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International equity markets posted positive performance during the first quarter of 2013, with significant dispersion across regions and sectors. International returns lagged U.S. returns for the quarter, primarily driven by a weak British pound, euro, and Japanese yen. Japan, a strong performer during the fourth quarter of last year, continued its strong equity market recovery by rising more than 10% in U.S. dollar terms during the quarter. Developed markets continued their recent relative strength versus emerging markets, outperforming by more than 6% during the quarter according to Bloomberg. Among the major sectors, healthcare, consumer staples, and consumer discretionary led the way. Three sectors, energy, materials, and technology, lagged the market.
Despite continued monetary easing by major central banks around the world, many European economies contracted in the fourth quarter of 2012. Across emerging markets, Asia and Latin America showed relatively greater strength. Among Europe's largest economies, Germany, France, and the United Kingdom contracted in the fourth quarter, which was not expected. European politics continued to add to the economic uncertainty, with a general election in Italy leaving the country's commitment to austerity programs unclear. The uncertain result caused some equity and bond market turmoil, as did a bailout program for the banking system of Cyprus. Despite these developments and continued economic sluggishness, results for Europe's major stock markets were mixed; Germany, France, and the United Kingdom rose slightly while Spain and Italy finished down.
In Asia, the election of Prime Minister Shinzo Abe, and his reflationary policies, resulted in a sharp drop in the value of the Japanese yen and a surge in the local equity market. Abe campaigned on a platform of aggressive monetary and fiscal policy, including a weaker yen, aimed at ending Japan's longstanding deflation.
China, on the other hand, announced that it would slightly moderate the growth of its money supply in an effort to prevent the return of higher inflation. After slowing early in 2012, the Chinese economy appeared to regain its momentum, with real growth amounting to 7.8% year over year, according to China's National Bureau of Statistics. The Chinese stock market declined somewhat in the first quarter.
In Latin America, Brazil's economy expanded less than expected in the fourth quarter of 2012, marking two years of slower growth. Mexico continues to benefit from its increasing competitiveness relative to China, and from proximity to the relatively strong U.S. economy. Markets in Latin America were largely up at the end of the first quarter, though Brazil declined slightly.
The Fund returned 3.91%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended March 31, 2013, compared to its benchmark the MSCI EAFE with Gross Dividends Index,1 which returned 5.23%, and the MSCI EAFE with Net Dividends Index,1 which returned 5.13%. 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: 1.02%; five years: -2.28%; and since inception (December 31, 2003): 4.54%. Expense ratio, gross: 1.47%, and net: 1.12%.
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.
Overall, weak stock selection was the key reason for the Fund's relative underperformance versus the index during the first quarter of 2013. Within the materials sector, shares of Rio Tinto plc, a United Kingdom-based metals and mining company, dropped as a result of the general weakness in commodity prices. Within the financials sector, ING Groep NV, a Netherlands-based banking, insurance, and investment management company, saw its shares decline after performance reports, released in January, reflected the effects of the eurozone recession during the fourth quarter as well as continued restructuring charges. Another detractor was Samsung Electronics Co., Ltd., a South Korea-based consumer electronic company, whose shares slid after conservative guidance for the first quarter of 2013 was announced, coupled with a seasonal decline in demand. However, the launch of the Galaxy S4 smartphone in the second quarter is expected to reverse the fall in share price.
Contributing to relative performance was stock selection within the health care and consumer staples sectors. Within the health care sector, shares of Shionogi & Co., Ltd., a Japan-based pharmaceutical company, rose. The company filed its new drug application in the United States for its product Dolutegravir. This drug, which is used in HIV treatment, received priority review and is expecting approval in August. In addition, shares of Roche Holding Ltd. AG, a Switzerland-based pharmaceutical company, benefited from success of its breast cancer fighting drug Perjerta, which gained approval in Europe. In addition, preliminary studies of an experimental drug for heart damage-related issues showed positive results compared to a placebo. Within the consumer staples sector, shares of Japan Tobacco, a Japan-based global cigarette manufacturer, rose on a strong earnings release and an unexpected increase in the dividend. Strength in domestic sales and the weaker yen continues to provide momentum for the company.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
While all eyes have returned to Europe, neither the crisis in Cyprus nor the inconclusive elections in Italy has shaken the European bond markets; Spanish and Italian yields remain below 5% according to Bloomberg. While global growth remains fragile, equity market valuations appear attractive relative to history and fixed-income alternatives. While valuations look attractive, we believe that corporate earnings need to grow from current levels to drive markets higher.
Recent earnings revisions have been a mixed bag, with positive revisions from Japan, Australia, and the United Kingdom. Emerging markets and Europe ex-U.K. have shown negative revisions year to date.
Following last year's leadership change in China, we are increasingly concerned that much of the growth in China will be linked to government spending. Three of our analysts have spent time in various parts of that country in recent weeks and found little to be enthusiastic about on a bottom-up basis.
We are overweight the Japanese equity market for the first time in many years. Exporters appear poised to do better, given the recent weakness in the yen; we have focused on auto, technology, and industrial companies. We also see tangible evidence that real estate is beginning to enjoy a meaningful recovery in Tokyo.
Relative to the index, we have emphasized companies in the information technology, industrials, and consumer discretionary sectors. We remain underweight the energy and materials sectors.
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.