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U.S. equity markets advanced during the fourth quarter of 2013 amid indications of an acceleration of economic growth. Investors appeared to be comfortable with the prospect that the U.S. Federal Reserve would begin to withdraw monetary accommodation via reduced monthly bond purchases. Indeed, the Fed announced on December 18 that it would start "tapering" at a modest pace during 2014. The outlook for other major global economies was decidedly mixed: the eurozone remained sluggish; Japan's growth rate decelerated despite an enormous stimulus program; and China's growth pace quickened amid government efforts to restructure the economy.
The Fed noted that "the economy continued to expand at a modest to moderate pace" between early October and mid-November, based on reports from the 12 Fed districts. The Fed said manufacturing activity expanded in most districts, with gains noted in the motor-vehicle and high-technology industries. Reports on retail spending were positive, though retailers reported being "hopeful, but cautious" ahead of the holiday season.1 The second estimate for the third quarter of 2013 showed that the economy grew by an annualized rate of 3.6%, above the previous estimate of 2.8%. Second-quarter 2013 growth was 2.5%.2
The S&P 500® Index3 rose 11% during the quarter, reaching an all-time closing high on December 31. Gains occurred in all of the 10 major sectors. The information technology and industrials sectors outperformed the broader market. Growth stocks (as represented by the Russell 3000® Growth Index4) outperformed value stocks (as represented by the Russell 3000® Value Index5). Large cap stocks (as represented by the Russell 1000® Index6) outperformed small caps (as represented by the Russell 2000® Index7).
The Lord Abbett Fundamental Equity Fund returned 9.70%, reflecting the performance at the net asset value (NAV) of Class A shares with all distributions reinvested for the quarter ended December 31, 2013, compared to the Fund's benchmark, the Russell 1000® Value Index8, which returned 10.01% 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 December 31, 2013, are: one year: 28.80%; five years: 15.49%; and 10 years: 8.12%. Expense ratio: 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 broad market continued to reach record highs during the fourth quarter despite some profit taking and rotation into more stable, less risky sectors which took place earlier in the quarter. Investors' concerns about the Fed's decision to taper bond purchases as well as the U.S. budget debate have seemingly abated. Positive economic reports such as improving employment trends, rising consumer confidence, and encouraging manufacturing data should also help put investors at ease moving into 2014.
Detracting from relative performance was stock selection within the industrials sector. Shares of URS Corp., a provider of engineering, construction and technical support services for government and commercial clients, declined despite reporting in line third quarter results due to investor's concerns about the uncertain fiscal budget as well as an expected reduction in chemical demilitarization incentive fees in the future. Shares of USG Corp., a manufacturer and distributor of gypsum wallboard and ceiling tiles for residential and commercial markets, fell after reporting weaker than expected commercial demand in the third quarter, as well as elevated costs. Stock selection within the information technology sector also detracted from relative performance. Shares of NCR Corp., a provider of technology services that helps businesses interact with customers, declined after reporting lighter than expected revenue for the third quarter primarily due to weak trends in ATMs and core retail.
Stock selection within the financials and health care sectors contributed to relative performance. Shares of Hartford Financial Group, a diversified financial services company, rose after reports of potential bidders for the firm's Japanese life insurance unit. Shares of Lincoln National Corp., a provider of life insurance, savings, retirement and supplemental health insurance products, benefited from market appreciation and expectations of higher forward interest rates. An underweight within the utilities sector also contributed to performance as this was the worst performing sector within the benchmark for the period. Within the health care sector, shares of Puma Biotechnology, a biopharmaceutical company focused on the development of cancer treatments, rose significantly following the announcement of better than expected top line results from a phase II drug trial for breast cancer.
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 execute a time-tested, bottom-up investment process predicated on valuation analysis and independent fundamental research. We expect the U.S. economy will continue to modestly expand in 2014. We believe that strengthening employment, improving consumer confidence and diminished investors' fears about the U.S. budget should support the progression. We remain aware of the potential impact of changes to Fed policy regarding tapering, status of global economic conditions, as well U.S. equity market valuation concerns.
The consumer discretionary sector is now the Fund's largest overweight. Exposure within the textile, apparel and luxury goods industry was increased and a hotel holding was added during the period. We expect these firms will benefit as the economy continues to expand. The health care sector continues to be a large overweight relative to the index. We continue to focus on biotechnology companies with unique products that address unmet needs and health care providers that are expected to benefit from the continuing implementation of the Patient Protection and Affordable Care Act. The financials sector remains the largest underweight in the portfolio, primarily due to the lack of exposure to real estate investment trusts (REITs) and an underweight within the diversified financial services industry. The Fund is also underweight the industrials sector relative to the index, as most companies leveraged to global growth are facing uncertainty in overseas economies.
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.