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If there is one term that underscores the need for active managers, it's "creative destruction," a term popularized by renowned capitalist Joseph Schumpeter to describe the incessant confluence of obsolescence and innovation. As old markets stagnate or shrink, seismic shifts in demand give rise to new consumers, goods, and methods of production. Finding tomorrow's growth leaders will be a big challenge, especially given the slow economic growth of the developed world, which is currently mired in debt. But Lord Abbett analysts and portfolio managers have identified six growth themes that they believe have significant upside potential over the next decade even if economic headwinds pick up as some academics expect. The thematic approach breaks down as follows:
1) The Ongoing Digitization of Society
According to Northwestern economics professor Robert J. Gordon, computers and the Internet underpin the Third Industrial Revolution.1 Driving that revolution are such growth engines as e-commerce (sales over the Internet); hosted software (the delivery of software from a site where it is hosted on the Internet); social networks (platforms that connect individuals and businesses); mobility; and cloud computing (a vast network of remote servers that have added unprecedented functionality to the technology ecosystem). Meanwhile, the Internet has enabled a mobility boom by linking itself to telecommunications networks. This has led to a proliferation in advanced wireless devices and has changed the way consumers and businesses communicate. But because of the enormous complexity all of this creates, the Internet's infrastructure, overburdened as it is today, is being upgraded through cloud computing, thereby elevating itself to a new functional level. These growth engines are bringing about an ongoing digitization of society.
2) U.S. Mass Consumerism
Although consumer spending in the developed world may grow at a subdued pace, creative destruction is alive and well in many consumer markets. Simply put, consumer companies are helping consumers look good and feel good. They also are making their lives much more convenient through a growing market in at-home products and services. And rapidly growing social networking sites are empowering individuals to take full advantage of this.
These trends open up big new markets for "winner take most" companies. These include apparel manufacturers and retailers as well as a wide variety of beauty products, ranging from cosmetic lasers to invisible braces. Compelling approaches to basic human needs or desires, such as sleep, beauty, and health, are also generating significant growth. So are alluring changes in the global luxury market, which has seen robust growth, especially in some of the largest emerging nations. Meantime, innovation at home that makes consumers' lives more convenient and economical is another growth category. For example, companies have developed brewing machines to allow single servings of a cup of coffee and carbonated beverages with healthier and tastier ingredients. Household chores, such as vacuuming and floor washing, are now performed by robots.
3) Emerging Nations
The superior growth rates of emerging nations, relative to the developed world, are giving rise to a growing middle class in these nations. The implications for increased spending are staggering. Ernst & Young predicts that three billion people will join the middle class by 2030,2 and the Organization for Economic Co-operation and Development (OECD) believes the middle class in the Asia-Pacific region alone could spend an incremental $25 trillion by 2030.3
We think that the growth in emerging nations will shift this decade toward the consumer sector of those nations and away from the sectors tied to Chinese industrialization. The increasing disposable incomes have particularly benefited the consumer, healthcare, and technology areas. And the middle class in emerging nations will happily "download" the attributes of U.S. consumerism.
4) Modern Medicine
Three areas of innovation that have fueled growth in health care include genomics, biotechnology, and minimally invasive devices and procedures. In genomics, significant progress in identifying genetic defects has led to breakthrough diagnostics, targeted drug therapies, and preventive medicine. The biotechnology industry is a major beneficiary of the greater understanding of human genetics and physiology. Scientists at biotechnology companies have used this knowledge to fundamentally change the drug-discovery process and develop new drugs they believe will be more effective and/or safer than earlier treatments. An improvement in the drug-discovery process has led to new and better medicines in many fields. Meantime, minimally invasive surgery has become one of the fastest-growing segments in health care. Among the benefits are quicker recovery, smaller incisions, less pain, fewer complications, and a faster return to normal activities. These solutions are focused on the cardiology, diabetes, and spinal markets, among others.
5) America's Manufacturing Renaissance
Lord Abbett's growth investment team believes sharply enhanced U.S. competitiveness provides secular growth opportunities in a range of industries, from consumer products such as athletic and casual apparel, cosmetics, and jewelry, to commercial and military aviation, industrial products, infrastructure, and materials.
In addition, owing to the growth of emerging nations, American manufacturers now have much bigger markets to sell into. U.S. exports to China alone have accelerated a whopping 583% between 2000 and 2012, according to the U.S. Department of Commerce.
Against that backdrop, Lord Abbett is finding growth opportunities in leading providers of advanced technology and training that will increase industrial productivity, flexibility, and efficiency while lowering costs and making manufacturing competitive globally. These include the leading provider of fiber lasers used in cutting and welding applications, a producer of vision systems and surface inspection systems, and a provider of 3-D measurement and imaging systems that speed up the design and development process of highly engineered products. The dramatic improvements in 3-D software and printing technology should also help fuel the growth of U.S. manufacturing, particularly in the medical, motor vehicle, and aerospace sectors, where faster prototyping and time to market can become a significant competitive advantage. 3-D technology has also begun to enable direct digital manufacturing in the consumer market.
6) The North American Energy Revival
Thanks to horizontal drilling and hydrofracking technology that breaks open shale rock by pumping high-pressure fluids into the ground, this unconventional energy source is now abundantly accessible. According to some experts, the United States alone has a 200-year supply of shale gas.
With natural gas in abundance, the economics of high-performance, fuel-efficient internal combustion engines that run on natural gas have become increasingly attractive to consumers. Shale producers have been so prodigious that they have created a supply/demand imbalance. For now, users of the cheap natural gas are the biggest beneficiaries. These include chemical companies and companies that make equipment used to compress and liquefy natural gas.
As shale gas production evolved into a state of oversupply, the solar industry came back into balance. Following a boom and bust cycle that transpired between 2006 and 2011, stronger demand has enabled solar producers to realize higher prices and profits, which has driven sharp appreciation in solar stocks this year.
The Bottom Line
Although there are social and economic headwinds, innovation continues to thrive, and growing companies continue to develop new products and services and exploit new markets. These are the progenitors of creative destruction that give big growth rivers the potential to flow a long distance.
We seek to identify exceptional U.S. and foreign companies that demonstrate above-average, long-term growth potential. These have good business models, strong managers, and leading market shares, and operate in healthy industries. We believe these companies hold the potential to be market leaders in an era of slow economic growth.
F. Thomas O'Halloran, J.D., CFA, Lord Abbett Partner & Director, is the lead Portfolio Manager of the multi and small cap growth equity strategies. Mr. O'Halloran joined Lord Abbett in 2001 as a Research Analyst for the small cap growth equity strategy, and was named Partner in 2003. His prior experience includes Executive Director/Senior Research Analyst at Dillon, Read & Co. and as a trial attorney. Mr. O'Halloran received an AB from Bowdoin College, a JD from Boston College, and an MBA from Columbia University. He also is a holder of a Chartered Financial Analyst (CFA) designation, and has been in the investment business since 1987.
Risks to Consider: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. Mid and small cap stocks tend to be more volatile and can be less liquid than other types of stocks. Mid and small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large companies. Larger companies may have slower rates of growth than smaller companies. Investing in international securities generally poses greater risk than investing in domestic securities, including greater price fluctuations and higher transaction costs. Special risks are inherent to international investing, including those related to currency fluctuations and foreign, political, and economic events. The securities markets of emerging countries tend to be less liquid, to be especially subject to greater price volatility, to have a smaller market capitalization, and to have less government regulation, and may not be subject to as extensive and frequent accounting, financial, and other reporting requirements as securities issued in more developed countries. Further, investing in the securities of issuers located in certain emerging countries may present a greater risk of loss resulting from problems in security registration and custody or substantial economic or political disruptions. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. No investing strategy can overcome all market volatility or guarantee future results.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.
Investors should carefully consider the investment objectives, risks, charges, and expenses of the Lord Abbett funds. This and other important information is contained in each fund’s summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, contact your investment professional or Lord Abbett Distributor LLC at 888-522-2388 or visit us at www.lordabbett.com. Read the prospectus carefully before you invest.