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Emerging markets experienced significant volatility throughout the third quarter, heavily affected by uncertainty surrounding the U.S. Federal Reserve's (the "Fed") plan to begin "tapering" its asset-purchase program. Fed chairman Ben Bernanke shocked the markets in late May by establishing a timetable for tapering, which exacerbated the wide-ranging sell-off in emerging market assets, including bonds and currencies, which had started in May. Positive economic data from the United States, Europe, and China provided much-needed support, however. Countries with strong fundamentals, such as South Korea, Poland, and Hungary, outperformed those with weaker fundamentals, such as India, Indonesia, Turkey and South Africa.
In September, the Bureau of Labor Statistics announced a weaker-than-expected payroll number, leading many market participants to lower their expectations of the amount of Fed tapering. Heeding the aphorism, "a rising tide lifts all boats," emerging markets, including countries with weaker fundamentals, rallied significantly following the Federal Open Market Committee's decision not to commence tapering. During the final two weeks of the quarter, market participants were once again confronted with unclear prospects surrounding the Fed's quantitative easing program, as well as uncertainty about the looming Congressional stalemate over the federal budget and the U.S. debt ceiling. The uncertain outlook for both monetary and fiscal policy in the U.S. contributed to increased market volatility and a slowing in the pace of the rally of emerging market assets.
The Fund returned 0.51%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the three-month period ended September 30, 2013. The Fund's benchmark, the Barclays Global Emerging Markets Strategy [GEMS] Index,1 returned 0.69% in the same period. The Fund's 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 September 30, 2013, are: one year: -4.34%; five years: 1.87%; and 10 years: 2.94%. Expense ratio: 1.01%.
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 largest detractor from relative performance was an overweight to the Indonesian rupiah. The Fund maintained an overweight in anticipation that Bank Indonesia would act aggressively to maintain rupiah stability. Encouragingly, starting in May, the central bank began increasing interest rates; however, the policy was abandoned during the beginning of the third quarter. Lack of measures to tighten liquidity and credit growth led to extreme volatility for the currency. In addition, the Fund's negative euro bias and underweight in the Czech koruna slightly detracted from relative performance. The European Central Bank took a more dovish tone, emphasizing the possibility of rate cuts or additional rounds of long-term refinancing operations, which many market participants viewed as a potential drag on the euro. The currency remained surprisingly resilient throughout the quarter, however, due to its improving growth outlook.
Although the Indian rupee experienced significant volatility throughout the quarter, our tactical positioning based on policy measures contributed positively to relative performance. In addition, an underweight in the Colombian peso also contributed positively to relative performance. The currency performed well during the sell-off in May and June to the extent that the Bank of the Republic announced it would renew and expand an intervention program to weaken the peso, effectively "going against the grain" of the majority of Latin American countries in terms of exchange rate policy. The Fund's underweight in the Colombian peso contributed positively to relative performance when the Colombian peso "caught up" to the regional underperformance in Latin America.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
In the coming months, there will likely be continued volatility in emerging markets, as the U.S. Federal Reserve clarifies its plan for tapering its quantitative easing program, which the Fed has signaled will be heavily dependent on economic data. We are, therefore, remaining neutral to the global macroeconomic back drop and focusing heavily on underlying fundamentals of individual emerging market countries to determine relative positioning.
We are actively seeking opportunities in countries that may have suffered in the volatility over the past several months. Specifically, we are seeking countries with improving financing conditions, strengthening current account balances, and credible monetary and fiscal policies. Furthermore, we continue to focus on countries that have less dependence upon foreign portfolio flows for their funding needs.
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.