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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. With relief that the worst of the "fiscal cliff" had passed without calamity, investors embraced risk throughout much of the first quarter of 2013.
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
Discussions about adjusting monetary policy were held amid a notable improvement in labor market conditions. In particular, the U.S. Bureau of Labor Statistics reported that non-farm payrolls increased by 236,000 in February, while the unemployment rate fell to 7.7%. Many observers regarded this as an encouraging report, considering that it reflected the looming sequestration of $85 billion in automatic federal spending cuts that took effect on March 1, as well as the 2% hike in payroll taxes and the increase in the top marginal tax rate that were part of the tax package that passed in early 2013.
Investors' increased comfort with risk was reflected in fixed-income asset classes, as the convertible bond market posted a quarterly return of nearly 7.6%, followed by the high-yield bond market with a gain of about 2.9%, and the floating-rate loan market with a positive return of about 2.4%.
The Fund returned 6.59%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended March 31, 2013. The Fund's benchmark, the BofA Merrill Lynch All Convertibles, All Qualities Index,3 returned 7.59% in the same period. Average annual total returns, which reflect performance at the maximum 2.25% sales charge applicable to Class A share investments and include the reinvestment of all distributions, as of March 31, 2013, are: one year: 6.81%; five years: 4.05%; and since inception (June 30, 2003): 5.31%. Expense ratio: gross 1.13% and net 1.06%.
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 convertible market has shown distinct signs of recovery and the new-issue market has seen broad participation from a number of sectors. According to Barclays, new issuance is running at the highest pace since 2008 and net organic new issuance is also running at a positive for the first time since 2007. In the first quarter of 2013, convertibles captured 72% of the equity market upside, as measured by the S&P 500® Index,4 and in line with historical levels.
The technology sector was the most significant detractor from relative performance during the quarter. Within technology, certain holdings were negatively affected by slow growth in Europe and by possible spending reductions in the United States due to the sequestration. Monster Worldwide, Inc., a job board website, reported disappointing earnings, due to continued weakness in European and Asian job markets and tough competition within the job search space. We also lagged within the energy sector, owing principally to a lack of exposure to Western Refining, Inc., a highly volatile, high-beta refining company.
Contributing to relative performance during the quarter were the high-beta holdings within the health care and consumer discretionary sectors. Within health care, biotechnology and pharmaceuticals were strong areas for the portfolio. Gilead Sciences, Inc., the world's biggest maker of AIDS medicines, benefited from reports that sales of its experimental drug for hepatitis C could significantly top current estimates. Within consumer discretionary, equipment rental company United Rentals, Inc. added to relative performance. The weak economic environment has prompted many construction companies to switch from buying equipment to renting it, and United Rentals has been successful in gaining market share.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
The unprecedented accommodation from the Fed, a stabilizing situation in China, and "open for business" corporate bond markets all support our belief that the U.S. economy will continue its slow-growth trajectory. Accordingly, we continue to position the portfolio in a pro-cyclical manner. On a delta-adjusted basis (which takes into account the equity sensitivity of the holdings), the portfolio is overweight technology, consumer discretionary, and materials relative to the benchmark. We also are overweight the health care sector, with an emphasis on biotechnology and pharmaceutical companies. A seemingly more accommodative Food and Drug Administration has been broadly positive for these groups.
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.