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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 13.50%, reflecting the performance at the net asset value (NAV) of Class A shares, with all distributions reinvested for the quarter ended March 31, 2013. The Fund outperformed its benchmark, the Russell 2000® Growth Index,8 which returned 13.21% 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, 2012, are: one year: 5.31%; five years: 9.38%; and 10 years: 12.37%. Expense ratio: 1.12%.
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.
Equity markets moved notably higher in the first quarter of the year, as lawmakers narrowly avoided the "fiscal cliff" and investor sentiment improved globally. Despite questions surrounding the viability of the Eurozone, U.S. indexes managed to reach new all-time highs. Market action has been more positive, and volatility has sunk to five-year lows, increasing our expectations of further gains for the current bull market, which has been in place since March 2009.
Security selection within the health care sector was a key contributor to relative outperformance during the quarter. We increased exposure to the sector as a combination of higher demand for services driven by the Patient Protection and Affordable Care Act and a more accommodative Food and Drug Administration has been broadly positive for both medical technology and services. Our position in Aegerion Pharmaceutical, Inc., a biopharmaceutical company engaged in the development of novel therapeutics to treat orphan diseases in the United States, contributed the most to relative performance in the sector. Share prices rose considerably, as the company anticipated sales for its recently launched cholesterol drug, Juxtapid, would meet or exceed expectations. Pharmacyclics, Inc., a clinical stage biopharmaceutical company focused on developing drugs used to treat cancer and other immune mediated diseases, also contributed to relative performance. Shares of the company rose sharply in mid-February after a new drug, ibrutinib, showed positive trial results in the treatment of leukemia and lymphoma.
Within the financials sector, security selection was also a notable contributor to relative performance. Zillow, Inc., an operator of a mobile and web-based real estate and home-related information marketplace in the United States, contributed the most to relative performance within the sector. Shares of the company moved higher on a positive quarterly report that showed earnings much stronger than anticipated, signaling continued growth for the residential housing marketplace. Financial Engines, Inc., a provider of independent technology enabling portfolio management services to participants in employer-sponsored defined contribution plans, also contributed to relative performance within the sector. The company reported quarterly earnings much higher than analyst expectations, as the continued shift away from defined benefit plans has greatly increased the number of individuals seeking investment advice within employer-sponsored retirement plans.
Security selection within the consumer discretionary sector detracted from relative performance during the quarter. Groupon, Inc., an e-commerce operator connecting businesses and consumers by offering goods and services at a discount, detracted most from relative performance within the sector. Shares of the company saw considerable volatility during the first quarter as a range of headwinds continued to weigh on margins, ultimately concluding with the board announcing that the CEO would be replaced. Ctrip.com International, Ltd. also detracted from relative performance within the sector. The provider of hotel, airline, and other travel services within the People's Republic of China extended a popular hotel coupon program to airfare, surprising investors, who worried that such a move would weigh on airfare profit margins.
Within the consumer staples sector, security selection also caused the sector to be an overall detractor from relative performance. Despite a move to reduce exposure to fully valued natural foods names during the quarter, companies within the industry still were among the largest detractors from relative performance. United Natural Foods, Inc., which distributes natural, organic, and specialty foods throughout the United States and Canada, saw its shares fall sharply during the quarter after announcing weaker than expected guidance. The Fresh Market, Inc., an operator of specialty grocery stores, also issued a tepid 2013 forecast and reported a sudden slowdown in fourth quarter sales, causing its shares to fall.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
As U.S. indexes near new all-time highs, investors appear to be edging back into equity markets. The major question facing us now is whether this move will continue. If investors begin to feel sufficiently comfortable with the environment to once again embrace equities, we could see further gains for the current bull market, which began in March 2009 and has recently passed its fourth-year anniversary.
This fund is closed to new investors, with the exception of certain retirement and benefit plans, existing mutual funds advisory programs, and variable annuity programs.
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.