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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 Lord Abbett Fundamental Equity Fund returned 13.37%, reflecting the performance at the net asset value (NAV) of Class A shares, with all distributions reinvested for the quarter ended March 31, 2013, compared to the Russell 3000® Index,8 which returned 11.07% 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, 2013, are: one year: 6.32%, five years: 5.61%, and 10 years: 9.45%. Expense ratio: 1.09%.
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.
Positive stock selection, particularly within the health care sector, enabled the portfolio to outperform the index during the quarter. The broad market finished the quarter at a record high, supported by the "fiscal cliff" deal on the New Year's holiday, strong U.S. employment reports, the improving U.S. housing market, and better than expected corporate earnings. Value stocks outperformed the broad market for the quarter, and most U.S. value equity indexes ended with double-digit returns.
Within health care, shares of Celgene Corp., a global biopharmaceutical company engaged in the discovery and development of drugs for the treatment of cancer and inflammatory disorders, rose after phase III test results showed that Abraxane, a Food and Drug Administration-approved treatment for breast and lung cancer, extended the life of late-stage pancreatic cancer patients by 1.8 months. In addition, shares of Community Health Systems Inc., an operator of hospitals in the United States, rallied due to solid fourth quarter results driven by higher than expected flu-related admissions. The market also anticipates the company to benefit from the Patient Protection and Affordable Care Act, which is expected to have a positive impact on company's earnings and margins as the number of uninsured patients entering hospitals decreases. An underweight allocation within the information technology sector also boosted relative performance. This sector was one of the worst performing sectors in the index during the quarter.
Detracting from the portfolio's relative performance was an underweight position within the consumer staples sector, which was one of the best performing sectors in the index. One of the top detractors in the portfolio was the consumer staples holding Bunge Ltd. Shares of the 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. Stock selection within the financials sector also negatively impacted relative performance during the period. Shares of Capital One Financial Corp., a diversified financial services holding company, fell after the firm reported lower than expected fourth quarter results, while also disappointing investors by announcing that they would not be enacting a share buyback in 2013. Investors also reacted negatively to the announced sale of the Best Buy private label and co-branded credit card accounts. This announcement was a reversal of the company's efforts to build in private labels.
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. Our expectation is that the U.S. economy will expand modestly in the coming year, supported by the improving U.S. housing market, strengthening employment trends, and a rise in U.S. energy production. We remain aware of several risk factors, including the possible negative impact of sequestration and continued uncertainty in Europe and China.
The financials sector remains the largest overweight in the portfolio relative to the index. In this sector, we are mainly concentrated in insurance companies and banks, but remain underweight in real estate investment trusts. The portfolio is also overweight in the health care sector, as we continue to focus on the biotechnology industry and on select health care providers that we believe should benefit from the implementation of the Patient Protection and Affordable Care Act. In addition, we increased our exposure to the telecommunication services sector because we believe consumers will continue to increase their usage of data services, and we expect margin expansion as providers reduce subsidies. The industrials sector remains a large underweight relative to the index, although we are overweight the construction and engineering segment. We reduced our exposure in the energy sector, primarily from the energy equipment and services segment. The information technology sector is the largest underweight relative to the index, as we decreased our exposure to the storage industry, which experienced a slowdown in demand during the first quarter.
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.