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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
The S&P 500® Index3 rose 10.6% during the quarter, reaching an all-time closing high on March 28. Gains occurred in all of the 10 major sectors. The consumer discretionary, consumer staples, financials, health care, industrials, and utilities sectors outperformed the broader market. Value stocks (as represented by the Russell 3000® Value Index4) outperformed growth stocks (as measured by the Russell 3000® Growth Index5). Small cap stocks (as represented by the Russell 2000® Index6) outperformed large caps (as represented by the Russell 1000® Index7).
The Fund returned 8.87%, reflecting the performance at the net asset value (NAV) of Class A shares, with all distributions reinvested for the period ended March 31, 2013, compared to its benchmarks, the Russell 1000 Index,7 which returned 10.96%, and the S&P 500® Index,3 which returned 10.61% for the same period. 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: 3.07%; five years: 2.89%; and 10 years: 7.67%. Expense ratio, gross: 1.26%, and net: 0.98%.
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 S&P 500 Index finished the first quarter at a record high, supported by the "fiscal cliff" deal on the New Year’s holiday, strong U.S. employment reports, the improving U.S. housing market, and better than expected corporate earnings. Despite the market rally, the period was not a traditional risk-on environment. Instead, investors seemed to be cautiously balancing the positive economic news against renewed risks, including concerns about sequestration and the banking crisis in Cyprus. Return patterns demonstrate this cautious approach, as investors seemed to favor safe, conservative, yield-producing stocks with a domestic (U.S.) focus. For example, the defensive health care, consumer staples, and utilities sectors all outperformed our overall benchmark while several cyclical sectors underperformed, including energy, materials, and information technology. Our slight cyclical bias, along with stock-specific events, caused the Fund to underperform in this mixed environment during the quarter.
Detracting from the Fund's relative performance during the period was stock selection within the information technology, financials, and materials sectors. Within the information technology sector, shares of Apple, Inc. fell as it reported weaker than expected quarterly results as investors became increasingly concerned about gross margin pressures and intensifying competition. Although VMware, Inc. reported in line fourth quarter results, its shares fell in response to the below consensus guidance for 2013 due to weakening macro environment. Within the financials sector, shares of Capital One Financials Corp., a diversified financial services holding company, fell after the firm reported lower than expected fourth quarter results, while also disappointing investors by announcing that the company would not be enacting a share buyback in 2013. Investors also reacted negatively to the announced sale of the Best Buy private label and co-branded credit card accounts. This announcement was a reversal of the company's efforts to build in private labels. Within materials, shares of Cliffs Natural Resources, Inc., an international mining and natural resources company, declined as investors reacted negatively to the announcement of a dividend cut and a dilutive common share offering.
Stock selection within the energy and industrials sectors contributed to relative performance for the period. Within the energy sector, shares of Hess Corp., an integrated oil and gas company, appreciated after the company's announcement of plans to divest its fuel storage terminal network in the United States and close its refinery at Port Reading, New Jersey. This plan, partially driven by an activist investor, will potentially free up more than $1 billion of capital for other efforts. Shares of Range Resources Corp., an oil and gas exploration and production company, rose after reporting strong fourth quarter results, driven by higher natural gas prices, production growth, and the company's initiative to decrease unit costs. Within the industrials sector, shares of Hertz Global Holdings, Inc., a United States-based car rental company, rose after management released better than expected 2013 guidance, driven by improving pricing trends and attractive fleet cost expectations. Shares of Hertz also benefited from the announcement that synergies following the Dollar Thrifty acquisition should be higher than initially estimated. Shares of Honeywell International, Inc., a diversified global technology and manufacturing company, rose after the company reiterated previously announced guidance for 2013. Investors had expected guidance to be lowered, but management announced that sales are on track to meet the previously announced expectations.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
We continue to modestly favor cyclical companies because we expect that the U.S. economy will continue to expand in the coming year. We expect economic growth to be supported by the improving U.S. housing market, strengthening employment trends, and a rise in U.S. energy production. We remain aware of several risk factors, including the possible negative impact of sequestration and continued uncertainty in Europe and China.
The materials sector is the largest overweight position relative to its index, with an emphasis on producers of chemicals. Our agriculture-related holdings in this sector should experience increased demand following last year's drought. We also are overweight the information technology sector relative to the index. Within this sector, we have an overweight position in one of the largest smartphone and tablet computer producers. The consumer discretionary sector is underweight, although we are overweight select gaming, hotel, and leisure names. We continue to be underweight the traditionally defensive utilities and consumer staples sectors, as valuations within these groups are elevated and we continue to find better opportunities.
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.