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U.S. equity markets advanced during the fourth quarter of 2013 amid indications of an acceleration of economic growth. Investors appeared to be comfortable with the prospect that the U.S. Federal Reserve would begin to withdraw monetary accommodation via reduced monthly bond purchases. Indeed, the Fed announced on December 18 that it would start "tapering" at a modest pace during 2014. The outlook for other major global economies was decidedly mixed: the eurozone remained sluggish; Japan's growth rate decelerated despite an enormous stimulus program; and China's growth pace quickened amid government efforts to restructure the economy.
The Fed noted that "the economy continued to expand at a modest to moderate pace" between early October and mid-November, based on reports from the 12 Fed districts. The Fed said manufacturing activity expanded in most districts, with gains noted in the motor-vehicle and high-technology industries. Reports on retail spending were positive, though retailers reported being "hopeful, but cautious" ahead of the holiday season.1 The second estimate for the third quarter of 2013 showed that the economy grew by an annualized rate of 3.6%, above the previous estimate of 2.8%. Second-quarter 2013 growth was 2.5%.2
The S&P 500® Index3 rose 11% during the quarter, reaching an all-time closing high on December 31. Gains occurred in all of the 10 major sectors. The information technology and industrials sectors outperformed the broader market. Growth stocks (as represented by the Russell 3000® Growth Index4) outperformed value stocks (as represented by the Russell 3000® Value Index5). Large cap stocks (as represented by the Russell 1000® Index6) outperformed small caps (as represented by the Russell 2000® Index7).
The Fund returned 8.61%, reflecting the performance at the net asset value (NAV) of Class A shares, with all distributions reinvested for the quarter ended December 31, 2013, compared to the S&P 900 10-Year Dividend Growth Index,8 which returned 8.95% for the same period. (Please note: Effective September 27, 2012, the Lord Abbett Capital Structure Fund underwent an investment strategy change and became the Lord Abbett Calibrated Dividend Growth Fund. Therefore, the performance of the Fund for periods prior to September 27, 2012, is not representative of the Fund's current strategy.) 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 December 31, 2013, are: one year: 20.63%; five years: 13.99%; and 10 years: 7.18%. Expense ratio, gross: 1.13%, and net: 0.85%.
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 performance of individual stocks drove relative performance during the quarter, as the Fund continued to invest according to the central investment tenets of the Calibrated approach, which seeks to focus exclusively on stock-specific opportunities. The Fund's overweight position in Family Dollar Stores, Inc., an operator of retail discount stores, detracted from relative performance as investors focused on early evidence of intense price promotion during the holiday season.
Shares of Occidental Petroleum Corp., an oil and gas exploration and production company, also underperformed during the quarter. Although the firm posted results that were modestly better than expectations, investor enthusiasm remained muted as shareholders awaited the results of an ongoing strategic business review that was announced earlier in the year. Also detracting from relative performance was the Fund's overweight position in C.H. Robinson Worldwide, Inc., one of the world's largest providers of third-party logistics and transportation services. The firm uses its large network of contractual relationships with transport companies to ship goods for over 40,000 customers, paying truckers while receiving payment from shippers. Shares of the firm declined as a tight supply of trucking capacity resulted in margin pressure because the firm has not been able to fully pass on the higher trucking costs to end customers.
Contributing to relative performance was the Fund's overweight position in 3M Co., a diversified industrial and technology company. Shares of the firm rose after an earnings report showed that management's strategic investments in research and development have led to improvements in organic growth. The share price continued to rise later in the quarter after the firm announced a 35% increase in the quarterly dividend.
Shares of Cardinal Health, Inc., a distributor of drugs and medical supplies to pharmacies, hospitals, and other healthcare providers, also rose as strategic moves to improve margins overshadowed the impact of high-profile account losses that have occurred over the past 18 months. One of these strategic initiatives is a new joint venture with CVS Caremark that was announced during the quarter and will combine the purchasing power of the two entities in the generic drug market. Shares of VF Corp., an apparel company that owns an assortment of brands including North Face, Wrangler, Timberland, and Nautica, contributed to relative performance during the quarter as marketing efforts have led to an increase in direct-to-consumer sales.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
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 effect of fee waivers or expense limitation arrangements.