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U.S. Equity markets climbed during the first quarter of 2013, as investors focused on solid growth in corporate earnings and continued monetary accommodation from the Federal Reserve. The gains came against a backdrop of continued uncertainty regarding the European sovereign debt crisis, and signs of improved economic growth in China and other key emerging markets.
The Fed noted that the U.S. economy "generally expanded at a modest to moderate pace" in January and early February, based on reports from the 12 Fed districts. The Fed said most districts reported expansion in consumer spending, although retail sales slowed in several districts. The manufacturing and service sectors showed improvement.1 The third estimate for the fourth quarter of 2012 showed that the economy grew by an annualized rate of 0.4%, versus the previous estimate of an increase of 0.1%. Third-quarter 2012 growth was 3.1%.2
Despite the equity market's milestones, the Treasury market remained range bound with the 10-year note yielding about 1.85%, according to Bloomberg. The Federal Reserve's program to purchase $85 billion in Treasury securities and agency mortgage-backed securities per month may have limited the increase in yields, even as Fed members became more vocal about the potential risks of further quantitative easing.
International equity markets posted positive performance during the first quarter, with significant dispersion across regions and sectors. International returns lagged U.S. returns for the quarter, primarily driven by a weak British pound, euro, and Japanese yen. Japan, a strong performer during the fourth quarter of last year, continued its strong equity market recovery by rising more than 10% in U.S. dollar terms during the quarter. Developed markets continued their recent relative strength versus emerging markets, outperforming by more than 6% during the quarter according to Bloomberg.
The Balanced Strategy Fund returned 6.73%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended March 31, 2013, compared to the benchmark, the 40% Russell 1000® Index3/35% Barclays U.S. Aggregate Bond Index4/15% BofA Merrill Lynch High Yield Master II Constrained Index5/10% MSCI EAFE Index with Gross Dividends,6 which returned 5.24%. The Fund's average annual total returns, which reflect performance at the maximum 5.75% sales charge applicable to Class A share investments and include the reinvestment of all distributions, as of March 31, 2013, are: one year: 5.46%; five years: 4.67%; and 10 years: 7.24%. Expense ratio: gross, 1.22%, and net, 1.03%.
Performance data quoted represent past performance, which does not guarantee future results. Current performance may be higher or lower than the performance data quoted. The investment return and principal value of an investment in the fund will fluctuate so that shares, on any given day or when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent month-end, call Lord Abbett at 1-888-522-2388 or visit us at www.lordabbett.com.
The Fund's overweight to equities contributed to relative performance, as stocks outperformed bonds for the period. The exposure to international equities detracted from relative performance, as international equities struggled to keep pace with domestic equities.
The high-yield fixed-income strategy outperformed versus its index, contributing to the Fund's relative performance. A domestic mid cap value equity investment strategy underperformed its index and, consequently, hurt Fund performance during the quarter.
Security selection within the high-yield fixed-income strategy was a significant contributor to relative outperformance. The exposure to non-index sectors such as bank loans and structured securities (e.g., CMBS) added to absolute strategy performance. U.S. dollar debt of non-U.S. issuers also aided relative performance. The strategy maintained an underweight to 'BB' and an overweight to 'B' rated securities during the period, positively contributing to relative performance. A majority of industries contributed positively to absolute performance, among those contributing most were basic industry, services, and consumer cyclical.
The most significant detractor from relative performance within a domestic mid cap value investment strategy was stock selection within the information technology and consumer staples sectors. Within the information technology sector, shares of Broadcom Corporation, a global semiconductor company, fell in January following management's announcement of disappointing guidance for the first quarter of 2013. Management highlighted macro weakness, which is exacerbating normal seasonal business fluctuations. Within consumer staples, shares of Bunge Ltd., a global agribusiness and food company, underperformed after the company reported fourth quarter results below consensus expectations. The agribusiness and sugar divisions were the main drivers of weakness.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
Whether it's to stimulate growth in the United States, Japan, and elsewhere or to calm debt markets in Europe, central bank policies worldwide continue to be extraordinarily accommodative. Monthly purchases of $85 billion in fixed-income securities by the Fed in particular continue to depress yields, encouraging investors to seek returns elsewhere. As a result, much of the fixed-income market appears to be fairly valued, at best, leaving the most attractive relative value opportunities in equities.
The U.S. stock market is particularly attractive, given its relatively strong fundamentals. Nevertheless, we have trimmed the Fund's equity position as the markets have rallied, and will continue to do so if this performance continues. With fixed income yields still low and credit spreads at or below long term averages, we continue to find equities more attractive than fixed income. Within fixed income, we continue to favor being exposed to credit risk over interest rate risk, though we think further price appreciation in corporate bonds may be limited.
The Fund invests all of its net assets directly in the underlying funds. The percentages shown are based on individual securities owned in one or more of the underlying funds. The Fund's portfolio is actively managed and therefore, its percentage allocations may change from time to time. Holdings are for informational purposes only and are not a recommendation to buy, sell, or hold any security.
Performance data quoted is historical. Past performance is not indicative of future results. Current performance may be higher or lower than the performance quoted. The investment return and principal value of an investment in the Fund will fluctuate so that shares, on any given day or when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent quarter-end, go to quarter ending performance on our Website or call Lord Abbett at (888) 522-2388.
1 The Fund’s dividend yield is shown without sales charges (at NAV) and with maximum sales charges (at MOP). The Fund’s dividend yield takes into account any fee waiver or expense limitation arrangements, if any. Without such fee waivers or expense limitation arrangements, the Fund’s dividend yield would have been lower. Information regarding any fee waivers or expense limitation arrangements applicable to the Fund is provided with the Fund’s expense ratio information.
2 The Fund’s unsubsidized dividend yield is shown without sales charges (at NAV) and with maximum sales charges (at MOP). The Fund’s unsubsidized dividend yield reflects what the yield would have been without the affect of fee waivers or expense limitation arrangements.