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: 811-4547
Exact name of registrant as specified in charter: Voyageur Mutual Funds III
Address of principal executive offices:
2005 Market Street
Philadelphia, PA 19103
Name and address of agent for service:
David F. Connor, Esq.
2005 Market Street
Philadelphia, PA 19103
Registrant's telephone number, including area code: (800) 523-1918
Date of fiscal year end: April 30
Date of reporting period: October 31, 2006
Item 1. Reports to Stockholders
Semiannual Report Delaware
Select Growth Fund
October 31, 2006
Growth equity mutual fund
[DELAWARE INVESTMENTS LOGO] [LOGO] POWERED BY RESEARCH(R)
Table of contents
> Disclosure of Fund expenses .................................................1
> Sector allocation and top 10 holdings .......................................2
> Statement of net assets .....................................................3
> Statement of operations .....................................................5
> Statements of changes in net assets .........................................6
> Financial highlights ........................................................7
> Notes to financial statements ..............................................12
> Other Fund information .....................................................16
> About the organization .....................................................18
Funds are not FDIC insured and are not guaranteed. It is possible to lose
the principal amount invested.
Mutual fund advisory services provided by Delaware Management Company, a
series of Delaware Management Business Trust, which is a registered
investment advisor.
(C) 2006 Delaware Distributors, L.P.
Disclosure of Fund expenses
For the period May 1, 2006 to October 31, 2006
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments, reinvested
dividends, or other distributions; redemption fees; and exchange fees; and (2)
ongoing costs, including management fees; distribution and/or service (12b-1)
fees; and other Fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period May 1, 2006 to October 31, 2006.
Actual Expenses
The first section of the table shown, "Actual Fund Return," provides information
about actual account values and actual expenses. You may use the information in
this section of the table, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first section under the heading
entitled "Expenses Paid During Period" to estimate the expenses you paid on your
account during this period.
Hypothetical Example for Comparison Purposes
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. Therefore, the second
section of the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have been
higher. The Fund's actual expenses shown in the table reflect fee waivers in
effect. The expenses shown in the table assume reinvestment of all dividends and
distributions.
Delaware Select Growth Fund
Expense Analysis of an Investment of $1,000
Expenses
Beginning Ending Paid During
Account Account Annualized Period
Value Value Expense 5/1/06 to
5/1/06 10/31/06 Ratios 10/31/06 *
________________________________________________________________________________
Actual Fund Return
Class A $1,000.00 $967.30 1.50% $ 7.44
Class B 1,000.00 963.70 2.25% 11.14
Class C 1,000.00 964.10 2.25% 11.14
Class R 1,000.00 966.60 1.75% 8.67
Institutional Class 1,000.00 968.70 1.25% 6.20
________________________________________________________________________________
Hypothetical 5% Return (5% return before expenses)
Class A $1,000.00 $1,017.64 1.50% $ 7.63
Class B 1,000.00 1,013.86 2.25% 11.42
Class C 1,000.00 1,013.86 2.25% 11.42
Class R 1,000.00 1,016.38 1.75% 8.89
Institutional Class 1,000.00 1,018.90 1.25% 6.36
________________________________________________________________________________
* "Expenses Paid During Period" are equal to the Fund's annualized expense
ratio, multiplied by the average account value over the period, multiplied by
184/365 (to reflect the one-half year period).
1
Sector allocation and top 10 holdings
Delaware Select Growth Fund
As of October 31, 2006
Sector designations may be different than the sector designations presented in
other Fund materials.
Percentage
Sector of Net Assets
________________________________________________________________________________
Common Stock \ 99.99%
Basic Industry/Capital Goods 1.70%
Business Services 7.49%
Consumer Durables 3.33%
Consumer Non-Durables 13.81%
Consumer Services 25.82%
Energy 1.15%
Financials 9.36%
Health Care 16.48%
Technology 20.85%
________________________________________________________________________________
Federal Agency (Discount Notes) 0.13%
________________________________________________________________________________
Securities Lending Collateral 17.69%
________________________________________________________________________________
Total Market Value of Securities 117.81%
________________________________________________________________________________
Obligation to Return Securities Lending Collateral (17.69%)
________________________________________________________________________________
Liabilities Net of Receivables and Other Assets (0.12%)
________________________________________________________________________________
Total Net Assets 100.00%
________________________________________________________________________________
\ 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 Holdings of Net Assets
________________________________________________________________________________
NetFlix 8.80%
eBay 6.53%
UnitedHealth Group 5.85%
QUALCOMM 5.05%
Jackson Hewitt Tax Service 5.04%
SanDisk 4.95%
IntercontinentalExchange 4.62%
Weight Watchers International 4.45%
Allergan 4.37%
Seagate Technology 3.58%
________________________________________________________________________________
2
Statement of net assets
Delaware Select Growth Fund
October 31, 2006 (Unaudited)
Number of Market
Shares Value
________________________________________________________________________________
Common Stock - 99.99% \
________________________________________________________________________________
Basic Industry/Capital Goods - 1.70%
* Graco 80,100 $ 3,264,876
* Praxair 72,200 4,350,050
____________
7,614,926
____________
Business Services - 7.49%
Expeditors International Washington 251,800 11,937,838
*+ Global Cash Access Holdings 909,400 14,504,930
Paychex 135,200 5,337,696
+ Research in Motion 15,600 1,832,688
____________
33,613,152
____________
Consumer Durables - 3.33%
*+ Select Comfort 698,000 14,923,240
____________
14,923,240
____________
Consumer Non-Durables - 13.81%
* Best Buy 37,900 2,093,975
*+ Blue Nile 272,500 10,412,225
*+ NetFlix 1,427,700 39,490,182
Staples 209,000 5,390,110
Walgreen 105,000 4,586,400
____________
61,972,892
____________
Consumer Services - 25.82%
*+ Apollo Group Class A 106,300 3,928,848
+ eBay 911,400 29,283,282
* IHOP 296,700 15,478,839
* Jackson Hewitt Tax Service 653,200 22,600,720
*+ MGM MIRAGE 199,500 8,582,490
* Strayer Education 112,200 12,692,064
Weight Watchers International 458,100 19,973,160
+ Western Union 150,000 3,307,500
____________
115,846,903
____________
Energy - 1.15%
* EOG Resources 77,700 5,169,381
____________
5,169,381
____________
Financials - 9.36%
Chicago Mercantile Exchange Holdings 21,300 10,671,300
*+ IntercontinentalExchange 245,400 20,716,668
+ NETeller 678,321 1,866,692
* optionsXpress Holdings 281,400 8,745,912
____________
42,000,572
____________
Health Care - 16.48%
Allergan 169,600 19,588,800
+ Genentech 163,700 13,636,210
UnitedHealth Group 537,600 26,224,128
*+ Zimmer Holdings 201,300 14,495,613
____________
73,944,751
____________
Technology - 20.85%
* Blackbaud 159,100 3,977,500
+ Google Class A 18,400 8,765,576
*+ Intuit 410,500 14,490,650
*+ NAVTEQ 161,600 5,365,120
QUALCOMM 622,800 22,663,692
*+ SanDisk 461,700 22,207,770
*+ Seagate Technology 710,900 16,052,122
____________
93,522,430
____________
Total Common Stock
(cost $375,639,779) 448,608,247
____________
Principal
Amount
________________________________________________________________________________
^ Federal agency (Discount notes) - 0.13%
________________________________________________________________________________
Freddie Mac 5.00% 11/1/06 $570,000 570,000
____________
Total Federal Agency (Discount Notes)
(cost $570,000) 570,000
____________
Total Market Value of Securities Before
Securities Lending Collateral - 100.12%
(cost $376,209,779) 449,178,247
____________
Number of
Shares
________________________________________________________________________________
Securities Lending Collateral ** - 17.69%
________________________________________________________________________________
Investment Companies
Mellon GSL DBT II Collateral Fund 79,353,146 79,353,146
____________
Total Securities Lending Collateral
(cost $79,353,146) 79,353,146
____________
Total Market Value of Securities - 117.81%
(cost $455,562,925) 528,531,393 \
Obligation to Return Securities Lending
Collateral ** - (17.69%) (79,353,146)
Liabilities Net of Receivables and
Other Assets - (0.12%) (549,646)
____________
Net Assets Applicable to 17,928,399 Shares
Outstanding - 100.00% $448,628,601
____________
Net Asset Value - Delaware Select Growth Fund
Class A ($175,646,702 / 6,679,970 Shares) $26.29
______
Net Asset Value - Delaware Select Growth Fund
Class B ($157,646,236 / 6,592,745 Shares) $23.91
______
Net Asset Value - Delaware Select Growth Fund
Class C ($72,438,404 / 3,062,059 Shares) $23.66
______
Net Asset Value - Delaware Select Growth Fund
Class R ($1,466,304 / 56,321 Shares) $26.03
______
Net Asset Value - Delaware Select Growth Fund
Institutional Class ($41,430,955 / 1,537,304 Shares) $26.95
______
(continues) 3
Statement of net assets
Delaware Select Growth Fund
________________________________________________________________________________
________________________________________________________________________________
Components of Net Assets at October 31, 2006:
Shares of beneficial interest
(unlimited authorization - no par) $1,027,002,813
Accumulated net realized loss on investments (651,342,680)
Net unrealized appreciation of investments 72,968,468
______________
Total net assets $ 448,628,601
______________
+ Non-income producing security for the period ended October 31, 2006.
* Fully or partially on loan.
** See Note 7 in "Notes to Financial Statements."
! Includes $76,484,367 of securities loaned.
^ Zero coupon security. The interest rate shown is the yield at the time of
purchase.
\ Narrow industries are utilized for compliance purposes for diversification
whereas broad sectors are used for financial reporting.
Net Asset Value and Offering Price per Share -
Delaware Select Growth Fund
Net asset value Class A (A) $26.29
Sales charges (5.75% of offering price) (B) 1.60
______
Offering price $27.89
______
(A) Net asset value per share, as illustrated, is the amount which would be
paid upon redemption or repurchase of shares.
(B) See the current prospectus for purchase of $50,000 or more.
See accompanying notes
4
Statement of operations
Delaware Select Growth Fund
Six Months Ended October 31, 2006 (Unaudited)
Investment Income:
Dividends $1,122,783
Securities lending income 642,571
Interest 133,496 $ 1,898,850
__________ ____________
Expenses:
Management fees 1,719,626
Distribution expenses - Class A 215,262
Distribution expenses - Class B 845,183
Distribution expenses - Class C 372,211
Distribution expenses - Class R 4,131
Dividend disbursing and transfer agent fees and expenses 1,174,735
Accounting and administration expenses 91,713
Reports and statements to shareholders 67,883
Registration fees 50,625
Legal fees 35,824
Trustees' fees & benefits 32,900
Audit and tax 15,872
Custodian fees 12,405
Taxes (other than taxes on income) 6,422
Insurance fees 5,552
Consulting fees 5,216
Dues and services 2,129
Trustees' expenses 1,550
Pricing fees 1,320 4,660,559
__________
Less expenses absorbed or waived (349,121)
Less waived distribution expenses - Class R (688)
Less expense paid indirectly (3,494)
____________
Total operating expenses 4,307,256
____________
Net Investment Loss (2,408,406)
____________
Net Realized and Unrealized Gain (Loss) on Investments and Foreign Currencies:
Net realized gain (loss) on:
Investments 6,426,501
Foreign currencies (9,486)
____________
Net realized gain 6,417,015
Net change in unrealized appreciation/depreciation of investments and foreign currencies (24,249,730)
____________
Net Realized and Unrealized Loss on Investments and Foreign Currencies (17,832,715)
____________
Net Decrease in Net Assets Resulting from Operations $(20,241,121)
____________
See accompanying notes
5
Statements of changes in net assets
Delaware Select Growth Fund
Six Months
Ended Year
10/31/06 Ended
(Unaudited) 4/30/06
Increase (Decrease) in Net Assets from Operations:
Net investment loss $ (2,408,406) $ (3,865,148)
Net realized gain on investments and foreign currencies 6,417,015 98,307,298
Net change in unrealized appreciation/depreciation of investments and foreign currencies (24,249,730) 46,335,632
____________ ____________
Net increase (decrease) in net assets resulting from operations (20,241,121) 140,777,782
____________ ____________
Capital Share Transactions:
Proceeds from shares sold:
Class A 24,652,832 62,014,484
Class B 1,878,050 6,935,811
Class C 4,357,626 24,125,361
Class R 223,618 1,169,731
Institutional Class 3,829,697 19,872,254
____________ ____________
34,941,823 114,117,641
____________ ____________
Cost of shares repurchased:
Class A (30,123,759) (100,060,074)
Class B (35,284,589) (68,215,523)
Class C (12,813,964) (23,648,373)
Class R (198,747) (507,634)
Institutional Class (6,927,885) (16,974,279)
____________ ____________
(85,348,944) (209,405,883)
____________ ____________
Decrease in net assets derived from capital share transactions (50,407,121) (95,288,242)
____________ ____________
Net Increase (Decrease) in Net Assets (70,648,242) 45,489,540
Net Assets:
Beginning of period 519,276,843 473,787,303
____________ ____________
End of period (there was no undistributed net investment income at either period end) $448,628,601 $519,276,843
____________ ____________
See accompanying notes
6
Financial highlights
Delaware Select Growth Fund Class A
Selected data for each share of the Fund outstanding throughout each period
were as follows:
Six Months Year Ended
Ended __________________________________________________________
10/31/06 (1)
(Unaudited) 4/30/06 4/30/05 4/30/04 4/30/03 4/30/02
____________________________________________________________________________________________________________________________________
Net asset value, beginning of period $27.180 $20.470 $20.680 $16.700 $20.290 $24.890
Income (loss) from investment operations:
Net investment loss (2) (0.082) (0.086) (0.170) (0.171) (0.147) (0.193)
Net realized and unrealized gain (loss) on investments
and foreign currencies (0.808) 6.796 (0.040) 4.151 (3.443) (4.407)
_______ _______ _______ _______ _______ _______
Total from investment operations (0.890) 6.710 (0.210) 3.980 (3.590) (4.600)
_______ _______ _______ _______ _______ _______
Net asset value, end of period $26.290 $27.180 $20.470 $20.680 $16.700 $20.290
_______ _______ _______ _______ _______ _______
Total return (3) (3.27%) 32.78% (1.02%) 23.83% (17.69%) (18.48%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $175,647 $187,319 $173,890 $243,201 $208,395 $333,172
Ratio of expenses to average net assets 1.50% 1.55% 1.52% 1.50% 1.50% 1.45%
Ratio of expenses to average net assets
prior to expense limitation and expense
paid indirectly 1.65% 1.70% 1.70% 1.86% 1.83% 1.50%
Ratio of net investment loss to average net assets (0.67%) (0.35%) (0.85%) (0.87%) (0.92%) (0.86%)
Ratio of net investment loss to average net assets
prior to expense limitation and expense
paid indirectly (0.82%) (0.50%) (1.03%) (1.23%) (1.25%) (0.91%)
Portfolio turnover 61% 124% 72% 82% 69% 127%
____________________________________________________________________________________________________________________________________
(1) Ratios and portfolio turnover have been annualized and total return has not been annualized.
(2) The average shares outstanding method has been applied for per share information.
(3) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of
dividends and distributions at net asset value and does not reflect the impact of a sales charge. Total investment return
reflects waivers and payment of fees by the manager. Performance would have been lower had the expense limitation not been
in effect.
See accompanying notes
(continues) 7
Financial highlights
Delaware Select Growth Fund Class B
Selected data for each share of the Fund outstanding throughout each period
were as follows:
Six Months Year Ended
Ended __________________________________________________________
10/31/06 (1)
(Unaudited) 4/30/06 4/30/05 4/30/04 4/30/03 4/30/02
____________________________________________________________________________________________________________________________________
Net asset value, beginning of period $24.810 $18.820 $19.160 $15.590 $19.090 $23.600
Income (loss) from investment operations:
Net investment loss (2) (0.166) (0.252) (0.310) (0.308) (0.259) (0.340)
Net realized and unrealized gain (loss) on investments
and foreign currencies (0.734) 6.242 (0.030) 3.878 (3.241) (4.170)
_______ _______ _______ _______ _______ _______
Total from investment operations (0.900) 5.990 (0.340) 3.570 (3.500) (4.510)
_______ _______ _______ _______ _______ _______
Net asset value, end of period $23.910 $24.810 $18.820 $19.160 $15.590 $19.090
_______ _______ _______ _______ _______ _______
Total return (3) (3.63%) 31.76% (1.77%) 22.90% (18.33%) (19.11%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $157,646 $199,863 $202,576 $281,906 $257,542 $421,578
Ratio of expenses to average net assets 2.25% 2.30% 2.27% 2.25% 2.25% 2.20%
Ratio of expenses to average net assets
prior to expense limitation and expense
paid indirectly 2.40% 2.45% 2.45% 2.61% 2.58% 2.25%
Ratio of net investment loss to average net assets (1.42%) (1.10%) (1.60%) (1.62%) (1.67%) (1.61%)
Ratio of net investment loss to average net assets
prior to expense limitation and expense
paid indirectly (1.57%) (1.25%) (1.78%) (1.98%) (2.00%) (1.66%)
Portfolio turnover 61% 124% 72% 82% 69% 127%
____________________________________________________________________________________________________________________________________
(1) Ratios and portfolio turnover have been annualized and total return has not been annualized.
(2) The average shares outstanding method has been applied for per share information.
(3) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of
dividends and distributions at net asset value and does not reflect the impact of a sales charge. Total investment return
reflects waivers and payment of fees by the manager. Performance would have been lower had the expense limitation not been
in effect.
See accompanying notes
8
Delaware Select Growth Fund Class C
Selected data for each share of the Fund outstanding throughout each period
were as follows:
Six Months Year Ended
Ended __________________________________________________________
10/31/06 (1)
(Unaudited) 4/30/06 4/30/05 4/30/04 4/30/03 4/30/02
____________________________________________________________________________________________________________________________________
Net asset value, beginning of period $24.540 $18.620 $18.950 $15.430 $18.890 $23.350
Income (loss) from investment operations:
Net investment loss (2) (0.165) (0.251) (0.308) (0.306) (0.258) (0.337)
Net realized and unrealized gain (loss) on investments
and foreign currencies (0.715) 6.171 (0.022) 3.826 (3.202) (4.123)
_______ _______ _______ _______ _______ _______
Total from investment operations (0.880) 5.920 (0.330) 3.520 (3.460) (4.460)
_______ _______ _______ _______ _______ _______
Net asset value, end of period $23.660 $24.540 $18.620 $18.950 $15.430 $18.890
_______ _______ _______ _______ _______ _______
Total return (3) (3.59%) 31.72% (1.74%) 22.81% (18.27%) (19.14%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $72,439 $84,458 $64,786 $98,549 $95,552 $166,246
Ratio of expenses to average net assets 2.25% 2.30% 2.27% 2.25% 2.25% 2.20%
Ratio of expenses to average net assets
prior to expense limitation and expense
paid indirectly 2.40% 2.45% 2.45% 2.61% 2.58% 2.25%
Ratio of net investment loss to average net assets (1.42%) (1.10%) (1.60%) (1.62%) (1.67%) (1.61%)
Ratio of net investment loss to average net assets
prior to expense limitation and expense
paid indirectly (1.57%) (1.25%) (1.78%) (1.98%) (2.00%) (1.66%)
Portfolio turnover 61% 124% 72% 82% 69% 127%
____________________________________________________________________________________________________________________________________
(1) Ratios and portfolio turnover have been annualized and total return has not been annualized.
(2) The average shares outstanding method has been applied for per share information.
(3) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of
dividends and distributions at net asset value and does not reflect the impact of a sales charge. Total investment return
reflects waivers and payment of fees by the manager. Performance would have been lower had the expense limitation not been
in effect.
See accompanying notes
(continues) 9
Financial highlights
Delaware Select Growth Fund Class R
Selected data for each share of the Fund outstanding throughout each period
were as follows:
Six Months Year Ended
Ended _____________________ 6/02/03 (2)
10/31/06 (1) to
(Unaudited) 4/30/06 4/30/05 4/30/04
____________________________________________________________________________________________________________________________________
Net asset value, beginning of period $26.940 $20.340 $20.620 $18.530
Income (loss) from investment operations:
Net investment loss (3) (0.113) (0.154) (0.242) (2.370)
Net realized and unrealized gain (loss) on investments
and foreign currencies (0.797) 6.754 (0.038) 4.460
_______ _______ _______ _______
Total from investment operations (0.910) 6.600 (0.280) 2.090
_______ _______ _______ _______
Net asset value, end of period $26.030 $26.940 $20.340 $20.620
_______ _______ _______ _______
Total return (4) (3.34%) 32.38% (1.36%) 11.28%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $1,466 $1,485 $652 $262
Ratio of expenses to average net assets 1.75% 1.82% 1.87% 1.85%
Ratio of expenses to average net assets
prior to expense limitation and expense paid indirectly 2.00% 2.05% 2.05% 2.21%
Ratio of net investment loss to average net assets (0.92%) (0.62%) (1.20%) (1.26%)
Ratio of net investment loss to average net assets
prior to expense limitation and expense paid indirectly (1.17%) (0.85%) (1.38%) (1.62%)
Portfolio turnover 61% 124% 72% 82% (5)
____________________________________________________________________________________________________________________________________
(1) Ratios and portfolio turnover have been annualized and total return has not been annualized.
(2) Date of commencement of operations; ratios have been annualized and total return has not been annualized.
(3) The average shares outstanding method has been applied for per share information.
(4) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of
dividends and distributions at net asset value. Total investment return reflects waivers and payment of fees by the manager and
distributor, as applicable. Performance would have been lower had the expense limitation not been in effect.
(5) Portfolio turnover is representative of the Fund for the entire year.
See accompanying notes
10
Delaware Select Growth Fund Institutional Class
Selected data for each share of the Fund outstanding throughout each period were
as follows:
Six Year
Months Ended
Ended ________________________________________________
10/31/06 (1)
(Unaudited) 4/30/06 4/30/05 4/30/04 4/30/03 4/30/02
____________________________________________________________________________________________________________________________________
Net asset value, beginning of period $27.820 $20.900 $21.060 $16.970 $20.570 $25.170
Income (loss) from investment operations:
Net investment loss (2) (0.051) (0.024) (0.118) (0.121) (0.106) (0.139)
Net realized and unrealized gain (loss) on investments
and foreign currencies (0.819) 6.944 (0.042) 4.211 (3.494) (4.461)
_______ _______ _______ _______ _______ ______
Total from investment operations (0.870) 6.920 (0.160) 4.090 (3.600) (4.600)
_______ _______ _______ _______ _______ ______
Net asset value, end of period $26.950 $27.820 $20.900 $21.060 $16.970 $20.570
_______ _______ _______ _______ _______ ______
Total return (3) (3.13%) 33.11% (0.76%) 24.10% (17.50%) (18.28%)
Ratios and supplemental data:
Net assets, end of period (000 omitted) $41,431 $46,152 $31,883 $42,410 $36,080 $53,381
Ratio of expenses to average net assets 1.25% 1.30% 1.27% 1.25% 1.25% 1.20%
Ratio of expenses to average net assets
prior to expense limitation and expense paid indirectly 1.40% 1.45% 1.45% 1.61% 1.58% 1.25%
Ratio of net investment loss to average net assets (0.42%) (0.10%) (0.60%) (0.62%) (0.67%) (0.61%)
Ratio of net investment loss to average net assets
prior to expense limitation and expense paid indirectly (0.57%) (0.25%) (0.78%) (0.98%) (1.00%) (0.66%)
Portfolio turnover 61% 124% 72% 82% 69% 127%
____________________________________________________________________________________________________________________________________
(1) Ratios and portfolio turnover have been annualized and total return has not been annualized.
(2) The average shares outstanding method has been applied for per share information.
(3) Total investment return is based on the change in net asset value of a share during the period and assumes reinvestment of
dividends and distributions at net asset value. Total investment return reflects waivers and payment of fees by the manager.
Performance would have been lower had the expense limitation not been in effect.
See accompanying notes
11
Notes to financial statements
Delaware Select Growth Fund
October 31, 2006 (Unaudited)
Voyageur Mutual Funds III (the "Trust") is organized as a Delaware statutory
trust and offers two series: Delaware Large Cap Core Fund and Delaware Select
Growth Fund. These financial statements and the related notes pertain to
Delaware Select Growth Fund (the "Fund"). The Trust is an open-end investment
company. The Fund is considered diversified under the Investment Company Act of
1940, as amended, and offers Class A, Class B, Class C, Class R and
Institutional Class shares. Class A shares are sold with a front-end sales
charge of up to 5.75%. Class A share purchases of $1,000,000 or more will incur
a contingent deferred sales charge of up to 1% if redeemed during the first year
and 0.50% during the second year, provided that Delaware Distributors, L.P.
(DDLP) paid a financial advisor a commission on the purchase of those shares.
Class B shares are sold with a contingent deferred sales charge that declines
from 4% to zero depending upon the period of time the shares are held. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately eight years after purchase. Class C shares are sold with a
contingent deferred sales charge of 1%, if redeemed during the first 12 months.
Class R and Institutional Class shares are not subject to a sales charge and are
offered for sale exclusively to a limited group of investors.
The investment objective of the Fund is to seek long-term capital appreciation
which the Fund attempts to achieve by investing primarily in equity securities
of companies the manager believes have the potential for high earnings growth.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Fund.
Security Valuation - Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Short-term debt securities having less than 60
days to maturity are valued at amortized cost, which approximates market value.
Securities lending collateral is valued at amortized cost, which approximates
market value. Other securities and assets for which market quotations are not
readily available are valued at fair value as determined in good faith under the
direction of the Fund's Board of Trustees. 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 with respect to
foreign securities, aftermarket trading or significant events after local market
trading (e.g., government actions or pronouncements, trading volume or
volatility on markets, exchanges among dealers, or news events).
In September 2006, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 157, Fair Value Measurements, (Statement 157). Statement 157
establishes a framework for measuring fair value in generally accepted
accounting principles, clarifies the definition of fair value within that
framework, and expands disclosures about the use of fair value measurements.
Statement 157 is intended to increase consistency and comparability among fair
value estimates used in financial reporting. Statement 157 is effective for
fiscal years beginning after November 15, 2007. Management does not expect the
adoption of Statement 157 to have an impact on the amounts reported in the
financial statements.
Federal Income Taxes - The Fund intends to continue to qualify for federal
income tax purposes as a regulated investment company and make the requisite
distributions to shareholders. Accordingly, no provision for federal income
taxes has been made in the financial statements.
On July 13, 2006, FASB released FASB Interpretation No. 48 "Accounting for
Uncertainty in Income Taxes" (FIN 48). FIN 48 provides guidance for how
uncertain tax positions should be recognized, measured, presented and disclosed
in the financial statements. FIN 48 requires the evaluation of tax positions
taken or expected to be taken in the course of preparing the Fund's 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 would be recorded as a tax benefit or expense in
the current year. Adoption of FIN 48 is required for fiscal years beginning
after December 15, 2006 and is to be applied to all open tax years as of the
effective date. Although the Fund's tax positions are currently being evaluated,
management does not expect the adoption of FIN 48 to have a material impact on
the Fund's financial statements.
Class Accounting - Investment income, common expenses and realized and
unrealized gain (loss) on investments are allocated to the various classes of
the Fund on the basis of daily net assets of each class. Distribution expenses
relating to a specific class are charged directly to that class.
Foreign Currency Transactions - Transactions denominated in foreign currencies
are recorded at the prevailing exchange rates on the valuation date. 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 Fund isolates
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 Fund reports certain foreign currency related transactions as
components of realized gains (losses) for financial reporting purposes, where
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. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other - Expenses directly attributable to the Fund are charged directly to the
Fund. Other expenses common to various funds within the Delaware Investments(R)
Family of Funds are generally allocated amongst such funds on the basis of
average net assets. Management fees and some other expenses are paid monthly.
Security transactions are recorded on
12
1. Significant Accounting Policies (continued)
The date the securities are purchased or sold (trade date) for financial
reporting purposes. Costs used in calculating realized gains and losses on the
sale of investment securities are those of the specific securities sold.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on the accrual basis. The Fund declares and pays dividends from net
investment income and distributions from net realized gain on investments, if
any, annually.
In addition, in order to satisfy certain distribution requirements of the Tax
Reform Act of 1986, the Fund may declare special year-end dividend and capital
gains distributions during November or December to shareholders of record on a
date in such month. Such distributions, if received by shareholders by January,
are deemed to have been paid by the Fund and received by shareholders on the
earlier of the date paid or December 31 of the prior year.
Subject to seeking best execution, the Fund may direct certain security trades
to brokers who have agreed to rebate a portion of the related brokerage
commission to the Fund in cash. Such commission rebates are included in realized
gain on investments in the accompanying financial statements and totaled $36,336
for the six months ended October 31, 2006. In general, best execution refers to
many factors, including the price paid or received for a security, the
commission charged, the promptness and reliability of execution, the
confidentiality and placement accorded the order, and other factors affecting
the overall benefit obtained by the Fund on the transaction.
The Fund receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expense paid
under the above arrangement is included in custodian fees on the Statement of
Operations with the corresponding expense offset shown as "expense paid
indirectly."
2. Investment Management, Administration Agreements and Other Transactions with
Affiliates
In accordance with the terms of its investment management agreement, the Fund
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.75% on the first $500 million of average daily net assets of the Fund,
0.70% on the next $500 million, 0.65% on the next $1.5 billion and 0.60% on
average daily net assets in excess of $2.5 billion.
Effective September 1, 2006, DMC has contractually agreed to waive that portion,
if any, of its management fee and reimburse the Fund to the extent necessary to
ensure that annual operating expenses, exclusive of taxes, interest, brokerage
commissions, distribution fees, certain insurance costs and extraordinary
expenses, do not exceed 1.23% of average daily net assets of the Fund through
August 31, 2007. Prior to September 1, 2006, DMC had contractually agreed to
waive its fees in order to prevent such expenses from exceeding 1.25% of the
average daily net assets of the Fund.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Fund pays
DSC a monthly fee computed at the annual rate of 0.04% of the Fund's average
daily net assets for accounting and administration services. The Fund pays DSC a
monthly fee based on the number of shareholder accounts for dividend disbursing
and transfer agent services.
Pursuant to a distribution agreement and distribution plan, the Fund pays DDLP,
the distributor and an affiliate of DMC, an annual distribution and service fee
not to exceed 0.25% of the average daily net assets of the Class A shares, 1.00%
of the average daily net assets of the Class B and C shares and 0.60% of the
average daily net assets of the Class R shares. Institutional Class shares pay
no distribution and services expenses. DDLP has contracted to limit distribution
and service fees through August 31, 2007 in order to prevent distribution and
service fees of Class R shares from exceeding 0.50% of average daily net assets.
At October 31, 2006, the Fund had liabilities payable to affiliates as follows:
Investment management fee payable to DMC $210,229
Dividend disbursing, transfer agent, accounting
and administration fees and other expenses
payable to DSC 204,891
Distribution fee payable to DDLP 232,463
Other expenses payable to DMC and affiliates * 49,866
* DMC, as part of its administrative services, pays operating expenses on behalf
of the Fund and is reimbursed on a periodic basis. Such expenses include items
such as printing of shareholder reports, fees for audit, legal and tax
services, registration fees and trustees' fees.
As provided in the investment management agreement, the Fund bears the cost of
certain legal and tax services, including internal legal and tax services
provided to the Fund by DMC and/or its' affiliates employees. For the six months
ended October 31, 2006, the Fund was charged $9,734 for internal legal and tax
services by DMC and/or its' affiliates employees.
For the six months ended October 31, 2006, DDLP earned $20,821 for commissions
on sales of the Fund's Class A shares. For the six months ended October 31,
2006, DDLP received gross contingent deferred sales charge commissions of $22,
$92,256 and $4,367 on redemption of the Fund's Class A, Class B and Class C
shares, respectively, and these commissions were entirely used to offset
up-front commissions previously paid by DDLP to broker-dealers on sales of those
shares.
Trustees' Fees and Benefits include expenses accrued by the Fund for each
Trustee's retainer, per meeting fees and retirement benefits. Independent
Trustees with over five years of uninterrupted service are eligible to
participate in a retirement plan that provides for the payment of benefits upon
retirement. The amount of the retirement benefit is based on factors set forth
in the plan including the number of years of service. On November 16, 2006, the
Board of Trustees of the Fund unanimously voted to terminate the retirement
plan. Payments equal to the net present value of the earned benefits will be
made in 2007 to those independent trustees and retired independent trustees so
entitled. The retirement benefit payout for the Fund is $54,849. Certain
officers of DMC, DSC and DDLP are officers and/or trustees of the Trust. These
officers and trustees are paid no compensation by the Fund.
(continues) 13
Notes to financial statements
Delaware Select Growth Fund
3. Investments
For the six months ended October 31, 2006, the Fund made purchases of
$141,875,697 and sales of $196,828,771 of investment securities other than
short-term investments.
At October 31, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At October 31, 2006, the cost of investments was $456,673,840.
At October 31, 2006, net unrealized appreciation was $71,857,553, of which
$84,208,212 related to unrealized appreciation of investments and $12,350,659
related to unrealized depreciation of investments.
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. generally
accepted accounting principles. Additionally, gains (losses) on foreign currency
transactions and net short-term gains on sales of investment securities are
treated as ordinary income for federal income tax purposes. There were no
dividends and distributions paid for the six months ended October 31, 2006 and
the year ended April 30, 2006.
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of October 31, 2006, the
estimated components of net assets on a tax basis were as follows:
Shares of beneficial interest $1,027,002,813
Realized gains 5/1/06 - 10/31/06 7,252,386
* Capital loss carryforwards as of 4/30/06 (657,484,151)
Unrealized appreciation of investments and
foreign currencies 71,857,553
____________
Net assets $448,628,601
____________
* The amount of this loss which can be utilized in subsequent years is subject
to an annual limitation in accordance with the Internal Revenue Code due to
the Fund merger with Delaware Technology and Innovation Fund in March 2004.
The differences between book basis and tax basis components of net assets are
primarily attributable to tax deferral of losses on wash sales.
For financial reporting purposes, capital accounts are adjusted to reflect the
tax character of permanent book/tax differences. Reclassifications are primarily
due to tax treatment of net operating losses and gain (loss) on foreign currency
transactions. Results of operations and net assets were not affected by these
reclassifications. For the six months ended October 31, 2006, the Fund recorded
an estimate of these differences since the final tax characteristics cannot be
determined until fiscal year end.
Accumulated net investment loss $ 2,408,406
Accumulated net realized gain (loss) 9,486
Paid-in Capital (2,417,892)
For federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. Capital loss carryforwards
remaining at April 30, 2006 will expire as follows: $451,231,283 expires in
2010, $187,722,457 expires in 2011 and $18,530,411 expires in 2012.
For the six months ended October 31, 2006, the Fund had capital gains of
$7,252,386 which may reduce the capital loss carryforwards.
5. Capital Shares
Transactions in capital stock shares were as follows:
Six Months Year
Ended Ended
10/31/06 4/30/06
Shares sold:
Class A 988,387 2,395,515
Class B 81,903 298,735
Class C 191,265 1,018,825
Class R 9,019 43,854
Institutional Class 146,801 778,469
__________ __________
1,417,375 4,535,398
__________ __________
Shares repurchased:
Class A (1,201,154) (3,998,857)
Class B (1,545,377) (3,003,725)
Class C (570,480) (1,056,505)
Class R (7,801) (20,825)
Institutional Class (268,505) (645,005)
__________ __________
(3,593,317) (8,724,917)
__________ __________
Net decrease (2,175,942) (4,189,519)
__________ __________
For the six months ended October 31, 2006 and the year ended April 30, 2006,
352,191 Class B shares were converted to 320,985 Class A shares valued at
$8,053,332 and 254,674 Class B shares were converted to 233,153 Class A shares
valued at $6,027,607, respectively. The respective amounts are included in Class
B redemptions and Class A subscriptions in the table above and the Statements of
Changes in Net Assets.
6. Line of Credit
The Fund, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each Participant's allocation of the entire facility. The
Participants may borrow up to a maximum of one third of their net assets under
the agreement. The Fund had no amounts outstanding as of October 31, 2006, or at
any time during the period then ended.
7. Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts as a way of
managing foreign exchange rate risk. The Fund may enter into these contracts to
fix the U.S. dollar value of a security that it has agreed to buy or sell for
the period between the date the trade was entered into and the date the security
is delivered and paid for. The Fund may also use these contracts to hedge the
U.S. dollar value of securities it already owns that are denominated in foreign
currencies. The change in market 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 forward foreign currency
exchange contracts does not eliminate fluctuations in the underlying prices of
14
7. Foreign Currency Exchange Contracts (continued)
the securities, but does establish a rate of exchange that can be achieved in
the future. Although forward foreign currency exchange contracts limit the risk
of loss due to a decline in the value of the hedged currency, they also limit
any potential gain that might result should the value of the currency increase.
In addition, the Fund could be exposed to risks if the counterparties to the
contracts are unable to meet the terms of their contracts. No forward foreign
currency exchange contracts were outstanding at October 31, 2006.
8. Securities Lending
The Fund, along with other funds in the Delaware Investments(R) Family of Funds,
may lend its securities pursuant to a security lending agreement (Lending
Agreement) with Mellon Bank N.A. ("Mellon"). Initial security loans made
pursuant to the Lending Agreement are required to be secured by U.S. government
obligations and/or cash collateral not less than 102% of the market value of the
securities issued in the United States. With respect to each loan, if the
aggregate market value of the collateral held on any business day is less than
the aggregate market value of the securities which are the subject of such loan,
the borrower will be notified to provide additional collateral not less than the
applicable collateral requirements. Cash collateral received is invested in
fixed income securities, with a weighted average maturity not to exceed 90 days,
rated in one of the top two tiers by Standard & Poor's Ratings Group or Moody's
Investors Service, Inc. or repurchase agreements collateralized by such
securities. However, in the event of default or bankruptcy by the lending agent,
realization and/or retention of the collateral may be subject to legal
proceedings. In the event the borrower fails to return loaned securities and the
collateral received is insufficient to cover the value of the loaned securities
and provided such collateral shortfall is not the result of investment losses,
the lending agent has agreed to pay the amount of the shortfall to the Fund, or
at the discretion of the lending agent, replace the loaned securities. The Fund
continues to record dividends on the securities loaned and is subject to change
in value of the securities loaned that may occur during the term of the loan.
The Fund has the right under the Lending Agreement to recover the securities
from the borrower on demand. The security lending agent and the borrower retain
a portion of the earnings from the collateral investments. The Fund records
security lending income net of such allocation.
At October 31, 2006, the market value of the securities on loan was $76,484,367,
for which cash collateral was received and invested in accordance with the
Lending Agreement. Such investments are presented on the Statement of Net Assets
under the caption "Securities Lending Collateral."
9. Credit and Market Risk
The Fund invests a significant portion of its assets in small- and mid-sized
companies and may be subject to certain risks associated with ownership of
securities of such companies. Investments in small- or mid-sized companies may
be more volatile than investments in larger companies for a number of reasons,
which include more limited financial resources or a dependence on narrow product
lines.
The Fund may invest up to 15% of its total assets in illiquid securities, which
may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Fund from disposing of them in a
timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Fund's Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Fund's limitation on investments in illiquid assets. At
October 31, 2006, there were no Rule 144A securities and no securities have been
determined to be illiquid under the Fund's Liquidity Procedures.
10. Contractual Obligations
The Fund enters into contracts in the normal course of business that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Fund's existing
contracts and expects the risk of loss to be remote.
15
Other Fund information
Delaware Select Growth Fund
Board Consideration of Delaware Select Growth Fund Investment Advisory
Agreement
At a meeting held on May 17-18, 2006 (the "Annual Meeting"), the Board of
Trustees, including a majority of disinterested or independent Trustees,
approved the renewal of the Investment Advisory Agreement for the Delaware
Select Growth Fund (the "Fund"). In making its decision, the Board considered
information furnished throughout the year at regular Board meetings, as well as
information prepared specifically in connection with the Annual Meeting.
Information furnished and discussed throughout the year included reports
detailing Fund performance, investment strategies, expenses, compliance matters
and other services provided by Delaware Management Company ("DMC"), the
investment advisor. Information furnished specifically in connection with the
Annual Meeting included materials provided by DMC and its affiliates ("Delaware
Investments") concerning, among other things, the level of services provided to
the Fund, the costs of such services to the Fund, economies of scale and the
financial condition and profitability of Delaware Investments. In addition, in
connection with the Annual Meeting, the Board considered independent historical
and comparative reports prepared by Lipper Inc. ("Lipper"), an independent
statistical compilation organization. The Board also considered industry
comparative information presented by representatives from Lipper. The Lipper
reports compared the Fund's investment performance and expenses with those of
other comparable mutual funds. The Board also received certain supplemental
information regarding management's policy with respect to advisory fee levels
and its philosophy with respect to breakpoints; the structure of portfolio
manager compensation; and any constraints or limitations on the availability of
securities in certain investment styles which might inhibit DMC's ability to
fully invest in accordance with Fund policies.
In considering such materials, the independent Trustees received assistance and
advice from and met separately with independent counsel and representatives from
Lipper. At the meeting with representatives from Lipper, Mr. Driscoll, then
Chairman of the Delaware Investments Family of Funds, and Chairman and Chief
Executive Officer of the investment advisor, was present to respond to questions
by Lipper and the independent Trustees. While the Board considered the
Investment Advisory Agreements for all of the funds in the Delaware Investments
Family of Funds at the same Board meeting, information was provided and
considered by the Board for each fund individually. In approving the continuance
of the Investment Advisory Agreement for the Fund, the Board, including a
majority of independent Trustees, determined that the existing advisory fee
structure was fair and reasonable and that the continuance of the Investment
Advisory Agreement was in the best interests of the Fund and its shareholders.
While attention was given to all information furnished, the following discusses
the primary factors relevant to the Board's deliberations and determination,
including those relating to the selection of the investment advisor and the
approval of the advisory fee.
Nature, Extent And Quality of Service. Consideration was given to the services
provided by Delaware Investments to the Fund and its shareholders. In reviewing
the nature, extent and quality of services, the Board emphasized reports
furnished to it throughout the year at regular Board meetings covering matters
such as the relative performance of the Fund, compliance of portfolio managers
with the investment policies, strategies and restrictions for the Fund, the
compliance of management personnel with the Code of Ethics adopted throughout
the Delaware Investments Family of Funds complex, the adherence to fair value
pricing procedures as established by the Board and the accuracy of net asset
value calculations. The Board noted that it was pleased with the current
staffing of the Fund's investment advisor and management's efforts to strengthen
and deepen portfolio management teams during the past year, the emphasis on
research and the compensation system for advisory personnel. Favorable
consideration was given to DMC's efforts to maintain, and in some instances
increase, financial and human resources committed to fund matters. Other factors
taken into account by the Board were Delaware Investments' preparedness for, and
response to, legal and regulatory matters. The Board also considered the
transfer agent and shareholder services provided to Fund shareholders by
Delaware Investments' affiliate, Delaware Service Company, Inc. ("DSC"), noting
DSC's commitment to maintain a high level of service in keeping with its past
receipt of the DALBAR Pyramid Award, and the continuing expenditures by Delaware
Investments to improve the delivery of shareholder services. Additionally, the
Board noted the extent of benefits provided to Fund shareholders for being part
of the Delaware Investments Family of Funds, including the privilege to exchange
investments between the same class of shares of funds without a sales charge,
the ability to reinvest Fund dividends into other funds and the privilege to
combine holdings in other funds to obtain a reduced sales charge. The Board was
satisfied with the nature, extent and quality of the overall services provided
by Delaware Investments.
Investment Performance. The Board considered the investment performance of DMC
and the Fund. The Board was pleased with DMC's investment performance. The Board
placed significant emphasis on the investment performance of the Fund in view of
its importance to shareholders. While consideration was given to performance
reports and discussions with portfolio managers at Board meetings throughout the
year, particular weight was given to the Lipper reports furnished for the Annual
Meeting. The Lipper reports prepared for the Fund showed the investment
performance of its Class A shares in comparison to a group of similar funds as
selected by Lipper (the "Performance Universe"). A fund with the best
performance is ranked first, and a fund with the poorest performance is ranked
last. The highest/best performing 25% of funds in the Performance Universe make
up the first quartile; the next 25% - the second quartile; the next 25% - the
third quartile; and the poorest/worst performing 25% of funds in the Performance
Universe make up the fourth quartile. Comparative annualized performance for the
Fund was shown for the past one, three, five and 10 year periods ended January
31, 2006. The Board noted its objective that the Fund's performance for the
periods considered be at or above the median of its Performance Universe. The
following paragraph summarizes the performance results for the Fund and the
Board's view of such performance.
The Performance Universe for the Fund consisted of the Fund and all retail and
institutional multi-cap growth funds as selected by Lipper. The Lipper report
comparison showed that the Fund's total return for the one and 10 year periods
was in the first quartile of such Performance Universe. The report further
showed that the Fund's total return for the three and five year periods was in
the second and third quartiles, respectively. The Board was satisfied with such
performance.
16
Other Fund information
Delaware Select Growth Fund
Board Consideration of Delaware Select Growth Fund Investment Advisory Agreement
(continued)
Comparative Expenses. The Board considered expense data for the Delaware
Investments Family of Funds. Management provided the Board with information on
pricing levels and fee structures for the Fund. The Board focused particularly
on the comparative analysis of the management fees and total expense ratios of
the Fund and the management fees and expense ratios of a group of similar funds
as selected by Lipper (the "Expense Group"). In reviewing comparative costs, the
Fund's contractual management fee and the actual management fee incurred by the
Fund were compared with the contractual management fees (assuming all funds in
the Expense Group were similar in size to the Fund) and actual management fees
(as reported by each fund) of other funds within the Expense Group, taking into
effect any applicable breakpoints and fee waivers. The Fund's total expenses
were also compared with those of its Expense Group. The Lipper total expenses,
for comparative consistency, were shown by Lipper for Class A shares and
compared total expenses including 12b-1 and non-12b-1 service fees. The Board
also considered fees paid to Delaware Investments for non-management services.
The Board noted its objective to limit the Fund's total expense ratio to an
acceptable range as compared to the median of the Expense Group. The following
paragraph summarizes the expense results for the Fund and the Board's view of
such expenses.
The expense comparisons for the Fund showed that its actual management fee was
in the quartile with the lowest expenses of its Expense Group and its total
expenses were in the quartile with the highest expenses of its Expense Group.
The Board gave favorable consideration to the Fund's management fee, but noted
that the Fund's total expenses were not in line with the Board's objective. In
evaluating the total expenses, the Board considered waivers in place through
August 2006 and recent initiatives implemented by management, such as the
outsourcing of certain transfer agency services, creating an opportunity for a
reduction in expenses. The Board was satisfied with management's efforts to
improve the Fund's total expense ratio and bring it in line with the Board's
objective.
Management Profitability. The Board considered the level of profits, if any,
realized by Delaware Investments in connection with the operation of the Fund.
In this respect, the Board reviewed the Investment Management Profitability
Analysis that addressed the overall profitability of Delaware Investments'
business in providing management and other services to each of the individual
funds and the Delaware Investments Family of Funds as a whole. Specific
attention was given to the methodology followed in allocating costs for the
purpose of determining profitability. Management stated that the level of
profits of Delaware Investments, to a certain extent, reflected operational cost
savings and efficiencies initiated by Delaware Investments. The Board considered
Delaware Investments' expenditures to improve services provided to fund
shareholders and to meet additional regulatory and compliance requirements
resulting from recent SEC 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, the benefits from allocation of fund
brokerage to improve trading efficiencies and the use of "soft" commission
dollars to pay for proprietary and non-proprietary research. The Board did not
find that the level of profits realized by Delaware Investments from the
relationships with the Fund and the Delaware Investments Family of Funds
required negotiation of reduction of fees.
Economies of Scale. The Trustees considered whether economies of scale are
realized by Delaware Investments as the Fund's assets increase and the extent to
which any economies of scale are reflected in the level of management fees
charged. The Trustees took into account the standardized advisory fee pricing
and structure approved by the Board and shareholders as part of a complex-wide
shareholder meeting conducted in 1998/1999. At that time, Delaware Investments
introduced breakpoints to account for management economies of scale. The Board
noted that the fee under the Fund's management contract fell within the standard
structure. The Board also noted that the Fund's assets exceeded the first
breakpoint level. The Board believed that, given the extent to which economics
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 Fund and its shareholders.
17
About the organization
This semiannual report is for the information of Delaware Select Growth Fund
shareholders, but it may be used with prospective investors when preceded or
accompanied by a current prospectus for Delaware Select Growth Fund and the
Delaware Investments(R) Performance Update for the most recently completed
calendar quarter. The prospectus sets forth details about charges, expenses,
investment objectives, and operating policies of the Fund. You should read the
prospectus carefully before you invest. The figures in this report represent
past results that are not a guarantee of future results. The return and
principal value of an investment in the Fund will fluctuate so that shares, when
redeemed, may be worth more or less than their original cost.
Board of trustees
Patrick P. Coyne
Chairman, President, and
Chief Executive Officer
Delaware Investments Family of Funds
Philadelphia, PA
Thomas L. Bennett
Private Investor
Rosemont, PA
John A. Fry
President
Franklin & Marshall College
Lancaster, PA
Anthony D. Knerr
Founder and Managing Director
Anthony Knerr & Associates
New York, NY
Lucinda S. Landreth
Former Chief Investment Officer
Assurant, Inc.
Philadelphia, PA
Ann R. Leven
Owner - ARL Associates,
Strategic Financial Planning
Consulting Firm
Washington, DC
Thomas F. Madison
President and Chief Executive Officer
MLM Partners, Inc.
Minneapolis, MN
Janet L. Yeomans
Vice President and Treasurer
3M Corporation
St. Paul, MN
J. Richard Zecher
Founder
Investor Analytics
Scottsdale, AZ
Affiliated officers
David F. Connor
Vice President, Deputy General Counsel,
and Secretary
Delaware Investments Family of Funds
Philadelphia, PA
David P. O'Connor
Senior Vice President, General Counsel,
and Chief Legal Officer
Delaware Investments Family of Funds
Philadelphia, PA
John J. O'Connor
Senior Vice President and Treasurer
Delaware Investments Family of Funds
Philadelphia, PA
Richard Salus
Senior Vice President and
Chief Financial Officer
Delaware Investments Family of Funds
Philadelphia, PA
Contact information
Investment manager
Delaware Management Company, a series
of Delaware Management Business Trust
Philadelphia, PA
National distributor
Delaware Distributors, L.P.
Philadelphia, PA
Shareholder servicing, dividend
disbursing, and transfer agent
Delaware Service Company, Inc.
2005 Market Street
Philadelphia, PA 19103-7094
For shareholders
800 523-1918
For securities dealers and financial
institutions representatives only
800 362-7500
Web site
www.delawareinvestments.com
Delaware Investments is the marketing name of Delaware Management Holdings, Inc.
and its subsidiaries.
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission for the first and third quarters of each fiscal year on
Form N-Q. The Fund's Forms N-Q, as well as a description of the policies and
procedures that the Fund uses to determine how to vote proxies (if any) relating
to portfolio securities are available without charge (i) upon request, by
calling 800 523-1918; (ii) on the Fund's Web site at
http://www.delawareinvestments.com; and (iii) on the Commission's Web site at
http://www.sec.gov. The Fund's Forms N-Q may be reviewed and copied at the
Commission's Public Reference Room in Washington, D.C.; information on the
operation of the Public Reference Room may be obtained by calling 800 SEC-0330.
Information (if any) regarding how the Fund voted proxies relating to portfolio
securities during the most recently disclosed 12-month period ended June 30 is
available without charge (i) through the Fund's Web site at
http://www.delawareinvestments.com; and (ii) on the Commission's Web site at
http://www.sec.gov.
18
Get shareholder reports and prospectuses online instead of in the mail.
> Visit www.delawareinvestments.com/edelivery
Simplify your life.
Manage your investments online!
Get Account Access, the Delaware Investments(R) secure Web site that allows
you to conduct your business online. Gain 24-hour access to your account and one
of the highest levels of Web security available. You also get:
o Hassle-free investing - Make online purchases and redemptions at any time.
o Simplified tax processing - Automatically retrieve your Delaware Investments
accounts' 1099 information and import it directly into your 1040 tax return.
Available only with Turbo Tax(R) Online(SM) and Desktop software -
www.turbotax.com.
o Less mail clutter - Get instant access to your fund materials online with
Delaware eDelivery.
Register for Account Access today! Please visit us at
www.delawareinvestments.com, select Individual Investors, and click Account
Access.
Please call our Shareholder Service Center at 800 523-1918 Monday through Friday
from 8:00 a.m. to 7:00 p.m., Eastern Time, for assistance with any questions.
[DELAWARE INVESTMENTS LOGO]
(1138) Printed in the USA
SA-316 [10/06] CGI 12/06 MF-06-11-070 PO11438
Semiannual Report 2006 October 31, 2006
________________________________________________________________________________
Delaware Large Cap Core Fund
Disclosure of Fund expenses
For the period August 31, 2006 to October 31, 2006
As a shareholder of the Fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments, reinvested
dividends, or other distributions; redemption fees; and exchange fees; and (2)
ongoing costs, including management fees; distribution and/or service (12b-1)
fees; and other Fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period August 31, 2006 to October 31, 2006.
Actual Expenses
The first section of the table shown, "Actual Fund Return," provides information
about actual account values and actual expenses. You may use the information in
this section of the table, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first section under the heading
entitled "Expenses Paid During Period" to estimate the expenses you paid on your
account during this period.
Hypothetical Example for Comparison Purposes
The second section of the table shown, "Hypothetical 5% Return," provides
information about hypothetical account values and hypothetical expenses based on
the Fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the Fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the Fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads), redemption fees, or exchange fees. Therefore, the second
section of the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have been
higher. The Fund's actual expenses shown in the table reflect fee waivers in
effect. The expenses shown in the table assume reinvestment of all dividends and
distributions.
Delaware Large Cap Core Fund Expense Analysis of an Investment of $1,000
Expenses
Beginning Ending Paid During
Account Account Annualized Period
Value Value Expense 8/31/06 to
8/31/06* 10/31/06 Ratios 10/31/06**
________________________________________________________________________________
Actual Fund Return
Class A $1,000.00 $1,052.90 0.95% $1.66
Institutional Class 1,000.00 1,052.90 0.95% 1.66
________________________________________________________________________________
Hypothetical 5% Return (5% return before expenses)
Class A $1,000.00 $1,006.88 0.95% $1.62
Institutional Class 1,000.00 1,006.88 0.95% 1.62
* Commenced operations on August 31, 2006.
** "Expenses Paid During Period" are equal to the Fund's annualized expense
ratio, multiplied by the average account value over the period, multiplied by
62/365 (to reflect the period since the date of the commencement of operations).
Sector Allocation and Top 10 Holdings As of October 31, 2006
Delaware Large Cap Core Fund
Sector designations may be different than the sector designations presented in
other Fund materials.
________________________________________________________________________________
Percentage
Sector of Net Assets
________________________________________________________________________________
Common Stock 98.44%
________________________________________________________________________________
Basic Materials 3.60%
Business Services 1.13%
Capital Goods 9.19%
Communication Services 2.44%
Consumer Discretionary 5.29%
Consumer Services 2.28%
Consumer Staples 6.83%
Credit Cyclicals 0.61%
Energy 7.42%
Financials 21.92%
Health Care 10.95%
Media 3.25%
Real Estate 0.75%
Technology 18.27%
Transportation 1.62%
Utilities 2.89%
________________________________________________________________________________
Total Market Value of Securities 98.44%
________________________________________________________________________________
Receivables and Other Assets Net of Liabilities 1.56%
________________________________________________________________________________
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 Holdings of Net Assets
________________________________________________________________________________
CIT Group 3.09%
Microsoft 2.93%
Johnson & Johnson 2.88%
Exxon Mobil 2.71%
Procter & Gamble 2.71%
American International Group 2.55%
Bank of America 2.20%
Cisco Systems 2.17%
International Business Machines 1.97%
PepsiCo 1.96%
________________________________________________________________________________
Statement of Net Assets
Delaware Large Cap Core Fund
____________________________
October 31, 2006 (Unaudited)
Number of Market
Shares Value
Common Stock- 98.44%
Basic Materials - 3.60%
Dow Chemical 550 $22,434
Freeport-McMoRan Copper & Gold Class B 350 21,168
Lubrizol 250 11,250
Steel Dynamics 350 21,039
______
75,891
______
Business Services - 1.13%
Manpower 200 13,554
Republic Services Class A 250 10,253
______
23,807
______
Capital Goods - 9.19%
Caterpillar 650 39,461
General Electric 1,050 36,865
Goodrich 800 35,272
+ Grant Prideco 750 28,328
Northrop Grumman 400 26,556
Textron 300 27,279
______
193,761
_______
Communication Services - 2.44%
Embarq 300 14,505
Verizon Communications 1,000 37,000
______
51,505
______
Consumer Discretionary - 5.29%
Abercrombie & Fitch Class A 300 22,995
Best Buy 550 30,388
+ Coach 800 31,712
Federated Department Stores 600 26,346
______
111,441
_______
Consumer Services - 2.28%
Marriott International Class A 550 22,974
McDonald's 600 25,152
______
48,126
______
Consumer Staples - 6.83%
CVS 600 18,828
Fortune Brands 350 26,933
PepsiCo 650 41,236
Procter & Gamble 900 57,050
______
144,047
_______
Credit Cyclicals - 0.61%
D.R. Horton 550 12,887
______
12,887
______
Energy - 7.42%
ConocoPhillips 400 24,096
EOG Resources 300 19,959
Exxon Mobil 800 57,135
+ National Oilwell Varco 300 18,120
+ Newfield Exploration 450 18,356
Occidental Petroleum 400 18,776
______
156,442
_______
Financials - 21.92%
+ Affiliated Managers Group 200 20,028
American International Group 800 53,735
Bank of America 860 46,328
Berkley (W.R.) 450 16,587
Capital One Financial 350 27,766
CIT Group 350 18,218
Citigroup 1,300 65,207
JPMorgan Chase 800 37,952
Mellon Financial 340 13,192
Merrill Lynch 350 30,597
Morgan Stanley 390 29,808
Prudential Financial 400 30,772
U.S. Bancorp 450 15,228
UnitedHealth Group 500 24,390
Washington Mutual 310 13,113
+ WellPoint 250 19,080
______
462,001
_______
Health Care - 10.95%
Abbott Laboratories 650 30,882
+ Amgen 300 22,773
+ Express Scripts Class A 200 12,744
+ Gen-Probe 250 11,968
+ Gilead Sciences 350 24,115
Johnson & Johnson 900 60,659
Medtronic 350 17,038
Quest Diagnostics 250 12,435
Wyeth 750 38,272
______
230,886
_______
Media - 3.25%
+ Comcast Class A 500 20,335
Disney (Walt) 850 26,741
+ Viacom Class B 550 21,406
______
68,482
______
Real Estate - 0.75%
ProLogis 250 15,818
______
15,818
______
Technology - 18.27%
Applied Materials 1,050 18,260
+ BEA Systems 1,500 24,405
+ Cisco Systems 1,900 45,846
+ Corning 900 18,387
+ EMC 1,550 18,988
+ Google Class A 60 28,583
Hewlett-Packard 650 25,181
Intel 1,400 29,876
International Business Machines 450 41,548
Microsoft 2,150 61,726
Motorola 800 18,448
National Semiconductor 500 12,145
QUALCOMM 650 23,654
Texas Instruments 600 18,108
______
385,155
_______
Transportation - 1.62%
Norfolk Southern 650 34,171
______
34,171
______
Utilities - 2.89%
Dominion Resources 400 32,396
TXU 450 28,409
______
60,805
______
Total Common Stock (cost $1,978,928) 2,075,225
_________
Total Market Value of Securities - 98.44%
(cost $1,978,928) 2,075,225
Receivables and Other Assets Net of Liabilities - 1.56% 32,846
______
Net Assets Applicable to 235,644 Shares Outstanding - 100.00% $2,108,071
__________
Net Asset Value - Delaware Large Cap Core Fund Class A ($3,122 / 349 Shares) $8.95
_____
Net Asset Value - Delaware Large Cap Core Fund Institutional Class ($2,104,949 / 235,295 Shares) $8.95
_____
Components of Net Assets at October 31, 2006:
Shares of beneficial interest (unlimited authorization - no par) $2,003,017
Undistributed net investment income 1,660
Accumulated net realized gain investments 7,097
Net unrealized appreciation of investments 96,297
______
Total net assets $2,108,071
__________
+ Non-income producing security for the period ended October 31, 2006.
Net Asset Value and Offering Price Per Share -
Delaware Large Cap Core Fund
Net asset value Class A (A) $8.95
Sales charge (5.75% of offering price) (B) 0.55
____
Offering price
$9.50
_____
(A) Net asset value per share, as illustrated, is the amount which would be paid upon redemption or repurchase of shares.
(B) See the current prospectus for purchases of $50,000 or more.
See accompanying notes
Delaware Large Cap Core Fund
Statement of Operations
August 31, 2006* to October 31, 2006
Investment Income:
Dividends $ 3,842
Interest 1,129 $ 4,971
____________ _____________
Expenses:
Management fees 2,267
Dividend disbursing and transfer
agent fees and expenses 20
Reports and statements to shareholders 403
Accounting and administration expenses 136
Registration fees 981
Legal fees 237
Trustees' fees and benefits 13
Audit and tax 2,680
Custodian fees 475
Consulting fees 19
Dues and services 51
Taxes (other than taxes on income) 29
Insurance fees 52
Trustees' expenses 9
Pricing fees 376
Other 61 7,809
____________
Less expenses absorbed or waived (4,498)
_____________
Total operating expenses 3,311
_____________
Net Investment Income 1,660
_____________
Net Realized and Unrealized Gain
on Investments:
Net realized gain on investments 7,097
Net change in unrealized appreciation/
depreciation of investments 96,297
_____________
Net Realized and Unrealized Gain on Investments 103,394
_____________
Net Increase in Net Assets Resulting
from Operations $ 105,054
_____________
*Date of commencement of operations.
See accompanying notes
Delaware Large Cap Core Fund
Statement of Changes in Net Assets
8/31/06*
to
10/31/06
(Unaudited)
Increase in Net Assets from Operations:
Net investment income $ 1,660
Net realized gain on investments 7,097
Net change in unrealized appreciation/
depreciation of investments 96,297
_____________
Net increase in net assets resulting from operations 105,054
_____________
Capital Share Transactions:
Proceeds from shares sold:
Class A 3,008
Institutional Class 2,000,009
_____________
2,003,017
_____________
Increase in net assets derived from capital
share transactions 2,003,017
_____________
Net Increase in Net Assets 2,108,071
_____________
Net Assets:
Beginning of period -
_____________
End of period (including undistributed net
investment income of $1,660) $ 2,108,071
_____________
*Date of commencement of operations.
See accompanying notes
Financial Highlights
Selected data for each share of the Fund outstanding throughout the period was
as follows:
Delaware Large Cap Core Fund
Class A Institutional Class
______________ _______________________
8/31/06 (1) 8/31/06 (1)
to to
10/31/06 10/31/06
______________ _______________________
Net asset value, beginning of period $ 8.500 $ 8.500
Income from investment operations:
Net investment income (2) 0.007 0.007
Net realized and unrealized gain on investments 0.443 0.443
______________ _______________________
Total from investment operations 0.450 0.450
______________ _______________________
Net asset value, end of period $ 8.950 $ 8.950
============== =======================
Total return (3) 5.29% 5.29%
Ratios and supplemental data:
Net assets, end of period (000 omitted) $ 3 $ 2,105
Ratio of expenses to average net assets 0.95% 0.95%
Ratio of expenses to average net assets
prior to fees waived and expense paid indirectly 2.24% 2.24%
Ratio of net investment income to average net assets 0.48% 0.48%
Ratio of net investment income to average net assets
prior to fees waived and expense paid indirectly (0.81%) (0.81%)
Portfolio turnover 27% 27%
(1) Date of commencement of operations; ratios and portfolio turnover have been annualized and total return
has not been annualized.
(2) The average shares outstanding method has been applied for per share information.
(3) Total investment return is based on the change in net asset value of a share during the period and
assumes reinvestment of dividends and distributions at net asset value, and, for Class A shares, does
not reflect the impact of a sales charge. Total investment return reflects voluntary waivers and payment
of fees by the manager and distributor. Performance would have been lower had the expense limitation not
been in effect.
See accompanying notes
Notes to Financial Statements
October 31, 2006 (Unaudited)
Voyageur Mutual Funds III (the "Trust") is organized as a Delaware statutory
trust and offers two series, Delaware Large Cap Core Fund and Delaware Select
Growth Fund. These financial statements and the related notes pertain to
Delaware Large Cap Core Fund (the "Fund"). The Trust is an open-end investment
company. The Fund is considered diversified under the Investment Company Act of
1940, as amended, and offers Class A, Class C, Class R and Institutional Class
shares. Class A shares are sold with a front-end sales charge of up to 5.75%.
Class A share purchases of $1,000,000 or more will incur a contingent deferred
sales charge of up to 1% if redeemed during the first year and 0.50% during the
second year, provided that Delaware Distributors, L.P. (DDLP) paid a financial
advisor a commission on the purchase of those shares. Class C shares are sold
with a contingent deferred sales charge of 1%, if redeemed during the first 12
months. Class R and Institutional Class shares are not subject to a sales charge
and are offered for sale only to certain eligible investors. As of October 31,
2006, Class C and Class R have not commenced operations.
The investment objective of the Fund is to seek long-term capital appreciation.
1. Significant Accounting Policies
The following accounting policies are in accordance with U.S. generally accepted
accounting principles and are consistently followed by the Fund.
Security Valuation - Equity securities, except those traded on the Nasdaq Stock
Market, Inc. (Nasdaq), are valued at the last quoted sales price as of the time
of the regular close of the New York Stock Exchange (NYSE) on the valuation
date. Securities traded on the Nasdaq are valued in accordance with the Nasdaq
Official Closing Price, which may not be the last sales price. If on a
particular day an equity security does not trade, then the mean between the bid
and asked prices will be used. Short-term debt securities having less than 60
days to maturity are valued at amortized cost, which approximates market value.
Other securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith under the
direction of the Fund's Board of Trustees. 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 with respect to
foreign securities, aftermarket trading or significant events after local market
trading (e.g., government actions or pronouncements, trading volume or
volatility on markets, exchanges among dealers, or news events).
In September 2006, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 157, Fair Value Measurements, (Statement 157). Statement 157
establishes a framework for measuring fair value in generally accepted
accounting principles, clarifies the definition of fair value within that
framework, and expands disclosures about the use of fair value measurements.
Statement 157 is intended to increase consistency and comparability among fair
value estimates used in financial reporting. Statement 157 is effective for
fiscal years beginning after November 15, 2007. Management does not expect the
adoption of Statement 157 to have an impact on the amounts reported in the
financial statements.
Federal Income Taxes - The Fund intends to qualify for federal income tax
purposes as a regulated investment company and make the requisite distributions
to shareholders. Accordingly, no provision for federal income taxes has been
made in the financial statements.
On July 13, 2006, the Financial Accounting Standards Board (FASB) released FASB
Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" (FIN 48). FIN
48 provides guidance for how uncertain tax positions should be recognized,
measured, presented and disclosed in the financial statements. FIN 48 requires
the evaluation of tax positions taken or expected to be taken in the course of
preparing the Fund's 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 would be
recorded as a tax benefit or expense in the current year. Adoption of FIN 48 is
required for fiscal years beginning after December 15, 2006 and is to be applied
to all open tax years as of the effective date. Although the Fund's tax
positions are currently being evaluated, management does not expect the adoption
of FIN 48 to have a material impact on the Fund's financial statements.
Class Accounting - Investment income, common expenses and realized and
unrealized gain (loss) on investments are allocated to the various classes of
the Fund on the basis of daily net assets of each class. Distribution expenses
relating to a specific class are charged directly to that class.
Repurchase Agreements - The Fund may invest in a pooled cash account along with
other members of the Delaware Investments(R) Family of Funds pursuant to an
exemptive order issued by the Securities and Exchange Commission. The aggregate
daily balance of the pooled cash account is invested in repurchase agreements
secured by obligations of the U.S. government. The respective collateral is held
by the Fund's custodian bank until the maturity of the respective repurchase
agreements. Each repurchase agreement is at least 102% collateralized. However,
in the event of default or bankruptcy by the counterparty to the agreement,
realization of the collateral may be subject to legal proceedings.
Use of Estimates - The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Other - Expenses directly attributable to the Fund are charged directly to the
Fund. Other expenses common to various funds within the Delaware Investments(R)
Family of Funds are generally allocated amongst such funds on the basis of
average net assets. Management fees and some other expenses are paid monthly.
Security transactions are recorded on the date the securities are purchased or
sold (trade date) for financial reporting purposes. Costs used in calculating
realized gains and losses on the sale of investment securities are those of the
specific securities sold. Dividend income is recorded on the ex-dividend date
and interest income is recorded on the accrual basis. The Fund declares and pays
dividends from net investment income and distributions from net realized gain on
investments, if any, annually.
In addition, in order to satisfy certain distribution requirements of the Tax
Reform Act of 1986, the Fund may declare special year-end dividend and capital
gains distributions during November or December to shareholders of record on a
date in such month. Such distributions, if received by shareholders by January,
are deemed to have been paid by the Fund and received by shareholders on the
earlier of the date paid or December 31 of the prior year.
Subject to seeking best execution, the Fund may direct certain security trades
to brokers who have agreed to rebate a portion of the related brokerage
commission to the Fund in cash. For the period* ended October 31, 2006, there
were no such commission rebates. In general, best execution refers to many
factors, including the price paid or received for a security, the commission
charged, the promptness and reliability of execution, the confidentiality and
placement accorded the order, and other factors affecting the overall benefit
obtained by the Fund on the transaction.
The Fund receives earnings credits from its custodian when positive cash
balances are maintained, which are used to offset custody fees. The expense paid
under the above arrangements is included in custodian fees on the Statement of
Operations with the corresponding expense offset shown as "expense paid
indirectly."
2. Investment Management, Administration Agreements and Other Transactions with
Affiliates
In accordance with the terms of its investment management agreement, the Fund
pays Delaware Management Company (DMC), a series of Delaware Management Business
Trust and the investment manager, an annual fee which is calculated daily at the
rate of 0.65% on the first $500 million of average daily net assets of the Fund,
0.60% on the next $500 million, 0.55% on the next $1.5 billion and 0.50% on
average daily net assets in excess of $2.5 billion.
DMC has voluntarily agreed to waive that portion, if any, of its management fee
and reimburse the Fund to the extent necessary to ensure that annual operating
expenses, exclusive of taxes, interest, brokerage commissions, distribution
fees, certain insurance costs and extraordinary expenses, do not exceed 0.95% of
average daily net assets of the Fund and may be terminated or modified at any
time.
Delaware Service Company, Inc. (DSC), an affiliate of DMC, provides accounting,
administration, dividend disbursing and transfer agent services. The Fund pays
DSC a monthly fee computed at the annual rate of 0.04% of the such Fund's
average daily net assets for accounting and administration services. The Fund
pays DSC a monthly fee based on the number of shareholder accounts for dividend
disbursing and transfer agent services.
Pursuant to a distribution agreement and distribution plan, the Fund pays
Delaware DDLP, the distributor and an affiliate of DMC, an annual distribution
and service fee not to exceed 0.25% of the average daily net assets of the Class
A shares, 1.00% of the average daily net assets of Class C shares and 0.60% of
the average daily net assets of Class R shares. Institutional Class shares pay
no distribution and services expenses. DDLP has elected voluntarily to waive
such distribution and service fees at this time.
At October 31, 2006, the Fund had receivables due from or liabilities payable to
affiliates as follows:
Investment management fee payable to DMC $(2,232)
Dividend disbursing, transfer agent, accounting
and administration fees and other expenses
payable to DSC 1,087
Other expenses payable to DMC and affiliates* 5,777
*DMC, as part of its administrative services, pays operating expenses on behalf
of the Fund and is reimbursed on a periodic basis. Such expenses include items
such as printing of shareholder reports, fees for audit, legal and tax
services, registration fees and trustees' fees.
As provided in the investment management agreement, the Fund bears the cost of
certain legal and tax services, including internal legal and tax services
provided to the Fund by DMC and/or its' affiliates employees. For the period*
ended October 31, 2006, the Fund was charged $27 for internal legal and tax
services provided by DMC and/or its' affiliates employees.
For the period* ended October 31, 2006, DDLP earned $1,132 for commissions on
sales of the Fund's Class A shares.
Trustees' Fees and Benefits include expenses accrued by the Fund for each
Trustee's retainer, per meeting fees and retirement benefits. Independent
Trustees with over five years of uninterrupted service are eligible to
participate in a retirement plan that provides for the payment of benefits upon
retirement. The amount of the retirement benefit is based on factors set forth
in the plan including the number of years of service. On November 16, 2006, the
Board of Trustees of the Fund unanimously voted to terminate the retirement
plan. Payments equal to the net present value of the earned benefits will be
made in 2007 to those independent trustees and retired independent trustees so
entitled. The retirement benefit payout for the Fund is $98. Certain officers of
DMC, DSC and DDLP are officers and/or trustees of the Trust. These officers and
trustees are paid no compensation by the Fund.
3. Investments
For the period* ended October 31, 2006, the Fund made purchases of $2,064,495
and sales of $92,664 of investment securities other than short-term investments.
At October 31, 2006, the cost of investments for federal income tax purposes has
been estimated since the final tax characteristics cannot be determined until
fiscal year end. At October 31, 2006, the cost of investments was $1,978,928. At
October 31, 2006, the net unrealized appreciation was $96,297, of which $127,185
related to unrealized appreciation of investments and $30,888 related to
unrealized depreciation of investments.
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. generally
accepted accounting principles. Additionally, net short-term gains on sales of
investment securities are treated as ordinary income for federal income tax
purposes. There were no dividends and distributions paid during the period*
ended October 31, 2006.
The components of net assets are estimated since final tax characteristics
cannot be determined until fiscal year end. As of October 31, 2006, the
estimated components of net assets on a tax basis were as follows:
Shares of beneficial interest $2,003,017
Undistributed ordinary income 8,757
Unrealized appreciation of investments 96,297
__________
Net assets $2,108,071
__________
5. Capital Shares
Transactions in capital stock shares were as follows:
8/31/06*
to
10/31/06
Shares sold:
Class A 349
Institutional Class 235,295
_______
Net Increase 235,644
_______
*Date of commencement of operations.
6. Line of Credit
The Fund, along with certain other funds in the Delaware Investments(R) Family
of Funds (the "Participants"), participates in a $225,000,000 revolving line of
credit facility to be used for temporary or emergency purposes as an additional
source of liquidity to fund redemptions of investor shares. The Participants are
charged an annual commitment fee, which is allocated across the Participants on
the basis of each Participant's allocation of the entire facility. The
Participants may borrow up to a maximum of one third of their net assets under
the agreement. The Fund had no amounts outstanding as of October 31, 2006, or at
any time during the period then ended.
7. Credit and Market Risk
The Fund may invest up to 15% of its total assets in illiquid securities, which
may include securities with contractual restrictions on resale, securities
exempt from registration under Rule 144A of the Securities Act of 1933, as
amended, and other securities which may not be readily marketable. The relative
illiquidity of these securities may impair the Fund from disposing of them in a
timely manner and at a fair price when it is necessary or desirable to do so.
While maintaining oversight, the Fund's Board of Trustees has delegated to DMC
the day-to-day functions of determining whether individual securities are liquid
for purposes of the Fund's limitation on investments in illiquid assets. At
October 31, 2006, there were no Rule 144A securities and no securities have been
determined to be illiquid under the Fund's Liquidity Procedures.
8. Contractual Obligations
The Fund enters into contracts in the normal course of business that contain a
variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts. Management has reviewed the Fund's existing
contracts and expects the risk of loss to be remote.
_________________________________________
*Commenced operations on August 31, 2006.
Item 2. Code of Ethics
Not applicable.
Item 3. Audit Committee Financial Expert
Not applicable.
Item 4. Principal Accountant Fees and Services
Not applicable.
Item 5. Audit Committee of Listed Registrants
Not applicable.
Item 6. Schedule of Investments
Included as part of report to shareholders filed under Item 1 of this Form
N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Companies and Affiliated Purchasers
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
The registrant's principal executive officer and principal financial
officer have evaluated the registrant's disclosure controls and procedures
within 90 days of the filing of this report and have concluded that they are
effective in providing reasonable assurance that the information required to be
disclosed by the registrant in its reports or statements filed under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission.
There were no significant changes in the registrant's internal control over
financial reporting that occurred during the second fiscal quarter of the period
covered by the report to stockholders included herein (i.e., the registrant's
second fiscal quarter) that have materially affected, or are reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
Item 12. Exhibits
(a) (1) Code of Ethics
Not applicable.
(2) Certifications of Principal Executive Officer and Principal Financial
Officer pursuant to Rule 30a-2 under the Investment Company Act of 1940 are
attached hereto as Exhibit 99.CERT.
(3) Written solicitations to purchase securities pursuant to Rule 23c-1
under the Securities Exchange Act of 1934.
Not applicable.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
are furnished herewith as Exhibit 99.906CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf, by the undersigned, thereunto duly authorized.
Name of Registrant: Voyageur Mutual Funds III
PATRICK P. COYNE
________________________________
By: Patrick P. Coyne
Title: Chief Executive Officer
Date: January 5, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
PATRICK P. COYNE
________________________________
By: Patrick P. Coyne
Title: Chief Executive Officer
Date: January 5, 2007
RICHARD SALUS
________________________________
By: Richard Salus
Title: Chief Financial Officer
Date: January 5, 2007