to December 31, 2012 that would require recognition or disclosure in the Series’ financial statements.
REIT Series-15
Delaware VIP® Trust — Delaware VIP REIT Series
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Delaware VIP Trust
and the Shareholders of Delaware VIP REIT Series:
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Delaware VIP REIT Series (one of the series constituting Delaware VIP Trust, hereafter referred to as the “Series”) at December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2012 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the two years in the period ended December 31, 2009 were audited by other independent accountants whose report dated February 17, 2010 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 15, 2013
REIT Series-16
Delaware VIP® Trust — Delaware VIP REIT Series
Other Series Information (Unaudited)
Board Consideration of Delaware VIP REIT Series Investment Advisory Agreement
At a meeting held on August 21-23, 2012 (“Annual Meeting”), the Board of Trustees (“Board”), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreement for Delaware VIP REIT Series (“Series”). In making its decision, the Board considered information furnished at regular quarterly Board meetings, including reports detailing Series performance, investment strategies and expenses, as well as information prepared specifically in connection with the renewal of the investment advisory contract. Information furnished specifically in connection with the renewal of the Investment Advisory Agreement with Delaware Management Company (“DMC”) included materials provided by DMC and its affiliates (“Delaware Investments”) concerning, among other things, the nature, extent and quality of services provided to the Series, the costs of such services to the Series, economies of scale and the financial condition and profitability of Delaware Investments. In addition, in connection with the Annual Meeting, reports were provided in May 2012 and included independent historical and comparative reports provided by Lipper, Inc., an independent statistical compilation organization (“Lipper”). The Lipper reports compared the Series’ investment performance and expenses with those of other comparable mutual funds. The Independent Trustees reviewed and discussed the Lipper reports with independent legal 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; comparative client fee information; 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 the Series’ policies.
In considering information relating to the approval of the Series’ advisory agreement, the Independent Trustees received assistance and advice from and met separately with independent legal 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 Series 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 Series, compliance of portfolio managers with the investment policies, strategies and restrictions for the Series, 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 Series’ investment advisor and the emphasis placed on research in the investment process. The Board recognized DMC’s receipt of several industry distinctions. The Board gave favorable consideration to DMC’s efforts to control expenditures while maintaining service levels committed to fund matters. The Board noted that in July 2011, Management implemented measures to reduce overall costs and improve transfer agent and shareholder servicing functions through outsourcing. 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 Series in view of the importance of investment performance 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 Series showed the investment performance of its Standard Class 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 Series was shown for the past one-, three-, five- and ten-year periods, as applicable, ended March 31, 2012. The Board’s objective is that the Series’ performance for the periods considered be at or above the median of its Performance Universe. The following paragraph summarizes the performance results for the Series and the Board’s view of such performance.
The Performance Universe for the Series consisted of the Series and all real estate funds underlying variable insurance products as selected by Lipper. The Lipper report comparison showed that the Series’ total return for the one- and five-year periods was in the first quartile of its Performance Universe. The report further showed that the Series’ total return for the three- and ten-year periods was in the second quartile and third quartile, respectively. The Board was satisfied with performance.
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 Series as of its most recently completed fiscal year. The Board also focused on the comparative analysis of effective management fees and total expense ratios of the Series versus effective management fees and expense ratios of a group of similar funds as selected by Lipper (“Expense Group”). In reviewing comparative costs, the Series’ contractual management fee and the actual management fee incurred by the Series were compared with the contractual management fees (assuming all funds in the Expense Group were similar in size to the Series) and actual management fees (as reported by each fund) within the Expense Group, taking into account any applicable breakpoints and fee waivers. The Series’ total expenses were also compared with those of its Expense Group. The Lipper total expenses, for comparative consistency, were shown by Lipper for Standard Class shares which do not charge 12b-1 and non 12b-1 service fees. The Board considered fees paid to Delaware Investments for non-management services. The Board’s objective is to limit the Series’ total expense ratio to be competitive with that of the Expense Group. The following paragraph summarizes the expense results for the Series and the Board’s view of such expenses.
The expense comparisons for the Series showed that the actual management fee and total expenses were in the quartile with the second lowest expenses of its Expense Group. The Board was satisfied with the management fee and total expenses of the Series in comparison to those of its Expense Group.
REIT Series-17
Delaware VIP® REIT Series
Other Series Information (Unaudited) (continued)
MANAGEMENT PROFITABILITY. The Board considered the level of profits realized by Delaware Investments in connection with the operation of the Series. 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, reflects 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 profitability of Delaware Investments.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are realized by Delaware Investments as the Series’ 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 Series’ management contract fell within the standard structure. Although the Series has not reached a size at which the advantages of breakpoints would be realized, the Board recognized that the fee was structured so that when the Series grows, economies of scale may be shared.
|
Tax Information
For the fiscal year ended December 31, 2012, the Series designates distributions paid during the year as follows:
| (A) |
| Ordinary |
| Income |
| Distributions |
| (Tax Basis) |
| 100% |
____________________
(A) is based on a percentage of the Series’ total distributions.
REIT Series-18
Delaware Investments® Family of Funds
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors (“Trustees”), which has oversight responsibility for the management of a fund’s business affairs. Trustees establish procedures and oversee and review the performance of the investment manager, the distributor, and others who perform services for the fund. The independent fund trustees, in particular, are advocates for shareholder interests. Each trustee has served in that capacity since he or she was elected to or appointed to the Board of Trustees, and will continue to serve until his or her retirement or the election of a new trustee in his or her place. The following is a list of the Trustees and Officers with certain background and related information.
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INTERESTED TRUSTEES | | | | | |
| Patrick P. Coyne1 | Chairman, | Chairman and Trustee | Patrick P. Coyne has served in | 71 | Director and Audit |
| 2005 Market Street | President, | since August 16, 2006 | various executive capacities | | Committee Member — |
| Philadelphia, PA | Chief Executive | | at different times at | | Kaydon Corp. |
| 19103 | Officer, and | President and | Delaware Investments.2 | | |
| Trustee | Chief Executive Officer | | | Board of Governors |
| April 1963 | | since August 1, 2006 | | | Member — Investment |
| | | | | Company Institute (ICI) |
| | | | | |
| INDEPENDENT TRUSTEES | | | | | |
| Thomas L. Bennett | Trustee | Since | Private Investor — | 71 | Director — |
| 2005 Market Street | | March 2005 | (March 2004–Present) | | Bryn Mawr |
| Philadelphia, PA | | | | | Bank Corp. (BMTC) |
| 19103 | | | Investment Manager — | | (2007–2011) |
| | | Morgan Stanley & Co. | | |
| October 1947 | | | (January 1984–March 2004) | | |
| Joseph W. Chow | Trustee | Since | Executive Vice President | 71 | Director and Audit |
| 2005 Market Street | | January 2013 | (Emerging Economies Strategies, | | Committee |
| Philadelphia, PA 19103 | | | Risk and Corporate Administration) | | Member — Hercules |
| | | State Street Corporation | | Technology Growth |
| January 1953 | | | (July 2004–March 2011) | | Capital, Inc. |
| John A. Fry | Trustee | Since | President | 71 | Board of Governors |
| 2005 Market Street | | January 2001 | Drexel University | | Member — NASDAQ |
| Philadelphia, PA | | | (August 2010–Present) | | OMX PHLX LLC |
| 19103 | | | | | |
| | | President — | | Director and Audit |
| May 1960 | | | Franklin & Marshall College | | Committee Member — |
| | | (June 2002–July 2010) | | Community Health |
| | | | | Systems |
| | | | | | |
| | | | | Director — Ecore |
| | | | | International |
| | | | | (2009–2010) |
| Anthony D. Knerr | Trustee | Since | Managing Director — | 71 | None |
| 2005 Market Street | | April 1990 | Anthony Knerr & Associates | | |
| Philadelphia, PA | | | (Strategic Consulting) | | |
| 19103 | | | (1990–Present) | | |
| | | | | | |
| December 1938 | | | | | |
| Lucinda S. Landreth | Trustee | Since | Private Investor | 71 | None |
| 2005 Market Street | | March 2005 | (2004–Present) | | |
| Philadelphia, PA | | | | | |
| 19103 | | | | | |
| | | | | | |
| June 1947 | | | | | |
REIT Series-19
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INDEPENDENT TRUSTEES (continued) | | | | |
| Frances A. Sevilla-Sacasa | Trustee | Since | Chief Executive Officer — | 71 | Trust Manager — |
| 2005 Market Street | | September 2011 | Banco Itaú Europa | | Camden Property Trust |
| Philadelphia, PA | | | International | | (2011–Present) |
| 19103 | | | (April 2012–Present) | | |
| |
| January 1956 | | | Executive Advisor to Dean | | |
| | | (August 2011–March 2012) | | |
| | | and Interim Dean | | |
| | | (January 2011–July 2011) — | | |
| | | University of Miami School of | | |
| | | Business Administration | | |
| |
| | | President — U.S. Trust, | | |
| | | Bank of America Private | | |
| | | Wealth Management | | |
| | | (Private Banking) | | |
| | | (July 2007–December 2008) | | |
| Thomas K. Whitford | Trustee | Since | Vice Chairman | 71 | None |
| 2005 Market Street | | January 2013 | (2010–Present) | | |
| Philadelphia, PA 19103 | | | Chief Administrative | | |
| | | Officer (2008–2010) | | |
| March 1956 | | | and Executive Vice | | |
| | | President and Chief | | |
| | | Administrative Officer | | |
| | | (2007–2009) — | | |
| | | PNC Financial | | |
| | | Services Group | | |
| Janet L. Yeomans | Trustee | Since | Vice President and Treasurer | 71 | Director, Audit |
| 2005 Market Street | | April 1999 | (January 2006–Present) | | Committee Member |
| Philadelphia, PA | | | Vice President — Mergers | | and Investment |
| 19103 | | | & Acquisitions | | Committee Member |
| | | (January 2003–January 2006), | | Okabena Company |
| July 1948 | | | and | | |
| | | Vice President and Treasurer | | Chair — 3M |
| | | (July 1995–January 2003) | | Investment Management |
| | | 3M Corporation | | Company |
| | | | | (January 2005–July 2012) |
| J. Richard Zecher | Trustee | Since | Founder — | 71 | Director and Compensation |
| 2005 Market Street | | March 2005 | Investor Analytics | | Committee Member — |
| Philadelphia, PA | | | (Risk Management) | | Investor Analytics |
| 19103 | | | (May 1999–Present) | | |
| | | | | Director — |
| July 1940 | | | Founder — | | P/E Investments |
| | | P/E Investments | | |
| | | (Hedge Fund) | | |
| | | (September 1996–Present) | | |
| |
| OFFICERS | | | | | |
| David F. Connor | Vice President, | Vice President since | David F. Connor has served as | 71 | None3 |
| 2005 Market Street | Deputy General | September 2000 | Vice President and Deputy | | |
| Philadelphia, PA | Counsel, and Secretary | and Secretary | General Counsel of | | |
| 19103 | | since | Delaware Investments | | |
| | October 2005 | since 2000. | | |
| December 1963 | | | | | |
| Daniel V. Geatens | Vice President | Treasurer | Daniel V. Geatens has served | 71 | None3 |
| 2005 Market Street | and Treasurer | since | in various capacities at | | |
| Philadelphia, PA | | October 2007 | different times at | | |
| 19103 | | | Delaware Investments. | | |
| |
| October 1972 | | | | | |
REIT Series-20
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| OFFICERS (continued) | | | | | |
| David P. O’Connor | Executive Vice | Executive Vice President | David P. O’Connor has served in | 71 | None3 |
| 2005 Market Street | President, | since February 2012; | various executive and legal | | |
| Philadelphia, PA | General Counsel, | Senior Vice President | capacities at different times | | |
| 19103 | and Chief | October 2005–February 2012; | at Delaware Investments. | | |
| Legal Officer | General Counsel and | | | |
| February 1966 | | Chief Legal Officer | | | |
| | since October 2005 | | | |
| Richard Salus | Senior | Chief Financial | Richard Salus has served in | 71 | None3 |
| 2005 Market Street | Vice President | Officer since | various executive capacities | | |
| Philadelphia, PA | and | November 2006 | at different times at | | |
| 19103 | Chief Financial | | Delaware Investments. | | |
| Officer | | | | |
| October 1963 | | | | | |
1 Patrick P. Coyne is considered to be an “Interested Trustee” because he is an executive officer of the Fund’s(s’) investment advisor. |
2 Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund’s(s’) investment advisor, principal underwriter, and its transfer agent. |
3 David F. Connor, Daniel V. Geatens, David P. O’Connor, and Richard Salus serve in similar capacities for the six portfolios of the Optimum Fund Trust, which have the same investment advisor, principal underwriter, and transfer agent as the registrant. |
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is available, without charge, upon request by calling 800 523-1918.
The Series files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q. The Series’ Forms N-Q, as well as a description of the policies and procedures that the Series 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 website at sec.gov. In addition, a description of the policies and procedures that the Series uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge on the Delaware Investments® Funds’ website at delawareinvestments.com. The Series’ Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Series voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the Delaware Investments Funds’ website at delawareinvestments.com; and (ii) on the Commission’s website at sec.gov. |
| AR-VIPREIT [12/12] DG3 18583 (2/13) | | (10125) | | REIT Series-21 |
| Delaware VIP® Trust |
| Delaware VIP Small Cap Value Series |
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| December 31, 2012 |
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Table of contents
| > Portfolio management review | 1 |
| | |
| > Performance summary | 2 |
| | |
| > Disclosure of Series expenses | 4 |
| | |
| > Security type/sector allocation and top 10 equity holdings | 5 |
| | |
| > Statement of net assets | 6 |
| | |
| > Statement of operations | 9 |
| | |
| > Statements of changes in net assets | 9 |
| | |
| > Financial highlights | 10 |
| | |
| > Notes to financial statements | 12 |
| | |
| > Report of independent registered public accounting firm | 17 |
| | |
| > Other Series information | 18 |
| | |
| > Board of trustees/directors and officers addendum | 20 |
Investments in Delaware VIP® Small Cap Value Series 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 (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 Series, the repayment of capital from the Series, or any particular rate of return.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
The Series is not FDIC insured and is 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 and member of Macquarie Group. Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries, including the Series’ distributor, Delaware Distributors, L.P. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide.
This material may be used in conjunction with the offering of shares in the Delaware VIP Small Cap Value Series only if preceded or accompanied by the Series’ current prospectus, and if available, the summary prospectus.
© 2013 Delaware Management Holdings, Inc.
All third-party marks cited are the property of their respective owners.
| Delaware VIP® Trust — Delaware VIP Small Cap Value Series | |
| Portfolio management review | Jan. 8, 2013 |
For the fiscal year ended Dec. 31, 2012, Delaware VIP Small Cap Value Series returned +13.90% for Standard Class shares and +13.63% for Service Class shares, both with all distributions reinvested. The Series’ benchmark, the Russell 2000® Value Index, returned +18.05% for the same period.
Overall, small-cap value stocks posted solid gains during the Series’ fiscal year, as supportive monetary policy and resilient earnings generally offset investors’ recurrent fears about political dysfunction and debt in the United States and Europe. Despite generally holding significant amounts of cash, however, corporations remained cautious, continuing a modest volume of mergers and acquisitions. In this market environment, real estate investment trusts (REITs), basic industry and capital spending equities outperformed, as did consumer stocks including homebuilders and autos. Conversely, the technology and energy sectors lagged due to lackluster global growth and the reserve currency status of the U.S. dollar.
Early in the Series’ fiscal year, stocks drifted lower amid renewed concerns that Europe’s experiment with monetary union was about to end in failure. Soon thereafter, the European Central Bank (ECB) initiated the first of two longer-term funding operations intended to relieve pressure on the region’s troubled sovereigns and financial institutions. With the “tail risk” of a euro-zone breakup averted, stock prices rose briskly until March 2012, when signs of a global growth slowdown became visible. Though investors understood that some European countries were already in a recession, there were new indications that the U.S. economy was slowing as China struggled to restore double-digit growth without inflating a credit bubble.
Ironically, it was those concerns that may have caused an increase in market performance. By early June 2012, many investors had concluded that economic conditions were so tenuous that the ECB, U.S. Federal Reserve, and People’s Bank of China would have little choice but to further ease monetary policy. As those expectations were met, stocks rallied sharply through mid-September. Despite political uncertainty and the approaching “fiscal cliff,” equity prices remained firm to close the Series’ fiscal year near their highs at the start of the period.
An underweight position in REITs, as well as weak stock selection within the sector, detracted from relative returns. Conversely, the Series benefited most from its strong stock selection in the technology, basic industry, healthcare, and transportation sectors. Specifically, we continued to find stocks within the technology sector that fit our preference for companies that we believe generate large amounts of free cash flow despite less-than-robust economic activity.
Cirrus Logic contributed to the Series’ relative performance during the fiscal year, advancing 83%. Reflecting its position as a major supplier of audio chips to Apple, the company announced a significant increase in order backlog, raised forward earnings guidance, and authorized a $200 million stock buy-back program. We believe the stock remains attractively priced on the basis of projected 2013 earnings and beyond, and continue to maintain our position.
Meanwhile, the Series’ holdings in the independent energy exploration-and-development company Forest Oil detracted from relative performance, declining 51%. Although we believe the stock is undervalued and continue to maintain a position, newly appointed president and chief executive officer Patrick McDonald, in our opinion, must convince investors that the company’s significant asset base (mostly oil and gas holdings in the south central region of the U.S.) can be monetized and its production profile improved.
As the fiscal year ended, the Series was positioned in companies that, in our view, met its traditional criteria of generating strong free cash flow and sporting healthy balance sheets. Historically, we believe that those types of businesses benefit disproportionately from mergers-and-acquisitions activity while retaining the financial resources to return money to shareholders through dividend increases, debt paydowns, and share repurchases.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
Small Cap Value Series-1
Delaware VIP® Trust — Delaware VIP Small Cap Value Series
Performance summary
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
Carefully consider the Series’ investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Series’ prospectuses and, if available, their summary prospectuses, which may be obtained by calling 800 523-1918. Investors should read the prospectuses and, if available, the summary prospectuses carefully before investing.
| Delaware VIP Small Cap Value Series | | | | | | | | | | | |
| Average annual total returns | | | | | | | | | | | |
| For periods ended Dec. 31, 2012 | | 1 year | | 3 years | | 5 years | | 10 years | | Lifetime | |
| Standard Class shares (commenced operations on Dec. 27, 1993) | | +13.90% | | +14.13% | | +6.56% | | +10.90% | | +10.43% | |
| Service Class shares (commenced operations on May 1, 2000) | | +13.63% | | +13.84% | | +6.30% | | +10.63% | | +10.22% | |
Returns reflect the reinvestment of all distributions and any applicable sales charges as noted in the following paragraphs.
As described in the Series’ most recent prospectus, the net expense ratio for Service Class shares of the Series was 1.06%, while total operating expenses for Standard Class and Service Class shares were 0.81% and 1.11%, respectively. The management fee for Standard Class and Service Class shares was 0.73%.
The Series’ distributor has contracted to limit the 12b-1 fees for Service Class shares to 0.25% of average daily net assets from April 30, 2012 through April 30, 2013.
Earnings from a variable annuity or variable life investment compound tax-free until withdrawal, and as a result, no adjustments were made for income taxes.
Expense limitations were in effect for all classes during certain periods shown in the Series’ performance table above and in the Performance of a $10,000 Investment chart on the next page.
Performance data do not reflect other costs incurred by beneficial owners such as insurance company separate account fees and variable annuity or variable life contract charges or deferred sales charges. Performance shown here would have been reduced if such fees were included and the expense limitation removed. For more information about fees, consult your variable annuity or variable life prospectus.
Investments in variable products involve risk.
Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies.
Please read both the contract and underlying prospectus for specific details regarding the product’s risk profile.
Small Cap Value Series-2
Delaware VIP® Small Cap Value Series
Performance summary (continued)
| For period beginning Dec. 31, 2002, through Dec. 31, 2012 | | Starting value | | Ending value |
| –– | Delaware VIP Small Cap Value Series (Standard Class shares) | | $10,000 | | $28,137 |
| – – | Russell 2000 Value Index | | $10,000 | | $24,780 |
The chart shows a $10,000 investment in the Delaware VIP Small Cap Value Series Standard Class shares for the period from Dec. 31, 2002 through Dec. 31, 2012.
The chart also shows $10,000 invested in the Russell 2000 Value Index for the period from Dec. 31, 2002 through Dec. 31, 2012. The Russell 2000 Value Index measures the performance of the small-cap value segment of the U.S. equity universe. It includes those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.
Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
Performance of Service Class shares will vary due to different charges and expenses.
Past performance is not a guarantee of future results.
Small Cap Value Series-3
Delaware VIP® Trust — Delaware VIP Small Cap Value Series
Disclosure of Series Expenses
For the Six-Month Period from July 1, 2012 to December 31, 2012 (Unaudited)
As a shareholder of the Series, you incur ongoing costs, which may include management fees; distribution and/or service (12b-1) fees; and other Series expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Series 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 six-month period from July 1, 2012 to December 31, 2012.
Actual Expenses
The first section of the table shown, “Actual Series 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 the 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 Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ 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 Series and other funds. To do so, compare the 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. As a shareholder of the Series, you do not incur any transaction costs, such as sales charges (loads), redemption fees or exchange fees, but shareholders of other funds may incur such costs. Also, the fees related to the variable annuity investment or the deferred sales charge that could apply have not been included. 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. The Series’ actual expenses shown in the table reflect fee waivers in effect for Service class shares. The expenses shown in the table assume reinvestment of all dividends and distributions.
Expense Analysis of an Investment of $1,000
| | | | | | | | | | Expenses |
| | Beginning | | Ending | | | | Paid During |
| | Account | | Account | | Annualized | | Period |
| | Value | | Value | | Expense | | 7/1/12 to |
| | 7/1/12 | | 12/31/12 | | Ratio | | 12/31/12* |
| Actual Series Return† | | | | | | | | | | | | |
| Standard Class | | $ | 1,000.00 | | $ | 1,068.70 | | 0.81% | | $ | 4.21 | |
| Service Class | | | 1,000.00 | | | 1,067.50 | | 1.06% | | | 5.51 | |
| Hypothetical 5% Return (5% return before expenses) | | | | | | |
| Standard Class | | $ | 1,000.00 | | $ | 1,021.06 | | 0.81% | | $ | 4.12 | |
| Service Class | | | 1,000.00 | | | 1,019.81 | | 1.06% | | | 5.38 | |
*“Expenses Paid During Period” are equal to the Series’ annualized expense ratio, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period).
†Because actual returns reflect only the most recent six-month period, the returns shown may differ significantly from fiscal year returns.
Small Cap Value Series-4
Delaware VIP® Trust — Delaware VIP Small Cap Value Series
Security Type/Sector Allocation and Top 10 Equity Holdings
As of December 31, 2012 (Unaudited)
Sector designations may be different than the sector designations presented in other Series materials. The sector designations may represent the investment manager’s internal sector classifications, which may result in the sector designations for one series being different than another series’ sector designations.
| Percentage |
| Security Type/Sector | of Net Assets |
| Common Stock | 96.57 | % |
| Basic Industry | 9.46 | % |
| Business Services | 1.42 | % |
| Capital Spending | 9.88 | % |
| Consumer Cyclical | 3.05 | % |
| Consumer Services | 11.43 | % |
| Consumer Staples | 1.23 | % |
| Energy | 6.87 | % |
| Financial Services | 20.56 | % |
| Healthcare | 7.15 | % |
| Real Estate | 3.98 | % |
| Technology | 15.92 | % |
| Transportation | 3.05 | % |
| Utilities | 2.57 | % |
| Short-Term Investments | 3.75 | % |
| Securities Lending Collateral | 0.16 | % |
| Total Value of Securities | 100.48 | % |
| Obligation to Return Securities Lending Collateral | (0.29 | %) |
| Other Liabilities Net of Receivables and Other Assets | (0.19 | %) |
| 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.
| Percentage |
| Top 10 Equity Holdings | of Net Assets |
| United Rentals | 3.00 | % |
| Whiting Petroleum | 2.26 | % |
| Platinum Underwriters Holdings | 2.20 | % |
| East West Bancorp | 2.05 | % |
| Synopsys | 1.99 | % |
| Cirrus Logic | 1.79 | % |
| Infinity Property & Casualty | 1.77 | % |
| Helix Energy Solutions Group | 1.74 | % |
| Chicago Bridge & Iron | 1.70 | % |
| Cytec Industries | 1.67 | % |
Small Cap Value Series-5
Delaware VIP® Trust — Delaware VIP Small Cap Value Series
Statement of Net Assets
December 31, 2012
| Number of | | | |
| Shares | | Value |
| COMMON STOCK–96.57% | | | | |
| Basic Industry–9.46% | | | | |
| Albemarle | 225,500 | | $ | 14,008,060 |
| †Chemtura | 412,700 | | | 8,774,002 |
| Cytec Industries | 209,300 | | | 14,406,119 |
| Fuller (H.B.) | 361,800 | | | 12,597,876 |
| Glatfelter | 379,700 | | | 6,637,156 |
| Kaiser Aluminum | 181,000 | | | 11,165,890 |
| Olin | 234,500 | | | 5,062,855 |
| Valspar | 145,700 | | | 9,091,680 |
| | | | | 81,743,638 |
| Business Services–1.42% | | | | |
| Brink’s | 202,900 | | | 5,788,737 |
| United Stationers | 210,300 | | | 6,517,197 |
| | | | | 12,305,934 |
| Capital Spending–9.88% | | | | |
| Actuant Class A | 341,000 | | | 9,517,310 |
| Altra Holdings | 374,900 | | | 8,266,545 |
| Chicago Bridge & Iron | 316,700 | | | 14,679,045 |
| Gardner Denver | 188,500 | | | 12,912,250 |
| Regal Beloit | 199,700 | | | 14,072,859 |
| †United Rentals | 569,800 | | | 25,937,297 |
| | | | | 85,385,306 |
| Consumer Cyclical–3.05% | | | | |
| *Autoliv | 92,800 | | | 6,253,792 |
| Dana Holdings | 411,400 | | | 6,421,954 |
| *Knoll | 363,300 | | | 5,580,288 |
| *†Meritage Homes | 216,700 | | | 8,093,745 |
| | | | | 26,349,779 |
| Consumer Services–11.43% | | | | |
| *†Big Lots | 240,000 | | | 6,830,400 |
| Brinker International | 223,900 | | | 6,938,661 |
| Cato Class A | 260,100 | | | 7,134,543 |
| CEC Entertainment | 202,700 | | | 6,727,613 |
| Cheesecake Factory | 259,800 | | | 8,500,656 |
| †Children’s Place Retail Stores | 125,300 | | | 5,549,537 |
| Finish Line Class A | 363,100 | | | 6,873,483 |
| †Genesco | 74,100 | | | 4,075,500 |
| Guess | 135,400 | | | 3,322,716 |
| †Hanesbrands | 205,700 | | | 7,368,174 |
| †Jack in the Box | 90,000 | | | 2,574,000 |
| Men’s Wearhouse | 194,900 | | | 6,073,084 |
| *Meredith | 173,600 | | | 5,980,520 |
| Rent-A-Center | 173,000 | | | 5,944,280 |
| Stage Stores | 353,825 | | | 8,767,784 |
| Texas Roadhouse | 140,300 | | | 2,357,040 |
| Wolverine World Wide | 91,750 | | | 3,759,915 |
| | | | | 98,777,906 |
| Consumer Staples–1.23% | | | | |
| Harris Teeter Supermarkets | 274,800 | | | 10,596,288 |
| | | | | 10,596,288 |
| Energy–6.87% | | | | |
| †Forest Oil | 533,600 | | | 3,569,784 |
| †Helix Energy Solutions Group | 727,400 | | | 15,013,536 |
| *Patterson-UTI Energy | 494,700 | | | 9,216,261 |
| Southwest Gas | 283,900 | | | 12,040,199 |
| †Whiting Petroleum | 450,000 | | | 19,516,500 |
| | | | | 59,356,280 |
| Financial Services–20.56% | | | | |
| Bank of Hawaii | 288,900 | | | 12,726,045 |
| Berkley (W.R.) | 130,343 | | | 4,919,145 |
| Boston Private Financial Holdings | 686,800 | | | 6,188,068 |
| Comerica | 104,031 | | | 3,156,301 |
| Community Bank System | 448,900 | | | 12,281,904 |
| CVB Financial | 275,400 | | | 2,864,160 |
| East West Bancorp | 824,436 | | | 17,717,129 |
| First Financial Bancorp | 555,700 | | | 8,124,334 |
| First Midwest Bancorp | 448,400 | | | 5,613,968 |
| Hancock Holding | 383,300 | | | 12,165,942 |
| Independent Bank | 381,700 | | | 11,050,215 |
| Infinity Property & Casualty | 262,500 | | | 15,288,000 |
| NBT Bancorp | 523,500 | | | 10,611,345 |
| Platinum Underwriters Holdings | 414,000 | | | 19,043,999 |
| S&T Bancorp | 238,100 | | | 4,302,467 |
| Selective Insurance Group | 673,500 | | | 12,978,345 |
| StanCorp Financial Group | 109,600 | | | 4,019,032 |
| Univest Corporation of Pennsylvania | 65,800 | | | 1,125,180 |
| Validus Holdings | 211,821 | | | 7,324,770 |
| WesBanco | 278,800 | | | 6,194,936 |
| | | | | 177,695,285 |
| Healthcare–7.15% | | | | |
| Cooper | 75,200 | | | 6,954,496 |
| †Haemonetics | 200,400 | | | 8,184,336 |
| *Owens & Minor | 235,050 | | | 6,701,276 |
| Service Corp. International | 776,300 | | | 10,720,703 |
| STERIS | 218,200 | | | 7,578,086 |
| Teleflex | 149,400 | | | 10,653,714 |
| Universal Health Services Class B | 227,400 | | | 10,994,790 |
| | | | | 61,787,401 |
| Real Estate–3.98% | | | | |
| †Alexander & Baldwin | 273,271 | | | 8,025,970 |
| Brandywine Realty Trust | 468,533 | | | 5,711,417 |
| Education Realty Trust | 443,700 | | | 4,720,968 |
| *Government Properties Income Trust | 149,500 | | | 3,583,515 |
| *Highwoods Properties | 205,900 | | | 6,887,355 |
| Washington Real Estate Investment Trust | 210,100 | | | 5,494,115 |
| | | | | 34,423,340 |
| Technology–15.92% | | | | |
| *Black Box | 167,102 | | | 4,067,263 |
| †Brocade Communications Systems | 1,334,100 | | | 7,110,753 |
| †Cirrus Logic | 533,500 | | | 15,455,495 |
| *†Compuware | 1,310,700 | | | 14,247,309 |
| †Electronics for Imaging | 306,900 | | | 5,828,031 |
| NetScout Systems | 277,000 | | | 7,199,230 |
| *†ON Semiconductor | 1,283,600 | | | 9,049,380 |
| †Parametric Technology | 559,000 | | | 12,583,090 |
| *†Premiere Global Services | 726,650 | | | 7,106,637 |
| QAD | | | | |
| *Class A | 143,400 | | | 2,064,960 |
| @Class B | 35,850 | | | 482,003 |
| †RF Micro Devices | 1,223,800 | | | 5,482,624 |
| †Synopsys | 541,400 | | | 17,238,176 |
| †Tech Data | 191,700 | | | 8,728,101 |
| *†Teradyne | 535,400 | | | 9,042,906 |
| †Vishay Intertechnology | 1,121,100 | | | 11,917,293 |
| | | | | 137,603,251 |
Small Cap Value Series-6
Delaware VIP® Small Cap Value Series
Statement of Net Assets (continued)
| Number of | | | |
| Shares | | Value |
| COMMON STOCK (continued) | | | | | |
| Transportation–3.05% | | | | | |
| †Kirby | | 111,700 | | $ | 6,913,113 |
| Matson | | 297,200 | | | 7,346,784 |
| *†Saia | | 230,900 | | | 5,338,408 |
| Werner Enterprises | | 313,700 | | | 6,797,879 |
| | | | | 26,396,184 |
| Utilities–2.57% | | | | | |
| Black Hills | | 137,300 | | | 4,989,482 |
| El Paso Electric | | 308,200 | | | 9,834,662 |
| NorthWestern | | 213,700 | | | 7,421,801 |
| | | | | 22,245,945 |
| Total Common Stock | | | | | |
| (cost $615,414,152) | | | | | 834,666,537 |
| |
| Principal | | | |
| Amount | | | |
| SHORT-TERM INVESTMENTS– 3.75% | | | | | |
| ≠Discount Notes–0.79% | | | | | |
| Federal Home Loan Bank | | | | | |
| 0.075% 1/4/13 | $ | 345,404 | | | 345,404 |
| 0.10% 1/18/13 | | 613,659 | | | 613,656 |
| 0.10% 1/23/13 | | 2,386,119 | | | 2,386,105 |
| 0.12% 4/2/13 | | 20,794 | | | 20,790 |
| 0.125% 3/6/13 | | 1,489,019 | | | 1,488,915 |
| 0.13% 2/6/13 | | 1,614,891 | | | 1,614,844 |
| 0.135% 2/15/13 | | 355,276 | | | 355,263 |
| | | | | 6,824,977 |
| Repurchase Agreements–1.42% | | | | | |
| Bank of America 0.11%, dated 12/31/12, | | | | | |
| to be repurchased on 1/2/13, repurchase price | | | | | |
| $8,254,579 (collateralized by U.S. government | | | | | |
| obligations 0.25%-2.375% 2/28/15-12/15/15; | | | | | |
| market value $8,419,620) | | 8,254,529 | | | 8,254,529 |
| BNP Paribas 0.15%, dated 12/31/12, | | | | | |
| to be repurchased on 1/2/13, repurchase price | | | | | |
| $3,992,034 (collateralized by U.S. government | | | | | |
| obligations 0.125%-0.25% 12/31/14-5/15/15; | | | | | |
| market value $4,071,841) | | 3,992,001 | | | 3,992,001 |
| | | | | 12,246,530 |
| ≠U.S. Treasury Obligations–1.54% | | | | | |
| U.S. Treasury Bills | | | | | |
| 0.04% 1/17/13 | | 22,397 | | | 22,397 |
| 0.04% 3/21/13 | | 7,764,625 | | | 7,764,082 |
| 0.04% 3/28/13 | | 5,503,020 | | | 5,502,596 |
| | | | | | 13,289,075 |
| Total Short-Term Investments | | | | | |
| (cost $32,359,742) | | | | | 32,360,582 |
| |
| Total Value of Securities Before Securities | | | | | |
| Lending Collateral–100.32% | | | | | |
| (cost $647,773,894) | | | | | 867,027,119 |
| |
| | Number of | | | |
| | Shares | | | |
| **SECURITIES LENDING COLLATERAL–0.16% | | | | | |
| Delaware Investments Collateral Fund No.1 | | 1,383,819 | | | 1,383,819 |
| †@Mellon GSL Reinvestment Trust II | | 1,097,377 | | | 0 |
| Total Securities Lending Collateral | | | | | |
| (cost $2,481,196) | | | | | 1,383,819 |
Small Cap Value Series-7
Delaware VIP® Small Cap Value Series
Statement of Net Assets (continued)
| TOTAL VALUE OF SECURITIES–100.48% (cost $650,255,090) | | $ | 868,410,938 | © |
| **OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL–(0.29%) | | | (2,481,196 | ) |
| OTHER LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS–(0.19%) | | | (1,636,538 | ) |
| NET ASSETS APPLICABLE TO 26,136,606 SHARES OUTSTANDING–100.00% | | $ | 864,293,204 | |
NET ASSET VALUE–DELAWARE VIP SMALL CAP VALUE SERIES
STANDARD CLASS ($271,271,799 / 8,186,126 Shares) | | | | $33.14 | |
NET ASSET VALUE–DELAWARE VIP SMALL CAP VALUE SERIES
SERVICE CLASS ($593,021,405 / 17,950,480 Shares) | | | | $33.04 | |
| COMPONENTS OF NET ASSETS AT DECEMBER 31, 2012: | | | | |
| Shares of beneficial interest (unlimited authorization–no par) | | $ | 595,920,320 | |
| Undistributed net investment income | | | 6,049,400 | |
| Accumulated net realized gain on investments | | | 44,167,636 | |
| Net unrealized appreciation of investments | | | 218,155,848 | |
| Total net assets | | $ | 864,293,204 | |
____________________
| * | Fully or partially on loan. |
| † | Non income producing security. |
| @ | Illiquid security. At December 31, 2012, the aggregate amount of illiquid securities was $482,003 which represented 0.06% of the Series’ net assets. See Note 9 in “Notes to Financial Statements” |
| ≠ | The rate shown is the effective yield at the time of purchase. |
| ** | See Note 8 in “Notes to Financial Statements” for additional information on securities lending collateral. |
| © | Includes $2,483,776 of securities loaned. |
See accompanying notes, which are an integral part of the financial statements.
Small Cap Value Series-8
Delaware VIP® Trust —
Delaware VIP Small Cap Value Series
Statement of Operations
Year Ended December 31, 2012
| INVESTMENT INCOME: | | | |
| Dividends | $ | 14,144,146 | |
| Securities lending income | | 74,373 | |
| Interest | | 20,489 | |
| Foreign tax withheld | | (10,001 | ) |
| | | 14,229,007 | |
| EXPENSES: | | | |
| Management fees | | 6,352,669 | |
| Distribution expenses – Service Class | | 1,839,464 | |
| Accounting and administration expenses | | 340,253 | |
| Reports and statements to shareholders | | 119,532 | |
| Dividend disbursing and transfer agent fees and expenses | | 75,748 | |
| Legal fees | | 61,496 | |
| Audit and tax | | 39,630 | |
| Trustees’ fees | | 38,864 | |
| Custodian fees | | 16,133 | |
| Insurance fees | | 15,449 | |
| Consulting fees | | 7,325 | |
| Dues and services | | 6,394 | |
| Trustees’ expenses | | 2,701 | |
| Pricing fees | | 838 | |
| Registration fees | | 656 | |
| | | 8,917,152 | |
| Less waiver of distribution expenses – Service Class | | (306,577 | ) |
| Less expense paid indirectly | | (2 | ) |
| Total operating expenses | | 8,610,573 | |
| |
| NET INVESTMENT INCOME | | 5,618,434 | |
| |
| NET REALIZED AND UNREALIZED GAIN: | | | |
| Net realized gain on investments | | 44,777,633 | |
| Net change in unrealized appreciation (depreciation) of investments | | 59,875,763 | |
| |
| NET REALIZED AND UNREALIZED GAIN | | 104,653,396 | |
| |
| NET INCREASE IN NET ASSETS RESULTING | | | |
| FROM OPERATIONS | $ | 110,271,830 | |
Delaware VIP Trust —
Delaware VIP Small Cap Value Series
Statements of Changes in Net Assets
| Year Ended |
| 12/31/12 | | 12/31/11 |
| INCREASE (DECREASE) IN NET ASSETS | | | | | | | |
| FROM OPERATIONS: | | | | | | | |
| Net investment income | $ | 5,618,434 | | | $ | 3,416,768 | |
| Net realized gain | | 44,777,633 | | | | 66,298,259 | |
| Net change in unrealized appreciation | | | | | | | |
| (depreciation) | | 59,875,763 | | | | (80,965,613 | ) |
| Net increase (decrease) in net assets resulting | | | | | | | |
| from operations | | 110,271,830 | | | | (11,250,586 | ) |
| |
| DIVIDENDS AND DISTRIBUTIONS TO | | | | | | | |
| SHAREHOLDERS FROM: | | | | | | | |
| Net investment income: | | | | | | | |
| Standard Class | | (1,464,270 | ) | | | (1,398,884 | ) |
| Service Class | | (2,154,131 | ) | | | (1,698,312 | ) |
| Net realized gain: | | | | | | | |
| Standard Class | | (17,285,890 | ) | | | – | |
| Service Class | | (42,748,361 | ) | | | – | |
| | (63,652,652 | ) | | | (3,097,196 | ) |
| |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | |
| Proceeds from shares sold: | | | | | | | |
| Standard Class | | 40,283,795 | | | | 28,348,102 | |
| Service Class | | 41,444,474 | | | | 83,765,143 | |
| Net asset value of shares issued upon | | | | | | | |
| reinvestment of dividends and distributions: | | | | | | | |
| Standard Class | | 18,750,160 | | | | 1,398,884 | |
| Service Class | | 44,902,492 | | | | 1,698,312 | |
| | 145,380,921 | | | | 115,210,441 | |
| Cost of shares redeemed: | | | | | | | |
| Standard Class | | (45,924,429 | ) | | | (100,100,673 | ) |
| Service Class | | (104,302,837 | ) | | | (89,058,079 | ) |
| | | (150,227,266 | ) | | | (189,158,752 | ) |
| Decrease in net assets derived from capital | | | | | | | |
| share transactions | | (4,846,345 | ) | | | (73,948,311 | ) |
| |
| NET INCREASE (DECREASE) IN NET ASSETS | | 41,772,833 | | | | (88,296,093 | ) |
| |
| NET ASSETS: | | | | | | | |
| Beginning of year | | 822,520,371 | | | | 910,816,464 | |
| End of year (including undistributed | | | | | | | |
| net investment income of $6,049,400 | | | | | | | |
| and $4,071,323, respectively) | $ | 864,293,204 | | | $ | 822,520,371 | |
See accompanying notes, which are an integral part of the financial statements.
Small Cap Value Series-9
Delaware VIP® Trust — Delaware VIP Small Cap Value Series
Financial Highlights
Selected data for each share of the Series outstanding throughout each period were as follows:
| Delaware VIP Small Cap Value Series Standard Class |
| Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $31.390 | | | $31.960 | | | $24.310 | | | $18.630 | | | $28.650 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.265 | | | 0.181 | | | 0.149 | | | 0.160 | | | 0.190 | |
| Net realized and unrealized gain (loss) | | 3.982 | | | (0.593 | ) | | 7.673 | | | 5.712 | | | (8.248 | ) |
| Total from investment operations | | 4.247 | | | (0.412 | ) | | 7.822 | | | 5.872 | | | (8.058 | ) |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.195 | ) | | (0.158 | ) | | (0.172 | ) | | (0.192 | ) | | (0.201 | ) |
| Net realized gain | | (2.302 | ) | | – | | | – | | | – | | | (1.761 | ) |
| Total dividends and distributions | | (2.497 | ) | | (0.158 | ) | | (0.172 | ) | | (0.192 | ) | | (1.962 | ) |
| |
| Net asset value, end of period | | $33.140 | | | $31.390 | | | $31.960 | | | $24.310 | | | $18.630 | |
| |
| Total return2 | | 13.90% | | | (1.33% | ) | | 32.27% | | | 31.83% | | | (29.88% | ) |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $271,272 | | | $243,440 | | | $316,960 | | | $279,723 | | | $241,427 | |
| Ratio of expenses to average net assets | | 0.81% | | | 0.81% | | | 0.83% | | | 0.85% | | | 0.85% | |
| Ratio of net investment income to average net assets | | 0.82% | | | 0.57% | | | 0.56% | | | 0.82% | | | 0.78% | |
| Portfolio turnover | | 14% | | | 17% | | | 10% | | | 19% | | | 29% | |
____________________
1The average shares outstanding method has been applied for per share information. |
2Total 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 does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
Small Cap Value Series-10
Delaware VIP® Small Cap Value Series
Financial Highlights (continued)
Selected data for each share of the Series outstanding throughout each period were as follows:
| Delaware VIP Small Cap Value Series Service Class |
| Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $31.300 | | | $31.890 | | | $24.280 | | | $18.590 | | | $28.570 | |
| | |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.184 | | | 0.101 | | | 0.082 | | | 0.111 | | | 0.129 | |
| Net realized and unrealized gain (loss) | | 3.974 | | | (0.600 | ) | | 7.651 | | | 5.709 | | | (8.226 | ) |
| Total from investment operations | | 4.158 | | | (0.499 | ) | | 7.733 | | | 5.820 | | | (8.097 | ) |
| | |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.116 | ) | | (0.091 | ) | | (0.123 | ) | | (0.130 | ) | | (0.122 | ) |
| Net realized gain | | (2.302 | ) | | – | | | – | | | – | | | (1.761 | ) |
| Total dividends and distributions | | (2.418 | ) | | (0.091 | ) | | (0.123 | ) | | (0.130 | ) | | (1.883 | ) |
| | |
| Net asset value, end of period | | $33.040 | | | $31.300 | | | $31.890 | | | $24.280 | | | $18.590 | |
| | |
| Total return2 | | 13.63% | | | (1.59% | ) | | 31.92% | | | 31.56% | | | (30.07% | ) |
| | |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $593,021 | | | $579,080 | | | $593,856 | | | $469,308 | | | $413,442 | |
| Ratio of expenses to average net assets | | 1.06% | | | 1.06% | | | 1.08% | | | 1.10% | | | 1.10% | |
Ratio of expenses to average net assets
prior to fees waived | | 1.11% | | | 1.11% | | | 1.13% | | | 1.15% | | | 1.15% | |
| Ratio of net investment income to average net assets | | 0.57% | | | 0.32% | | | 0.31% | | | 0.57% | | | 0.53% | |
Ratio of net investment income to average net assets
prior to fees waived | | 0.52% | | | 0.27% | | | 0.26% | | | 0.52% | | | 0.48% | |
| Portfolio turnover | | 14% | | | 17% | | | 10% | | | 19% | | | 29% | |
____________________
1The average shares outstanding method has been applied for per share information. |
2Total 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 during all of the periods reflects a waiver by the distributor. Performance would have been lower had the waiver not been in effect. Total investment return does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
Small Cap Value Series-11
Delaware VIP® Trust — Delaware VIP Small Cap Value Series
Notes to Financial Statements
December 31, 2012
Delaware VIP Trust (Trust) is organized as a Delaware statutory trust and offers 10 series: Delaware VIP Diversified Income Series, Delaware VIP Emerging Markets Series, Delaware VIP High Yield Series, Delaware VIP International Value Equity Series, Delaware VIP Limited-Term Diversified Income Series, Delaware VIP REIT Series, Delaware VIP Small Cap Value Series, Delaware VIP Smid Cap Growth Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series. These financial statements and the related notes pertain to Delaware VIP Small Cap Value Series (Series). The Trust is an open-end investment company. The Series is considered diversified under the Investment Company Act of 1940, as amended, and offers Standard Class and Service Class shares. The Standard Class shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee. The shares of the Series are sold only to separate accounts of life insurance companies.
The investment objective of the Series is to seek capital appreciation.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and are consistently followed by the Series.
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, which approximates fair value. U.S. government and agency securities are valued at the mean between the bid and ask prices, which approximates fair value. Investment company securities are valued at net asset value per share, as reported by the underlying investment company. 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 Series’ 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 Series 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 Series values its securities, generally as of 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 Series may frequently value foreign securities using fair value prices based on third-party vendor modeling tools (international fair value pricing).
Federal & Foreign Income Taxes—No provision for federal income taxes has been made as the Series 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 Series evaluates tax positions taken or expected to be taken in the course of preparing the Series’ tax returns 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 analyzed the Series’ tax positions taken for all open federal income tax years (December 31, 2009 – December 31, 2012), and has concluded that no provision for federal income tax is required in the Series’ financial statements. In regards to foreign taxes, the Series only has open tax years in certain foreign countries it invests in that may date back to the inception of the Series.
Class Accounting—Investment income, common expenses and realized and unrealized gain (loss) on investments are allocated to the classes of the Series 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 Series may purchase certain U.S. government securities subject to the counterparty’s agreement to repurchase them at an agreed upon date and price. The counterparty will be required on a daily basis to maintain the value of the collateral subject to the agreement at not less than the repurchase price (including accrued interest). The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system with the Series’ custodian or a third-party sub-custodian. In the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. All open repurchase agreements as of the date of this report were entered into on December 31, 2012.
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments, the reported amounts of assets and liabilities and disclosure of contingent 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 and the differences could be material.
Other—Expenses directly attributable to the Series are charged directly to the Series. Other expenses common to various funds within the Delaware Investments® Family of Funds are generally allocated among 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. Distributions received from investments in real estate investment trusts are recorded as dividend income on the ex-dividend date, subject to reclassification upon notice of the character of such distribution by the issuer. Foreign dividends are also recorded on the ex-dividend date or as soon after the ex-dividend date that the Series is aware of such dividends, net of all non-rebatable tax withholdings. Withholding taxes on foreign dividends have been recorded in accordance with the Series’ understanding of the applicable country’s tax rules and rates. The Series declares and pays dividends from net investment income and distributions from net realized gain on investments, if any, following the close of the fiscal year. The Series may distribute income dividends and capital gains more frequently, if necessary for tax purposes. Dividends and distributions, if any, are recorded on the ex-dividend date.
Subject to seeking best execution, the Series may direct certain security trades to brokers who have agreed to rebate a portion of the related brokerage commission to the Series in cash. 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 Series on the transaction. There were no commission rebates during the year ended December 31, 2012.
The Series 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 year ended December 31, 2012.
Small Cap Value Series-12
Delaware VIP® Small Cap Value Series
Notes to Financial Statements (continued)
1. Significant Accounting Policies (continued)
The Series receives earnings credits from its transfer agent when positive cash balances are maintained, which are used to offset transfer agent fees. The expense paid under this arrangement is included in dividend disbursing and transfer agent fees and expenses on the Statement of Operations with the corresponding expense offset shown as “expense paid indirectly.” For the year ended December 31, 2012, the Series earned $2 under this agreement.
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Series 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 Series, 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.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to the Series. For these services, the Series 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 year ended December 31, 2012, the Series was charged $42,654 for these services.
DSC is also the transfer agent and dividend disbursing agent of the Series. The Series pays DSC a monthly asset-based fee for these services. Pursuant to a sub-transfer agency agreement between DSC and BNY Mellon Investment Servicing (US) Inc. (BNYMIS), BNYMIS provides certain sub-transfer agency services to the Series. Sub-transfer agency fees are passed on to and paid directly by the Series.
Pursuant to a distribution agreement and distribution plan, the Series pays Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an annual distribution and service fee of 0.30% of the average daily net assets of the Service Class shares. DDLP has contracted to waive distribution and service fees through April 30, 2013 in order to prevent distribution and service fees of the Service Class shares from exceeding 0.25% of average daily net assets. Standard Class shares pay no distribution and service expenses.
At December 31, 2012, the Series had liabilities payable to affiliates as follows:
| | | Dividend Disbursing, | | | | Other |
| Investment | | Transfer Agent and Fund | | | | Expenses |
| Management | | Accounting Oversight | | Distribution | | Payable |
| Fee Payable to | | Fees and Other Expenses | | Fee Payable | | to DMC |
| DMC | | Payable to DSC | | to DDLP | | and Affiliates* |
| $527,087 | | $8,943 | | $124,150 | | $20,547 |
____________________
*DMC, as part of its administrative services, pays operating expenses on behalf of the Series and is reimbursed on a periodic basis. Expenses include items such as printing of shareholder reports, legal and tax services, custodian fees and trustees’ fees.
As provided in the investment management agreement, the Series bears the cost of certain legal and tax services, including internal legal and tax services provided to the Series by DMC and/or its affiliates’ employees. For the year ended December 31, 2012, the Series was charged $26,169 for internal legal and tax services provided by DMC and/or its affiliates’ employees.
Trustees’ fees include expenses accrued by the Series 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 Series.
3. Investments
For the year ended December 31, 2012, the Series made purchases and sales of investment securities other than short-term investments as follows:
| Purchases | | $117,156,181 |
| Sales | | 201,499,913 |
At December 31, 2012, the cost of investments for federal income tax purposes and unrealized appreciation (depreciation) for the Series were as follows:
| | | Aggregate | | Aggregate | | |
| Cost of | | Unrealized | | Unrealized | | Net Unrealized |
| Investments | | Appreciation | | Depreciation | | Appreciation |
| $650,981,994 | | $262,802,230 | | $(45,373,286) | | $217,428,944 |
U.S. GAAP defines fair value as the price that the Series 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. A three level hierarchy for fair value measurements has been established 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
Small Cap Value Series-13
Delaware VIP® Small Cap Value Series
Notes to Financial Statements (continued)
3. Investments (continued)
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 Series’ investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three level hierarchy of inputs is summarized below.
| Level 1 – | inputs are quoted prices in active markets for identical investments (e.g., equity securities, open-end investment companies, futures contracts, exchange-traded options contracts) |
| Level 2 – | other observable inputs (including, but not limited to: quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs) (e.g., debt securities, government securities, swap contracts, foreign currency exchange contracts, foreign securities utilizing international fair value pricing, broker-quoted securities, fair valued securities) |
| Level 3 – | inputs are significant unobservable inputs (including the Series’ own assumptions used to determine the fair value of investments) (e.g., broker-quoted securities, fair valued securities) |
Level 3 investments are valued using significant unobservable inputs. The Series may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Valuations may also be based upon current market prices of securities that are comparable in coupon, rating, maturity and industry. The derived value of a Level 3 investment may not represent the value which is received upon disposition and this could impact the results of operations.
The following table summarizes the valuation of the Series’ investments by fair value hierarchy levels as of December 31, 2012:
| Level 1 | | Level 2 | | Level 3 | | Total |
| Common Stock | $ | 834,666,537 | | $ | – | | $ | – | | $ | 834,666,537 |
| Short-Term Investments | | – | | | 32,360,582 | | | – | | | 32,360,582 |
| Securities Lending Collateral | | – | | | 1,383,819 | | | – | | | 1,383,819 |
| Total | $ | 834,666,537 | | $ | 33,744,401 | | $ | – | | $ | 868,410,938 |
The securities that have been deemed worthless on the statement of net assets are considered to be Level 3 securities in this table.
During the period ended December 31, 2012, there were no transfers between Level 1 investments, Level 2 investments or Level 3 investments that had a significant impact to the Series. The Series’ policy is to recognize transfers between levels at the beginning of the reporting period.
A reconciliation of Level 3 investments is presented when the Series has a significant amount of Level 3 investments at the beginning, interim or end of the period in relation to net assets. Management has determined not to provide additional disclosure on Level 3 inputs under ASU No. 2011-04 since the Level 3 investments are not considered significant to the Series’ net assets at the end of the period.
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 years ended December 31, 2012 and 2011 was as follows:
| Year Ended |
| 12/31/12 | | 12/31/11 |
| Ordinary income | $ | 6,260,483 | | $ | 3,097,196 |
| Long-term capital gain | | 57,392,169 | | | – |
| Total | $ | 63,652,652 | | $ | 3,097,196 |
5. Components of Net Assets on a Tax Basis
As of December 31, 2012, the components of net assets on a tax basis were as follows:
| Shares of beneficial interest | $ | 595,920,320 |
| Undistributed ordinary income | | 6,049,400 |
| Undistributed long-term capital gains | | 44,894,540 |
| Unrealized appreciation | | 217,428,944 |
| Net assets | $ | 864,293,204 |
Small Cap Value Series-14
Delaware VIP® Small Cap Value Series
Notes to Financial Statements (continued)
5. Components of Net Assets on a Tax Basis (continued)
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales.
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 dividends and distributions. Results of operations and net assets were not affected by these reclassifications. For the year ended December 31, 2012, the Series recorded the following reclassifications.
| Undistributed | | Accumulated |
| Net Investment | | Net Realized |
| Income | | Gain |
| $(21,956) | | $21,956 |
6. Capital Shares
Transactions in capital shares were as follows:
| Year | | Year |
| Ended | | Ended |
| 12/31/12 | | 12/31/11 |
| Shares sold: | | | | | |
| Standard Class | 1,245,095 | | | 871,350 | |
| Service Class | 1,284,159 | | | 2,618,058 | |
| |
| Shares issued upon reinvestment of dividends and distributions: | | | | | |
| Standard Class | 592,422 | | | 40,760 | |
| Service Class | 1,420,516 | | | 49,528 | |
| | 4,542,192 | | | 3,579,696 | |
| Shares redeemed: | | | | | |
| Standard Class | (1,407,657 | ) | | (3,071,954 | ) |
| Service Class | (3,255,880 | ) | | (2,786,218 | ) |
| | (4,663,537 | ) | | (5,858,172 | ) |
| Net decrease | (121,345 | ) | | (2,278,476 | ) |
7. Line of Credit
The Series, along with certain other funds in the Delaware Investments® Family of Funds (Participants), was a participant in a $125,000,000 revolving line of credit 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 were charged an annual commitment fee, which was allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants were permitted to borrow up to a maximum of one third of their net assets under the agreement. Each Participant was individually, and not jointly, liable for its particular advances, if any, under the line of credit. The line of credit under the agreement expired on November 13, 2012.
On November 13, 2012, the Series, along with the other Participants, entered into an amendment to the agreement for a $125,000,000 revolving line of credit. The agreement is to be used as described above and operates in substantially the same manner as the original agreement. The line of credit available under the agreement expires on November 12, 2013. The Series had no amounts outstanding as of December 31, 2012 or at any time during the year then ended.
8. Securities Lending
The Series, along with other funds in the Delaware Investments® Family of Funds, may lend its securities pursuant to a security lending agreement (Lending Agreement) with The Bank of New York Mellon (BNY Mellon). At the time a security is loaned, the borrower must post collateral equal to the required percentage of the market value of the loaned security, including any accrued interest. The required percentage is: (i) 102% with respect to U.S. securities and foreign securities that are denominated and payable in U.S. dollars; and (ii) 105% with respect to foreign securities. With respect to each loan, if on any business day the aggregate market value of securities collateral plus cash collateral held 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 by the end of the following business day which, together with the collateral already held, will be not less than the applicable initial collateral requirements for such security loan. If the aggregate market value of securities collateral and cash collateral held with respect to a security loan exceeds the applicable initial collateral requirement, upon request of the borrower BNY Mellon must return enough collateral to the borrower by the end of the following business day to reduce the value of the remaining collateral to the applicable initial collateral requirement for such security loan. As a result of the foregoing, the value of the collateral held with respect to a loaned security may be temporarily more or less than the value of the security on loan.
Cash collateral received is generally invested in the Delaware Investments Collateral Fund No. 1 (Collective Trust) established by BNY Mellon for the purpose of investment on behalf of funds managed by DMC that participate in BNY Mellon’s securities lending program. The Collective Trust may invest in U.S. government securities and high quality corporate debt, asset-backed and other money market securities and in repurchase agreements collateralized by such securities, provided that the Collective Trust will generally have a dollar-weighted average portfolio maturity of 60 days or less. In October 2008, BNY Mellon transferred certain distressed securities from the Series’ previous collateral investment pool into the Mellon GSL Reinvestment Trust II. The Series 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 Series or, at the discretion of the lending agent,
Small Cap Value Series-15
Delaware VIP® Small Cap Value Series
Notes to Financial Statements (continued)
8. Securities Lending (continued)
replace the loaned securities. The Series continues to record dividends or interest, as applicable, on the securities loaned and is subject to changes in value of the securities loaned that may occur during the term of the loan. The Series 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 Series 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 Series, the security lending agent and the borrower. The Series records security lending income net of allocations to the security lending agent and the borrower.
The Collective Trust used for the investment of cash collateral received from borrowers of securities 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. The Series may incur investment losses as a result of investing securities lending collateral in the Collective Trust or another collateral investment pool. This could occur if an investment in a collateral investment pool defaulted or if it were necessary to liquidate assets in the collateral investment pool to meet returns on outstanding security loans at a time when the collateral investment pool’s net asset value per unit was less than $1.00. Under those circumstances, the Series may not receive an amount from the collateral investment pool that is equal in amount to the collateral the Series would be required to return to the borrower of the securities and the Series would be required to make up for this shortfall.
At December 31, 2012, the value of the securities on loan was $2,483,776, for which cash collateral was received and invested in accordance with the Lending Agreement. At December 31, 2012, the value of invested collateral was $1,383,819. These investments are presented on the Statement of Net Assets under the caption “Securities Lending Collateral.”
9. Credit and Market Risk
The Series invests a significant portion of its assets in small companies and may be subject to certain risks associated with ownership of securities of such companies. Investments in small-sized companies may be more volatile than investments in larger companies for a number of reasons, which include limited financial resources or a dependence on narrow product lines.
The Series may invest up to 10% 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 Series 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 Series’ Board has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of the Series’ limitation on investments in illiquid securities. Securities eligible for resale pursuant to Rule 144A, which are determined to be liquid, are not subject to the Series’ 10% limit on investments in illiquid securities. As of December 31, 2012, there were no Rule 144A securities. Illiquid securities have been identified on the Statement of Net Assets.
10. Contractual Obligations
The Series enters into contracts in the normal course of business that contain a variety of indemnifications. The Series’ maximum exposure under these arrangements is unknown. However, the Series has not had prior claims or losses pursuant to these contracts. Management has reviewed the Series’ existing contracts and expects the risk of loss to be remote.
11. Subsequent Events
Management has determined that no material events or transactions occurred subsequent to December 31, 2012 that would require recognition or disclosure in the Series’ financial statements.
Small Cap Value Series-16
Delaware VIP® Trust — Delaware VIP Small Cap Value Series
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Delaware VIP Trust
and the Shareholders of Delaware VIP Small Cap Value Series:
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Delaware VIP Small Cap Value Series (one of the series constituting Delaware VIP Trust, hereafter referred to as the “Series”) at December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2012 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the two years in the period ended December 31, 2009 were audited by other independent accountants whose report dated February 17, 2010 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 15, 2013
Small Cap Value Series-17
Delaware VIP® Trust — Delaware VIP Small Cap Value Series
Other Series Information (Unaudited)
Board Consideration of Delaware VIP Small Cap Value Series Investment Advisory Agreement
At a meeting held on August 21-23, 2012 (“Annual Meeting”), the Board of Trustees (“Board”), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreement for Delaware VIP Small Cap Value Series (“Series”). In making its decision, the Board considered information furnished at regular quarterly Board meetings, including reports detailing Series performance, investment strategies and expenses, as well as information prepared specifically in connection with the renewal of the investment advisory contract. Information furnished specifically in connection with the renewal of the Investment Advisory Agreement with Delaware Management Company (“DMC”) included materials provided by DMC and its affiliates (“Delaware Investments”) concerning, among other things, the nature, extent and quality of services provided to the Series, the costs of such services to the Series, economies of scale and the financial condition and profitability of Delaware Investments. In addition, in connection with the Annual Meeting, reports were provided in May 2012 and included independent historical and comparative reports provided by Lipper, Inc., an independent statistical compilation organization (“Lipper”). The Lipper reports compared the Series’ investment performance and expenses with those of other comparable mutual funds. The Independent Trustees reviewed and discussed the Lipper reports with independent legal 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; comparative client fee information; 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 the Series’ policies.
In considering information relating to the approval of the Series’ advisory agreement, the Independent Trustees received assistance and advice from and met separately with independent legal 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 Series 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 Series, compliance of portfolio managers with the investment policies, strategies and restrictions for the Series, 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 Series’ investment advisor and the emphasis placed on research in the investment process. The Board recognized DMC’s receipt of several industry distinctions. The Board gave favorable consideration to DMC’s efforts to control expenditures while maintaining service levels committed to fund matters. The Board noted that in July 2011, Management implemented measures to reduce overall costs and improve transfer agent and shareholder servicing functions through outsourcing. 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 Series in view of the importance of investment performance 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 Series showed the investment performance of its Standard Class 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 Series was shown for the past one-, three-, five- and ten-year periods, as applicable, ended March 31, 2012. The Board’s objective is that the Series’ performance for the periods considered be at or above the median of its Performance Universe. The following paragraph summarizes the performance results for the Series and the Board’s view of such performance.
The Performance Universe for the Series consisted of the Series and all small cap value funds underlying variable insurance products. The Lipper report comparison showed that the Series’ total return for the one-, three-, five- and ten-year periods was in the first quartile of its Performance Universe. The Board was satisfied with performance.
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 Series as of its most recently completed fiscal year. The Board also focused on the comparative analysis of effective management fees and total expense ratios of the Series versus effective management fees and expense ratios of a group of similar funds as selected by Lipper (“Expense Group”). In reviewing comparative costs, the Series’ contractual management fee and the actual management fee incurred by the Series were compared with the contractual management fees (assuming all funds in the Expense Group were similar in size to the Series) and actual management fees (as reported by each fund) within the Expense Group, taking into account any applicable breakpoints and fee waivers. The Series’ total expenses were also compared with those of its Expense Group. The Lipper total expenses, for comparative consistency, were shown by Lipper for Standard Class shares which do not charge 12b-1 and non 12b-1 service fees. The Board considered fees paid to Delaware Investments for non-management services. The Board’s objective is to limit the Series’ total expense ratio to be competitive with that of the Expense Group. The following paragraph summarizes the expense results for the Series and the Board’s view of such expenses.
The expense comparisons for the Series showed that the actual management fee was in the quartile with the lowest expenses of its Expense Group and the total expenses were in the quartile with the second lowest expenses of its Expense Group. The Board was satisfied with the management fee and total expenses of the Series in comparison to those of its Expense Group.
MANAGEMENT PROFITABILITY. The Board considered the level of profits realized by Delaware Investments in connection with the operation of the Series. 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, reflects 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 profitability of Delaware Investments.
Small Cap Value Series-18
Delaware VIP® Small Cap Value Series
Other Series Information (Unaudited) (continued)
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are realized by Delaware Investments as the Series’ 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 Series’ management contract fell within the standard structure. The Board also noted that the Series’ assets exceeded the first breakpoint level. The Board believed that, given the extent to which economies of scale might be realized by the advisor and its affiliates, the schedule of fees under the Investment Advisory Agreement provides a sharing of benefits with the Series and its shareholders.
Tax Information
For the fiscal year ended December 31, 2012, the Series designates distributions paid during the year as follows:
| (A) | | (B) | | | | |
| Long-Term | | Ordinary | | | | |
| Capital Gain | | Income | | Total | | (B) |
| Distributions | | Distributions | | Distributions | | Qualifying |
| (Tax Basis) | | (Tax Basis) | | (Tax Basis) | | Dividends1 |
| 90.16% | | 9.84% | | 100.00% | | 100.00% |
____________________
(A) and (B) are based on a percentage of the Series’ total distributions.
(C) is based on a percentage of the Series’ ordinary income distributions.
1Qualifying dividends represent dividends which qualify for the corporate dividends received deduction.
Small Cap Value Series-19
Delaware Investments® Family of Funds
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors (“Trustees”), which has oversight responsibility for the management of a fund’s business affairs. Trustees establish procedures and oversee and review the performance of the investment manager, the distributor, and others who perform services for the fund. The independent fund trustees, in particular, are advocates for shareholder interests. Each trustee has served in that capacity since he or she was elected to or appointed to the Board of Trustees, and will continue to serve until his or her retirement or the election of a new trustee in his or her place. The following is a list of the Trustees and Officers with certain background and related information.
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INTERESTED TRUSTEES | | | | | |
| Patrick P. Coyne1 | Chairman, | Chairman and Trustee | Patrick P. Coyne has served in | 71 | Director and Audit |
| 2005 Market Street | President, | since August 16, 2006 | various executive capacities | | Committee Member — |
| Philadelphia, PA | Chief Executive | | at different times at | | Kaydon Corp. |
| 19103 | Officer, and | President and | Delaware Investments.2 | | |
| Trustee | Chief Executive Officer | | | Board of Governors |
| April 1963 | | since August 1, 2006 | | | Member — Investment |
| | | | | Company Institute (ICI) |
| | | | | |
| INDEPENDENT TRUSTEES | | | | | |
| Thomas L. Bennett | Trustee | Since | Private Investor — | 71 | Director — |
| 2005 Market Street | | March 2005 | (March 2004–Present) | | Bryn Mawr |
| Philadelphia, PA | | | | | Bank Corp. (BMTC) |
| 19103 | | | Investment Manager — | | (2007–2011) |
| | | Morgan Stanley & Co. | | |
| October 1947 | | | (January 1984–March 2004) | | |
| Joseph W. Chow | Trustee | Since | Executive Vice President | 71 | Director and Audit |
| 2005 Market Street | | January 2013 | (Emerging Economies Strategies, | | Committee |
| Philadelphia, PA 19103 | | | Risk and Corporate Administration) | | Member — Hercules |
| | | State Street Corporation | | Technology Growth |
| January 1953 | | | (July 2004–March 2011) | | Capital, Inc. |
| John A. Fry | Trustee | Since | President | 71 | Board of Governors |
| 2005 Market Street | | January 2001 | Drexel University | | Member — NASDAQ |
| Philadelphia, PA | | | (August 2010–Present) | | OMX PHLX LLC |
| 19103 | | | | | |
| | | President — | | Director and Audit |
| May 1960 | | | Franklin & Marshall College | | Committee Member — |
| | | (June 2002–July 2010) | | Community Health |
| | | | | Systems |
| | | | | |
| | | | | | |
| | | | | Director — Ecore |
| | | | | International |
| | | | | (2009–2010) |
| Anthony D. Knerr | Trustee | Since | Managing Director — | 71 | None |
| 2005 Market Street | | April 1990 | Anthony Knerr & Associates | | |
| Philadelphia, PA | | | (Strategic Consulting) | | |
| 19103 | | | (1990–Present) | | |
| | | | | |
| | | | | | |
| December 1938 | | | | | |
| Lucinda S. Landreth | Trustee | Since | Private Investor | 71 | None |
| 2005 Market Street | | March 2005 | (2004–Present) | | |
| Philadelphia, PA | | | | | |
| 19103 | | | | | |
| | | | | | |
| June 1947 | | | | | |
Small Cap Value Series-20
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INDEPENDENT TRUSTEES (continued) | | | | |
| Frances A. Sevilla-Sacasa | Trustee | Since | Chief Executive Officer — | 71 | Trust Manager — |
| 2005 Market Street | | September 2011 | Banco Itaú Europa | | Camden Property Trust |
| Philadelphia, PA | | | International | | (2011–Present) |
| 19103 | | | (April 2012–Present) | | |
| |
| January 1956 | | | Executive Advisor to Dean | | |
| | | (August 2011–March 2012) | | |
| | | and Interim Dean | | |
| | | (January 2011–July 2011) — | | |
| | | University of Miami School of | | |
| | | Business Administration | | |
| |
| | | President — U.S. Trust, | | |
| | | Bank of America Private | | |
| | | Wealth Management | | |
| | | (Private Banking) | | |
| | | (July 2007–December 2008) | | |
| Thomas K. Whitford | Trustee | Since | Vice Chairman | 71 | None |
| 2005 Market Street | | January 2013 | (2010–Present) | | |
| Philadelphia, PA 19103 | | | Chief Administrative | | |
| | | Officer (2008–2010) | | |
| March 1956 | | | and Executive Vice | | |
| | | President and Chief | | |
| | | Administrative Officer | | |
| | | (2007–2009) — | | |
| | | PNC Financial | | |
| | | Services Group | | |
| Janet L. Yeomans | Trustee | Since | Vice President and Treasurer | 71 | Director, Audit |
| 2005 Market Street | | April 1999 | (January 2006–Present) | | Committee Member |
| Philadelphia, PA | | | Vice President — Mergers | | and Investment |
| 19103 | | | & Acquisitions | | Committee Member |
| | | (January 2003–January 2006), | | Okabena Company |
| July 1948 | | | and Vice President and Treasurer | | |
| | | (July 1995–January 2003) | | Chair — 3M |
| | | 3M Corporation | | Investment Management |
| | | | | Company |
| | | | | (January 2005–July 2012) |
| J. Richard Zecher | Trustee | Since | Founder — | 71 | Director and Compensation |
| 2005 Market Street | | March 2005 | Investor Analytics | | Committee Member — |
| Philadelphia, PA | | | (Risk Management) | | Investor Analytics |
| 19103 | | | (May 1999–Present) | | |
| | | | | Director — |
| July 1940 | | | Founder — | | P/E Investments |
| | | P/E Investments | | |
| | | (Hedge Fund) | | |
| | | (September 1996–Present) | | |
| |
| OFFICERS | | | | | |
| David F. Connor | Vice President, | Vice President since | David F. Connor has served as | 71 | None3 |
| 2005 Market Street | Deputy General | September 2000 | Vice President and Deputy | | |
| Philadelphia, PA | Counsel, and Secretary | and Secretary | General Counsel of | | |
| 19103 | | since | Delaware Investments | | |
| | October 2005 | since 2000. | | |
| | | | | | |
| December 1963 | | | | | |
| Daniel V. Geatens | Vice President | Treasurer | Daniel V. Geatens has served | 71 | None3 |
| 2005 Market Street | and Treasurer | since | in various capacities at | | |
| Philadelphia, PA | | October 2007 | different times at | | |
| 19103 | | | Delaware Investments. | | |
|
| | | | | | |
| October 1972 | | | | | |
Small Cap Value Series-21
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| OFFICERS (continued) | | | | | |
| David P. O’Connor | Executive Vice | Executive Vice President | David P. O’Connor has served in | 71 | None3 |
| 2005 Market Street | President, | since February 2012; | various executive and legal | | |
| Philadelphia, PA | General Counsel, | Senior Vice President | capacities at different times | | |
| 19103 | and Chief | October 2005–February 2012; | at Delaware Investments. | | |
| Legal Officer | General Counsel and | | | |
| February 1966 | | Chief Legal Officer | | | |
| | since October 2005 | | | |
| Richard Salus | Senior | Chief Financial | Richard Salus has served in | 71 | None3 |
| 2005 Market Street | Vice President | Officer since | various executive capacities | | |
| Philadelphia, PA | and | November 2006 | at different times at | | |
| 19103 | Chief Financial | | Delaware Investments. | | |
| Officer | | | | |
| October 1963 | | | | | |
1 Patrick P. Coyne is considered to be an “Interested Trustee” because he is an executive officer of the Fund’s(s’) investment advisor. |
2 Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund’s(s’) investment advisor, principal underwriter, and its transfer agent. |
3 David F. Connor, Daniel V. Geatens, David P. O’Connor, and Richard Salus serve in similar capacities for the six portfolios of the Optimum Fund Trust, which have the same investment advisor, principal underwriter, and transfer agent as the registrant. |
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is available, without charge, upon request by calling 800 523-1918.
The Series files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q. The Series’ Forms N-Q, as well as a description of the policies and procedures that the Series 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 website at sec.gov. In addition, a description of the policies and procedures that the Series uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge on the Delaware Investments® Funds’ website at delawareinvestments.com. The Series’ Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Series voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the Delaware Investments Funds’ website at delawareinvestments.com; and (ii) on the Commission’s website at sec.gov. |
| AR-VIPSCV [12/12] DG3 18584 (2/13) | | (10125) | | Small Cap Value Series-22 |
| Delaware VIP® Trust |
| Delaware VIP Smid Cap Growth Series |
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Table of contents
| > Portfolio management review | 1 |
| | |
| > Performance summary | 2 |
| | |
| > Disclosure of Series expenses | 4 |
| | |
| > Security type/sector allocation and top 10 equity holdings | 5 |
| | |
| > Statement of net assets | 6 |
| | |
| > Statement of operations | 8 |
| | |
| > Statements of changes in net assets | 8 |
| | |
| > Financial highlights | 9 |
| | |
| > Notes to financial statements | 11 |
| | |
| > Report of independent registered public accounting firm | 16 |
| | |
| > Other Series information | 17 |
| | |
| > Board of trustees/directors and officers addendum | 19 |
Investments in Delaware VIP® Smid Cap Growth Series 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 (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 Series, the repayment of capital from the Series, or any particular rate of return.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
The Series is not FDIC insured and is 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 and member of Macquarie Group. Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries, including the Series’ distributor, Delaware Distributors, L.P. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide.
This material may be used in conjunction with the offering of shares in the Delaware VIP Smid Cap Growth Series only if preceded or accompanied by the Series’ current prospectus, and if available, the summary prospectus.
© 2013 Delaware Management Holdings, Inc.
All third-party marks cited are the property of their respective owners.
| Delaware VIP® Trust — Delaware VIP Smid Cap Growth Series | |
| Portfolio management review | Jan. 8, 2013 |
For the fiscal year ended Dec. 31, 2012, Delaware VIP Smid Cap Growth Series Standard Class shares returned +11.02%, while Service Class shares returned +10.71% (both figures reflect returns with dividends reinvested). The Series’ benchmark, the Russell 2500™ Growth Index, returned +16.13% for the same period.
Early in the Series’ fiscal year, investors were generally encouraged by positive reports about U.S. labor markets, manufacturing, and consumer demand. The spring and early summer months, however, featured renewed volatility, primarily caused by political and economic uncertainty. Worries included speculation about Greece’s potential exit from the euro; additional evidence of deterioration within Spain’s banks; and uncertainty about upcoming political policies and elections in several euro zone countries and in the United States. Many investors also fretted about a slowing global growth environment, along with persistently high rates of unemployment in the U.S.
Sentiment improved in June as European leaders signaled a more comprehensive approach to stabilizing banks and sovereign credits. In the summer and early fall of 2012, domestic stock performance received a boost from the latest bond-buying programs by the U.S. Federal Reserve and the European Central Bank, along with the Chinese government’s impending stimulus. The U.S. economy was able to maintain a moderate growth pace, thanks to an improvement in housing and a positive report about manufacturing.
The fiscal year closed with economic indicators posting reasonably solid performances and major market indices experiencing only mild declines, while international indices generated positive results.
SBA Communications was one of the strongest contributors during the Series’ fiscal year. The company, an infrastructure provider for wireless services, reported strong earnings and growth projections driven by the proliferation of wireless devices (smartphones and tablets). In addition, towards the end of the period, the company closed a domestic acquisition of a portfolio of towers and announced an international acquisition of another portfolio, which we believe likely led to an upward bias in earnings projections and investor optimism.
Strayer Education was one of the Series’ largest detractors from performance during the fiscal year. The company reported disappointing earnings, showing significant weakness in student enrollment growth. While the for-profit industry has undergone significant change in the past two years due to regulatory scrutiny and government oversight, companies like Strayer had gone through significant business model transformations in recent years. The company had shown steady improvement in many areas at the beginning of this transformation but in recent quarters has given investors concerns that the challenges they face are significant and potentially lingering. We recognized the problems were longer term in nature than originally expected and included a higher risk-reward investment profile — therefore, we exited the position during the fiscal year.
Regardless of the economic outcome, we remain consistent in our long-term investment philosophy: We want to own what we view as strong secular-growth companies with solid business models and competitive positions that we believe can grow market share and have the potential to deliver shareholder value in a variety of market environments.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
Smid Cap Growth Series-1
Delaware VIP® Trust — Delaware VIP Smid Cap Growth Series
Performance summary
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
Carefully consider the Series’ investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Series’ prospectuses and, if available, their summary prospectuses, which may be obtained by calling 800 523-1918. Investors should read the prospectuses and, if available, the summary prospectuses carefully before investing.
| Delaware VIP Smid Cap Growth Series | | | | | | | | | | | |
| Average annual total returns | | | | | | | | | | | |
| For periods ended Dec. 31, 2012 | | 1 year | | 3 years | | 5 years | | 10 years | | Lifetime | |
| Standard Class shares (commenced operations on July 12, 1991) | | +11.02% | | +17.84% | | +7.18% | | +11.63% | | +9.44% | |
| Service Class shares (commenced operations on May 1, 2000) | | +10.71% | | +17.56% | | +6.93% | | +11.36% | | +3.68% | |
Returns reflect the reinvestment of all distributions and any applicable sales charges as noted in the following paragraphs.
As described in the Series’ most recent prospectus, the net expense ratio for Service Class shares of the Series was 1.08%, while total operating expenses for Standard Class and Service Class shares were 0.83% and 1.13%, respectively. The management fee for Standard Class and Service Class shares was 0.75%.
The Series’ distributor has contracted to limit the 12b-1 fees for Service Class shares to 0.25% of average daily net assets from Feb. 27, 2012 through April 30, 2013, or, if longer, until the Series is offered under new participation agreements or under new contracts with existing insurance companies (other than the update and modification of existing contracts in the normal course of business that may require registration or re-registration under state insurance laws as a new insurance contract, provided the new insurance contract effectively replaces the current insurance contract). The waiver may only be terminated by agreement of the Distributor and the Series.
Earnings from a variable annuity or variable life investment compound tax-free until withdrawal, and as a result, no adjustments were made for income taxes.
Expense limitations were in effect for all classes during certain periods shown in the Series’ performance table above and in the Performance of a $10,000 Investment chart on the next page.
Performance data do not reflect other costs incurred by beneficial owners such as insurance company separate account fees and variable annuity or variable life contract charges or deferred sales charges. Performance shown here would have been reduced if such fees were included and the expense limitation removed. For more information about fees, consult your variable annuity or variable life prospectus.
Investments in variable products involve risk.
Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies.
Please read both the contract and underlying prospectus for specific details regarding the product’s risk profile.
Smid Cap Growth Series-2
Delaware VIP® Smid Cap Growth Series
Performance summary (continued)
| For period beginning Dec. 31, 2002, through Dec. 31, 2012 | | Starting value | | Ending value |
| –– | Delaware VIP Smid Cap Growth Series (Standard Class shares) | | $10,000 | | $30,038 |
| – – | Russell 2500 Growth Index (current benchmark) | | $10,000 | | $27,257 |
The chart shows a $10,000 investment in the Delaware VIP Smid Cap Growth Series Standard Class shares for the period from Dec. 31, 2002 through Dec. 31, 2012.
The chart also shows $10,000 invested in the Russell 2500 Growth Index for the period from Dec. 31, 2002 through Dec. 31, 2012. The Russell 2500 Growth Index measures the performance of the small- to mid-cap growth segment of the U.S. equity universe. It includes those Russell 2500 companies with higher price-to-book ratios and higher forecasted growth values.
Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
Performance of Service Class shares will vary due to different charges and expenses.
Past performance is not a guarantee of future results.
Smid Cap Growth Series-3
Delaware VIP® Trust — Delaware VIP Smid Cap Growth Series
Disclosure of Series Expenses
For the Six-Month Period from July 1, 2012 to December 31, 2012 (Unaudited)
As a shareholder of the Series, you incur ongoing costs, which may include management fees; distribution and/or service (12b-1) fees; and other Series expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Series 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 six-month period from July 1, 2012 to December 31, 2012.
Actual Expenses
The first section of the table shown, “Actual Series 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 the 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 Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ 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 Series and other funds. To do so, compare the 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. As a shareholder of the Series, you do not incur any transaction costs, such as sales charges (loads), redemption fees or exchange fees, but shareholders of other funds may incur such costs. Also, the fees related to the variable annuity investment or the deferred sales charge that could apply have not been included. 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. The Series’ actual expenses shown in the table reflect fee waivers in effect for Service Class shares. The expenses shown in the table assume reinvestment of all dividends and distributions.
Expense Analysis of an Investment of $1,000
| | | | | | | | | Expenses |
| Beginning | | Ending | | | | Paid During |
| Account | | Account | | Annualized | | Period |
| Value | | Value | | Expense | | 7/1/12 to |
| 7/1/12 | | 12/31/12 | | Ratio | | 12/31/12* |
| Actual Series Return† | | | | | | | | | | | |
| Standard Class Shares | | $1,000.00 | | | $1,007.40 | | 0.85% | | | $4.29 | |
| Service Class Shares | | 1,000.00 | | | 1,006.40 | | 1.10% | | | 5.55 | |
| Hypothetical 5% Return (5% return before expenses) | | | | | | |
| Standard Class Shares | | $1,000.00 | | | $1,020.86 | | 0.85% | | | $4.32 | |
| Service Class Shares | | 1,000.00 | | | 1,019.61 | | 1.10% | | | 5.58 | |
*“Expenses Paid During Period” are equal to the Series’ annualized expense ratio, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period).
†Because actual returns reflect only the most recent six-month period, the returns shown may differ significantly from fiscal year returns.
Smid Cap Growth Series-4
Delaware VIP® Trust — Delaware VIP Smid Cap Growth Series
Security Type/Sector Allocation and Top 10 Equity Holdings
As of December 31, 2012 (Unaudited)
Sector designations may be different than the sector designations presented in other Series materials. The sector designations may represent the investment manager’s internal sector classifications, which may result in the sector designations for one series being different than another series’ sector designations.
| Percentage |
| Security Type/Sector | of Net Assets |
| Common Stock | 97.18 | % |
| Consumer Discretionary | 20.67 | % |
| Energy | 4.99 | % |
| Financial Services | 18.38 | % |
| Healthcare | 10.98 | % |
| Producer Durables | 13.00 | % |
| Technology | 24.50 | % |
| Utilities | 4.66 | % |
| Short-Term Investments | 3.11 | % |
| Securities Lending Collateral | 9.42 | % |
| Total Value of Securities | 109.71 | % |
| Obligation to Return Securities Lending Collateral | (9.52 | %) |
| Other Liabilities Net of Receivables and Other Assets | (0.19 | %) |
| 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.
| Percentage |
| Top 10 Equity Holdings | of Net Assets |
| Affiliated Managers Group | 5.79 | % |
| Graco | 5.30 | % |
| DineEquity | 5.30 | % |
| SBA Communications Class A | 5.20 | % |
| NeuStar Class A | 4.99 | % |
| Core Laboratories | 4.99 | % |
| VeriFone Systems | 4.93 | % |
| MSCI Class A | 4.93 | % |
| Techne | 4.72 | % |
| j2 Global | 4.66 | % |
Smid Cap Growth Series-5
Delaware VIP® Trust — Delaware VIP Smid Cap Growth Series
Statement of Net Assets
December 31, 2012
| Number of | | | |
| Shares | | Value |
| COMMON STOCK–97.18% | | | | |
| Consumer Discretionary–20.67% | | | | |
| †DineEquity | 389,434 | | $ | 26,092,077 |
| Gentex | 752,650 | | | 14,164,873 |
| Interval Leisure Group | 551,575 | | | 10,695,039 |
| *†K12 | 797,622 | | | 16,303,394 |
| †Sally Beauty Holdings | 627,750 | | | 14,796,068 |
| Weight Watchers International | 374,932 | | | 19,631,440 |
| | | | | 101,682,891 |
| Energy–4.99% | | | | |
| Core Laboratories | 224,647 | | | 24,556,164 |
| | | | | 24,556,164 |
| Financial Services–18.38% | | | | |
| †Affiliated Managers Group | 218,775 | | | 28,473,566 |
| Heartland Payment Systems | 712,049 | | | 21,005,446 |
| †IntercontinentalExchange | 134,625 | | | 16,667,921 |
| †MSCI Class A | 782,525 | | | 24,250,450 |
| | | | | 90,397,383 |
| Healthcare–10.98% | | | | |
| *†ABIOMED | 770,550 | | | 10,371,603 |
| *†athenahealth | 111,757 | | | 8,208,552 |
| Perrigo | 117,429 | | | 12,216,139 |
| Techne | 340,100 | | | 23,242,434 |
| | | | | 54,038,728 |
| Producer Durables–13.00% | | | | |
| Expeditors International of Washington | 546,748 | | | 21,623,883 |
| Graco | 506,750 | | | 26,092,557 |
| *Ritchie Brothers Auctioneers | 777,325 | | | 16,238,319 |
| | | | | 63,954,759 |
| Technology–24.50% | | | | |
| Blackbaud | 653,064 | | | 14,909,451 |
| †NeuStar Class A | 585,730 | | | 24,559,659 |
| †Polycom | 1,090,822 | | | 11,409,998 |
| †SBA Communications Class A | 360,500 | | | 25,602,710 |
| †VeriFone Systems | 817,750 | | | 24,270,820 |
| †VeriSign | 509,020 | | | 19,760,156 |
| | | | | 120,512,794 |
| Utilities–4.66% | | | | |
| *j2 Global | 749,889 | | | 22,931,606 |
| | | | | 22,931,606 |
| Total Common Stock | | | | |
| (cost $366,126,913) | | | | 478,074,325 |
| Principal | | | |
| Amount | | |
| SHORT-TERM INVESTMENTS–3.11% | | | | | |
| ≠Discount Notes–0.41% | | | | | |
| Federal Home Loan Bank | | | | | |
| 0.10% 1/18/13 | $ | 351,196 | | | 351,195 |
| 0.10% 1/23/13 | | 538,335 | | | 538,332 |
| 0.12% 4/2/13 | | 8,945 | | | 8,943 |
| 0.13% 2/6/13 | | 924,200 | | | 924,173 |
| 0.135% 2/15/13 | | 203,324 | | | 203,316 |
| | | | | | 2,025,959 |
| Repurchase Agreements–1.30% | | | | | |
| Bank of America 0.11%, dated 12/31/12, to be | | | | | |
| repurchased on 1/2/13, repurchase price | | | | | |
| $4,326,573 (collateralized by U.S. government | | | | | |
| obligations 0.25%-2.375% 2/28/15-12/15/15; | | | | | |
| market value $4,413,078) | | 4,326,547 | | | 4,326,547 |
| BNP Paribas 0.15%, dated 12/31/12, to be | | | | | |
| repurchased on 1/2/13, repurchase price | | | | | |
| $2,092,394 (collateralized by U.S. government | | | | | |
| obligations 0.125%-0.25% 12/31/14-5/15/15; | | | | | |
| market value $2,134,224) | | 2,092,376 | | | 2,092,376 |
| | | | | | 6,418,923 |
| ≠U.S. Treasury Obligations–1.40% | | | | | |
| U.S. Treasury Bills | | | | | |
| 0.04% 1/17/13 | | 9,635 | | | 9,635 |
| 0.04% 3/21/13 | | 3,972,684 | | | 3,972,405 |
| 0.04% 3/28/13 | | 2,884,365 | | | 2,884,143 |
| | | | | | 6,866,183 |
| Total Short-Term Investments | | | | | |
| (cost $15,310,775) | | | | | 15,311,065 |
| |
| Total Value of Securities Before | | | | | |
| Securities Lending Collateral–100.29% | | | | | |
| (cost $381,437,688) | | | | | 493,385,390 |
| |
| Number of | | | |
| Shares | | | |
| **SECURITIES LENDING COLLATERAL–9.42% | | | | | |
| Investment Companies | | | | | |
| Delaware Investments Collateral Fund No.1 | | 46,339,478 | | | 46,339,478 |
| @†Mellon GSL Reinvestment Trust II | | 517,983 | | | 0 |
| Total Securities Lending Collateral | | | | | |
| (cost $46,857,461) | | | | | 46,339,478 |
Smid Cap Growth Series-6
Delaware VIP® Smid Cap Growth Series
Statement of Net Assets (continued)
| TOTAL VALUE OF SECURITIES–109.71% (cost $428,295,149) | $ | 539,724,868 | © |
| **OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL–(9.52%) | | (46,857,461 | ) |
| OTHER LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS–(0.19%) | | (917,539 | ) |
| NET ASSETS APPLICABLE TO 20,394,331 SHARES OUTSTANDING–100.00% | $ | 491,949,868 | |
NET ASSET VALUE–DELAWARE VIP SMID CAP GROWTH SERIES
STANDARD CLASS ($318,001,850 / 13,046,885 Shares) | | | $24.37 | |
NET ASSET VALUE–DELAWARE VIP SMID CAP GROWTH SERIES
SERVICE CLASS ($173,948,018 / 7,347,446 Shares) | | | $23.67 | |
| COMPONENTS OF NET ASSETS AT DECEMBER 31, 2012: | | | |
| Shares of beneficial interest (unlimited authorization–no par) | $ | 349,819,054 | |
| Undistributed net investment income | | 82,585 | |
| Accumulated net realized gain on investments | | 30,618,510 | |
| Net unrealized appreciation of investments | | 111,429,719 | |
| Total net assets | $ | 491,949,868 | |
____________________
| † | Non income producing security. |
| * | Fully or partially on loan. |
| ≠ | The rate shown is the effective yield at the time of purchase. |
| ** | See Note 8 in “Notes to Financial Statements” for additional information on securities lending collateral and non-cash collateral. |
| @ | Illiquid security. At December 31, 2012, the aggregate value of illiquid securities was $0, which represented 0.00% of the Series’ net assets. See Note 9 in “Notes to Financial Statements.” |
| © | Includes $61,161,533 of securities loaned. |
See accompanying notes, which are an integral part of the financial statements.
Smid Cap Growth Series-7
Delaware VIP® Trust —
Delaware VIP Smid Cap Growth Series
Statement of Operations
Year Ended December 31, 2012
| INVESTMENT INCOME: | | | |
| Dividends | $ | 4,232,408 | |
| Securities lending income | | 825,400 | |
| Interest | | 29,211 | |
| Foreign tax withheld | | (81,085 | ) |
| | | 5,005,934 | |
| |
| EXPENSES: | | | |
| Management fees | | 3,961,053 | |
| Distribution expenses – Service Class | | 563,129 | |
| Accounting and administration expenses | | 206,968 | |
| Reports and statements to shareholders | | 98,183 | |
| Dividend disbursing and transfer agent fees and expenses | | 46,135 | |
| Legal fees | | 41,534 | |
| Audit and tax | | 28,930 | |
| Trustees’ fees | | 23,606 | |
| Custodian fees | | 11,439 | |
| Insurance fees | | 9,089 | |
| Consulting fees | | 4,983 | |
| Dues and services | | 3,621 | |
| Trustees’ expenses | | 1,608 | |
| Registration fees | | 1,352 | |
| Pricing fees | | 280 | |
| | | 5,001,910 | |
| Less waived distribution expenses – Service Class | | (93,855 | ) |
| Less expense paid indirectly | | (1 | ) |
| Total operating expenses | | 4,908,054 | |
| |
| NET INVESTMENT INCOME | | 97,880 | |
| |
| NET REALIZED AND UNREALIZED GAIN: | | | |
| Net realized gain on investments | | 30,689,808 | |
| Net change in unrealized appreciation (depreciation) of investments | | 19,553,609 | |
| |
| NET REALIZED AND UNREALIZED GAIN | | 50,243,417 | |
| |
| NET INCREASE IN NET ASSETS RESULTING | | | |
| FROM OPERATIONS | $ | 50,341,297 | |
Delaware VIP Trust —
Delaware VIP Smid Cap Growth Series
Statements of Changes in Net Assets
| Year Ended |
| 12/31/12 | | 12/31/11 |
| INCREASE IN NET ASSETS | | | | | | | |
| FROM OPERATIONS: | | | | | | | |
| Net investment income | $ | 97,880 | | | $ | 827,217 | |
| Net realized gain | | 30,689,808 | | | | 29,500,255 | |
| Net change in unrealized appreciation | | | | | | | |
| (depreciation) | | 19,553,609 | | | | 3,386,839 | |
| Net increase in net assets resulting | | | | | | | |
| from operations | | 50,341,297 | | | | 33,714,311 | |
| |
| DIVIDENDS AND DISTRIBUTIONS TO | | | | | | | |
| SHAREHOLDERS FROM: | | | | | | | |
| Net investment income: | | | | | | | |
| Standard Class | | (826,548 | ) | | | (3,368,877 | ) |
| Service Class | | (15,963 | ) | | | (1,045,322 | ) |
| Net realized gain: | | | | | | | |
| Standard Class | | (18,679,721 | ) | | | (9,641,959 | ) |
| Service Class | | (10,822,680 | ) | | | (3,772,248 | ) |
| | | (30,344,912 | ) | | | (17,828,406 | ) |
| |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | |
| Proceeds from shares sold: | | | | | | | |
| Standard Class | | 10,305,444 | | | | 32,287,259 | |
| Service Class | | 58,026,324 | | | | 84,164,095 | |
| Net asset value of shares issued upon | | | | | | | |
| reinvestment of dividends and distributions: | | | | | | | |
| Standard Class | | 19,506,269 | | | | 13,010,836 | |
| Service Class | | 10,838,643 | | | | 4,817,570 | |
| | | 98,676,680 | | | | 134,279,760 | |
| Cost of shares redeemed: | | | | | | | |
| Standard Class | | (51,274,061 | ) | | | (58,865,414 | ) |
| Service Class | | (50,238,750 | ) | | | (57,659,967 | ) |
| | | (101,512,811 | ) | | | (116,525,381 | ) |
| Increase (decrease) in net assets derived | | | | | | | |
| from capital share transactions | | (2,836,131 | ) | | | 17,754,379 | |
| |
| NET INCREASE IN NET ASSETS | | 17,160,254 | | | | 33,640,284 | |
| |
| NET ASSETS: | | | | | | | |
| Beginning of year | | 474,789,614 | | | | 441,149,330 | |
| End of year (including undistributed | | | | | | | |
| net investment income of $82,585 | | | | | | | |
| and $827,216, respectively) | $ | 491,949,868 | | | $ | 474,789,614 | |
See accompanying notes, which are an integral part of the financial statements.
Smid Cap Growth Series-8
Delaware VIP® Trust — Delaware VIP Smid Cap Growth Series
Financial Highlights
Selected data for each share of the Series outstanding throughout each period were as follows:
| Delaware VIP Smid Cap Growth Series Standard Class |
| Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $23.190 | | | $22.220 | | | $16.300 | | | $11.210 | | | $21.360 | |
| | |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income (loss)1 | | 0.026 | | | 0.058 | | | 0.786 | | | (0.023 | ) | | (0.047 | ) |
| Net realized and unrealized gain (loss) | | 2.570 | | | 1.808 | | | 5.134 | | | 5.113 | | | (7.975 | ) |
| Total from investment operations | | 2.596 | | | 1.866 | | | 5.920 | | | 5.090 | | | (8.022 | ) |
| | |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.060 | ) | | (0.232 | ) | | – | | | – | | | – | |
| Net realized gain | | (1.356 | ) | | (0.664 | ) | | – | | | – | | | (2.128 | ) |
| Total dividends and distributions | | (1.416 | ) | | (0.896 | ) | | – | | | – | | | (2.128 | ) |
| | |
| Net asset value, end of period | | $24.370 | | | $23.190 | | | $22.220 | | | $16.300 | | | $11.210 | |
| | |
| Total return2 | | 11.02% | | | 8.13% | | | 36.32% | | | 45.41% | | | (40.55% | ) |
| | |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $318,002 | | | $323,798 | | | $324,450 | | | $20,208 | | | $15,173 | |
| Ratio of expenses to average net assets | | 0.84% | | | 0.83% | | | 0.89% | | | 1.07% | | | 0.97% | |
| Ratio of net investment income (loss) to average net assets | | 0.11% | | | 0.24% | | | 3.87% | | | (0.18% | ) | | (0.29% | ) |
| Portfolio turnover | | 23% | | | 19% | | | 37% | | | 95% | | | 101% | |
____________________
1The average shares outstanding method has been applied for per share information. |
2Total 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 does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
Smid Cap Growth Series-9
Delaware VIP® Smid Cap Growth Series
Financial Highlights (continued)
Selected data for each share of the Series outstanding throughout each period were as follows:
| Delaware VIP Smid Cap Growth Series Service Class |
| Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $22.570 | | | $21.650 | | | $15.920 | | | $10.970 | | | $21.010 | |
| | |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income (loss)1 | | (0.034 | ) | | (0.002 | ) | | 0.715 | | | (0.056 | ) | | (0.087 | ) |
| Net realized and unrealized gain (loss) | | 2.492 | | | 1.770 | | | 5.015 | | | 5.006 | | | (7.825 | ) |
| Total from investment operations | | 2.458 | | | 1.768 | | | 5.730 | | | 4.950 | | | (7.912 | ) |
| | |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.002 | ) | | (0.184 | ) | | – | | | – | | | – | |
| Net realized gain | | (1.356 | ) | | (0.664 | ) | | – | | | – | | | (2.128 | ) |
| Total dividends and distributions | | (1.358 | ) | | (0.848 | ) | | – | | | – | | | (2.128 | ) |
| | |
| Net asset value, end of period | | $23.670 | | | $22.570 | | | $21.650 | | | $15.920 | | | $10.970 | |
| | |
| Total return2 | | 10.71% | | | 7.90% | | | 35.99% | | | 45.12% | | | (40.71% | ) |
| | |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $173,948 | | | $150,991 | | | $116,699 | | | $7,953 | | | $6,102 | |
| Ratio of expenses to average net assets | | 1.09% | | | 1.08% | | | 1.14% | | | 1.32% | | | 1.22% | |
Ratio of expenses to average net assets
prior to fees waived | | 1.14% | | | 1.13% | | | 1.19% | | | 1.37% | | | 1.27% | |
| Ratio of net investment income (loss) to average net assets | | (0.14% | ) | | (0.01% | ) | | 3.62% | | | (0.43% | ) | | (0.54% | ) |
Ratio of net investment income (loss) to average net assets
prior to fees waived | | (0.19% | ) | | (0.06% | ) | | 3.57% | | | (0.48% | ) | | (0.59% | ) |
| Portfolio turnover | | 23% | | | 19% | | | 37% | | | 95% | | | 101% | |
____________________
1The average shares outstanding method has been applied for per share information. |
2Total 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 during all of the periods shown reflects a waiver by the distributor. Performance would have been lower had the waiver not been in effect. Total investment return does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
Smid Cap Growth Series-10
Delaware VIP® Trust — Delaware VIP Smid Cap Growth Series
Notes to Financial Statements
December 31, 2012
Delaware VIP Trust (Trust) is organized as a Delaware statutory trust and offers 10 series: Delaware VIP Diversified Income Series, Delaware VIP Emerging Markets Series, Delaware VIP High Yield Series, Delaware VIP International Value Equity Series, Delaware VIP Limited-Term Diversified Income Series, Delaware VIP REIT Series, Delaware VIP Small Cap Value Series, Delaware VIP Smid Cap Growth Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series. These financial statements and the related notes pertain to Delaware VIP Smid Cap Growth Series (Series). The Trust is an open-end investment company. The Series is considered diversified under the Investment Company Act of 1940, as amended, and offers Standard Class and Service Class shares. The Standard Class shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee. The shares of the Series are sold only to separate accounts of life insurance companies.
The investment objective of the Series 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 (U.S. GAAP) and are consistently followed by the Series.
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, which approximates fair value. U.S. government and agency securities are valued at the mean between the bid and ask prices, which approximates fair value. Investment company securities are valued at net asset value per share, as reported by the underlying investment company. 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 Series’ 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 Series 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 Series values its securities, generally as of 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 Series may frequently value foreign securities using fair value prices based on third-party vendor modeling tools (international fair value pricing).
Federal & Foreign Income Taxes—No provision for federal income taxes has been made as the Series 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 Series evaluates tax positions taken or expected to be taken in the course of preparing the Series’ tax returns 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 analyzed the Series’ tax positions taken for all open federal income tax years (December 31, 2009 – December 31, 2012) and has concluded that no provision for federal income tax is required in the Series’ financial statements. In regards to foreign taxes, the Series only has open tax years in certain foreign countries it invests in that may date back to the inception of the Series.
Class Accounting—Investment income, common expenses and realized and unrealized gain (loss) on investments are allocated to the classes of the Series 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 Series may purchase certain U.S. government securities subject to the counterparty’s agreement to repurchase them at an agreed upon date and price. The counterparty will be required on a daily basis to maintain the value of the collateral subject to the agreement at not less than the repurchase price (including accrued interest). The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system with the Series’ custodian or a third-party sub-custodian. In the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. All open repurchase agreements as of the date of this report were entered into on December 31, 2012.
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments, the reported amounts of assets and liabilities and disclosure of contingent 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 and the differences could be material.
Other—Expenses directly attributable to the Series are charged directly to the Series. Other expenses common to various funds within the Delaware Investments® Family of Funds are generally allocated among 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. Foreign dividends are also recorded on the ex-dividend date or as soon after the ex-dividend date that the Series is aware of such dividends, net of all non-rebatable tax withholdings. Withholding taxes on foreign dividends have been recorded in accordance with the Series’ understanding of the applicable country’s tax rules and rates. The Series declares and pays dividends from net investment income and distributions from net realized gain on investments, if any, following the close of the fiscal year. The Series may distribute income dividends and capital gains more frequently, if necessary for tax purposes. Dividends and distributions, if any, are recorded on the ex-dividend date.
Subject to seeking best execution, the Series may direct certain security trades to brokers who have agreed to rebate a portion of the related brokerage commission to the Series in cash. 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 Series on the transaction. There were no commission rebates for year ended December 31, 2012.
The Series 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 year ended December 31, 2012.
The Series receives earnings credits from its transfer agent when positive cash balances are maintained, which are used to offset transfer agent fees. The expense paid under this arrangement is included in dividend disbursing and transfer agent fees and expenses on the Statement of Operations with the corresponding expense offset shown as “expense paid indirectly.” For the year ended December 31, 2012, the Series earned $1 under this agreement.
Smid Cap Growth Series-11
Delaware VIP® Smid Cap Growth Series
Notes to Financial Statements (continued)
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Series 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 Series, 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.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to the Series. For these services, the Series 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 year ended December 31, 2012, the Series was charged $25,946 for these services.
DSC is also the transfer agent and dividend disbursing agent of the Series. The Series pays DSC a monthly asset-based fee for these services. Pursuant to a sub-transfer agency agreement between DSC and BNY Mellon Investment Servicing (US) Inc. (BNYMIS), BNYMIS provides certain sub-transfer agency services to the Series. Sub-transfer agency fees are passed on to and paid directly by the Series.
Pursuant to a distribution agreement and distribution plan, the Series pays Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an annual distribution and service fee of 0.30% of the average daily net assets of the Service Class shares. DDLP has contracted to waive distribution and service fees through April 30, 2013 or, if longer, until the Series is offered under new participation agreements or under new contracts with existing insurance companies (other than the update and modification of existing contracts in the normal course of business that may require registration or re-registration under state insurance laws as a new insurance contract, provided the new insurance contract effectively replaces the current insurance contract) in order to prevent distribution and service fees of the Service Class shares from exceeding 0.25% of average daily net assets. Standard Class shares pay no distribution and service expenses.
At December 31, 2012, the Series had liabilities payable to affiliates as follows:
| | | Dividend Disbursing, | | | | Other |
| Investment | | Transfer Agent and Fund | | | | Expenses |
| Management | | Accounting Oversight | | Distribution | | Payable |
| Fee Payable to | | Fees and Other Expenses | | Fee Payable | | to DMC |
| DMC | | Payable to DSC | | to DDLP | | and Affiliates* |
| $312,140 | | $5,150 | | $36,724 | | $11,993 |
____________________
*DMC, as part of its administrative services, pays operating expenses on behalf of the Series and is reimbursed on a periodic basis. Expenses include items such as printing of shareholder reports, legal and tax services, custodian fees and trustees’ fees.
As provided in the investment management agreement, the Series bears the cost of certain legal and tax services, including internal legal and tax services provided to the Series by DMC and/or its affiliates’ employees. For the year ended December 31, 2012, the Series was charged $15,919 for internal legal and tax services provided by DMC and/or its affiliates’ employees.
Trustees’ fees include expenses accrued by the Series 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 Series.
3. Investments
For the year ended December 31, 2012, the Series made purchases and sales of investment securities other than short-term investments as follows:
| Purchases | $113,301,221 |
| Sales | 146,640,379 |
At December 31, 2012, the cost of investments for federal income tax purposes and unrealized appreciation (depreciation) for the Series were as follows:
| | | Aggregate | | Aggregate | | |
| Cost of | | Unrealized | | Unrealized | | Net Unrealized |
| Investments | | Appreciation | | Depreciation | | Appreciation |
| $428,556,914 | | $121,670,441 | | $(10,502,487) | | $111,167,954 |
U.S. GAAP defines fair value as the price that the Series 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. A three level hierarchy for fair value measurements has been established 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
Smid Cap Growth Series-12
Delaware VIP® Smid Cap Growth Series
Notes to Financial Statements (continued)
3. Investments (continued)
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 Series’ investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three level hierarchy of inputs is summarized below.
| Level 1 – | inputs are quoted prices in active markets for identical investments (e.g., equity securities, open-end investment companies, futures contracts, exchange-traded options contracts) |
| Level 2 – | other observable inputs (including, but not limited to: quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs) (e.g., debt securities, government securities, swap contracts, foreign currency exchange contracts, foreign securities utilizing international fair value pricing, broker-quoted securities, fair valued securities) |
| Level 3 – | inputs are significant unobservable inputs (including the Fund’s own assumptions used to determine the fair value of investments) (e.g., broker-quoted securities, fair valued securities) |
Level 3 investments are valued using significant unobservable inputs. The Series may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Valuations may also be based upon current market prices of securities that are comparable in coupon, rating, maturity and industry. The derived value of a Level 3 investment may not represent the value which is received upon disposition and this could impact the results of operations.
The following table summarizes the valuation of the Series’ investments by fair value hierarchy levels as of December 31, 2012:
| Level 1 | | Level 2 | | Level 3 | | Total |
| Common Stock | $ | 478,074,325 | | $ | – | | | $ | – | | | $ | 478,074,325 |
| Short-Term Investments | | – | | | 15,311,065 | | | | – | | | | 15,311,065 |
| Securities Lending Collateral | | – | | | 46,339,478 | | | | – | | | | 46,339,478 |
| Total | $ | 478,074,325 | | $ | 61,650,543 | | | $ | – | | | $ | 539,724,868 |
The securities that have been deemed worthless on the statement of net assets are considered to be Level 3 securities in this table.
During the year ended December 31, 2012, there were no transfers between Level 1 investments, Level 2 investments or Level 3 investments that had a significant impact to the Series. The Series’ policy is to recognize transfers between levels at the beginning of the reporting period.
A reconciliation of Level 3 investments is presented when the Series has a significant amount of Level 3 investments at the beginning, interim or end of the period in relation to net assets. Management has determined not to provide additional disclosure on Level 3 inputs under ASU No. 2011-04 since the Level 3 investments are not considered significant to the Series’ net assets at the end of the period.
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 year ended December 31, 2012 and 2011 was as follows:
| Year | | Year |
| Ended | | Ended |
| 12/31/12 | | 12/31/11 |
| Ordinary income | $ | 8,392,167 | | $ | 14,717,280 |
| Long-term capital gain | | 21,952,745 | | | 3,111,126 |
| $ | 30,344,912 | | $ | 17,828,406 |
5. Components of Net Assets on a Tax Basis
As of December 31, 2012, the components of net assets on a tax basis were as follows:
| Shares of beneficial interest | $ | 349,819,054 |
| Undistributed ordinary income | | 1,981,322 |
| Undistributed long-term capital gains | | 28,981,538 |
| Unrealized appreciation | | 111,167,954 |
| Net assets | $ | 491,949,868 |
Smid Cap Growth Series-13
Delaware VIP® Smid Cap Growth Series
Notes to Financial Statements (continued)
5. Components of Net Assets on a Tax Basis (continued)
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales.
6. Capital Shares
Transactions in capital shares were as follows:
| Year | | Year |
| Ended | | Ended |
| 12/31/12 | | 12/31/11 |
| Shares sold: | | | | | |
| Standard Class | 403,735 | | | 1,325,622 | |
| Service Class | 2,340,736 | | | 3,546,423 | |
| | | | | | |
| Shares issued upon reinvestment of dividends and distributions: | | | | | |
| Standard Class | 777,762 | | | 523,786 | |
| Service Class | 444,207 | | | 198,991 | |
| | 3,966,440 | | | 5,594,822 | |
| |
| Shares redeemed: | | | | | |
| Standard Class | (2,095,474 | ) | | (2,493,024 | ) |
| Service Class | (2,128,083 | ) | | (2,445,393 | ) |
| | (4,223,557 | ) | | (4,938,417 | ) |
| Net increase (decrease) | (257,117 | ) | | 656,405 | |
7. Line of Credit
The Series, along with certain other funds in the Delaware Investments® Family of Funds (Participants), was a participant in a $125,000,000 revolving line of credit 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 were charged an annual commitment fee, which was allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants were permitted to borrow up to a maximum of one third of their net assets under the agreement. Each Participant was individually, and not jointly, liable for its particular advances, if any, under the line of credit. The line of credit under the agreement expired on November 13, 2012.
On November 13, 2012, the Series, along with the other Participants, entered into an amendment to the agreement for a $125,000,000 revolving line of credit. The agreement is to be used as described above and operates in substantially the same manner as the original agreement. The line of credit available under the agreement expires on November 12, 2013. The Series had no amounts outstanding as of December 31, 2012 or at any time during the year then ended.
8. Securities Lending
The Series, along with other funds in the Delaware Investments® Family of Funds, may lend its securities pursuant to a security lending agreement (Lending Agreement) with The Bank of New York Mellon (BNY Mellon). At the time a security is loaned, the borrower must post collateral equal to the required percentage of the market value of the loaned security, including any accrued interest. The required percentage is: (i) 102% with respect to U.S. securities and foreign securities that are denominated and payable in U.S. dollars; and (ii) 105% with respect to foreign securities. With respect to each loan, if on any business day the aggregate market value of securities collateral plus cash collateral held 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 by the end of the following business day which, together with the collateral already held, will be not less than the applicable initial collateral requirements for such security loan. If the aggregate market value of securities collateral and cash collateral held with respect to a security loan exceeds the applicable initial collateral requirement, upon request of the borrower BNY Mellon must return enough collateral to the borrower by the end of the following business day to reduce the value of the remaining collateral to the applicable initial collateral requirement for such security loan. As a result of the foregoing, the value of the collateral held with respect to a loaned security may be temporarily more or less than the value of the security on loan.
Cash collateral received is generally invested in the Delaware Investments Collateral Fund No. 1 (Collective Trust) established by BNY Mellon for the purpose of investment on behalf of funds managed by DMC that participate in BNY Mellon’s securities lending program. The Collective Trust may invest in U.S. government securities and high quality corporate debt, asset-backed and other money market securities and in repurchase agreements collateralized by such securities, provided that the Collective Trust will generally have a dollar-weighted average portfolio maturity of 60 days or less. In October 2008, BNY Mellon transferred certain distressed securities from the Series’ previous collateral investment pool into the Mellon GSL Reinvestment Trust II. The Series 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 Series or, at the discretion of the lending agent, replace the loaned securities. The Series continues to record dividends or interest, as applicable, on the securities loaned and is subject to changes in value of the securities loaned that may occur during the term of the loan. The Series 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 Series 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 Series, the security lending agent and the borrower. The Series records security lending income net of allocations to the security lending agent and the borrower.
Smid Cap Growth Series-14
Delaware VIP® Smid Cap Growth Series
Notes to Financial Statements (continued)
8. Securities Lending (continued)
The Collective Trust used for the investment of cash collateral received from borrowers of securities 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. The Series may incur investment losses as a result of investing securities lending collateral in the Collective Trust or another collateral investment pool. This could occur if an investment in a collateral investment pool defaulted or if it were necessary to liquidate assets in the collateral investment pool to meet returns on outstanding security loans at a time when the collateral investment pool’s net asset value per unit was less than $1.00. Under those circumstances, the Series may not receive an amount from the collateral investment pool that is equal in amount to the collateral the Series would be required to return to the borrower of the securities and the Series would be required to make up for this shortfall.
At December 31, 2012, the value of the securities on loan was $61,161,533, for which the Series received collateral, comprised of non-cash collateral (U.S. government securities) valued at $15,244,077 and cash collateral of $46,857,461. At December 31, 2012, the value of invested collateral was $46,339,478. Investments purchased with cash collateral are presented on the Statement of Net Assets under the caption “Securities Lending Collateral”.
9. Credit and Market Risk
The Series 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.
The Series may invest up to 10% 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 Series 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 Series’ Board has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of the Series’ limitation on investments in illiquid securities. Securities eligible for resale pursuant to Rule 144A, which are determined to be liquid, are not subject to the Series’ 10% limit on investments in illiquid securities. As of December 31, 2012, there were no Rule 144A securities. Illiquid securities have been identified on the Statement of Net Assets.
10. Contractual Obligations
The Series enters into contracts in the normal course of business that contain a variety of indemnifications. The Series’ maximum exposure under these arrangements is unknown. However, the Series has not had prior claims or losses pursuant to these contracts. Management has reviewed the Series’ existing contracts and expects the risk of loss to be remote.
11. Closure of the Series to Certain Investors
As of February 24, 2012, the Series is no longer offered (1) under existing participation agreements for use with new insurance products; or (2) under new participation agreements to insurance companies that seek to include the Series in their products, except for certain insurance companies that have initiated negotiations to add the Series to a new product prior to February 9, 2012. Contract holders of existing insurance companies that offer the Series will be able to continue to make purchases of shares, including purchases through reinvestment of dividends or capital gains distributions, and exchanges, regardless of whether they own, or have owned in the past, shares of the Series. The Series reserves the right to modify this policy at any time.
12. Subsequent Events
Management has determined that no material events or transactions occurred subsequent to December 31, 2012 that would require recognition or disclosure in the Series’ financial statements.
Smid Cap Growth Series-15
Delaware VIP® Trust — Delaware VIP Smid Cap Growth Series
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Delaware VIP Trust
and the Shareholders of Delaware VIP Smid Cap Growth Series:
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Delaware VIP Smid Cap Growth Series (one of the series constituting Delaware VIP Trust, hereafter referred to as the “Series”) at December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2012 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the two years in the period ended December 31, 2009 were audited by other independent accountants whose report dated February 17, 2010 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 15, 2013
Smid Cap Growth Series-16
Delaware VIP® Trust — Delaware VIP Smid Cap Growth Series
Other Series Information (Unaudited)
Board Consideration of Delaware VIP Smid Cap Growth Series Investment Advisory Agreement
At a meeting held on August 21-23, 2012 (“Annual Meeting”), the Board of Trustees (“Board”), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreement for Delaware VIP Smid Cap Growth Series (“Series”). In making its decision, the Board considered information furnished at regular quarterly Board meetings, including reports detailing Series performance, investment strategies and expenses, as well as information prepared specifically in connection with the renewal of the investment advisory contract. Information furnished specifically in connection with the renewal of the Investment Advisory Agreement with Delaware Management Company (“DMC”) included materials provided by DMC and its affiliates (“Delaware Investments”) concerning, among other things, the nature, extent and quality of services provided to the Series, the costs of such services to the Series, economies of scale and the financial condition and profitability of Delaware Investments. In addition, in connection with the Annual Meeting, reports were provided in May 2012 and included independent historical and comparative reports provided by Lipper, Inc., an independent statistical compilation organization (“Lipper”). The Lipper reports compared the Series’ investment performance and expenses with those of other comparable mutual funds. The Independent Trustees reviewed and discussed the Lipper reports with independent legal 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; comparative client fee information; 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 the Series’ policies.
In considering information relating to the approval of the Series’ advisory agreement, the Independent Trustees received assistance and advice from and met separately with independent legal 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 Series 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 Series, compliance of portfolio managers with the investment policies, strategies and restrictions for the Series, 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 Series’ investment advisor and the emphasis placed on research in the investment process. The Board recognized DMC’s receipt of several industry distinctions. The Board gave favorable consideration to DMC’s efforts to control expenditures while maintaining service levels committed to fund matters. The Board noted that in July 2011, Management implemented measures to reduce overall costs and improve transfer agent and shareholder servicing functions through outsourcing. 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 Series in view of the importance of investment performance 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 Series showed the investment performance of its Standard Class 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 Series was shown for the past one-, three-, five- and ten-year periods, as applicable, ended March 31, 2012. The Board’s objective is that the Series’ performance for the periods considered be at or above the median of its Performance Universe. The following paragraph summarizes the performance results for the Series and the Board’s view of such performance.
The Performance Universe for the Series consisted of the Series and all mid-cap growth funds underlying variable insurance products as selected by Lipper. The Lipper report comparison showed that the Series’ total return for the one-, three-, five- and ten-year periods was in the first quartile of its Performance Universe. The Board was satisfied with performance.
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 Series as of its most recently completed fiscal year. The Board also focused on the comparative analysis of effective management fees and total expense ratios of the Series versus effective management fees and expense ratios of a group of similar funds as selected by Lipper (“Expense Group”). In reviewing comparative costs, the Series’ contractual management fee and the actual management fee incurred by the Series were compared with the contractual management fees (assuming all funds in the Expense Group were similar in size to the Series) and actual management fees (as reported by each fund) within the Expense Group, taking into account any applicable breakpoints and fee waivers. The Series’ total expenses were also compared with those of its Expense Group. The Lipper total expenses, for comparative consistency, were shown by Lipper for Standard Class shares which do not charge 12b-1 and non 12b-1 service fees. The Board considered fees paid to Delaware Investments for non-management services. The Board’s objective is to limit the Series’ total expense ratio to be competitive with that of the Expense Group. The following paragraph summarizes the expense results for the Series and the Board’s view of such expenses.
The expense comparisons for the Series showed that the actual management fee and total expenses were in the quartile with the second lowest expenses of its Expense Group. The Board was satisfied with the management fee and total expenses of the Series in comparison to those of its Expense Group.
MANAGEMENT PROFITABILITY. The Board considered the level of profits realized by Delaware Investments in connection with the operation of the Series. 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, reflects 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 profitability of Delaware Investments.
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Delaware VIP® Smid Cap Growth Series
Other Series Information (Unaudited) (continued)
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are realized by Delaware Investments as the Series’ 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 Series’ management contract fell within the standard structure. The Board also noted that the Series’ assets exceeded the first breakpoint level. The Board believed that, given the extent to which economies of scale might be realized by the advisor and its affiliates, the schedule of fees under the Investment Advisory Agreement provides a sharing of benefits with the Series and its shareholders.
Tax Information
For the fiscal year ended December 31, 2012, the Series designates distributions paid during the year as follows:
| (A) | | (B) | | | | |
| Long-Term | | Ordinary | | | | |
| Capital Gain | | Income | | Total | | (C) |
| Distributions | | Distributions | | Distributions | | Qualifying |
| (Tax Basis) | | (Tax Basis) | | (Tax Basis) | | Dividends1 |
| 72.34% | | 27.66% | | 100.00% | | 56.01% |
____________________
(A) and (B) are based on a percentage of the Series’ total distributions.
(C) is based on a percentage of the Series’ ordinary income distributions.
1Qualifying dividends represent dividends which qualify for the corporate dividends received deduction.
Smid Cap Growth Series-18
Delaware Investments® Family of Funds
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors (“Trustees”), which has oversight responsibility for the management of a fund’s business affairs. Trustees establish procedures and oversee and review the performance of the investment manager, the distributor, and others who perform services for the fund. The independent fund trustees, in particular, are advocates for shareholder interests. Each trustee has served in that capacity since he or she was elected to or appointed to the Board of Trustees, and will continue to serve until his or her retirement or the election of a new trustee in his or her place. The following is a list of the Trustees and Officers with certain background and related information.
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INTERESTED TRUSTEES | | | | | |
| Patrick P. Coyne1 | Chairman, | Chairman and Trustee | Patrick P. Coyne has served in | 71 | Director and Audit |
| 2005 Market Street | President, | since August 16, 2006 | various executive capacities | | Committee Member — |
| Philadelphia, PA | Chief Executive | | at different times at | | Kaydon Corp. |
| 19103 | Officer, and | President and | Delaware Investments.2 | | |
| Trustee | Chief Executive Officer | | | Board of Governors |
| April 1963 | | since August 1, 2006 | | | Member — Investment |
| | | | | Company Institute (ICI) |
| | | | | |
| INDEPENDENT TRUSTEES | | | | | |
| Thomas L. Bennett | Trustee | Since | Private Investor — | 71 | Director — |
| 2005 Market Street | | March 2005 | (March 2004–Present) | | Bryn Mawr |
| Philadelphia, PA | | | | | Bank Corp. (BMTC) |
| 19103 | | | Investment Manager — | | (2007–2011) |
| | | Morgan Stanley & Co. | | |
| October 1947 | | | (January 1984–March 2004) | | |
| Joseph W. Chow | Trustee | Since | Executive Vice President | 71 | Director and Audit |
| 2005 Market Street | | January 2013 | (Emerging Economies Strategies, | | Committee |
| Philadelphia, PA 19103 | | | Risk and Corporate Administration) | | Member — Hercules |
| | | State Street Corporation | | Technology Growth |
| January 1953 | | | (July 2004–March 2011) | | Capital, Inc. |
| John A. Fry | Trustee | Since | President | 71 | Board of Governors |
| 2005 Market Street | | January 2001 | Drexel University | | Member — NASDAQ |
| Philadelphia, PA | | | (August 2010–Present) | | OMX PHLX LLC |
| 19103 | | | | | |
| | | President — | | Director and Audit |
| May 1960 | | | Franklin & Marshall College | | Committee Member — |
| | | (June 2002–July 2010) | | Community Health |
| | | | | Systems |
| | | | | | |
| | | | | Director — Ecore |
| | | | | International |
| | | | | (2009–2010) |
| Anthony D. Knerr | Trustee | Since | Managing Director — | 71 | None |
| 2005 Market Street | | April 1990 | Anthony Knerr & Associates | | |
| Philadelphia, PA | | | (Strategic Consulting) | | |
| 19103 | | | (1990–Present) | | |
| | | | | | |
| December 1938 | | | | | |
| Lucinda S. Landreth | Trustee | Since | Private Investor | 71 | None |
| 2005 Market Street | | March 2005 | (2004–Present) | | |
| Philadelphia, PA | | | | | |
| 19103 | | | | | |
| | | | | | |
| June 1947 | | | | | |
Small Cap Growth Series-19
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INDEPENDENT TRUSTEES (continued) | | | | |
| Frances A. Sevilla-Sacasa | Trustee | Since | Chief Executive Officer — | 71 | Trust Manager — |
| 2005 Market Street | | September 2011 | Banco Itaú Europa | | Camden Property Trust |
| Philadelphia, PA | | | International | | (2011–Present) |
| 19103 | | | (April 2012–Present) | | |
| |
| January 1956 | | | Executive Advisor to Dean | | |
| | | (August 2011–March 2012) | | |
| | | and Interim Dean | | |
| | | (January 2011–July 2011) — | | |
| | | University of Miami School of | | |
| | | Business Administration | | |
| |
| | | President — U.S. Trust, | | |
| | | Bank of America Private | | |
| | | Wealth Management | | |
| | | (Private Banking) | | |
| | | (July 2007–December 2008) | | |
| Thomas K. Whitford | Trustee | Since | Vice Chairman | 71 | None |
| 2005 Market Street | | January 2013 | (2010–Present) | | |
| Philadelphia, PA 19103 | | | Chief Administrative | | |
| | | Officer (2008–2010) | | |
| March 1956 | | | and Executive Vice | | |
| | | President and Chief | | |
| | | Administrative Officer | | |
| | | (2007–2009) — | | |
| | | PNC Financial | | |
| | | Services Group | | |
| Janet L. Yeomans | Trustee | Since | Vice President and Treasurer | 71 | Director, Audit |
| 2005 Market Street | | April 1999 | (January 2006–Present) | | Committee Member |
| Philadelphia, PA | | | Vice President — Mergers | | and Investment |
| 19103 | | | & Acquisitions | | Committee Member |
| | | (January 2003–January 2006), | | Okabena Company |
| July 1948 | | | and Vice President and Treasurer | | |
| | | (July 1995–January 2003) | | Chair — 3M |
| | | 3M Corporation | | Investment Management |
| | | | | Company |
| | | | | (January 2005–July 2012) |
| J. Richard Zecher | Trustee | Since | Founder — | 71 | Director and Compensation |
| 2005 Market Street | | March 2005 | Investor Analytics | | Committee Member — |
| Philadelphia, PA | | | (Risk Management) | | Investor Analytics |
| 19103 | | | (May 1999–Present) | | |
| | | | | Director — |
| July 1940 | | | Founder — | | P/E Investments |
| | | P/E Investments | | |
| | | (Hedge Fund) | | |
| | | (September 1996–Present) | | |
| |
| OFFICERS | | | | | |
| David F. Connor | Vice President, | Vice President since | David F. Connor has served as | 71 | None3 |
| 2005 Market Street | Deputy General | September 2000 | Vice President and Deputy | | |
| Philadelphia, PA | Counsel, and Secretary | and Secretary | General Counsel of | | |
| 19103 | | since | Delaware Investments | | |
| | October 2005 | since 2000. | | |
| December 1963 | | | | | |
| Daniel V. Geatens | Vice President | Treasurer | Daniel V. Geatens has served | 71 | None3 |
| 2005 Market Street | and Treasurer | since | in various capacities at | | |
| Philadelphia, PA | | October 2007 | different times at | | |
| 19103 | | | Delaware Investments. | | |
| | | | | | |
| October 1972 | | | | | |
Small Cap Growth Series-20
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| OFFICERS (continued) | | | | | |
| David P. O’Connor | Executive Vice | Executive Vice President | David P. O’Connor has served in | 71 | None3 |
| 2005 Market Street | President, | since February 2012; | various executive and legal | | |
| Philadelphia, PA | General Counsel, | Senior Vice President | capacities at different times | | |
| 19103 | and Chief | October 2005–February 2012; | at Delaware Investments. | | |
| Legal Officer | General Counsel and | | | |
| February 1966 | | Chief Legal Officer | | | |
| | since October 2005 | | | |
| Richard Salus | Senior | Chief Financial | Richard Salus has served in | 71 | None3 |
| 2005 Market Street | Vice President | Officer since | various executive capacities | | |
| Philadelphia, PA | and | November 2006 | at different times at | | |
| 19103 | Chief Financial | | Delaware Investments. | | |
| Officer | | | | |
| October 1963 | | | | | |
1 Patrick P. Coyne is considered to be an “Interested Trustee” because he is an executive officer of the Fund’s(s’) investment advisor. |
2 Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund’s(s’) investment advisor, principal underwriter, and its transfer agent. |
3 David F. Connor, Daniel V. Geatens, David P. O’Connor, and Richard Salus serve in similar capacities for the six portfolios of the Optimum Fund Trust, which have the same investment advisor, principal underwriter, and transfer agent as the registrant. |
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is available, without charge, upon request by calling 800 523-1918.
The Series files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q. The Series’ Forms N-Q, as well as a description of the policies and procedures that the Series 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 website at sec.gov. In addition, a description of the policies and procedures that the Series uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge on the Delaware Investments® Funds’ website at delawareinvestments.com. The Series’ Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Series voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the Delaware Investments Funds’ website at delawareinvestments.com; and (ii) on the Commission’s website at sec.gov. |
| AR-VIPSCG [12/12] DG3 18585 (2/13) | | (10125) | | Small Cap Growth Series-21 |
| Delaware VIP® Trust |
| Delaware VIP U.S. Growth Series |
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| December 31, 2012 |
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Table of contents
| > Portfolio management review | 1 |
| | |
| > Performance summary | 2 |
| | |
| > Disclosure of Series expenses | 4 |
| | |
| > Security type/sector allocation and top 10 equity holdings | 5 |
| | |
| > Statement of net assets | 6 |
| | |
| > Statement of operations | 8 |
| | |
| > Statements of changes in net assets | 8 |
| | |
| > Financial highlights | 9 |
| | |
| > Notes to financial statements | 11 |
| | |
| > Report of independent registered public accounting firm | 16 |
| | |
| > Other Series information | 17 |
| | |
| > Board of trustees/directors and officers addendum | 19 |
Investments in Delaware VIP® U.S. Growth Series 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 (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 Series, the repayment of capital from the Series, or any particular rate of return.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
The Series is not FDIC insured and is 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 and member of Macquarie Group. Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries, including the Series’ distributor, Delaware Distributors, L.P. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide.
This material may be used in conjunction with the offering of shares in the Delaware VIP U.S. Growth Series only if preceded or accompanied by the Series’ current prospectus, and if available, the summary prospectus.
© 2013 Delaware Management Holdings, Inc.
All third-party marks cited are the property of their respective owners.
| Delaware VIP® Trust — Delaware VIP U.S. Growth Series | |
| Portfolio management review | Jan. 8, 2013 |
For the fiscal year ended Dec. 31, 2012, Delaware VIP U.S. Growth Series Standard Class shares returned +16.23%, while Service Class shares returned +15.95% (both figures reflect returns with dividends reinvested). The Series’ benchmark, the Russell 1000® Growth Index, returned +15.26% for the same period.
Early in the Series’ fiscal year, investors were generally encouraged by positive reports about U.S. labor markets, manufacturing, and consumer demand. The spring and early summer months, however, featured renewed volatility, primarily caused by political and economic uncertainty. Worries included speculation about Greece’s potential exit from the euro; additional evidence of deterioration within Spain’s banks; and uncertainty about upcoming political policies and elections in several euro zone countries and in the United States. Many investors also fretted about a slowing global growth environment, along with persistently high rates of unemployment in the U.S.
Sentiment improved in June as European leaders signaled a more comprehensive approach to stabilizing banks and sovereign credits. In the summer and early fall of 2012, domestic stock performance received a boost from the latest bond-buying programs by the U.S. Federal Reserve and the European Central Bank, along with the Chinese government’s impending stimulus. The U.S. economy was able to maintain a moderate growth pace, thanks to an improvement in housing and a positive report about manufacturing.
The fiscal year closed with economic indicators posting reasonably solid performances and major market indices experiencing only mild declines, while international indices generated positive results.
Crown Castle International was one of the strongest contributors during the Series’ fiscal year. The company continued to report strong earnings and growth projections, helped by their key position as an infrastructure provider for wireless services. The proliferation of wireless devices (smartphones and tablets) is in strong secular demand and the company is the industry leader of wireless towers in North America. In addition, we believe the company’s acquisition of a large portfolio of towers towards the end of the year helped further increase their competitive position and a refinance of some of the company’s debt also led to an upward bias in earnings projections and investor optimism.
Apollo Education was one of the Series’ largest detractors from performance during the fiscal year. The company reported disappointing earnings, showing significant weakness in student enrollment growth. While the for-profit industry has undergone significant change in the past two years due to regulatory scrutiny and government oversight, companies like Apollo had gone through significant business model transformations in recent years. The company had shown steady improvement in many areas at the beginning of this transformation but in recent quarters has given investors concerns that the challenges they face are significant and potentially lingering. We recognized the problems were longer term in nature than originally expected and included a higher risk-reward investment profile — therefore, we exited the position during the fiscal year.
Regardless of the economic outcome, we remain consistent in our long-term investment philosophy: We want to own what we view as strong secular-growth companies with solid business models and competitive positions that we believe can grow market share and have the potential to deliver shareholder value in a variety of market environments.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
U.S. Growth Series-1
Delaware VIP® Trust — Delaware VIP U.S. Growth Series
Performance summary
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
Carefully consider the Series’ investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Series’ prospectuses and, if available, their summary prospectuses, which may be obtained by calling 800 523-1918. Investors should read the prospectuses and, if available, the summary prospectuses carefully before investing.
| Delaware VIP U.S. Growth Series | | | | | | | | | | |
| Average annual total returns | | | | | | | | | | |
| For periods ended Dec. 31, 2012 | | 1 year | | 3 years | | 5 years | | 10 years | | Lifetime |
| Standard Class shares (commenced operations on Nov. 15, 1999) | | +16.23% | | +12.53% | | +3.20% | | +7.05% | | +0.53% |
| Service Class shares (commenced operations on May 1, 2000) | | +15.95% | | +12.28% | | +2.94% | | +6.79% | | -0.36% |
Returns reflect the reinvestment of all distributions and any applicable sales charges as noted in the following paragraphs.
As described in the Series’ most recent prospectus, the net expense ratio for Service Class shares of the Series was 0.99%, while total operating expenses for Standard Class and Service Class shares were 0.74% and 1.04%, respectively. The management fee for Standard Class and Service Class shares was 0.65%.
The Series’ distributor has contracted to limit the 12b-1 fees for Service Class shares to 0.25% of average daily net assets from April 30, 2012 through April 30, 2013.
Earnings from a variable annuity or variable life investment compound tax-free until withdrawal, and as a result, no adjustments were made for income taxes.
Expense limitations were in effect for all classes during certain periods shown in the Series’ performance table above and in the Performance of a $10,000 Investment chart on the next page.
Performance data do not reflect other costs incurred by beneficial owners such as insurance company separate account fees and variable annuity or variable life contract charges or deferred sales charges. Performance shown here would have been reduced if such fees were included and the expense limitation removed. For more information about fees, consult your variable annuity or variable life prospectus.
Investments in variable products involve risk.
Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies.
Please read both the contract and underlying prospectus for specific details regarding the product’s risk profile.
U.S. Growth Series-2
Delaware VIP® U.S. Growth Series
Performance summary (continued)
| For period beginning Dec. 31, 2002, through Dec. 31, 2012 | | Starting value | | Ending value |
| –– | Delaware VIP U.S. Growth Series (Standard Class shares) | | $10,000 | | $19,762 |
| – – | Russell 1000 Growth Index | | $10,000 | | $20,651 |
The chart shows a $10,000 investment in the Delaware VIP U.S. Growth Series Standard Class shares for the period from Dec. 31, 2002 through Dec. 31, 2012.
The chart also shows $10,000 invested in the Russell 1000 Growth Index for the period from Dec. 31, 2002 through Dec. 31, 2012. The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
Performance of Service Class shares will vary due to different charges and expenses.
Past performance is not a guarantee of future results.
U.S. Growth Series-3
Delaware VIP® Trust — Delaware VIP U.S. Growth Series
Disclosure of Series Expenses
For the Six-Month Period from July 1, 2012 to December 31, 2012 (Unaudited)
As a shareholder of the Series, you incur ongoing costs, which may include management fees; distribution and/or service (12b-1) fees; and other Series expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Series 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 six-month period from July 1, 2012 to December 31, 2012.
Actual Expenses
The first section of the table shown, “Actual Series 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 the 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 Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ 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 Series and other funds. To do so, compare the 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. As a shareholder of the Series, you do not incur any transaction costs, such as sales charges (loads), redemption fees or exchange fees, but shareholders of other funds may incur such costs. Also, the fees related to the variable annuity investment or the deferred sales charge that could apply have not been included. 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. The Series’ actual expenses shown in the table reflect fee waivers in effect for Service Class shares. The expenses shown in the table assume reinvestment of all dividends and distributions.
Expense Analysis of an Investment of $1,000
| | | | | | | | | | | | | | | Expenses |
| | Beginning | | Ending | | | | | | | Paid During |
| | Account | | Account | | Annualized | | Period |
| | Value | | Value | | Expense | | 7/1/12 to |
| | 7/1/12 | | 12/31/12 | | Ratio | | 12/31/12* |
| Actual Series Return† | | | | | | | | | | | | | | | | | | |
| Standard Class | | | $ | 1,000.00 | | | $ | 1,056.10 | | | 0.74 | % | | | | $ | 3.82 | |
| Service Class | | | | 1,000.00 | | | | 1,054.70 | | | 0.99 | % | | | | | 5.11 | |
| Hypothetical 5% Return (5% return before expenses) | | | | | | | | | | |
| Standard Class | | | $ | 1,000.00 | | | $ | 1,021.42 | | | 0.74 | % | | | | $ | 3.76 | |
| Service Class | | | | 1,000.00 | | | | 1,020.16 | | | 0.99 | % | | | | | 5.03 | |
*“Expenses Paid During Period” are equal to the Series’ annualized expense ratio, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period).
†Because actual returns reflect only the most recent six-month period, the returns shown may differ significantly from fiscal year returns.
U.S. Growth Series-4
Delaware VIP® Trust — Delaware VIP U.S. Growth Series
Security Type/Sector Allocation and Top 10 Equity Holdings
As of December 31, 2012 (Unaudited)
Sector designations may be different than the sector designations presented in other Series materials. The sector designations may represent the investment manager’s internal sector classifications, which may result in the sector designations for one series being different than another series’ sector designations.
| Percentage |
| Security Type/Sector | of Net Assets |
| ²Common Stock | 99.38 | % |
| Consumer Discretionary | 12.20 | % |
| Consumer Staples | 3.37 | % |
| Energy | 10.08 | % |
| Financial Services | 18.17 | % |
| Healthcare | 11.57 | % |
| Materials & Processing | 2.94 | % |
| Producer Durables | 6.86 | % |
| Technology | 34.19 | % |
| Warrant | 0.18 | % |
| Short-Term Investments | 0.57 | % |
| Securities Lending Collateral | 0.06 | % |
| Total Value of Securities | 100.19 | % |
| Obligation to Return Securities Lending Collateral | (0.14 | %) |
| Other Liabilities Net of Receivables and Other Assets | (0.05 | %) |
| Total Net Assets | 100.00 | % |
| ² | Narrow industries are utilized for compliance purposes for diversification whereas broad sectors are used for financial reporting. |
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.
| Percentage |
| Top 10 Equity Holdings | of Net Assets |
| Apple | 6.83 | % |
| EOG Resources | 5.53 | % |
| Visa Class A | 5.43 | % |
| Crown Castle International | 5.36 | % |
| QUALCOMM | 5.02 | % |
| MasterCard Class A | 4.94 | % |
| Kinder Morgan | 4.56 | % |
| Allergan | 4.40 | % |
| Adobe Systems | 3.90 | % |
| Intuit | 3.86 | % |
U.S. Growth Series-5
Delaware VIP® Trust — Delaware VIP U.S. Growth Series
Statement of Net Assets
December 31, 2012
| Number of | | | |
| Shares | | Value |
| ²COMMON STOCK–99.38% | | | | | |
| Consumer Discretionary–12.20% | | | | | |
| †Liberty Interactive Class A | | 731,150 | | $ | 14,389,032 |
| NIKE Class B | | 176,900 | | | 9,128,040 |
| †priceline.com | | 21,825 | | | 13,557,690 |
| †Sally Beauty Holdings | | 163,850 | | | 3,861,945 |
| *Staples | | 561,925 | | | 6,405,945 |
| | | | | 47,342,652 |
| Consumer Staples–3.37% | | | | | |
| Walgreen | | 353,500 | | | 13,083,035 |
| | | | | 13,083,035 |
| Energy–10.08% | | | | | |
| EOG Resources | | 177,575 | | | 21,449,284 |
| Kinder Morgan | | 500,305 | | | 17,675,776 |
| | | | | 39,125,060 |
| Financial Services–18.17% | | | | | |
| CME Group | | 145,200 | | | 7,363,092 |
| †IntercontinentalExchange | | 82,925 | | | 10,266,944 |
| MasterCard Class A | | 39,025 | | | 19,172,202 |
| Progressive | | 597,500 | | | 12,607,250 |
| Visa Class A | | 139,075 | | | 21,080,989 |
| | | | | 70,490,477 |
| Healthcare–11.57% | | | | | |
| Allergan | | 185,975 | | | 17,059,487 |
| †Celgene | | 98,000 | | | 7,714,560 |
| Novo Nordisk ADR | | 78,375 | | | 12,791,584 |
| Perrigo | | 70,475 | | | 7,331,514 |
| | | | | 44,897,145 |
| Materials & Processing–2.94% | | | | | |
| Syngenta ADR | | 141,400 | | | 11,425,120 |
| | | | | 11,425,120 |
| Producer Durables–6.86% | | | | | |
| Caterpillar | | 64,800 | | | 5,804,784 |
| †Crown Castle International | | 288,250 | | | 20,800,120 |
| | | | | 26,604,904 |
| Technology–34.19% | | | | | |
| †Adobe Systems | | 401,200 | | | 15,117,215 |
| Apple | | 49,750 | | | 26,518,243 |
| †BMC Software | | 373,450 | | | 14,811,027 |
| †Google Class A | | 19,850 | | | 14,080,995 |
| Intuit | | 251,550 | | | 14,967,225 |
| †Polycom | | 383,700 | | | 4,013,502 |
| QUALCOMM | | 313,825 | | | 19,463,426 |
| †Teradata | | 152,750 | | | 9,453,698 |
| †VeriFone Systems | | 158,950 | | | 4,717,636 |
| †VeriSign | | 245,150 | | | 9,516,723 |
| | | | | 132,659,690 |
| Total Common Stock | | | | | |
| (cost $312,363,905) | | | | | 385,628,083 |
| |
| WARRANT–0.18% | | | | | |
| †Kinder Morgan CW17 | | 184,792 | | | 698,513 |
| Total Warrant (cost $351,093) | | | | | 698,513 |
| | | | | |
| Principal | | | |
| Amount | | | |
| SHORT-TERM INVESTMENTS–0.57% | | | | | |
| ≠Discount Notes–0.25% | | | | | |
| Federal Home Loan Bank | | | | | |
| 0.075% 1/4/13 | $ | 6,264 | | $ | 6,264 |
| 0.10% 1/18/13 | | 91,234 | | | 91,234 |
| 0.10% 1/23/13 | | 474,512 | | | 474,510 |
| 0.12% 4/2/13 | | 32,062 | | | 32,057 |
| 0.125% 3/6/13 | | 49,348 | | | 49,344 |
| 0.13% 2/6/13 | | 240,089 | | | 240,082 |
| 0.135% 2/15/13 | | 52,820 | | | 52,818 |
| | | | | 946,309 |
| Repurchase Agreements–0.17% | | | | | |
| Bank of America 0.11%, dated 12/31/12, to be | | | | | |
| repurchased on 1/2/13, repurchase price | | | | | |
| $438,099 (collateralized by U.S. government | | | | | |
| obligations 0.25%-2.375% 2/28/15-12/15/15; | | | | | |
| market value $446,858) | | 438,096 | | | 438,096 |
| BNP Paribas 0.15%, dated 12/31/12, to be | | | | | |
| repurchased on 1/2/13, repurchase price | | | | | |
| $211,871 (collateralized by U.S. government | | | | | |
| obligations 0.125%-0.25% 12/31/14-5/15/15; | | | | | |
| market value $216,106) | | 211,869 | | | 211,869 |
| | | | | 649,965 |
| ≠U.S. Treasury Obligations–0.15% | | | | | |
| U.S. Treasury Bills | | | | | |
| 0.04% 1/17/13 | | 34,534 | | | 34,534 |
| 0.04% 3/21/13 | | 272,027 | | | 272,008 |
| 0.04% 3/28/13 | | 292,064 | | | 292,041 |
| | | | | 598,583 |
| Total Short-Term Investments | | | | | |
| (cost $2,194,772) | | | | | 2,194,857 |
| |
| Total Value of Securities Before Securities | | | | | |
| Lending Collateral–100.13% | | | | | |
| (cost $314,909,770) | | | | | 388,521,453 |
| |
| Number of | | | |
| Shares | | | |
| **SECURITIES LENDING COLLATERAL–0.06% | | | | | |
| Delaware Investments Collateral Fund No.1 | | 249,661 | | | 249,661 |
| @†Mellon GSL Reinvestment Trust II | | 275,126 | | | 0 |
| Total Securities Lending Collateral | | | | | |
| (cost $524,787) | | | | | 249,661 |
U.S. Growth Series-6
Delaware VIP® U.S. Growth Series
Statement of Net Assets (continued)
| TOTAL VALUE OF SECURITIES–100.19% (cost $315,434,557) | | $ | 388,771,114 | © |
| **OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL–(0.14%) | | | (524,787 | ) |
| OTHER LIABILITIES NET OF RECEIVABLES AND OTHER ASSETS–(0.05%) | | | (204,480 | ) |
| NET ASSETS APPLICABLE TO 38,550,849 SHARES OUTSTANDING–100.00% | | $ | 388,041,847 | |
NET ASSET VALUE–DELAWARE VIP U.S. GROWTH SERIES
STANDARD CLASS ($106,068,911 / 10,427,544 Shares) | | | $10.17 | |
NET ASSET VALUE–DELAWARE VIP U.S. GROWTH SERIES
SERVICE CLASS ($281,972,936 / 28,123,305 Shares) | | | $10.03 | |
| COMPONENTS OF NET ASSETS AT DECEMBER 31, 2012: | | | | |
| Shares of beneficial interest (unlimited authorization–no par) | | $ | 302,468,144 | |
| Undistributed net investment income | | | 783,835 | |
| Accumulated net realized gain on investments | | | 11,453,311 | |
| Net unrealized appreciation of investments | | | 73,336,557 | |
| Total net assets | | $ | 388,041,847 | |
____________________
| ² | Narrow industries are utilized for compliance purposes for diversification whereas broad sectors are used for financial reporting. |
| † | Non income producing security. |
| * | Fully or partially on loan. |
| ≠ | The rate shown is the effective yield at the time of purchase. |
| ** | See Note 8 in “Notes to financial statements” for additional information on securities lending collateral. |
| @ | Illiquid security. At December 31, 2012, the aggregate amount of illiquid securities was $0, which represented 0.00% of the Series’ net assets. See Note 9 in “Notes to financial statements.” |
| © | Includes $520,228 of securities loaned. |
ADR – American Depositary Receipt
See accompanying notes, which are an integral part of the financial statements.
U.S. Growth Series-7
Delaware VIP® Trust —
Delaware VIP U.S. Growth Series
Statement of Operations
Year Ended December 31, 2012
| INVESTMENT INCOME: | | | |
| Dividends | $ | 4,013,853 | |
| Securities lending income | | 199,191 | |
| Interest | | 6,359 | |
| Foreign tax withheld | | (66,977 | ) |
| | 4,152,426 | |
| |
| EXPENSES: | | | |
| Management fees | | 2,377,083 | |
| Distribution expenses – Service Class | | 794,928 | |
| Accounting and administration expenses | | 142,709 | |
| Reports and statements to shareholders | | 61,084 | |
| Dividend disbursing and transfer agent fees and expenses | | 31,664 | |
| Legal fees | | 26,042 | |
| Audit and tax | | 23,140 | |
| Trustees’ fees | | 16,102 | |
| Custodian fees | | 11,331 | |
| Insurance fees | | 5,826 | |
| Consulting fees | | 3,963 | |
| Dues and services | | 2,936 | |
| Registration fees | | 2,280 | |
| Trustees’ expenses | | 1,098 | |
| Pricing fees | | 289 | |
| | 3,500,475 | |
| Less waiver of distribution expenses – Service Class | | (132,488 | ) |
| Less expense paid indirectly | | (1 | ) |
| Total operating expenses | | 3,367,986 | |
| |
| NET INVESTMENT INCOME | | 784,440 | |
| |
| NET REALIZED AND UNREALIZED GAIN (LOSS): | | | |
| Net realized gain (loss) on: | | | |
| Investments | | 28,593,129 | |
| Foreign currencies | | (605 | ) |
| Net realized gain | | 28,592,524 | |
| Net change in unrealized appreciation (depreciation) | | | |
| of investments | | 21,728,815 | |
| |
| NET REALIZED AND UNREALIZED GAIN | | 50,321,339 | |
| |
| NET INCREASE IN NET ASSETS RESULTING | | | |
| FROM OPERATIONS | $ | 51,105,779 | |
Delaware VIP Trust —
Delaware VIP U.S. Growth Series
Statements of Changes in Net Assets
| Year Ended |
| 12/31/12 | | 12/31/11 |
| INCREASE (DECREASE) IN NET ASSETS | | | | | | | |
| FROM OPERATIONS: | | | | | | | |
| Net investment income (loss) | $ | 784,440 | | | $ | (25,565 | ) |
| Net realized gain | | 28,592,524 | | | | 26,220,863 | |
| Net change in unrealized appreciation | | | | | | | |
| (depreciation) | | 21,728,815 | | | | (5,511,954 | ) |
| Net increase in net assets resulting | | | | | | | |
| from operations | | 51,105,779 | | | | 20,683,344 | |
| |
| DIVIDENDS AND DISTRIBUTIONS TO | | | | | | | |
| SHAREHOLDERS FROM: | | | | | | | |
| Net investment income: | | | | | | | |
| Standard Class | | – | | | | (432,001 | ) |
| Service Class | | – | | | | (82,658 | ) |
| | – | | | | (514,659 | ) |
| |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | |
| Proceeds from shares sold: | | | | | | | |
| Standard Class | | 7,676,222 | | | | 3,065,054 | |
| Service Class | | 75,539,546 | | | | 135,021,072 | |
| Net asset value of shares issued upon | | | | | | | |
| reinvestment of dividends and distributions: | | | | | | | |
| Standard Class | | – | | | | 17,405 | |
| Service Class | | – | | | | 82,658 | |
| | 83,215,768 | | | | 138,186,189 | |
| Cost of shares redeemed: | | | | | | | |
| Standard Class | | (3,443,680 | ) | | | (83,924,379 | ) |
| Service Class | | (66,766,421 | ) | | | (37,882,704 | ) |
| | (70,210,101 | ) | | | (121,807,083 | ) |
| Increase in net assets derived from capital | | | | | | | |
| share transactions | | 13,005,667 | | | | 16,379,106 | |
| |
| NET INCREASE IN NET ASSETS | | 64,111,446 | | | | 36,547,791 | |
| |
| NET ASSETS: | | | | | | | |
| Beginning of year | | 323,930,401 | | | | 287,382,610 | |
| End of year (including undistributed | | | | | | | |
| net investment income of $783,835 | | | | | | | |
| and $–, respectively) | $ | 388,041,847 | | | $ | 323,930,401 | |
See accompanying notes, which are an integral part of the financial statements.
U.S. Growth Series-8
Delaware VIP® Trust — Delaware VIP U.S. Growth Series
Financial Highlights
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP U.S. Growth Series Standard Class |
| | Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $8.750 | | $8.150 | | | $7.160 | | | $5.010 | | | $8.960 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | | |
| Net investment income1 | | 0.039 | | 0.012 | | | 0.023 | | | 0.007 | | | 0.016 | |
| Net realized and unrealized gain (loss) | | 1.381 | | 0.610 | | | 0.972 | | | 2.157 | | | (3.768 | ) |
| Total from investment operations | | 1.420 | | 0.622 | | | 0.995 | | | 2.164 | | | (3.752 | ) |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | | |
| Net investment income | | – | | (0.022 | ) | | (0.005 | ) | | (0.014 | ) | | (0.003 | ) |
| Net realized gain | | – | | – | | | – | | | – | | | (0.195 | ) |
| Total dividends and distributions | | – | | (0.022 | ) | | (0.005 | ) | | (0.014 | ) | | (0.198 | ) |
| |
| Net asset value, end of period | | $10.170 | | $8.750 | | | $8.150 | | | $7.160 | | | $5.010 | |
| |
| Total return2 | | 16.23% | | 7.63% | | | 13.90% | | | 43.30% | | | (42.66% | ) |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $106,069 | | $87,389 | | | $159,857 | | | $151,611 | | | $127,338 | |
| Ratio of expenses to average net assets | | 0.74% | | 0.74% | | | 0.75% | | | 0.75% | | | 0.76% | |
| Ratio of net investment income to average net assets | | 0.40% | | 0.13% | | | 0.31% | | | 0.12% | | | 0.22% | |
| Portfolio turnover | | 35% | | 43% | | | 26% | | | 43% | | | 28% | |
____________________
1The average shares outstanding method has been applied for per share information. |
2Total 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 does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
U.S. Growth Series-9
Delaware VIP® U.S. Growth Series
Financial Highlights (continued)
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP U.S. Growth Series Service Class |
| | Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $8.650 | | $8.050 | | | $7.090 | | $4.960 | | | $8.900 | |
| |
| Income (loss) from investment operations: | | | | | | | | | | | | | |
| Net investment income (loss)1 | | 0.014 | | (0.010 | ) | | 0.005 | | (0.008 | ) | | (0.002 | ) |
| Net realized and unrealized gain (loss) | | 1.366 | | 0.614 | | | 0.955 | | 2.138 | | | (3.743 | ) |
| Total from investment operations | | 1.380 | | 0.604 | | | 0.960 | | 2.130 | | | (3.745 | ) |
| |
| Less dividends and distributions from: | | | | | | | | | | | | | |
| Net investment income | | – | | (0.004 | ) | | – | | – | | | – | |
| Net realized gain | | – | | – | | | – | | – | | | (0.195 | ) |
| Total dividends and distributions | | – | | (0.004 | ) | | – | | – | | | (0.195 | ) |
| |
| Net asset value, end of period | | $10.030 | | $8.650 | | | $8.050 | | $7.090 | | | $4.960 | |
| |
| Total return2 | | 15.95% | | 7.50% | | | 13.54% | | 42.94% | | | (42.86% | ) |
| |
| Ratios and supplemental data: | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $281,973 | | $236,541 | | | $127,526 | | $64,683 | | | $23,038 | |
| Ratio of expenses to average net assets | | 0.99% | | 0.99% | | | 1.00% | | 1.00% | | | 1.01% | |
| Ratio of expenses to average net assets | | | | | | | | | | | | | |
| prior to fees waived | | 1.04% | | 1.04% | | | 1.05% | | 1.05% | | | 1.06% | |
| Ratio of net investment income (loss) to average net assets | | 0.15% | | (0.12% | ) | | 0.06% | | (0.13% | ) | | (0.03% | ) |
Ratio of net investment income (loss) to average net assets
prior to fees waived | | 0.10% | | (0.17% | ) | | 0.01% | | (0.18% | ) | | (0.08% | ) |
| Portfolio turnover | | 35% | | 43% | | | 26% | | 43% | | | 28% | |
____________________
| 1The average shares outstanding method has been applied for per share information. |
2Total 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 during all of the periods shown reflects a waiver by the distributor. Performance would have been lower had the waiver not been in effect. Total investment return does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
U.S. Growth Series-10
Delaware VIP® Trust — Delaware VIP U.S. Growth Series
Notes to Financial Statements
December 31, 2012
Delaware VIP Trust (Trust) is organized as a Delaware statutory trust and offers 10 series: Delaware VIP Diversified Income Series, Delaware VIP Emerging Markets Series, Delaware VIP High Yield Series, Delaware VIP International Value Equity Series, Delaware VIP Limited-Term Diversified Income Series, Delaware VIP REIT Series, Delaware VIP Small Cap Value Series, Delaware VIP Smid Cap Growth Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series. These financial statements and the related notes pertain to Delaware VIP U.S. Growth Series (Series). The Trust is an open-end investment company. The Series is considered diversified under the Investment Company Act of 1940, as amended, and offers Standard Class and Service Class shares. The Standard Class shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee. The shares of the Series are sold only to separate accounts of life insurance companies.
The investment objective of the Series 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 (U.S. GAAP) and are consistently followed by the Series.
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, which approximates fair value. U.S. government and agency securities are valued at the mean between the bid and ask prices, which approximates fair value. Investment company securities are valued at net asset value per share, as reported by the underlying investment company. 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 Series’ 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 Series 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 Series values its securities, generally as of 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 Series may frequently value foreign securities using fair value prices based on third-party vendor modeling tools (international fair value pricing).
Federal & Foreign Income Taxes—No provision for federal income taxes has been made as the Series 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 Series evaluates tax positions taken or expected to be taken in the course of preparing the Series’ tax returns 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 analyzed the Series’ tax positions taken for all open federal income tax years (December 31, 2009 – December 31, 2012), and has concluded that no provision for federal income tax is required in the Series’ financial statements. In regards to foreign taxes, the Series only has open tax years in certain foreign countries it invests in that may date back to the inception of the Series.
Class Accounting—Investment income, common expenses and realized and unrealized gain (loss) on investments are allocated to the classes of the Series 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 Series may purchase certain U.S. government securities subject to the counterparty’s agreement to repurchase them at an agreed upon date and price. The counterparty will be required on a daily basis to maintain the value of the collateral subject to the agreement at not less than the repurchase price (including accrued interest). The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system with the Series’ custodian or a third-party sub-custodian. In the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. All open repurchase agreements as of the date of this report were entered into on December 31, 2012.
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments, the reported amounts of assets and liabilities and disclosure of contingent 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 and the differences could be material.
Other—Expenses directly attributable to the Series are charged directly to the Series. Other expenses common to various funds within the Delaware Investments® Family of Funds are generally allocated among 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. Foreign dividends are also recorded on the ex-dividend date or as soon after the ex-dividend date that the Series is aware of such dividends, net of all non-rebatable tax withholdings. Withholding taxes on foreign dividends have been recorded in accordance with the Series’ understanding of the applicable country’s tax rules and rates. The Series declares and pays dividends from net investment income and distributions from net realized gain on investments, if any, following the close of the fiscal year. The Series may distribute income dividends and capital gains more frequently, if necessary for tax purposes. Dividends and distributions, if any, are recorded on the ex-dividend date.
Subject to seeking best execution, the Series may direct certain security trades to brokers who have agreed to rebate a portion of the related brokerage commission to the Series in cash. Such commission rebates are included in realized gain on investments in the accompanying financial statements and totaled $6,089 for the year ended December 31, 2012. 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 Series on the transaction.
The Series 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 year ended December 31, 2012.
The Series receives earnings credits from its transfer agent when positive cash balances are maintained, which are used to offset transfer agent fees. The expense paid under this arrangement is included in dividend disbursing and transfer agent fees and expenses on the Statement of Operations with the corresponding expense offset shown as “expense paid indirectly.” For the year ended December 31, 2012, the Series earned $1 under this agreement.
U.S. Growth Series-11
Delaware VIP® U.S. Growth Series
Notes to Financial Statements (continued)
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Series 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 Series, 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.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to the Series. For these services, the Series 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 year ended December 31, 2012, the Series was charged $17,889 for these services.
DSC is also the transfer agent and dividend disbursing agent of the Series. The Series pays DSC a monthly asset-based fee for these services. Pursuant to a sub-transfer agency agreement between DSC and BNY Mellon Investment Servicing (US) Inc. (BNYMIS), BNYMIS provides certain sub-transfer agency services to the Series. Sub-transfer agency fees are passed on to and paid directly by the Series.
Pursuant to a distribution agreement and distribution plan, the Series pays Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an annual distribution and service fee of 0.30% of the average daily net assets of the Service Class shares. DDLP has contracted to waive distribution and service fees through April 30, 2013 in order to prevent distribution and service fees of the Service Class shares from exceeding 0.25% of average daily net assets. Standard Class shares pay no distribution and service expenses.
At December 31, 2012, the Series had liabilities payable to affiliates as follows:
| | | Dividend Disbursing, | | | | Other |
| Investment | | Transfer Agent and Fund | | | | Expenses |
| Management | | Accounting Oversight | | Distribution | | Payable |
| Fee Payable to | | Fees and Other Expenses | | Fee Payable | | to DMC |
| DMC | | Payable to DSC | | to DDLP | | and Affiliates* |
| $212,218 | | $4,040 | | $59,393 | | $9,198 |
____________________
*DMC, as part of its administrative services, pays operating expenses on behalf of the Series and is reimbursed on a periodic basis. Expenses include items such as printing of shareholder reports, legal and tax services, custodian fees and trustees’ fees.
As provided in the investment management agreement, the Series bears the cost of certain legal and tax services, including internal legal and tax services provided to the Series by DMC and/or its affiliates’ employees. For the year ended December 31, 2012, the Series was charged $10,961 for internal legal and tax services provided by DMC and/or its affiliates’ employees.
Trustees’ fees include expenses accrued by the Series 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 Series.
3. Investments
For the year ended December 31, 2012, the Series made purchases and sales of investment securities other than short-term investments as follows:
| Purchases | $137,870,814 |
| Sales | 124,672,923 |
At December 31, 2012, the cost of investments for federal income tax purposes and unrealized appreciation (depreciation) for the Series were as follows:
| | | Aggregate | | Aggregate | | |
| Cost of | | Unrealized | | Unrealized | | Net Unrealized |
| Investments | | Appreciation | | Depreciation | | Appreciation |
| $319,889,608 | | $80,724,294 | | $(11,842,788) | | $68,881,506 |
U.S. GAAP defines fair value as the price that the Series 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. A three level hierarchy for fair value measurements has been established 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
U.S. Growth Series-12
Delaware VIP® U.S. Growth Series
Notes to Financial Statements (continued)
3. Investments (continued)
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 Series’ investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three level hierarchy of inputs is summarized below.
| Level 1 – | inputs are quoted prices in active markets for identical investments (e.g., equity securities, open-end investment companies, futures contracts, exchange-traded options contracts) |
| Level 2 – | other observable inputs (including, but not limited to: quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs) (e.g., debt securities, government securities, swap contracts, foreign currency exchange contracts, foreign securities utilizing international fair value pricing, broker-quoted securities, fair valued securities) |
| Level 3 – | inputs are significant unobservable inputs (including the Series’ own assumptions used to determine the fair value of investments) (e.g., broker-quoted securities, fair valued securities) |
Level 3 investments are valued using significant unobservable inputs. The Series may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Valuations may also be based upon current market prices of securities that are comparable in coupon, rating, maturity and industry. The derived value of a Level 3 investment may not represent the value which is received upon disposition and this could impact the results of operations.
The following table summarizes the valuation of the Series’ investments by fair value hierarchy levels as of December 31, 2012:
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Common Stock | | $ | 385,628,083 | | $ | – | | | $ | – | | | $ | 385,628,083 |
| Warrant | | | 698,513 | | | – | | | | – | | | | 698,513 |
| Short-Term Investments | | | – | | | 2,194,857 | | | | – | | | | 2,194,857 |
| Securities Lending Collateral | | | – | | | 249,661 | | | | – | | | | 249,661 |
| Total | | $ | 386,326,596 | | $ | 2,444,518 | | | $ | – | | | $ | 388,771,114 |
The securities that have been deemed worthless on the statement of net assets are considered to be Level 3 securities in this table.
During the period ended December 31, 2012, there were no transfers between Level 1 investments, Level 2 investments or Level 3 investments that had a significant impact to the Series. The Series’ policy is to recognize transfers between levels at the beginning of the reporting period.
A reconciliation of Level 3 investments is presented when the Series has a significant amount of Level 3 investments at the beginning, interim or end of the period in relation to net assets. Management has determined not to provide additional disclosure on Level 3 inputs under ASU No. 2011-04 since the Level 3 investments are not considered significant to the Series’ net assets at the end of the period.
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. There were no dividends and distributions for the year ended December 31, 2012. The tax character of dividends and distributions paid during the year ended December 31, 2011 was as follows:
| | Year |
| | Ended |
| | 12/31/11 |
| Ordinary income | | $514,659 |
5. Components of Net Assets on a Tax Basis
As of December 31, 2012, the components of net assets on a tax basis were as follows:
| Shares of beneficial interest | | $ | 302,468,144 |
| Undistributed ordinary income | | | 783,835 |
| Undistributed long-term capital gains | | | 15,908,362 |
| Unrealized appreciation | | | 68,881,506 |
| Net assets | | $ | 388,041,847 |
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales.
U.S. Growth Series-13
Delaware VIP® U.S. Growth Series
Notes to Financial Statements (continued)
5. Components of Net Assets on a Tax Basis (continued)
For financial reporting purposes, capital accounts are adjusted to reflect the tax character of permanent book/tax differences. Reclassifications are primarily due to gain (loss) on foreign currency transactions. Results of operations and net assets were not affected by these reclassifications. For the year ended December 31, 2012, the Series recorded the following reclassifications.
| Undistributed | | Accumulated |
| Net Investment | | Net Realized |
| Income | | Gain |
| $(605) | | $605 |
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. $11,852,102 was utilized in 2012.
6. Capital Shares
Transactions in capital shares were as follows:
| | Year | | Year |
| | Ended | | Ended |
| | 12/31/12 | | 12/31/11 |
| Shares sold: | | | | | | |
| Standard Class | | 793,506 | | | 357,009 | |
| Service Class | | 7,956,850 | | | 15,953,622 | |
| |
| Shares issued upon reinvestment of dividends and distributions: | | | | | | |
| Standard Class | | – | | | 1,958 | |
| Service Class | | – | | | 9,404 | |
| | 8,750,356 | | | 16,321,993 | |
| Shares redeemed: | | | | | | |
| Standard Class | | (350,651 | ) | | (9,998,954 | ) |
| Service Class | | (7,183,866 | ) | | (4,449,953 | ) |
| | (7,534,517 | ) | | (14,448,907 | ) |
| Net increase | | 1,215,839 | | | 1,873,086 | |
7. Line of Credit
The Series, along with certain other funds in the Delaware Investments® Family of Funds (Participants), was a participant in a $125,000,000 revolving line of credit 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 were charged an annual commitment fee, which was allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants were permitted to borrow up to a maximum of one third of their net assets under the agreement. Each Participant was individually, and not jointly, liable for its particular advances, if any, under the line of credit. The line of credit under the agreement expired on November 13, 2012.
On November 13, 2012, the Series, along with the other Participants, entered into an amendment to the agreement for a $125,000,000 revolving line of credit. The agreement is to be used as described above and operates in substantially the same manner as the original agreement. The line of credit available under the agreement expires on November 12, 2013. The Series had no amounts outstanding as of December 31, 2012 or at any time during the year then ended.
8. Securities Lending
The Series, along with other funds in the Delaware Investments® Family of Funds, may lend its securities pursuant to a security lending agreement (Lending Agreement) with The Bank of New York Mellon (BNY Mellon). At the time a security is loaned, the borrower must post collateral equal to the required percentage of the market value of the loaned security, including any accrued interest. The required percentage is: (i) 102% with respect to U.S. securities and foreign securities that are denominated and payable in U.S. dollars; and (ii) 105% with respect to foreign securities. With respect to each loan, if on any business day the aggregate market value of securities collateral plus cash collateral held 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 by the end of the following business day which, together with the collateral already held, will be not less than the applicable initial collateral requirements for such security loan. If the aggregate market value of securities collateral and cash collateral held with respect to a security loan exceeds the applicable initial collateral requirement, upon request of the borrower BNY Mellon must return enough collateral to the borrower by the end of the following business day to reduce the value of the remaining collateral to the applicable initial collateral requirement for such security loan. As a result of the foregoing, the value of the collateral held with respect to a loaned security may be temporarily more or less than the value of the security on loan.
U.S. Growth Series-14
Delaware VIP® U.S. Growth Series
Notes to Financial Statements (continued)
8. Securities Lending (continued)
Cash collateral received is generally invested in the Delaware Investments Collateral Fund No. 1 (Collective Trust) established by BNY Mellon for the purpose of investment on behalf of funds managed by DMC that participate in BNY Mellon’s securities lending program. The Collective Trust may invest in U.S. government securities and high quality corporate debt, asset-backed and other money market securities and in repurchase agreements collateralized by such securities, provided that the Collective Trust will generally have a dollar-weighted average portfolio maturity of 60 days or less. In October 2008, BNY Mellon transferred certain distressed securities from the previous collateral investment pool into the Mellon GSL Reinvestment Trust II. The Series 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 Series or, at the discretion of the lending agent, replace the loaned securities. The Series continues to record dividends or interest, as applicable, on the securities loaned and is subject to changes in value of the securities loaned that may occur during the term of the loan. The Series 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 Series 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 Series, the security lending agent and the borrower. The Series records security lending income net of allocations to the security lending agent and the borrower.
The Collective Trust used for the investment of cash collateral received from borrowers of securities 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. The Series may incur investment losses as a result of investing securities lending collateral in the Collective Trust or another collateral investment pool. This could occur if an investment in a collateral investment pool defaulted or if it were necessary to liquidate assets in the collateral investment pool to meet returns on outstanding security loans at a time when the collateral investment pool’s net asset value per unit was less than $1.00. Under those circumstances, the Series may not receive an amount from the collateral investment pool that is equal in amount to the collateral the Series would be required to return to the borrower of the securities and the Series would be required to make up for this shortfall.
At December 31, 2012, the value of the securities on loan was $520,228, for which cash collateral was received and invested in accordance with the Lending Agreement. At December 31, 2012, the value of invested collateral was $249,661. These investments are presented on the schedule of investments under the caption “Securities Lending Collateral.”
9. Credit and Market Risk
The Series 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 Series 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 Series’ Board has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of the Series’ limitation on investments in illiquid securities. Securities eligible for resale pursuant to Rule 144A, which are determined to be liquid, are not subject to the Series’ 15% limit on investments in illiquid securities. As of December 31, 2012, there were no Rule 144A securities. Illiquid securities have been identified on the Statement of Net Assets.
10. Contractual Obligations
The Series enters into contracts in the normal course of business that contain a variety of indemnifications. The Series’ maximum exposure under these arrangements is unknown. However, the Series has not had prior claims or losses pursuant to these contracts. Management has reviewed the Series’ existing contracts and expects the risk of loss to be remote.
11. Subsequent Events
Management has determined that no material events or transactions occurred subsequent to December 31, 2012 that would require recognition or disclosure in the Series’ financial statements.
U.S. Growth Series-15
Delaware VIP® Trust — Delaware VIP U.S. Growth Series
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Delaware VIP Trust
and the Shareholders of Delaware VIP U.S. Growth Series:
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Delaware VIP U.S. Growth Series (one of the series constituting Delaware VIP Trust, hereafter referred to as the “Series”) at December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2012 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the two years in the period ended December 31, 2009 were audited by other independent accountants whose report dated February 17, 2010 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 15, 2013
U.S. Growth Series-16
Delaware VIP® Trust — Delaware VIP U.S. Growth Series
Other Series Information (Unaudited)
Board Consideration of Delaware VIP U.S. Growth Series Investment Advisory Agreement
At a meeting held on August 21-23, 2012 (“Annual Meeting”), the Board of Trustees (“Board”), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreement for Delaware VIP U.S. Growth Series (“Series”). In making its decision, the Board considered information furnished at regular quarterly Board meetings, including reports detailing Series performance, investment strategies and expenses, as well as information prepared specifically in connection with the renewal of the investment advisory contract. Information furnished specifically in connection with the renewal of the Investment Advisory Agreement with Delaware Management Company (“DMC”) included materials provided by DMC and its affiliates (“Delaware Investments”) concerning, among other things, the nature, extent and quality of services provided to the Series, the costs of such services to the Series, economies of scale and the financial condition and profitability of Delaware Investments. In addition, in connection with the Annual Meeting, reports were provided in May 2012 and included independent historical and comparative reports provided by Lipper, Inc., an independent statistical compilation organization (“Lipper”). The Lipper reports compared the Series’ investment performance and expenses with those of other comparable mutual funds. The Independent Trustees reviewed and discussed the Lipper reports with independent legal 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; comparative client fee information; 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 the Series’ policies.
In considering information relating to the approval of the Series’ advisory agreement, the Independent Trustees received assistance and advice from and met separately with independent legal 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 Series 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 Series, compliance of portfolio managers with the investment policies, strategies and restrictions for the Series, 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 Series’ investment advisor and the emphasis placed on research in the investment process. The Board recognized DMC’s receipt of several industry distinctions. The Board gave favorable consideration to DMC’s efforts to control expenditures while maintaining service levels committed to fund matters. The Board noted that in July 2011, Management implemented measures to reduce overall costs and improve transfer agent and shareholder servicing functions through outsourcing. 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 Series in view of the importance of investment performance 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 Series showed the investment performance of its Standard Class 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 Series was shown for the past one-, three-, five- and ten-year periods, as applicable, ended March 31, 2012. The Board’s objective is that the Series’ performance for the periods considered be at or above the median of its Performance Universe. The following paragraph summarizes the performance results for the Series and the Board’s view of such performance.
The Performance Universe for the Series consisted of the Series and all large cap growth funds underlying variable insurance products as selected by Lipper. The Lipper report comparison showed that the Series’ total return for the one-, three- and five-year periods was in the first quartile of its Performance Universe. The report further showed that the Series’ total return for the ten-year period was in the third quartile. The Board was satisfied with performance.
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 Series as of its most recently completed fiscal year. The Board also focused on the comparative analysis of effective management fees and total expense ratios of the Series versus effective management fees and expense ratios of a group of similar funds as selected by Lipper (“Expense Group”). In reviewing comparative costs, the Series’ contractual management fee and the actual management fee incurred by the Series were compared with the contractual management fees (assuming all funds in the Expense Group were similar in size to the Series) and actual management fees (as reported by each fund) within the Expense Group, taking into account any applicable breakpoints and fee waivers. The Series’ total expenses were also compared with those of its Expense Group. The Lipper total expenses, for comparative consistency, were shown by Lipper for Standard Class shares which do not charge 12b-1 and non 12b-1 service fees. The Board considered fees paid to Delaware Investments for non-management services. The Board’s objective is to limit the Series’ total expense ratio to be competitive with that of the Expense Group. The following paragraph summarizes the expense results for the Series and the Board’s view of such expenses.
The expense comparisons for the Series showed that the actual management fee and total expenses were in the quartile with the lowest expenses of the Expense Group. The Board was satisfied with the management fee and total expenses of the Series in comparison to those of its Expense Group.
U.S. Growth Series-17
Delaware VIP® U.S. Growth Series
Other Series Information (Unaudited) (continued)
MANAGEMENT PROFITABILITY. The Board considered the level of profits realized by Delaware Investments in connection with the operation of the Series. 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, reflects 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 profitability of Delaware Investments.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are realized by Delaware Investments as the Series’ 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 Series’ management contract fell within the standard structure. Although the Series has not reached a size at which the advantages of breakpoints would be realized, the Board recognized that the fee was structured so that when the Series grows, economies of scale may be shared.
U.S. Growth Series-18
Delaware Investments® Family of Funds
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors (“Trustees”), which has oversight responsibility for the management of a fund’s business affairs. Trustees establish procedures and oversee and review the performance of the investment manager, the distributor, and others who perform services for the fund. The independent fund trustees, in particular, are advocates for shareholder interests. Each trustee has served in that capacity since he or she was elected to or appointed to the Board of Trustees, and will continue to serve until his or her retirement or the election of a new trustee in his or her place. The following is a list of the Trustees and Officers with certain background and related information.
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INTERESTED TRUSTEES | | | | | |
| Patrick P. Coyne1 | Chairman, | Chairman and Trustee | Patrick P. Coyne has served in | 71 | Director and Audit |
| 2005 Market Street | President, | since August 16, 2006 | various executive capacities | | Committee Member — |
| Philadelphia, PA | Chief Executive | | at different times at | | Kaydon Corp. |
| 19103 | Officer, and | President and | Delaware Investments.2 | | |
| Trustee | Chief Executive Officer | | | Board of Governors |
| April 1963 | | since August 1, 2006 | | | Member — Investment |
| | | | | Company Institute (ICI) |
| | | | | |
| INDEPENDENT TRUSTEES | | | | | |
| Thomas L. Bennett | Trustee | Since | Private Investor — | 71 | Director — |
| 2005 Market Street | | March 2005 | (March 2004–Present) | | Bryn Mawr |
| Philadelphia, PA | | | | | Bank Corp. (BMTC) |
| 19103 | | | Investment Manager — | | (2007–2011) |
| | | Morgan Stanley & Co. | | |
| October 1947 | | | (January 1984–March 2004) | | |
| Joseph W. Chow | Trustee | Since | Executive Vice President | 71 | Director and Audit |
| 2005 Market Street | | January 2013 | (Emerging Economies Strategies, | | Committee |
| Philadelphia, PA 19103 | | | Risk and Corporate Administration) | | Member — Hercules |
| | | State Street Corporation | | Technology Growth |
| January 1953 | | | (July 2004–March 2011) | | Capital, Inc. |
| John A. Fry | Trustee | Since | President | 71 | Board of Governors |
| 2005 Market Street | | January 2001 | Drexel University | | Member — NASDAQ |
| Philadelphia, PA | | | (August 2010–Present) | | OMX PHLX LLC |
| 19103 | | | | | |
| | | President — | | Director and Audit |
| May 1960 | | | Franklin & Marshall College | | Committee Member — |
| | | (June 2002–July 2010) | | Community Health |
| | | | | Systems |
| | | | | | |
| | | | | Director — Ecore |
| | | | | International |
| | | | | (2009–2010) |
| Anthony D. Knerr | Trustee | Since | Managing Director — | 71 | None |
| 2005 Market Street | | April 1990 | Anthony Knerr & Associates | | |
| Philadelphia, PA | | | (Strategic Consulting) | | |
| 19103 | | | (1990–Present) | | |
| | | | | | |
| December 1938 | | | | | |
| Lucinda S. Landreth | Trustee | Since | Private Investor | 71 | None |
| 2005 Market Street | | March 2005 | (2004–Present) | | |
| Philadelphia, PA | | | | | |
| 19103 | | | | | |
| | | | | | |
| June 1947 | | | | | |
U.S. Growth Series-19
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INDEPENDENT TRUSTEES (continued) | | | | |
| Frances A. Sevilla-Sacasa | Trustee | Since | Chief Executive Officer — | 71 | Trust Manager — |
| 2005 Market Street | | September 2011 | Banco Itaú Europa | | Camden Property Trust |
| Philadelphia, PA | | | International | | (2011–Present) |
| 19103 | | | (April 2012–Present) | | |
| |
| January 1956 | | | Executive Advisor to Dean | | |
| | | (August 2011–March 2012) | | |
| | | and Interim Dean | | |
| | | (January 2011–July 2011) — | | |
| | | University of Miami School of | | |
| | | Business Administration | | |
| |
| | | President — U.S. Trust, | | |
| | | Bank of America Private | | |
| | | Wealth Management | | |
| | | (Private Banking) | | |
| | | (July 2007–December 2008) | | |
| Thomas K. Whitford | Trustee | Since | Vice Chairman | 71 | None |
| 2005 Market Street | | January 2013 | (2010–Present) | | |
| Philadelphia, PA 19103 | | | Chief Administrative | | |
| | | Officer (2008–2010) | | |
| March 1956 | | | and Executive Vice | | |
| | | President and Chief | | |
| | | Administrative Officer | | |
| | | (2007–2009) — | | |
| | | PNC Financial | | |
| | | Services Group | | |
| Janet L. Yeomans | Trustee | Since | Vice President and Treasurer | 71 | Director, Audit |
| 2005 Market Street | | April 1999 | (January 2006–Present) | | Committee Member |
| Philadelphia, PA | | | Vice President — Mergers | | and Investment |
| 19103 | | | & Acquisitions | | Committee Member |
| | | | (January 2003–January 2006), | | Okabena Company |
| July 1948 | | | and | | |
| | | | Vice President and Treasurer | | Chair — 3M |
| | | (July 1995–January 2003) | | Investment Management |
| | | 3M Corporation | | Company |
| | | | | (January 2005–July 2012) |
| J. Richard Zecher | Trustee | Since | Founder — | 71 | Director and Compensation |
| 2005 Market Street | | March 2005 | Investor Analytics | | Committee Member — |
| Philadelphia, PA | | | (Risk Management) | | Investor Analytics |
| 19103 | | | (May 1999–Present) | | |
| | | | | Director — |
| July 1940 | | | Founder — | | P/E Investments |
| | | P/E Investments | | |
| | | (Hedge Fund) | | |
| | | (September 1996–Present) | | |
| |
| OFFICERS | | | | | |
| David F. Connor | Vice President, | Vice President since | David F. Connor has served as | 71 | None3 |
| 2005 Market Street | Deputy General | September 2000 | Vice President and Deputy | | |
| Philadelphia, PA | Counsel, and Secretary | and Secretary | General Counsel of | | |
| 19103 | | since | Delaware Investments | | |
| | October 2005 | since 2000. | | |
| December 1963 | | | | | |
| Daniel V. Geatens | Vice President | Treasurer | Daniel V. Geatens has served | 71 | None3 |
| 2005 Market Street | and Treasurer | since | in various capacities at | | |
| Philadelphia, PA | | October 2007 | different times at | | |
| 19103 | | | Delaware Investments. | | |
| |
| October 1972 | | | | | |
U.S. Growth Series-20
| | | | Number of | Other |
| | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| OFFICERS (continued) | | | | | |
| David P. O’Connor | Executive Vice | Executive Vice President | David P. O’Connor has served in | 71 | None3 |
| 2005 Market Street | President, | since February 2012; | various executive and legal | | |
| Philadelphia, PA | General Counsel, | Senior Vice President | capacities at different times | | |
| 19103 | and Chief | October 2005–February 2012; | at Delaware Investments. | | |
| Legal Officer | General Counsel and | | | |
| February 1966 | | Chief Legal Officer | | | |
| | since October 2005 | | | |
| Richard Salus | Senior | Chief Financial | Richard Salus has served in | 71 | None3 |
| 2005 Market Street | Vice President | Officer since | various executive capacities | | |
| Philadelphia, PA | and | November 2006 | at different times at | | |
| 19103 | Chief Financial | | Delaware Investments. | | |
| Officer | | | | |
| October 1963 | | | | | |
1 Patrick P. Coyne is considered to be an “Interested Trustee” because he is an executive officer of the Fund’s(s’) investment advisor. |
2 Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund’s(s’) investment advisor, principal underwriter, and its transfer agent. |
3 David F. Connor, Daniel V. Geatens, David P. O’Connor, and Richard Salus serve in similar capacities for the six portfolios of the Optimum Fund Trust, which have the same investment advisor, principal underwriter, and transfer agent as the registrant. |
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is available, without charge, upon request by calling 800 523-1918.
The Series files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q. The Series’ Forms N-Q, as well as a description of the policies and procedures that the Series 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 website at sec.gov. In addition, a description of the policies and procedures that the Series uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge on the Delaware Investments® Funds’ website at delawareinvestments.com. The Series’ Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Series voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the Delaware Investments Funds’ website at delawareinvestments.com; and (ii) on the Commission’s website at sec.gov. |
| AR-VIPUSG [12/12] DG3 18586 (2/13) | | (10125) | | U.S. Growth Series-21 |
| Delaware VIP® Trust |
Delaware VIP Value Series |
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December 31, 2012 |
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Table of contents
| > Portfolio management review | 1 |
| | |
| > Performance summary | 2 |
| | |
| > Disclosure of Series expenses | 4 |
| | |
| > Security type/sector allocation and top 10 equity holdings | 5 |
| | |
| > Statement of net assets | 6 |
| | |
| > Statement of operations | 8 |
| | |
| > Statements of changes in net assets | 8 |
| | |
| > Financial highlights | 9 |
| | |
| > Notes to financial statements | 11 |
| | |
| > Report of independent registered public accounting firm | 16 |
| | |
| > Other Series information | 17 |
| | |
| > Board of trustees/directors and officers addendum | 19 |
Investments in Delaware VIP® Value Series 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 (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 Series, the repayment of capital from the Series, or any particular rate of return.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
The Series is not FDIC insured and is 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 and member of Macquarie Group. Delaware Investments, a member of Macquarie Group, refers to Delaware Management Holdings, Inc. and its subsidiaries, including the Series’ distributor, Delaware Distributors, L.P. Macquarie Group refers to Macquarie Group Limited and its subsidiaries and affiliates worldwide.
This material may be used in conjunction with the offering of shares in the Delaware VIP Value Series only if preceded or accompanied by the Series’ current prospectus, and if available, the summary prospectus.
© 2013 Delaware Management Holdings, Inc.
All third-party marks cited are the property of their respective owners.
| Delaware VIP® Trust — Delaware VIP Value Series | |
| Portfolio management review | Jan. 8, 2013 |
For the fiscal year ended Dec. 31, 2012, Delaware VIP Value Series Standard Class shares returned +14.73% and Service Class shares returned +14.44%. Both figures reflect all distributions reinvested. During the same period, the Series’ benchmark, the Russell 1000® Value Index, returned +17.51%.
The Series’ fiscal year saw favorable stock market performance despite continued economic challenges both in the United States and abroad. Markets generally responded well to economic stimulus measures by the U.S. Federal Reserve, including the Fed maintaining low interest rates for an extended period and initiating a third round of quantitative easing (QE3), which was intended to boost flagging economic activity.
Throughout the fiscal year, slow growth continued to plague the U.S. economy. In the U.S., gross domestic product (GDP), which measures the value of all goods and services a nation produces, began this period at a healthy 4.1% growth rate in the fourth quarter of 2011. However, it tailed off in subsequent quarters, dipping below its historical average and finishing the third quarter of 2012 at a modest 2.7%, according to the most recent estimate released by the U.S. Commerce Department. High unemployment also plagued the U.S. economy during the fiscal year, as the unemployment rate began the Series’ fiscal year at 9.0% and fell to a still-high 7.8% by the end of December 2012. Payroll gains were quite modest during the latter part of this period and employment did not grow fast enough to boost the number of available jobs.
On a brighter note, however, housing fundamentals improved during the fiscal year: home prices, sales volumes, and sentiment all ticked up in recent months. If a housing recovery can be sustained, this could alleviate pressure on some of the 11 million homeowners with “underwater” mortgages. (Source: S&P/Case-Shiller Home Price Indices.) Overall during the Series’ fiscal year, we believe that the slow improvement in unemployment, coupled with evidence of more favorable housing market conditions, gave many investors increased confidence, which, in turn, led to the positive results turned in by stocks and other riskier assets.
The Series’ underperformance relative to its benchmark was driven primarily by disappointing returns among its technology, consumer staples, and healthcare holdings. The Series’ investments in consumer staples hurt relative performance the most. A notable detractor during the Series’ fiscal year was food retailer Safeway, which declined 11%. In general, the food retail group, of which Safeway is a part, came under pressure after a major competitor, Supervalu, cut its dividend and management said it was exploring strategic options.
Relative performance got a boost from the Series’ investments in the energy sector. The Series’ position in Williams Companies, whose shares rose along with a surge in natural gas prices during the latter part of the fiscal year, led all of the Series’ energy holdings, advancing 34%. Williams operates a large gas pipeline system, which closely ties its financial results to natural gas prices, which rose during the fiscal year. We sold the Series’ position in Williams near the end of the fiscal year after the stock hit our price target.
In light of the stock market’s rally during the fiscal year, it became more challenging to find attractively valued securities to add to the Series. A number of its holdings neared our price targets, but we ultimately identified relatively few good investment opportunities that fit our parameters of low valuations coupled with solid business fundamentals. That said, we will continue to look for opportunities to invest in what we view as undeservedly inexpensive stocks that we believe have good potential to rebound, as we maintain our commitment to high-quality companies with what we view as stronger balance sheets and relatively consistent cash flows and earnings.
Unless otherwise noted, views expressed herein are current as of Dec. 31, 2012, and subject to change.
Value Series-1
Delaware VIP® Trust — Delaware VIP Value Series
Performance summary
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.
Carefully consider the Series’ investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Series’ prospectuses and, if available, their summary prospectuses, which may be obtained by calling 800 523-1918. Investors should read the prospectuses and, if available, the summary prospectuses carefully before investing.
| Delaware VIP Value Series | | | | | | | | | | |
| Average annual total returns | | | | | | | | | | |
| For periods ended Dec. 31, 2012 | | 1 year | | 3 years | | 5 years | | 10 years | | Lifetime |
| Standard Class shares (commenced operations on July 28, 1988) | | +14.73% | | +13.27% | | +2.68% | | +7.97% | | +8.07% |
| Service Class shares (commenced operations on May 1, 2000) | | +14.44% | | +12.97% | | +2.42% | | +7.71% | | +5.29% |
Returns reflect the reinvestment of all distributions and any applicable sales charges as noted in the following paragraphs.
As described in the Series’ most recent prospectus, the net expense ratio for Service Class shares of the Series was 0.98%, while total operating expenses for Standard Class and Service Class shares were 0.73% and 1.03%, respectively. The management fee for Standard Class and Service Class shares was 0.65%.
The Series’ distributor has contracted to limit the 12b-1 fees for Service Class shares to 0.25% of average daily net assets from April 30, 2012 through April 30, 2013.
Earnings from a variable annuity or variable life investment compound tax-free until withdrawal, and as a result, no adjustments were made for income taxes.
Expense limitations were in effect for all classes during certain periods shown in the Series’ performance table above and in the Performance of a $10,000 Investment chart on the next page.
Performance data do not reflect other costs incurred by beneficial owners such as insurance company separate account fees and variable annuity or variable life contract charges or deferred sales charges. Performance shown here would have been reduced if such fees were included and the expense limitation removed. For more information about fees, consult your variable annuity or variable life prospectus.
Investments in variable products involve risk.
Please read both the contract and underlying prospectus for specific details regarding the product’s risk profile.
Value Series-2
Delaware VIP® Value Series
Performance summary (continued)
| For period beginning Dec. 31, 2002, through Dec. 31, 2012 | | Starting value | | Ending value |
| –– | Delaware VIP Value Series (Standard Class shares) | | $10,000 | | $21,538 |
| – – | Russell 1000 Value Index | | $10,000 | | $20,378 |
The chart shows a $10,000 investment in the Delaware VIP Value Series Standard Class shares for the period from Dec. 31, 2002 through Dec. 31, 2012.
The chart also shows $10,000 invested in the Russell 1000 Value Index for the period from Dec. 31, 2002 through Dec. 31, 2012. The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
Index performance returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and one cannot invest directly in an index.
Performance of Service Class shares will vary due to different charges and expenses.
Past performance is not a guarantee of future results.
Value Series-3
Delaware VIP® Trust — Delaware VIP Value Series
Disclosure of Series Expenses
For the Six-Month Period from July 1, 2012 to December 31, 2012 (Unaudited)
As a shareholder of the Series, you incur ongoing costs, which may include management fees; distribution and/or service (12b-1) fees; and other Series expenses. This Example is intended to help you understand your ongoing costs (in dollars) of investing in the Series 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 six-month period from July 1, 2012 to December 31, 2012.
Actual Expenses
The first section of the table shown, “Actual Series 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 the 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 Series’ actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Series’ 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 Series and other funds. To do so, compare the 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only. As a shareholder of the Series, you do not incur any transaction costs, such as sales charges (loads), redemption fees or exchange fees, but shareholders of other funds may incur such costs. Also, the fees related to the variable annuity investment or the deferred sales charge that could apply have not been included. 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. The Series’ actual expenses shown in the table reflect fee waivers in effect for Service Class shares. The expenses shown in the table assume reinvestment of all dividends and distributions.
Expense Analysis of an Investment of $1,000
| | | | | | | | | | | | Expenses |
| | Beginning | | Ending | | | | Paid During |
| | Account | | Account | | Annualized | | Period |
| | Value | | Value | | Expense | | 7/1/12 to |
| | 7/1/12 | | 12/31/12 | | Ratio | | 12/31/12* |
| Actual Series Return† | | | | | | | | |
| Standard Class | | | $1,000.00 | | | | $1,063.10 | | | 0.73% | | | $3.79 | |
| Service Class | | | 1,000.00 | | | | 1,062.10 | | | 0.98% | | | 5.08 | |
| Hypothetical 5% Return (5% return before expenses) | | | | | | | |
| Standard Class | | | $1,000.00 | | | | $1,021.47 | | | 0.73% | | | $3.71 | |
| Service Class | | | 1,000.00 | | | | 1,020.21 | | | 0.98% | | | 4.98 | |
*“Expenses Paid During Period” are equal to the Series’ annualized expense ratio, multiplied by the average account value over the period, multiplied by 184/366 (to reflect the one-half year period).
†Because actual returns reflect only the most recent six-month period, the returns shown may differ significantly from fiscal year returns.
Value Series-4
Delaware VIP® Trust — Delaware VIP Value Series
Security Type/Sector Allocation and Top 10 Equity Holdings
As of December 31, 2012 (Unaudited)
Sector designations may be different than the sector designations presented in other Series materials. The sector designations may represent the investment manager’s internal sector classifications, which may result in the sector designations for one series being different than another series’ sector designations.
| Percentage |
| Security Type/Sector | of Net Assets |
| Common Stock | 97.08 | % |
| Consumer Discretionary | 5.90 | % |
| Consumer Staples | 13.27 | % |
| Energy | 15.42 | % |
| Financials | 12.24 | % |
| Healthcare | 17.63 | % |
| Industrials | 8.94 | % |
| Information Technology | 11.84 | % |
| Materials | 3.04 | % |
| Telecommunications | 5.82 | % |
| Utilities | 2.98 | % |
| Short-Term Investments | 2.77 | % |
| Securities Lending Collateral | 0.02 | % |
| Total Value of Securities | 99.87 | % |
| Obligation to Return Securities Lending Collateral | (0.07 | %) |
| Receivables and Other Assets Net of Other Liabilities | 0.20 | % |
| 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.
| Percentage |
| Top 10 Equity Holdings | of Net Assets |
| Bank of New York Mellon | 3.41 | % |
| Halliburton | 3.33 | % |
| Marathon Oil | 3.16 | % |
| Johnson & Johnson | 3.08 | % |
| Pfizer | 3.07 | % |
| duPont (E.I.) deNemours | 3.04 | % |
| Occidental Petroleum | 3.04 | % |
| Lowe’s | 3.02 | % |
| Intel | 3.01 | % |
| Motorola Solutions | 3.01 | % |
Value Series-5
Delaware VIP® Trust — Delaware VIP Value Series
Statement of Net Assets
December 31, 2012
| Number of | | | |
| Shares | | Value |
| COMMON STOCK–97.08% | | | | |
| Consumer Discretionary–5.90% | | | | |
| Comcast Class A | 432,800 | | $ | 16,178,064 |
| Lowe’s | 476,400 | | | 16,921,728 |
| | | | | 33,099,792 |
| Consumer Staples–13.27% | | | | |
| Archer-Daniels-Midland | 610,800 | | | 16,729,812 |
| CVS Caremark | 324,100 | | | 15,670,235 |
| Kraft Foods Group | 364,633 | | | 16,579,863 |
| Mondelez International Class A | 423,300 | | | 10,781,451 |
| *Safeway | 814,100 | | | 14,727,069 |
| | | | | 74,488,430 |
| Energy–15.42% | | | | |
| Chevron | 152,900 | | | 16,534,606 |
| ConocoPhillips | 285,300 | | | 16,544,547 |
| Halliburton | 539,200 | | | 18,704,848 |
| Marathon Oil | 577,800 | | | 17,715,348 |
| Occidental Petroleum | 222,400 | | | 17,038,064 |
| | | | | 86,537,413 |
| Financials–12.24% | | | | |
| Allstate | 416,700 | | | 16,738,839 |
| Bank of New York Mellon | 743,700 | | | 19,113,090 |
| Marsh & McLennan | 481,200 | | | 16,586,964 |
| Travelers | 225,900 | | | 16,224,138 |
| | | | | 68,663,031 |
| Healthcare–17.63% | | | | |
| Baxter International | 252,600 | | | 16,838,316 |
| Cardinal Health | 395,000 | | | 16,266,100 |
| Johnson & Johnson | 246,500 | | | 17,279,650 |
| Merck | 358,500 | | | 14,676,990 |
| Pfizer | 687,041 | | | 17,230,988 |
| Quest Diagnostics | 285,600 | | | 16,641,912 |
| | | | | 98,933,956 |
| Industrials–8.94% | | | | |
| Northrop Grumman | 244,700 | | | 16,536,826 |
| Raytheon | 291,700 | | | 16,790,252 |
| Waste Management | 498,600 | | | 16,822,764 |
| | | | | 50,149,842 |
| Information Technology–11.84% | | | | |
| Cisco Systems | 837,800 | | | 16,462,770 |
| Intel | 818,700 | | | 16,889,781 |
| Motorola Solutions | 302,971 | | | 16,869,425 |
| Xerox | 2,382,700 | | | 16,250,014 |
| | | | | 66,471,990 |
| Materials–3.04% | | | | |
| duPont (E.I.) deNemours | 379,700 | | | 17,075,109 |
| | | | | 17,075,109 |
| Telecommunications–5.82% | | | | |
| AT&T | 485,824 | | | 16,377,127 |
| Verizon Communications | 376,800 | | | 16,304,136 |
| | | | | 32,681,263 |
| Utilities–2.98% | | | | |
| Edison International | 370,400 | | | 16,738,376 |
| | | | | 16,738,376 |
| Total Common Stock | | | | |
| (cost $422,238,595) | | | | 544,839,202 |
| Principal | | | |
| | Amount | | |
| SHORT-TERM INVESTMENTS–2.77% | | | | | |
| ≠Discount Notes–0.67% | | | | | |
| Federal Home Loan Bank | | | | | |
| 0.075% 1/4/13 | $ | 419,583 | | | 419,582 |
| 0.10% 1/18/13 | | 126,694 | | | 126,693 |
| 0.10% 1/23/13 | | 636,179 | | | 636,175 |
| 0.12% 4/2/13 | | 920,027 | | | 919,889 |
| 0.125% 3/6/13 | | 1,254,255 | | | 1,254,168 |
| 0.13% 2/6/13 | | 333,404 | | | 333,394 |
| 0.135% 2/15/13 | | 73,349 | | | 73,346 |
| | | | | | 3,763,247 |
| Repurchase Agreements–0.91% | | | | | |
| Bank of America 0.11%, dated 12/31/12, to be | | | | | |
| repurchased on 1/2/13, repurchase price | | | | | |
| $3,455,027 (collateralized by U.S. government | | | | | |
| obligations 0.25%-2.375% 2/28/15-12/15/15; | | | | | |
| market value $3,524,106) | | 3,455,006 | | | 3,455,006 |
| BNP Paribas 0.15%, dated 12/31/12, to be | | | | | |
| repurchased on 1/2/13, repurchase price | | | | | |
| $1,670,901 (collateralized by U.S. government | | | | | |
| obligations 0.125%-0.25% 12/31/14-5/15/15; | | | | | |
| market value $1,704,305) | | 1,670,887 | | | 1,670,887 |
| | | | | | 5,125,893 |
| ≠U.S. Treasury Obligations–1.19% | | | | | |
| U.S. Treasury Bill | | | | | |
| 0.04% 1/17/13 | | 990,984 | | | 990,977 |
| 0.04% 3/21/13 | | 3,377,816 | | | 3,377,580 |
| 0.04% 3/28/13 | | 2,303,337 | | | 2,303,160 |
| | | | | | 6,671,717 |
| Total Short-Term Investments | | | | | |
| (cost $15,560,326) | | | | | 15,560,857 |
| |
| Total Value of Securities Before | | | | | |
| Securities Lending Collateral–99.85% | | | | | |
| (cost $437,798,921) | | | | | 560,400,059 |
| |
| | Number of | | | |
| | Shares | | | |
| **SECURITIES LENDING COLLATERAL–0.02% | | | | | |
| Investment Companies | | | | | |
| Delaware Investments Collateral Fund No.1 | | 127,303 | | | 127,303 |
| @†Mellon GSL Reinvestment Trust II | | 287,283 | | | 0 |
| Total Securities Lending Collateral | | | | | |
| (cost $414,586) | | | | | 127,303 |
Value Series-6
Delaware VIP® Value Series
Statement of Net Assets (continued)
| TOTAL VALUE OF SECURITIES–99.87% (cost $438,213,507) | $ | 560,527,362 | © |
| **OBLIGATION TO RETURN SECURITIES LENDING COLLATERAL–(0.07%) | | (414,586 | ) |
| RECEIVABLES AND OTHER ASSETS NET OF OTHER LIABILITIES–0.20% | | 1,135,031 | |
| NET ASSETS APPLICABLE TO 28,252,024 SHARES OUTSTANDING–100.00% | $ | 561,247,807 | |
NET ASSET VALUE–DELAWARE VIP VALUE SERIES STANDARD CLASS
($350,443,675 / 17,628,250 Shares) | | | $19.88 | |
NET ASSET VALUE–DELAWARE VIP VALUE SERIES SERVICE CLASS
($210,804,132 / 10,623,774 Shares) | | | $19.84 | |
| COMPONENTS OF NET ASSETS AT DECEMBER 31, 2012: | | | |
| Shares of beneficial interest (unlimited authorization–no par) | $ | 510,283,160 | |
| Undistributed net investment income | | 11,109,286 | |
| Accumulated net realized loss on investments | | (82,458,494 | ) |
| Net unrealized appreciation of investments | | 122,313,855 | |
| Total net assets | $ | 561,247,807 | |
____________________
| * | Fully or partially on loan. |
| † | Non income producing security. |
| ** | See Note 8 in “Notes to financial statements” for additional information on securities lending collateral. |
| ≠ | The rate shown is the effective yield at the time of purchase. |
| @ | Illiquid security. At December 31, 2012, the aggregate value of illiquid securities was $0, which represented 0.00% of the Series’ net assets. See Note 9 in “Notes to financial statements.” |
| © | Includes $402,852 of securities loaned. |
See accompanying notes, which are an integral part of the financial statements.
Value Series-7
Delaware VIP® Trust —
Delaware VIP Value Series
Statement of Operations
Year Ended December 31, 2012
| INVESTMENT INCOME: | | | |
| Dividends | $ | 15,452,199 | |
| Interest | | 15,581 | |
| Securities lending income | | 1,325 | |
| | 15,469,105 | |
| |
| EXPENSES: | | | |
| Management fees | | 3,406,747 | |
| Distribution expenses – Service Class | | 589,113 | |
| Accounting and administration expenses | | 205,329 | |
| Reports and statements to shareholders | | 63,714 | |
| Dividend disbursing and transfer agent fees and expenses | | 45,573 | |
| Legal fees | | 37,176 | |
| Audit and tax | | 28,460 | |
| Trustees’ fees | | 23,268 | |
| Custodian fees | | 9,242 | |
| Insurance fees | | 8,921 | |
| Consulting fees | | 5,487 | |
| Dues and services | | 4,537 | |
| Registration fees | | 1,688 | |
| Trustees’ expenses | | 1,622 | |
| Pricing fees | | 336 | |
| | 4,431,213 | |
| Less waiver of distribution expenses – Service Class | | (98,185 | ) |
| Less expense paid indirectly | | (1 | ) |
| Total operating expenses | | 4,333,027 | |
| |
| NET INVESTMENT INCOME | | 11,136,078 | |
| |
| NET REALIZED AND UNREALIZED GAIN: | | | |
| Net realized gain on investments | | 26,426,267 | |
| Net change in unrealized appreciation (depreciation) of investments | | 33,763,095 | |
| |
| NET REALIZED AND UNREALIZED GAIN | | 60,189,362 | |
| |
| NET INCREASE IN NET ASSETS RESULTING | | | |
| FROM OPERATIONS | $ | 71,325,440 | |
Delaware VIP Trust —
Delaware VIP Value Series
Statements of Changes in Net Assets
| Year Ended |
| 12/31/12 | | 12/31/11 |
| INCREASE (DECREASE) IN NET ASSETS | | | | | | | |
| FROM OPERATIONS: | | | | | | | |
| Net investment income | $ | 11,136,078 | | | $ | 11,351,045 | |
| Net realized gain | | 26,426,267 | | | | 30,796,191 | |
| Net change in unrealized | | | | | | | |
| appreciation (depreciation) | | 33,763,095 | | | | (373,265 | ) |
| Net increase in net assets resulting | | | | | | | |
| from operations | | 71,325,440 | | | | 41,773,971 | |
| |
| DIVIDENDS AND DISTRIBUTIONS TO | | | | | | | |
| SHAREHOLDERS FROM: | | | | | | | |
| Net investment income: | | | | | | | |
| Standard Class | | (7,445,068 | ) | | | (7,809,389 | ) |
| Service Class | | (3,898,561 | ) | | | (2,658,917 | ) |
| | (11,343,629 | ) | | | (10,468,306 | ) |
| |
| CAPITAL SHARE TRANSACTIONS: | | | | | | | |
| Proceeds from shares sold: | | | | | | | |
| Standard Class | | 22,023,577 | | | | 19,116,491 | |
| Service Class | | 40,095,832 | | | | 48,045,155 | |
| Net asset value of shares issued upon | | | | | | | |
| reinvestment of dividends and distributions: | | | | | | | |
| Standard Class | | 5,555,698 | | | | 4,404,186 | |
| Service Class | | 3,898,561 | | | | 2,658,916 | |
| | 71,573,668 | | | | 74,224,748 | |
| Cost of shares redeemed: | | | | | | | |
| Standard Class | | (25,119,551 | ) | | | (123,810,394 | ) |
| Service Class | | (32,045,301 | ) | | | (30,702,145 | ) |
| | (57,164,852 | ) | | | (154,512,539 | ) |
| Increase (decrease) in net assets derived from capital | | | | | | | |
| share transactions | | 14,408,816 | | | | (80,287,791 | ) |
| |
| NET INCREASE (DECREASE) IN NET ASSETS | | 74,390,627 | | | | (48,982,126 | ) |
| |
| NET ASSETS: | | | | | | | |
| Beginning of year | | 486,857,180 | | | | 535,839,306 | |
| End of year (including undistributed | | | | | | | |
| net investment income of $11,109,286 | | | | | | | |
| and $11,316,837, respectively) | $ | 561,247,807 | | | $ | 486,857,180 | |
See accompanying notes, which are an integral part of the financial statements.
Value Series-8
Delaware VIP® Trust — Delaware VIP Value Series
Financial Highlights
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP Value Series Standard Class |
| | Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $17.730 | | | $16.490 | | | $14.600 | | | $12.830 | | | $21.440 | |
| | |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.418 | | | 0.382 | | | 0.323 | | | 0.351 | | | 0.438 | |
| Net realized and unrealized gain (loss) | | 2.163 | | | 1.191 | | | 1.926 | | | 1.838 | | | (7.066 | ) |
| Total from investment operations | | 2.581 | | | 1.573 | | | 2.249 | | | 2.189 | | | (6.628 | ) |
| | |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.431 | ) | | (0.333 | ) | | (0.359 | ) | | (0.419 | ) | | (0.512 | ) |
| Net realized gain | | – | | | – | | | – | | | – | | | (1.470 | ) |
| Total dividends and distributions | | (0.431 | ) | | (0.333 | ) | | (0.359 | ) | | (0.419 | ) | | (1.982 | ) |
| | |
| Net asset value, end of period | | $19.880 | | | $17.730 | | | $16.490 | | | $14.600 | | | $12.830 | |
| | |
| Total return2 | | 14.73% | | | 9.54% | | | 15.62% | | | 17.96% | | | (33.42% | ) |
| | |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $350,444 | | | $310,494 | | | $390,861 | | | $369,859 | | | $330,717 | |
| Ratio of expenses to average net assets | | 0.73% | | | 0.73% | | | 0.75% | | | 0.74% | | | 0.71% | |
Ratio of expenses to average net assets
prior to fees waived | | 0.73% | | | 0.73% | | | 0.75% | | | 0.76% | | | 0.76% | |
| Ratio of net investment income to average net assets | | 2.21% | | | 2.23% | | | 2.18% | | | 2.75% | | | 2.69% | |
Ratio of net investment income to average net assets
prior to fees waived | | 2.21% | | | 2.23% | | | 2.18% | | | 2.73% | | | 2.65% | |
| Portfolio turnover | | 21% | | | 20% | | | 15% | | | 22% | | | 38% | |
____________________
| 1 | The average shares outstanding method has been applied for per share information. |
| 2 | 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 during some of the periods shown reflects a waiver by the manager. Performance would have been lower had the waiver not been in effect. Total investment return does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
Value Series-9
Delaware VIP® Value Series
Financial Highlights (continued)
Selected data for each share of the Series outstanding throughout each period were as follows:
| | Delaware VIP Value Series Service Class |
| | Year Ended |
| | 12/31/12 | | 12/31/11 | | 12/31/10 | | 12/31/09 | | 12/31/08 |
| Net asset value, beginning of period | | $17.700 | | | $16.470 | | | $14.590 | | | $12.810 | | | $21.390 | |
| | |
| Income (loss) from investment operations: | | | | | | | | | | | | | | | |
| Net investment income1 | | 0.370 | | | 0.338 | | | 0.286 | | | 0.319 | | | 0.397 | |
| Net realized and unrealized gain (loss) | | 2.158 | | | 1.188 | | | 1.921 | | | 1.839 | | | (7.052 | ) |
| Total from investment operations | | 2.528 | | | 1.526 | | | 2.207 | | | 2.158 | | | (6.655 | ) |
| | |
| Less dividends and distributions from: | | | | | | | | | | | | | | | |
| Net investment income | | (0.388 | ) | | (0.296 | ) | | (0.327 | ) | | (0.378 | ) | | (0.455 | ) |
| Net realized gain | | – | | | – | | | – | | | – | | | (1.470 | ) |
| Total dividends and distributions | | (0.388 | ) | | (0.296 | ) | | (0.327 | ) | | (0.378 | ) | | (1.925 | ) |
| | |
| Net asset value, end of period | | $19.840 | | | $17.700 | | | $16.470 | | | $14.590 | | | $12.810 | |
| | |
| Total return2 | | 14.44% | | | 9.26% | | | 15.32% | | | 17.65% | | | (33.57% | ) |
| | |
| Ratios and supplemental data: | | | | | | | | | | | | | | | |
| Net assets, end of period (000 omitted) | | $210,804 | | | $176,363 | | | $144,978 | | | $133,753 | | | $105,992 | |
| Ratio of expenses to average net assets | | 0.98% | | | 0.98% | | | 1.00% | | | 0.99% | | | 0.96% | |
Ratio of expenses to average net assets
prior to fees waived | | 1.03% | | | 1.03% | | | 1.05% | | | 1.06% | | | 1.06% | |
| Ratio of net investment income to average net assets | | 1.96% | | | 1.98% | | | 1.93% | | | 2.50% | | | 2.44% | |
Ratio of net investment income to average net assets
prior to fees waived | | 1.91% | | | 1.93% | | | 1.88% | | | 2.43% | | | 2.35% | |
| Portfolio turnover | | 21% | | | 20% | | | 15% | | | 22% | | | 38% | |
____________________
| 1 | The average shares outstanding method has been applied for per share information. |
| 2 | 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 during all of the periods shown reflects a waiver by the manager and/or distributor. Performance would have been lower had the waiver not been in effect. Total investment return does not include fees, charges, or expenses imposed by the variable annuity and life insurance contracts for which Delaware VIP Trust serves as an underlying investment vehicle. |
See accompanying notes, which are an integral part of the financial statements.
Value Series-10
Delaware VIP® Trust — Delaware VIP Value Series
Notes to Financial Statements
December 31, 2012
Delaware VIP Trust (Trust) is organized as a Delaware statutory trust and offers 10 series: Delaware VIP Diversified Income Series, Delaware VIP Emerging Markets Series, Delaware VIP High Yield Series, Delaware VIP International Value Equity Series, Delaware VIP Limited-Term Diversified Income Series, Delaware VIP REIT Series, Delaware VIP Small Cap Value Series, Delaware VIP Smid Cap Growth Series, Delaware VIP U.S. Growth Series and Delaware VIP Value Series. These financial statements and the related notes pertain to Delaware VIP Value Series (Series). The Trust is an open-end investment company. The Series is considered diversified under the Investment Company Act of 1940, as amended, and offers Standard Class and Service Class shares. The Standard Class shares do not carry a 12b-1 fee and the Service Class shares carry a 12b-1 fee. The shares of the Series are sold only to separate accounts of life insurance companies.
The investment objective of the Series 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 (U.S. GAAP) and are consistently followed by the Series.
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, which approximates fair value. U.S. government and agency securities are valued at the mean between the bid and ask prices, which approximates fair value. Investment company securities are valued at net asset value per share, as reported by the underlying investment company. 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 Series’ 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 Series 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 Series values its securities, generally as of 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 Series 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 Series 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 Series evaluates tax positions taken or expected to be taken in the course of preparing the Series’ tax returns 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 analyzed the Series’ tax positions taken for all open federal income tax years (December 31, 2009 – December 31, 2012), and has concluded that no provision for federal income tax is required in the Series’ financial statements.
Class Accounting—Investment income, common expenses and realized and unrealized gain (loss) on investments are allocated to the classes of the Series 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 Series may purchase certain U.S. government securities subject to the counterparty’s agreement to repurchase them at an agreed upon date and price. The counterparty will be required on a daily basis to maintain the value of the collateral subject to the agreement at not less than the repurchase price (including accrued interest). The agreements are conditioned upon the collateral being deposited under the Federal Reserve book-entry system with the Series’ custodian or a third party sub-custodian. In the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. All open repurchase agreements as of the date of this report were entered into on December 31, 2012.
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the fair value of investments, the reported amounts of assets and liabilities and disclosure of contingent 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 and the differences could be material.
Other—Expenses directly attributable to the Series are charged directly to the Series. Other expenses common to various funds within the Delaware Investments® Family of Funds are generally allocated among 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 Series declares and pays dividends from net investment income and distributions from net realized gain on investments, if any, following the close of the fiscal year. The Series may distribute income dividends and capital gains more frequently, if necessary for tax purposes. Dividends and distributions, if any, are recorded on the ex-dividend date.
Subject to seeking best execution, the Series may direct certain security trades to brokers who have agreed to rebate a portion of the related brokerage commission to the Series in cash. 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 Series on the transaction. There were no commission rebates for the year ended December 31, 2012.
The Series 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 year ended December 31, 2012.
The Series receives earnings credits from its transfer agent when positive cash balances are maintained, which are used to offset transfer agent fees. The expense paid under this arrangement is included in dividend disbursing and transfer agent fees and expenses on the Statement of Operations with the corresponding expense offset shown as “expense paid indirectly.” For the year ended December 31, 2012, the Series earned $1 under this agreement.
Value Series-11
Delaware VIP® Value Series
Notes to Financial Statements (continued)
2. Investment Management, Administration Agreements and Other Transactions with Affiliates
In accordance with the terms of its investment management agreement, the Series 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 Series, 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.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides fund accounting and financial administration oversight services to the Series. For these services, the Series 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 year ended December 31, 2012, the Series was charged $25,739 for these services.
DSC is also the transfer agent and dividend disbursing agent of the Series. The Series pays DSC a monthly asset-based fee for these services. Pursuant to a sub-transfer agency agreement between DSC and BNY Mellon Investment Servicing (US) Inc. (BNYMIS), BNYMIS provides certain sub-transfer agency services to the Series. Sub-transfer agency fees are passed on to and paid directly by the Series.
Pursuant to a distribution agreement and distribution plan, the Series pays Delaware Distributors, L.P. (DDLP), the distributor and an affiliate of DMC, an annual distribution and service fee of 0.30% of the average daily net assets of the Service Class shares. DDLP has contracted to waive distribution and service fees through April 30, 2013 in order to prevent distribution and service fees of the Service Class shares from exceeding 0.25% of average daily net assets. Standard Class shares pay no distribution and service expenses.
At December 31, 2012, the Series had liabilities payable to affiliates as follows:
| | | | Dividend Disbursing, | | | | Other |
| | Investment | | Transfer Agent and Fund | | | | Expenses |
| | | Management | | Accounting Oversight | | Distribution | | Payable |
| | Fee Payable to | | Fees and Other Expenses | | Fee Payable | | to DMC |
| | DMC | | Payable to DSC | | to DDLP | | and Affiliates* |
| | $303,797 | | $5,828 | | $44,478 | | $12,770 |
____________________
*DMC, as part of its administrative services, pays operating expenses on behalf of the Series and is reimbursed on a periodic basis. Expenses include items such as printing of shareholder reports, legal and tax services, custodian fees and trustees’ fees.
As provided in the investment management agreement, the Series bears the cost of certain legal and tax services, including internal legal and tax services provided to the Series by DMC and/or its affiliates’ employees. For the year ended December 31, 2012, the Series was charged $15,735 for internal legal and tax services provided by DMC and/or its affiliates’ employees.
Trustees’ fees include expenses accrued by the Series 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 Series.
3. Investments
For the year ended December 31, 2012, the Series made purchases and sales of investment securities other than short-term investments as follows:
| Purchases | $112,488,109 |
| Sales | 106,817,664 |
At December 31, 2012, the cost of investments for federal income tax purposes and unrealized appreciation (depreciation) for the Series were as follows:
| | | | | Aggregate | | Aggregate | | |
| | Cost of | | Unrealized | | Unrealized | | Net Unrealized |
| | Investments | | Appreciation | | Depreciation | | Appreciation |
| | $441,491,770 | | $130,536,305 | | $(11,500,713) | | $119,035,592 |
U.S. GAAP defines fair value as the price that the Series 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. A three level hierarchy for fair value measurements has been established 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
Value Series-12
Delaware VIP® Value Series
Notes to Financial Statements (continued)
3. Investments (continued)
the assumptions that market participants would use in pricing the asset or liability developed based on the best information available under the circumstances. The Series’ investment in its entirety is assigned a level based upon the observability of the inputs which are significant to the overall valuation. The three level hierarchy of inputs is summarized below.
| Level 1 – | inputs are quoted prices in active markets for identical investments (e.g., equity securities, open-end investment companies, futures contracts, exchange-traded options contracts) |
| Level 2 – | other observable inputs (including, but not limited to: quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs) (e.g., debt securities, government securities, swap contracts, foreign currency exchange contracts, foreign securities utilizing international fair value pricing, broker-quoted securities, fair valued securities) |
| Level 3 – | inputs are significant unobservable inputs (including the Series’ own assumptions used to determine the fair value of investments) (e.g., broker-quoted securities, fair valued securities) |
Level 3 investments are valued using significant unobservable inputs. The Series may also use an income-based valuation approach in which the anticipated future cash flows of the investment are discounted to calculate fair value. Discounts may also be applied due to the nature or duration of any restrictions on the disposition of the investments. Valuations may also be based upon current market prices of securities that are comparable in coupon, rating, maturity and industry. The derived value of a Level 3 investment may not represent the value which is received upon disposition and this could impact the results of operations.
The following table summarizes the valuation of the Series’ investments by fair value hierarchy levels as of December 31, 2012:
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Common Stock | | $ | 544,839,202 | | $ | – | | | $ | – | | | $ | 544,839,202 |
| Securities Lending Collateral | | | – | | | 127,303 | | | | – | | | | 127,303 |
| Short-Term Investments | | | – | | | 15,560,857 | | | | – | | | | 15,560,857 |
| Total | | $ | 544,839,202 | | $ | 15,688,160 | | | $ | – | | | $ | 560,527,362 |
The securities that have been deemed worthless on the statement of net assets are considered to be Level 3 securities in this table.
During the year ended December 31, 2012, there were no transfers between Level 1 investments, Level 2 investments or Level 3 investments that had a significant impact to the Series. The Series’ policy is to recognize transfers between levels at the beginning of the reporting period.
A reconciliation of Level 3 investments is presented when the Series has a significant amount of Level 3 investments at the beginning, interim or end of period in relation to net assets. Management has determined not to provide additional disclosure on Level 3 inputs under ASU No. 2011-04 since the Level 3 investments are not considered significant to the Series’ net assets at the end of the period.
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 years ended December 31, 2012 and 2011 was as follows:
| Year | | Year |
| Ended | | Ended |
| | 12/31/12 | | 12/31/11 |
| Ordinary income | $ | 11,343,629 | | $ | 10,468,306 |
5. Components of Net Assets on a Tax Basis
As of December 31, 2012, the components of net assets on a tax basis were as follows:
| Shares of beneficial interest | $ | 510,283,160 | |
| Undistributed ordinary income | | 11,109,286 | |
| Capital loss carryforwards | | (79,180,231 | ) |
| Unrealized appreciation of investments | | 119,035,592 | |
| Net assets | $ | 561,247,807 | |
The differences between book basis and tax basis components of net assets are primarily attributable to tax deferral of losses on wash sales.
Value Series-13
Delaware VIP® Value Series
Notes to Financial Statements (continued)
5. Components of Net Assets on a Tax Basis (continued)
For federal income tax purposes, capital loss carryforwards may be carried forward and applied against future capital gains. $26,426,267 was utilized in 2012. Capital loss carryforwards remaining at December 31, 2012 will expire as follows: $36,245,426 expires in 2016 and $42,934,805 expires in 2017.
On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (Act) was enacted, which changed various technical rules governing the tax treatment of regulated investment companies. The changes were generally effective for taxable years beginning after the date of enactment. Under the Act, the Series is permitted to carry forward capital losses incurred in taxable years beginning after the date of enactment for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years, which carry an expiration date. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital loss carryforwards will retain their character as either short-term or long-term capital losses rather than being considered all short-term as permitted under previous regulation.
6. Capital Shares
Transactions in capital shares were as follows:
| Year | | Year |
| Ended | | Ended |
| 12/31/12 | | 12/31/11 |
| Shares sold: | | | | | |
| Standard Class | 1,138,908 | | | 1,109,510 | |
| Service Class | 2,155,629 | | | 2,805,446 | |
| |
| Shares issued upon reinvestment of dividends and distributions: | | | | | |
| Standard Class | 299,499 | | | 248,123 | |
| Service Class | 210,165 | | | 149,798 | |
| | 3,804,201 | | | 4,312,877 | |
| Shares redeemed: | | | | | |
| Standard Class | (1,322,667 | ) | | (7,551,486 | ) |
| Service Class | (1,705,740 | ) | | (1,795,502 | ) |
| (3,028,407 | ) | | (9,346,988 | ) |
| Net increase (decrease) | 775,794 | | | (5,034,111 | ) |
7. Line of Credit
The Series, along with certain other funds in the Delaware Investments® Family of Funds (Participants), was a participant in a $125,000,000 revolving line of credit 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 were charged an annual commitment fee, which was allocated across the Participants on the basis of each Participant’s allocation of the entire facility. The Participants were permitted to borrow up to a maximum of one third of their net assets under the agreement. Each Participant was individually, and not jointly, liable for its particular advances, if any, under the line of credit. The line of credit under the agreement expired on November 13, 2012.
On November 13, 2012, the Series, along with the other Participants, entered into an amendment to the agreement for a $125,000,000 revolving line of credit. The agreement is to be used as described above and operates in substantially the same manner as the original agreement. The line of credit available under the agreement expires on November 12, 2013. The Series had no amounts outstanding as of December 31, 2012 or at any time during the year then ended.
8. Securities Lending
The Series, along with other funds in the Delaware Investments® Family of Funds, may lend its securities pursuant to a security lending agreement (Lending Agreement) with The Bank of New York Mellon (BNY Mellon). At the time a security is loaned, the borrower must post collateral equal to the required percentage of the market value of the loaned security, including any accrued interest. The required percentage is: (i) 102% with respect to U.S. securities and foreign securities that are denominated and payable in U.S. dollars; and (ii) 105% with respect to foreign securities. With respect to each loan, if on any business day the aggregate market value of securities collateral plus cash collateral held 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 by the end of the following business day which, together with the collateral already held, will be not less than the applicable initial collateral requirements for such security loan. If the aggregate market value of securities collateral and cash collateral held with respect to a security loan exceeds the applicable initial collateral requirement, upon the request of the borrower BNY Mellon must return enough collateral to the borrower by the end of the following business day to reduce the value of the remaining collateral to the applicable initial collateral requirement for such security loan. As a result of the foregoing, the value of the collateral held with respect to a loaned security may be temporarily more or less than the value of the security on loan.
Cash collateral received is generally invested in the Delaware Investments Collateral Fund No. 1 (Collective Trust) established by BNY Mellon for the purpose of investment on behalf of funds managed by DMC that participate in BNY Mellon’s securities lending program. The Collective Trust may invest in U.S. government securities and high quality corporate debt, asset-backed and other money market securities and in repurchase agreements collateralized by such securities, provided that the Collective Trust will generally have a dollar-weighted average portfolio maturity of 60 days or less. In October 2008, BNY Mellon transferred certain distressed securities from the previous collateral investment pool into the Mellon GSL Reinvestment Trust II. The Series 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 Series or, at the discretion of the lending agent, replace the loaned securities. The Series continues to record dividends or interest, as applicable, on the securities loaned and is subject to changes in value of the securities loaned that may occur during the
Value Series-14
Delaware VIP® Value Series
Notes to Financial Statements (continued)
8. Securities Lending (continued)
term of the loan. The Series 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 Series 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 Series, the security lending agent and the borrower. The Series records security lending income net of allocations to the security lending agent and the borrower.
The Collective Trust used for the investment of cash collateral received from borrowers of securities 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. The Series may incur investment losses as a result of investing securities lending collateral in the Collective Trust or another collateral investment pool. This could occur if an investment in a collateral investment pool defaulted or if it were necessary to liquidate assets in the collateral investment pool to meet returns on outstanding security loans at a time when the collateral investment pool’s net asset value per unit was less than $1.00. Under those circumstances, the Series may not receive an amount from the collateral investment pool that is equal in amount to the collateral the Series would be required to return to the borrower of the securities and the Series would be required to make up for this shortfall.
At December 31, 2012, the value of the securities on loan was $402,852, for which cash collateral was received and invested in accordance with the Lending Agreement. At December 31, 2012, the value of invested collateral was $127,303. These investments are presented on the Statement of Net Assets under the caption “Securities Lending Collateral.”
9. Credit and Market Risk
The Series may invest up to 10% 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 Series 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 Series’ Board has delegated to DMC the day-to-day functions of determining whether individual securities are liquid for purposes of the Series’ limitation on investments in illiquid securities. Securities eligible for resale pursuant to Rule 144A, which are determined to be liquid, are not subject to the Series’ 10% limit on investments in illiquid securities. As of December 31, 2012, there were no Rule 144A securities. Illiquid securities have been identified on the Statement of Net Assets.
10. Contractual Obligations
The Series enters into contracts in the normal course of business that contain a variety of indemnifications. The Series’ maximum exposure under these arrangements is unknown. However, the Series has not had prior claims or losses pursuant to these contracts. Management has reviewed the Series’ existing contracts and expects the risk of loss to be remote.
11. Subsequent Events
Management has determined that no material events or transactions occurred subsequent to December 31, 2012 that would require recognition or disclosure in the Series’ financial statements.
Value Series-15
Delaware VIP® Trust — Delaware VIP Value Series
Report of Independent Registered Public Accounting Firm
To the Board of Trustees of Delaware VIP Trust
and the Shareholders of Delaware VIP Value Series:
In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Delaware VIP Value Series (one of the series constituting Delaware VIP Trust, hereafter referred to as the "Series") at December 31, 2012, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Series’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2012 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial highlights for each of the two years in the period ended December 31, 2009 were audited by other independent accountants whose report dated February 17, 2010 expressed an unqualified opinion on those statements.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 15, 2013
Value Series-16
Delaware VIP® Trust — Delaware VIP Value Series
Other Series Information (Unaudited)
Board Consideration of Delaware VIP Value Series Investment Advisory Agreement
At a meeting held on August 21-23, 2012 (“Annual Meeting”), the Board of Trustees (“Board”), including a majority of disinterested or independent Trustees, approved the renewal of the Investment Advisory Agreement for Delaware VIP Value Series (“Series”). In making its decision, the Board considered information furnished at regular quarterly Board meetings, including reports detailing Series performance, investment strategies and expenses, as well as information prepared specifically in connection with the renewal of the investment advisory contract. Information furnished specifically in connection with the renewal of the Investment Advisory Agreement with Delaware Management Company (“DMC”) included materials provided by DMC and its affiliates (“Delaware Investments”) concerning, among other things, the nature, extent and quality of services provided to the Series, the costs of such services to the Series, economies of scale and the financial condition and profitability of Delaware Investments. In addition, in connection with the Annual Meeting, reports were provided in May 2012 and included independent historical and comparative reports provided by Lipper, Inc., an independent statistical compilation organization (“Lipper”). The Lipper reports compared the Series’ investment performance and expenses with those of other comparable mutual funds. The Independent Trustees reviewed and discussed the Lipper reports with independent legal 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; comparative client fee information; 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 the Series’ policies.
In considering information relating to the approval of the Series’ advisory agreement, the Independent Trustees received assistance and advice from and met separately with independent legal 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 Series 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 Series, compliance of portfolio managers with the investment policies, strategies and restrictions for the Series, 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 Series’ investment advisor and the emphasis placed on research in the investment process. The Board recognized DMC’s receipt of several industry distinctions. The Board gave favorable consideration to DMC’s efforts to control expenditures while maintaining service levels committed to fund matters. The Board noted that in July 2011, Management implemented measures to reduce overall costs and improve transfer agent and shareholder servicing functions through outsourcing. 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 Series in view of the importance of investment performance 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 Series showed the investment performance of its Standard Class 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 Series was shown for the past one-, three-, five- and ten-year periods, as applicable, ended March 31, 2012. The Board’s objective is that the Series’ performance for the periods considered be at or above the median of its Performance Universe. The following paragraph summarizes the performance results for the Series and the Board’s view of such performance.
The Performance Universe for the Series consisted of the Series and all large-cap value funds underlying variable insurance products as selected by Lipper. The Lipper report comparison showed that the Series’ total return for the one-, five- and ten-year periods was in the first quartile of its Performance Universe. The report further showed that the Series’ total return for the three-year period was in the second quartile. The Board was satisfied with performance.
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 Series as of its most recently completed fiscal year. The Board also focused on the comparative analysis of effective management fees and total expense ratios of the Series versus effective management fees and expense ratios of a group of similar funds as selected by Lipper (“Expense Group”). In reviewing comparative costs, the Series’ contractual management fee and the actual management fee incurred by the Series were compared with the contractual management fees (assuming all funds in the Expense Group were similar in size to the Series) and actual management fees (as reported by each fund) within the Expense Group, taking into account any applicable breakpoints and fee waivers. The Series’ total expenses were also compared with those of its Expense Group. The Lipper total expenses, for comparative consistency, were shown by Lipper for Standard Class shares which do not charge 12b-1 and non 12b-1 service fees. The Board considered fees paid to Delaware Investments for non-management services. The Board’s objective is to limit the Series’ total expense ratio to be competitive with that of the Expense Group. The following paragraph summarizes the expense results for the Series and the Board’s view of such expenses.
The expense comparisons for the Series showed that the actual management fee and total expenses were in the quartile with the second lowest expenses of its Expense Group. The Board was satisfied with the management fee and total expenses of the Series in comparison to those of its Expense Group.
MANAGEMENT PROFITABILITY. The Board considered the level of profits realized by Delaware Investments in connection with the operation of the Series. 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, reflects 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
Value Series-17
Delaware VIP® Value Series
Other Series Information (Unaudited) (continued)
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 profitability of Delaware Investments.
ECONOMIES OF SCALE. The Trustees considered whether economies of scale are realized by Delaware Investments as the Series’ 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 Series’ management contract fell within the standard structure. The Board also noted that the Series’ assets exceeded the first breakpoint level. The Board believed that, given the extent to which economies of scale might be realized by the advisor and its affiliates, the schedule of fees under the Investment Advisory Agreement provides a sharing of benefits with the Series and its shareholders.
Tax Information
For the fiscal year ended December 31, 2012, the Fund designates distributions paid during the year as follows:
| (A) | | |
| Ordinary | | |
| Income | | (B) |
| | Distributions | | Qualifying |
| (Tax Basis) | | Dividends1 |
| 100% | | 100% |
____________________
(A) is based on a percentage of the Fund’s total distributions.
(B) is based on a percentage of the Fund’s ordinary income distributions.
1Qualifying dividends represent dividends which qualify for the corporate dividends received deduction.
Value Series-18
Delaware Investments® Family of Funds
BOARD OF TRUSTEES/DIRECTORS AND OFFICERS ADDENDUM
A mutual fund is governed by a Board of Trustees/Directors (“Trustees”), which has oversight responsibility for the management of a fund’s business affairs. Trustees establish procedures and oversee and review the performance of the investment manager, the distributor, and others who perform services for the fund. The independent fund trustees, in particular, are advocates for shareholder interests. Each trustee has served in that capacity since he or she was elected to or appointed to the Board of Trustees, and will continue to serve until his or her retirement or the election of a new trustee in his or her place. The following is a list of the Trustees and Officers with certain background and related information.
| | | | | Number of | Other |
| | | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INTERESTED TRUSTEES | | | | | |
| Patrick P. Coyne1 | Chairman, | Chairman and Trustee | Patrick P. Coyne has served in | 71 | Director and Audit |
| 2005 Market Street | President, | since August 16, 2006 | various executive capacities | | Committee Member — |
| Philadelphia, PA | Chief Executive | | at different times at | | Kaydon Corp. |
| 19103 | Officer, and | President and | Delaware Investments.2 | | |
| Trustee | Chief Executive Officer | | | Board of Governors |
| April 1963 | | since August 1, 2006 | | | Member — Investment |
| | | | | Company Institute (ICI) |
| |
| INDEPENDENT TRUSTEES | | | | | |
| Thomas L. Bennett | Trustee | Since | Private Investor — | 71 | Director — |
| 2005 Market Street | | March 2005 | (March 2004–Present) | | Bryn Mawr |
| Philadelphia, PA | | | | | Bank Corp. (BMTC) |
| 19103 | | | Investment Manager — | | (2007–2011) |
| | | | Morgan Stanley & Co. | | |
| October 1947 | | | (January 1984–March 2004) | | |
| Joseph W. Chow | Trustee | Since | Executive Vice President | 71 | Director and Audit |
| 2005 Market Street | | January 2013 | (Emerging Economies Strategies, | | Committee |
| Philadelphia, PA 19103 | | | Risk and Corporate Administration) | | Member — Hercules |
| | | State Street Corporation | | Technology Growth |
| January 1953 | | | (July 2004–March 2011) | | Capital, Inc. |
| John A. Fry | Trustee | Since | President | 71 | Board of Governors |
| 2005 Market Street | | January 2001 | Drexel University | | Member — NASDAQ |
| Philadelphia, PA | | | (August 2010–Present) | | OMX PHLX LLC |
| 19103 | | | | | |
| | | President — | | Director and Audit |
| May 1960 | | | Franklin & Marshall College | | Committee Member — |
| | | (June 2002–July 2010) | | Community Health |
| | | | | Systems |
| |
| | | | | Director — Ecore |
| | | | | International |
| | | | | (2009–2010) |
| Anthony D. Knerr | Trustee | Since | Managing Director — | 71 | None |
| 2005 Market Street | | April 1990 | Anthony Knerr & Associates | | |
| Philadelphia, PA | | | (Strategic Consulting) | | |
| 19103 | | | (1990–Present) | | |
| |
| December 1938 | | | | | |
| Lucinda S. Landreth | Trustee | Since | Private Investor | 71 | None |
| 2005 Market Street | | March 2005 | (2004–Present) | | |
| Philadelphia, PA | | | | | |
| 19103 | | | | | |
| |
| June 1947 | | | | | |
Value Series-19
| | | | | Number of | Other |
| | | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| INDEPENDENT TRUSTEES (continued) | | | |
| Frances A. Sevilla-Sacasa | Trustee | Since | Chief Executive Officer — | 71 | Trust Manager — |
| 2005 Market Street | | September 2011 | Banco Itaú Europa | | Camden Property Trust |
| Philadelphia, PA | | | International | | (2011–Present) |
| 19103 | | | (April 2012–Present) | | |
| |
| January 1956 | | | Executive Advisor to Dean | | |
| | | (August 2011–March 2012) | | |
| | | and Interim Dean | | |
| | | (January 2011–July 2011) — | | |
| | | University of Miami School of | | |
| | | Business Administration | | |
| |
| | | | President — U.S. Trust, | | |
| | | Bank of America Private | | |
| | | Wealth Management | | |
| | | (Private Banking) | | |
| | | (July 2007–December 2008) | | |
| Thomas K. Whitford | Trustee | Since | Vice Chairman | 71 | None |
| 2005 Market Street | | January 2013 | (2010–Present) | | |
| Philadelphia, PA 19103 | | | Chief Administrative | | |
| | | Officer (2008–2010) | | |
| March 1956 | | | and Executive Vice | | |
| | | President and Chief | | |
| | | Administrative Officer | | |
| | | (2007–2009) — | | |
| | | PNC Financial | | |
| | | Services Group | | |
| Janet L. Yeomans | Trustee | Since | Vice President and Treasurer | 71 | Director, Audit |
| 2005 Market Street | | April 1999 | (January 2006–Present) | | Committee Member |
| Philadelphia, PA | | | Vice President — Mergers | | and Investment |
| 19103 | | | & Acquisitions | | Committee Member |
| | | (January 2003–January 2006), | | Okabena Company |
| July 1948 | | | and | | |
| | | Vice President and Treasurer | | Chair — 3M |
| | | (July 1995–January 2003) | | Investment Management |
| | | 3M Corporation | | Company |
| | | | | (January 2005–July 2012) |
| J. Richard Zecher | Trustee | Since | Founder — | 71 | Director and Compensation |
| 2005 Market Street | | March 2005 | Investor Analytics | | Committee Member — |
| Philadelphia, PA | | | (Risk Management) | | Investor Analytics |
| 19103 | | | (May 1999–Present) | | |
| | | | | Director — |
| July 1940 | | | Founder — | | P/E Investments |
| | | P/E Investments | | |
| | | (Hedge Fund) | | |
| | | (September 1996–Present) | | |
| |
| OFFICERS | | | | | |
| David F. Connor | Vice President, | Vice President since | David F. Connor has served as | 71 | None3 |
| 2005 Market Street | Deputy General | September 2000 | Vice President and Deputy | | |
| Philadelphia, PA | Counsel, and Secretary | and Secretary | General Counsel of | | |
| 19103 | | since | Delaware Investments | | |
| | October 2005 | since 2000. | | |
| December 1963 | | | | | |
| Daniel V. Geatens | Vice President | Treasurer | Daniel V. Geatens has served | 71 | None3 |
| 2005 Market Street | and Treasurer | since | in various capacities at | | |
| Philadelphia, PA | | October 2007 | different times at | | |
| 19103 | | | Delaware Investments. | | |
| |
| October 1972 | | | | | |
Value Series-20
| | | | | Number of | Other |
| | | | Principal | Portfolios in Fund | Directorships |
| Name, | Position(s) | | Occupation(s) | Complex Overseen | Held by |
| Address, | Held with | Length of Time | During | by Trustee | Trustee |
| and Birth Date | Fund(s) | Served | Past 5 Years | or Officer | or Officer |
| OFFICERS (continued) | | | | |
| David P. O’Connor | Executive Vice | Executive Vice President | David P. O’Connor has served in | 71 | None3 |
| 2005 Market Street | President, | since February 2012; | various executive and legal | | |
| Philadelphia, PA | General Counsel, | Senior Vice President | capacities at different times | | |
| 19103 | and Chief | October 2005–February 2012; | at Delaware Investments. | | |
| Legal Officer | General Counsel and | | | |
| February 1966 | | Chief Legal Officer | | | |
| | since October 2005 | | | |
| Richard Salus | Senior | Chief Financial | Richard Salus has served in | 71 | None3 |
| 2005 Market Street | Vice President | Officer since | various executive capacities | | |
| Philadelphia, PA | and | November 2006 | at different times at | | |
| 19103 | Chief Financial | | Delaware Investments. | | |
| Officer | | | | |
| October 1963 | | | | | |
| 1 Patrick P. Coyne is considered to be an “Interested Trustee” because he is an executive officer of the Fund’s(s’) investment advisor. |
| 2 Delaware Investments is the marketing name for Delaware Management Holdings, Inc. and its subsidiaries, including the Fund’s(s’) investment advisor, principal underwriter, and its transfer agent. |
| 3 David F. Connor, Daniel V. Geatens, David P. O’Connor, and Richard Salus serve in similar capacities for the six portfolios of the Optimum Fund Trust, which have the same investment advisor, principal underwriter, and transfer agent as the registrant. |
The Statement of Additional Information for the Fund(s) includes additional information about the Trustees and Officers and is available, without charge, upon request by calling 800 523-1918.
The Series files its complete schedule of portfolio holdings with the Securities and Exchange Commission (Commission) for the first and third quarters of each fiscal year on Form N-Q. The Series’ Forms N-Q, as well as a description of the policies and procedures that the Series 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 website at sec.gov. In addition, a description of the policies and procedures that the Series uses to determine how to vote proxies (if any) relating to portfolio securities is available without charge on the Delaware Investments® Funds’ website at delawareinvestments.com. The Series’ Forms N-Q may be reviewed and copied at the Commission’s Public Reference Room in Washington, DC; information on the operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Series voted proxies relating to portfolio securities during the most recently disclosed 12-month period ended June 30 is available without charge (i) through the Delaware Investments Funds’ website at delawareinvestments.com; and (ii) on the Commission’s website at sec.gov. |
| AR-VIPV [12/12] DG3 18587 (2/13) (10125) | | Value Series-21 |
Item 2. Code of Ethics
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. A copy of the registrant’s Code of Business Ethics has been posted on the Delaware Investments Internet Web site at www.delawareinvestments.com. Any amendments to the Code of Business Ethics, and information on any waiver from its provisions granted by the registrant, will also be posted on this Web site within five business days of such amendment or waiver and will remain on the Web site for at least 12 months.
Item 3. Audit Committee Financial Expert
The registrant’s Board of Trustees/Directors has determined that certain members of the registrant’s Audit Committee are audit committee financial experts, as defined below. For purposes of this item, an “audit committee financial expert” is a person who has the following attributes:
a. An understanding of generally accepted accounting principles and financial statements;
b. The ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserves;
c. Experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant’s financial statements, or experience actively supervising one or more persons engaged in such activities;
d. An understanding of internal controls and procedures for financial reporting; and
e. An understanding of audit committee functions.
An “audit committee financial expert” shall have acquired such attributes through:
a. Education and experience as a principal financial officer, principal accounting officer, controller, public accountant, or auditor or experience in one or more positions that involve the performance of similar functions;
b. Experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor, or person performing similar functions;
c. Experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing, or evaluation of financial statements; or
d. Other relevant experience.
The registrant’s Board of Trustees/Directors has also determined that each member of the registrant’s Audit Committee is independent. In order to be “independent” for purposes of this item, the Audit Committee member may not: (i) other than in his or her capacity as a member of the Board of Trustees/Directors or any committee thereof, accept directly or indirectly any consulting, advisory or other compensatory fee from the issuer; or (ii) be an “interested person” of the registrant as defined in Section 2(a)(19) of the Investment Company Act of 1940.
The names of the audit committee financial experts on the registrant’s Audit Committee are set forth below:
Thomas L. Bennett1
John A. Fry
Frances A. Sevilla-Sacasa
Janet L. Yeomans
Item 4. Principal Accountant Fees and Services
(a) Audit fees.
The aggregate fees billed for services provided to the registrant by its independent auditors for the audit of the registrant’s annual financial statements and for services normally provided by the independent auditors in connection with statutory and regulatory filings or engagements were $298,090 for the fiscal year ended December 31, 2012.
The aggregate fees billed for services provided to the registrant by its independent auditors for the audit of the registrant’s annual financial statements and for services normally provided by the independent auditors in connection with statutory and regulatory filings or engagements were $288,440 for the fiscal year ended December 31, 2011.
(b) Audit-related fees.
The aggregate fees billed by the registrant’s independent auditors for services relating to the performance of the audit of the registrant’s financial statements and not reported under paragraph (a) of this Item were $0 for the fiscal year ended December 31, 2012.
The aggregate fees billed by the registrant’s independent auditors for services relating to the performance of the audit of the financial statements of the registrant’s investment adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $685,000 for the registrant’s fiscal year ended December 31, 2012. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%. These audit-related services were as follows: year end audit procedures; group reporting and subsidiary statutory audits.
The aggregate fees billed by the registrant’s independent auditors for services relating to the performance of the audit of the registrant’s financial statements and not reported under paragraph (a) of this Item were $0 for the fiscal year ended December 31, 2011.
____________________
1 The instructions to Form N-CSR require disclosure on the relevant experience of persons who qualify as audit committee financial experts based on “other relevant experience.” The Board of Trustees/Directors has determined that Mr. Bennett qualifies as an audit committee financial expert by virtue of: his education and Chartered Financial Analyst designation; his experience as a credit analyst, portfolio manager and the manager of other credit analysts and portfolio managers; and his prior service on the audit committees of public companies.
The aggregate fees billed by the registrant’s independent auditors for services relating to the performance of the audit of the financial statements of the registrant’s investment adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $593,000 for the registrant’s fiscal year ended December 31, 2011. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%. These audit-related services were as follows: year end audit procedures; reporting up and subsidiary statutory audits.
(c) Tax fees.
The aggregate fees billed by the registrant’s independent auditors for tax-related services provided to the registrant were $58,250 for the fiscal year ended December 31, 2012. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%. These tax-related services were as follows: review of income tax returns and review of annual excise distribution calculations.
The aggregate fees billed by the registrant’s independent auditors for tax-related services provided to the registrant’s investment adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $0 for the registrant’s fiscal year ended December 31, 2012.
The aggregate fees billed by the registrant’s independent auditors for tax-related services provided to the registrant were $56,400 for the fiscal year ended December 31, 2011. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%. These tax-related services were as follows: review of income tax returns and review of annual excise distribution calculations.
The aggregate fees billed by the registrant’s independent auditors for tax-related services provided to the registrant’s investment adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $0 for the registrant’s fiscal year ended December 31, 2011.
(d) All other fees.
The aggregate fees billed for all services provided by the independent auditors to the registrant other than those set forth in paragraphs (a), (b) and (c) of this Item were $0 for the fiscal year ended December 31, 2012.
The aggregate fees billed for all services other than those set forth in paragraphs (b) and (c) of this Item provided by the registrant’s independent auditors to the registrant’s adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $0 for the registrant’s fiscal year ended December 31, 2012. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%.
The aggregate fees billed for all services provided by the independent auditors to the registrant other than those set forth in paragraphs (a), (b) and (c) of this Item were $0 for the fiscal year ended December 31, 2011.
The aggregate fees billed for all services other than those set forth in paragraphs (b) and (c) of this Item provided by the registrant’s independent auditors to the registrant’s adviser and other service providers under common control with the adviser and that relate directly to the operations or financial reporting of the registrant were $25,000 for the registrant’s fiscal year ended December 31, 2011. The percentage of these fees relating to services approved by the registrant’s Audit Committee pursuant to the de minimis exception from the pre-approval requirement in Rule 2-01(c)(7)(i)(C) of Regulation S-X was 0%. These other services were as follows: attest examination of management's assertion to the controls in place at the transfer agent to be in compliance with Rule 17ad-13(a)(3) of the Securities Exchange Act of 1934.
(e) The registrant’s Audit Committee has established pre-approval policies and procedures as permitted by Rule 2-01(c)(7)(i)(B) of Regulation S-X (the “Pre-Approval Policy”) with respect to services provided by the registrant’s independent auditors. Pursuant to the Pre-Approval Policy, the Audit Committee has pre-approved the services set forth in the table below with respect to the registrant up to the specified fee limits. Certain fee limits are based on aggregate fees to the registrant and other registrants within the Delaware Investments Family of Funds.
| Service | Range of Fees |
| Audit Services | |
| Statutory audits or financial audits for new Funds | up to $40,000 per Fund |
| Services associated with SEC registration statements (e.g., Form N-1A, Form N-14, etc.), periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings (e.g., comfort letters for closed-end Fund offerings, consents), and assistance in responding to SEC comment letters | up to $10,000 per Fund |
| Consultations by Fund management as to the accounting or disclosure treatment of transactions or events and/or the actual or potential impact of final or proposed rules, standards or interpretations by the SEC, FASB, or other regulatory or standard-setting bodies (Note: Under SEC rules, some consultations may be considered “audit-related services” rather than “audit services”) | up to $25,000 in the aggregate |
| Audit-Related Services | |
| Consultations by Fund management as to the accounting or disclosure treatment of transactions or events and/or the actual or potential impact of final or proposed rules, standards or interpretations by the SEC, FASB, or other regulatory or standard-setting bodies (Note: Under SEC rules, some consultations may be considered “audit services” rather than “audit-related services”) | up to $25,000 in the aggregate |
| Tax Services | |
| U.S. federal, state and local and international tax planning and advice (e.g., consulting on statutory, regulatory or administrative developments, evaluation of Funds’ tax compliance function, etc.) | up to $25,000 in the aggregate |
| U.S. federal, state and local tax compliance (e.g., excise distribution reviews, etc.) | up to $5,000 per Fund |
| Review of federal, state, local and international income, franchise and other tax returns | up to $5,000 per Fund |
Under the Pre-Approval Policy, the Audit Committee has also pre-approved the services set forth in the table below with respect to the registrant’s investment adviser and other entities controlling, controlled by or under common control with the investment adviser that provide ongoing services to the registrant (the “Control Affiliates”) up to the specified fee limit. This fee limit is based on aggregate fees to the investment adviser and its Control Affiliates.
| Service | Range of Fees |
| Non-Audit Services | |
| Services associated with periodic reports and other documents filed with the SEC and assistance in responding to SEC comment letters | up to $10,000 in the aggregate |
The Pre-Approval Policy requires the registrant’s independent auditors to report to the Audit Committee at each of its regular meetings regarding all services initiated since the last such report was rendered, including those services authorized by the Pre-Approval Policy.
(f) Not applicable.
(g) The aggregate non-audit fees billed by the registrant’s independent auditors for services rendered to the registrant and to its investment adviser and other service providers under common control with the adviser were $10,528,331 and $5,228,766 for the registrant’s fiscal years ended December 31, 2012 and December 31, 2011, respectively.
(h) In connection with its selection of the independent auditors, the registrant’s Audit Committee has considered the independent auditors’ provision of non-audit services to the registrant’s investment adviser and other service providers under common control with the adviser that were not required to be pre-approved pursuant to Rule 2-01(c)(7)(ii) of Regulation S-X. The Audit Committee has determined that the independent auditors’ provision of these services is compatible with maintaining the auditors’ independence.
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 Company 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 fourth 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: DELAWARE VIP® TRUST
| /s/ PATRICK P. COYNE |
| By: | Patrick P. Coyne |
| Title: | Chief Executive Officer |
| Date: | March 1, 2013 |
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.
| /s/ PATRICK P. COYNE |
| By: | Patrick P. Coyne |
| Title: | Chief Executive Officer |
| Date: | March 1, 2013 |
| |
| /s/ RICHARD SALUS |
| By: | Richard Salus |
| Title: | Chief Financial Officer |
| Date: | March 1, 2013 |
