Diversified Income Strategy Fund (ISFAX) - Class A

With relief that the worst of the "fiscal cliff" had passed without calamity, investors embraced risk throughout much of the first quarter of 2013. As a result, major equity indexes surged, highlighted by several record-high closing levels.

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 (MBS) per month may have limited the increase in yields, even as Fed members became more vocal about the potential risks of further quantitative easing.

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.

U.S. Equity markets climbed during the first quarter, 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.

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.

Lord Abbett Diversified Income Strategy Fund returned 4.06%, reflecting the performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the three-month period ended March 31, 2013, compared to the 50% Barclays U.S. Aggregate Bond Index¹/25% BofA Merrill Lynch High Yield Master II Constrained Index²/15% Russell 1000^® Index³/10% MSCI EAFE Index with Gross Dividends,⁴ which returned 2.79%. 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: 3.67%; five years: 6.58%; and since inception (June 30, 2005): 5.42%. Expense ratio: gross, 1.15%, and net, 0.97%.

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 credit-sensitive bonds contributed to relative performance, as this asset class outperformed interest rate-sensitive bonds for the period. Also contributing to relative performance was an overweight to equities, versus bonds, as this was a better performing asset class for the period.

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 relative 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 the consumer staples sector, 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.

Outlook
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.