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U.S. equity markets advanced during the third quarter of 2013 amid indications of continued economic expansion. The market saw some choppiness during the quarter as investors anticipated that the U.S. Federal Reserve (the "Fed") would begin to withdraw monetary accommodation via reduced bond purchases, though the Fed held off on such a move at its policy meeting on September 18. The U.S. gains came against a generally positive global backdrop: the eurozone economy moved out of recession; Japan's stimulus program spurred renewed optimism that the country will see stronger growth; and China's economy recovered from a June 2013 credit squeeze.
The Fed noted that "national economic activity continued to expand at a modest to moderate pace" between early July and late August, based on reports from the 12 Fed districts. The Fed said manufacturing activity expanded modestly. Consumer spending rose in most Fed districts, reflecting, in part, strong demand for automobiles and housing-related goods.1 The third estimate for the second quarter of 2013 showed that the economy grew by an annualized rate of 2.5%, in line with the previous estimate. First-quarter 2013 growth was 1.1%.2
The S&P 500® Index3 rose 5.2% during the quarter, reaching an all-time closing high on September 18. Gains occurred in all of the 10 major sectors. The materials, industrial, consumer discretionary, health care, and information technology 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). Small cap stocks (as represented by the Russell 2000® Index6) outperformed large caps (as represented by the Russell 1000® Index7).
The Lord Abbett Growth Leaders Fund returned 13.12%, reflecting the performance at the net asset value (NAV) of Class A shares, with all distributions reinvested for the quarter ended September 30, 2013. The Fund outperformed its benchmark, the Russell 3000® Growth Index,5 which returned 8.48% 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 September 30, 2013, are: one year: 24.22%; and since inception (June 30, 2011): 11.74%. Expense ratio, gross: 1.55%, and net: 0.85%.
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 began the quarter on solid footing, bolstered by positive economic reports, favorable employment numbers, and improved consumer sentiment, which sent U.S. equities to all-time highs. In August, concerns surrounding the Syrian crisis and the effect of a potential wind-down of the Fed's bond-buying program caused equity markets to correct. By September however, equities again advanced to fresh all-time highs, following an announcement by Fed chairman Ben Bernanke that the bond-buying program would not be reduced and would likely continue into the foreseeable future.
We were pleased with our performance during the quarter, as the Fund outperformed its benchmark, the Russell 3000® Growth Index. The Fund was able to outperform the benchmark both as the market gained in July and September and as the market moved lower in August. Our pure growth investment process—that is, one which looks for companies with strong revenue and earnings growth along with conservative capital structures—benefited in an environment where growth broadly outperformed value.
Both an overweight and security selection within the information technology sector contributed to the Fund's relative performance. Facebook, Inc., operator of the world's largest online social network, saw its shares rise considerably during the quarter. The company's second quarter 2013 earnings report highlighted a 21% year-over-year increase in active users and a 53% year-over-year increase in advertising revenue. Online professional network LinkedIn Corp. also contributed to relative performance within the sector, as its shares likewise rose sharply on significant revenue and active user growth.
Security selection within the consumer discretionary sector also contributed to relative Fund performance. Shares of Ctrip.com, a travel service provider for hotel accommodations and airline tickets in China, rose during the quarter. In the second quarter, revenue growth increased at the fastest pace since first quarter 2011 as the Chinese travel industry continues to grow. Netflix, Inc., an internet subscription service streaming television shows and movies, also contributed to performance within the sector. Netflix's shares have moved steadily higher this year following the addition of a number of high-profile content deals and notable subscription growth.
Both security selection and a slight underweight to the industrials sector detracted from relative Fund performance. Shares of United Continental Holdings, Inc., the parent of the now merged United and Continental Airlines, fell with the entire airline industry in August after the U.S. Justice Department sued to block the merger of American Airlines and US Airways. Rental car operator Hertz Global Holdings, Inc. also detracted from relative Fund performance within the sector. Its shares fell after management expressed a cautious outlook for vehicle depreciation costs and slower-than-anticipated rental volume.
Security selection and an underweight to the energy sector also detracted from relative Fund performance during the quarter. Shares of Cobalt International Energy, Inc., a global deepwater oil-focused exploration company, fell sharply after the company provided a disappointing update on exploratory well progress: a major exploratory project in the Gulf of Mexico turned up dry, with no commercially viable oil available from the site. Shares of FMC Technologies, Inc., a global provider of control systems used for offshore oil and gas wells, detracted slightly from relative Fund performance within the sector. The firm moved lower following a second quarter earnings report that, although earnings beat expectations, showed little upside to margin expansion.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
U.S. equity markets soared to all-time highs in September, after the Fed opted to delay the taper of quantitative easing. This move supported our contention that any withdrawal of easing would be carefully paced to avoid disrupting the economic recovery. In September, the Fed re-emphasized that progress in tapering bond purchases would depend on the condition of the economy. With unemployment remaining high and inflation remaining below the Fed's 2% target, we believe the Fed will maintain an accommodative stance. Meanwhile, central banks in Europe, Japan, and China have indicated they, too, will remain accommodative; such global measures should, in the larger scheme of things, help offset concerns over the domestic monetary and political situation.
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.