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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 Fund returned 11.01%, 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 Midcap® Growth Index,8 which returned 9.34% 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: 19.23%; five years: 11.10%; and 10 years: 8.64%. Expense ratio, gross: 1.42%, and net: 1.40%
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 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 Midcap® Growth Index. Notably, outperformance was across a wide array of sectors and due primarily to security selection.
The most significant contributor to relative Fund performance came from security selection within the consumer discretionary sector. Polaris Industries, Inc., a manufacturer of off-road vehicles for recreational and utility use, contributed most to relative sector performance. The company released its new 2014 line of vehicles during the quarter, which have been very popular with consumers; the company's shares rose on anticipated market share gains in coming quarters. Shares of BorgWarner, Inc., a global supplier of automotive systems and components used in commercial trucks and machinery, also rose during the quarter. The company recorded record profit margins in the second quarter and raised the second half 2013 outlook on an improving European economy.
Security selection within the information technology sector was also a leading contributor to relative Fund performance. Shares of Pandora Media, Inc., a provider of Internet radio service with more than 125 million registered users, moved higher during the quarter. The company posted year-over-year user and ad revenue growth, and has been fairly unaffected by the recent debut of Apple's iRadio service. NCR Corporation, a technology company that provides much of the automation to bank ATM machines and self-checkout systems, also has seen shares move higher as banks and retailers continue to increase automation in an effort to reduce costs.
Although the energy sector contributed to absolute Fund performance, negative security selection resulted in the sector detracting from relative Fund performance during the quarter. Cabot Oil & Gas Corporation, an energy company involved in the exploration of oil and gas properties, detracted from relative performance within the sector. Shares pulled back after running higher for much of the 2013 calendar year, as management noted production volume has been reduced in recent weeks. Cameron International Corp., an equipment provider to the global oil and gas industries, also detracted from relative Fund performance within the sector. Shares moved lower in July after a downward revision to 2013 earnings due to delays on a major subsea drilling project.
Security selection within the materials sector also detracted from relative Fund performance. Among the top detractors within the sector were shares of Boise Cascade Company. The manufacturer of wood products and building materials sold off following a disappointing second quarter 2013 earnings report tied to a sharp decline in the price of lumber. Shares of Axiall Corporation, a manufacturer of integrated chemicals and building products in North America and Asia, also fell during the quarter. Higher commodity prices have reduced margins and have been a major headwind on the building products business.
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 long-held 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. As such, we continue to believe the economy will continue its slow growth trajectory.
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.