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Fourth quarter equity market performance was essentially a microcosm of the entire 2013 year. With a gradually recovering global economy and accommodative monetary policies as the backdrop, developed market equities performed strongly over the quarter and propelled returns for the broad indexes such as MSCI EAFE Index1 and MSCI World Index2 above 20% for the year. Emerging markets were essentially flat over the quarter and were generally poor performers through the year as their growth faded, currencies weakened and tighter liquidity conditions negatively affected the most indebted countries.
For all their past troubles, equities markets in Egypt, Greece, and Ireland morphed into some of the best performers of the quarter. Then there was Spain, the fourth largest economy in the eurozone, which continued to recover from a two-year recession thanks to exports, and enabled stocks to finish with a healthy double-digit gain for the year.
Among larger countries, other significant gainers during the period included India, China, Germany, and Mexico. India rebounded from a period of currency free-fall and capital flight. China's exports rose beyond analyst expectations and inflation declined, which dampened fears of tighter government policies. Germany's central bank upgraded its economic projections for 2014.
In U.S. dollar terms, Japan stalled during the fourth quarter amid concerns about the timing of promised structural reforms, yet the Japanese market, led by the Bank of Japan's aggressive monetary policy, still managed to finish as one of the biggest gainers in Asia for the year. China completed its highly anticipated Third Plenum, a once a decade meeting of top leaders, with generally positive reviews. Key highlights included lower future credit growth, a more market-based approach across a range of government controlled companies, and a gradual end to China's one-child policy.
The best performing sectors during the fourth quarter of 2013 included telecom services, (driven by increased expectations of M&A activity), information technology (weak yen beneficiaries in Japan), and health care (M&A activity). Consumer staples, materials, and utilities all eked out modest gains.
The Fund returned 4.34%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended December 31, 2013, compared to its benchmark, the MSCI All Country World Ex-U.S. Value Index with Gross Dividends,3 which returned 4.93%, and the MSCI All Country World Ex-U.S. Value Index with Net Dividends,3 which returned 4.86%. 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 December 31, 2013, are: one year: 7.89%; five years: 10.67%; and since inception (June 30, 2008): 1.62%. Expense ratio, gross: 1.27%, 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, stock selection from the energy and information technology sectors was the reason for the Fund's relative underperformance versus the benchmark during the fourth quarter of 2013. A notable detractor from the energy sector was Lightstream Resources Ltd., a Canadian oil and gas exploration and production company. Despite strong oil prices, Lightstream was unable to beat analyst-forecasts on third quarter earnings. Increased operating expenditures were due in part to lower volumes and higher power costs. Also detracting from the energy sector was Bermuda/Norway-based offshore drilling service company, Seadrill Ltd. Providers of sea-based oil rigs, such as Seadrill, have faced recent hardships as oil firms have begun delaying drilling investments in an effort to save capital. Despite a raise in dividend, Seadrill's stock price was unable to overcome negative industry sentiment during the quarter. From the information technology sector, Ricoh Co., Ltd., a Japan based office and industrial equipment manufacturer, was a significant detractor. New products produced and shipped in China were delayed, thus missing estimated guidance. The run rates, however, are expected to normalize quickly and the dip in share price is believed to be short-lived.
Stock selection within the materials and consumer discretionary sectors contributed to the Fund's relative performance. A strong contributor from the materials sector was United Kingdom-based metals and mining company Rio Tinto plc. During the latter half of the quarter, Rio surprised analysts when it announced significant improvements to production estimates and cost levels for its Pilbara iron ore mining site. This was a result of Rio's plan to defer development of new mines, which is hoped to ultimately save the mining company upward of $3 billion. UPM-Kymmene Corp., a Finland-based pulp, paper, and timber manufacturer, was another contributor from the materials sector. UPM benefited from a series of positive announcements early in the quarter. The government of Uruguay granted UPM permission to increase its pulp production by nearly 10% per year despite environmental complaints from neighboring Argentina. UPM also successfully completed the sale of a processing mill in France as part of a continued effort to reduce costs by €200 million by the end of 2014. From the consumer discretionary sector, China-based casino gaming and entertainment resort company Wynn Macau Ltd. was a notable contributor. Early in the quarter, Wynn reported third quarter earnings that were either in line or outpaced analyst estimates. Wynn's shares subsequently rallied for the remainder of the period as the Macau gambling industry reported revenues that had grown roughly 30% on a year-over-year basis.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
Confidence has returned to the developed world's equity markets. While U.S. equities have been strong performers for each of the past three years, Europe and Japan both delivered strong returns during 2013. Economic news flow has improved across the developed world, major risks have receded and expectations for better economic outcomes have increased.
Strong equity market performances have dragged valuation levels up to mid cycle/average for many countries and sectors across Europe and Japan. From our perspective, this means that earnings now matter a great deal; it is difficult to see stocks higher in 2014 without an uplift in corporate profits. The liquidity environment remains supportive in both Europe and Japan, and investor sentiment is increasingly positive.
Emerging markets continue to struggle in both absolute and relative terms. Gross Domestic Product (GDP) growth expectations have slowed, commodity prices have been weak, and capital flows have been weak due to the change in U.S. Federal Reserve policy. All of these factors are now well-understood by the markets, and valuations are attractive in many areas. We continue to be very selective across the emerging markets, with a current focus on companies in North Asia (Korea, Taiwan, China). Many of the headwinds facing the developing world could begin to dissipate during 2014. Given the low valuations and low investor expectations, this could create an attractive entry point.
High dividend yielding stocks put in a mixed performance during 2013. Global equity markets were led by Japan, European recovery and internet stocks, none of which pay average dividend yields. History shows us that reinvested dividends have generated 40-60% of major equity market total returns.4 Valuations remain supportive, and dividend yields across our strategy look attractive versus government or corporate debt. Many of the companies in the portfolio continue to pay dividend yields in excess of their corporate bond yield. Lower investor expectations for dividend strategies as a whole may create a contrarian investment opportunity.
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.