Income Fund (LAGVX) - Class A

With relief that the worst of the "fiscal cliff" had passed without calamity, investors embraced risk throughout much of the first quarter of 2013. As a result, major equity indexes surged, highlighted by several record-high closing levels.

Despite the equity market's milestones, the Treasury market remained range bound, with the 10-year note yielding about 1.85%, according to Bloomberg. The Federal Reserve's program to purchase $85 billion in Treasury securities and agency mortgage-backed securities (MBS) per month may have limited the increase in yields, even as Fed members became more vocal about the potential risks of further quantitative easing.

Some suggestions about how policy might be adjusted were discussed at the Federal Open Market Committee in late January 2013. In addition to proposing to vary the pace of the asset purchases, another suggestion was that the Fed could hold securities on its balance sheet for longer than initially planned.

Discussions about adjusting monetary policy were held amid a notable improvement in labor market conditions. In particular, the U.S. Bureau of Labor Statistics reported that non-farm payrolls increased by 236,000 in February, while the unemployment rate fell to 7.7%. Many observers regarded this as an encouraging report, considering that it reflected the looming sequestration of $85 billion in automatic federal spending cuts that took effect on March 1, as well as the 2% hike in payroll taxes and the increase in the top marginal tax rate that were part of the tax package that passed in early 2013.

Meanwhile, the annual rate of inflation in February 2013 remained consistent with the Fed's stated long-term target of 2.0%. The Consumer Price Index (CPI)¹—on an all-items basis and core basis, which excludes food and energy—rose by 2.0%, according to the Bureau of Labor Statistics.

Investors' increased comfort with risk was reflected in fixed-income asset classes, as the convertible bond market posted a quarterly return of nearly 7.6%, followed by the high-yield bond market with a gain of about 2.9%, and the floating-rate loan market with a positive return of about 2.4%. The municipal bond market managed a positive return of 30 basis points (bps), and government securities posted a loss of about 16 bps, according to Bloomberg.

The Fund returned 1.20%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended March 31, 2013. The Fund's benchmark, the Barclays U.S. Aggregate Bond Index,² returned -0.12% in the same period. 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 March 31, 2013, are: one year: 7.15%; five years: 8.74%; and 10 years: 6.13%. Expense ratio: gross 0.87% and net 0.78%.

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.

As investors continued to embrace risk, credit-risk sectors of the bond market outperformed Treasuries in the quarter. Therefore, our overweight in credit-sensitive sectors contributed to relative performance during the first quarter.

The most significant factor contributing to overall performance for the quarter was security selection within the portfolio's corporate allocation. Within investment-grade corporate bonds, we continued to concentrate on 'BBB' rated bonds, which outperformed higher-rated issues. Our position within the high-yield sector also contributed greatly to performance, as lower-rated issues generated strong returns.

The portfolio's overweight in commercial mortgage-backed securities (CMBS) also contributed to relative performance. We will continue to look for opportunities to increase our CMBS exposure, especially in lower-rated issues, including new issue 'A' or 'BBB' rated bonds, as well as seasoned mezzanine classes.

In addition, our position in selected emerging-market currency forwards aided relative performance, as a number of these currencies appreciated relative to the U.S. dollar.

An underweight in agency debentures hurt our relative performance during the quarter. This modest drag on performance was, however, more than offset by a significant exposure to the credit sectors, such as corporate bonds and CMBS. The portfolio's yield curve positioning was also a slight detractor from relative performance.

Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.

Outlook
At its late January Federal Open Market Committee meeting, the Fed committed to keeping rates low and continuing its policy of quantitative easing, purchasing $85 billion of agency MBS and Treasuries per month, for as long as it takes to bring unemployment down to below 6.5% as long as inflation remains under 2.5%. That implies the fed funds rate might remain near zero for as long as another two years. During the meeting the Fed also discussed various ways it might adjust monetary policy including varying the pace of asset purchases and holding securities on its balance sheet for longer than initially planned. In the meantime, there is still the backdrop of recessionary conditions and debt problems in Europe—with Cyprus replacing Greece as the poster child of fiscal irresponsibility, ongoing unrest in the Middle East, and decelerating economic activity in the emerging markets, all with the potential to roil the financial markets.

Despite having reduced some of our credit exposures over the course of the last year, we continue to be positioned with an overweight to the credit sectors of the bond market and an underweight to the government-related sectors. We remain poised to add back to the credit sectors on weakness because our base-case scenario is that the U.S. economy will remain on a positive, albeit modest, growth path, that corporate credit fundamentals are still favorable, and that investor demand for yield will be supportive of credit-sensitive securities.