Perspectives

Target risk mutual funds: paving the way toward asset allocation

March 2009

Recent market volatility, together with the steady drumbeat of bad news, has shaken the nerves of even the most stouthearted investors. But don't let the dramatic headlines, or the advice of self-styled financial experts on television, knock your investment plans off course. Focus instead on a primary component of successful long-term investing: diversification through asset allocation. By holding a diverse mix of stocks, bonds, and cash that is in line with your time horizon and risk tolerance, you may help maximize your chances of weathering stormy markets.

Though it may not seem the most exciting way to invest, a properly allocated portfolio can help lower the overall risk in a portfolio by combining asset types that have different risk profiles and low performance correlations. However, studies dating back at least to 1986* show that diversification, in and of itself, can have a far greater influence on investment results than the particular securities you choose. The same studies also warn about the futility of timing the market. While diversification may not predict against risk, it may help you maintain perspective when other investors rush from one fad investment to the next.

If you don't have an allocation plan, ask your financial advisor to help you create a suitable one. A well-considered plan may provide a valuable mooring, especially when volatility roils the markets. One simple way to get started comes in the form of distinctive mutual funds called target-risk funds. At first glance, target-risk funds might appear to be relatively uncomplicated. But they actually employ a sophisticated approach to asset allocation, geared toward serving investors who are at different life stages or have specific risk preferences.

Whether you consider yourself a conservative, moderate, or aggressive investor, a suitable target-risk fund may accommodate your risk tolerance by investing in a variety of asset classes and investment styles. Risk controls and asset allocation models do not promise any level of performance or guarantee against loss of principal. Each Portfolio has a different level of risk. Target-risk funds also offer many of the same benefits as other types of mutual funds, including: management by a professional staff that oversees all investment decisions within the fund; detailed periodic reports describing the fund's holdings and overall performance; and easy, convenient access to your account. Delaware Investments offers three target-risk funds, known collectively as the Delaware Foundation^® Funds. From the most conservative (Delaware Conservative Allocation Portfolio) to the most aggressive (Delaware Aggressive Allocation Portfolio), each Portfolio relies on active asset allocation, striving to maintain its stated risk level.

Delaware Foundation Funds provide:

• diversification by investing in a broad collection of securities
• a mix of risk and return that may be suitable to your particular risk tolerance
• access to the expertise of several professional portfolio managers at once

As we move through the rest of 2009, investors may continue coping with uncertainties about the future while making peace with a downturn that haunted much of 2008. No one will be able to accurately predict which asset classes could recover ahead of others, or when. Although there are no guarantees, a diversified portfolio merits consideration as it may help cushion some of the blows that tend to accompany a difficult investment environment.

* Brinson, Hood, and Beebower: "Determinants of Portfolio Performance," Financial Analysts Journal (1986, 1991).

Foundation Funds: An easy way to diversify

Investing involves risk, including the possible loss of principal.

Carefully consider the Fund's investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Fund's prospectus, which may be obtained by clicking here or calling 800 523-1918. Investors should read the prospectus carefully before investing.

Significant fund event

Effective September 20, 2008, the "fund of funds" structure for each Portfolio has changed to a multi-sleeve, multi-portfolio manager approach. The portfolio management team and the Portfolios' fee structure changed. For more information about these changes, please obtain a copy of the Portfolios' prospectus.

These Portfolios are subject to the same risks as the underlying investment styles in which they invest.

Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies.

International investments are subject to risks not ordinarily associated with U.S. investments including capital loss from unfavorable fluctuation in currency values, differences in generally accepted accounting principles, or economic or political instability in other nations.

Investing in emerging markets can be riskier than investing in established foreign markets due to increased volatility and lower trading volume.

Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer's ability to make interest and principal payments on its debt. Fixed income securities may also be subject to prepayment risk, the risk that the principal of a fixed income security may be paid prior to maturity, potentially forcing a strategy to reinvest that money at a lower interest rate.

High yielding, noninvestment grade bonds (junk bonds) involve higher risk than investment grade bonds.

The high yield secondary market is particularly susceptible to liquidity problems when institutional investors, such as mutual funds and certain other financial institutions, temporarily stop buying bonds for regulatory, financial, or other reasons. In addition, a less liquid secondary market makes it more difficult for the Fund to obtain precise valuations of the high yield securities in its portfolio.

Important notes

The views expressed represent the Manager's assessment of the Fund and market environment as of March 2009, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice.

The Funds are distributed by Delaware Distributors, L.P., an affiliate of DMHI, and MGL.