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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 3.12%, 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 All Country World Ex-U.S. Value Index with Gross Dividends,1 which returned 1.94%, and the MSCI All Country World Ex-U.S. Value Index with Net Dividends,1 which returned 1.81%. 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: 1.44%; and since inception (June 30, 2008): -0.32%. Expense ratio, gross: 1.36%, 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, strong stock selection was the reason for the Fund's outperformance, versus the index, during the first quarter of 2013. Contributing to relative performance was stock selection within the consumer discretionary and consumer staples sectors. Within the consumer discretionary sector, Toyota Motor Corp., a Japan-based automaker, benefited from cost reductions and weakness in the Japanese yen. In addition, the United States and emerging market countries are targeted growth areas, as Toyota plans to launch new models in these regions, which should prove timely in view of the weakened yen. Shares of Prosieben Sat.1 Media AG, a Germany-based broadcasting company, were propelled after positive fiscal year 2012 performance reports were released, fueled by the "Digital and Adjacent" segment. Within the consumer staples sector, shares of Japan Tobacco, Inc., 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.
Detracting from relative performance was stock selection in the industrials and information technology sectors. Within the industrials sector, shares of Globaltrans Investment PLC, a Russian freight rail transportation company, suffered due to higher interest costs and weakness in the ruble. In addition, Atlantia SpA, an Italy-based toll road operator, saw its shares fall due to continued weakness in the Italian economy and its merger with Gemina, an airport operator, which the market viewed skeptically. Within the information technology sector, Siliconware Precision, a Taiwan-based company in the semiconductor industry, was hampered by an inventory correction and lowered guidance for the first quarter of 2013.
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 their focus onto 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 continue to increase our holdings in Japanese companies. Exporters appear poised to do better, given the recent weakness in the yen; we have focused on auto, industrial, and financial 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 consumer staples, telecommunication services, and utilities sectors. We remain underweight the energy, materials, and financials sectors.
We continue to believe that above average dividend-yielding companies with below-average valuations are an attractive investment combination. Reinvested dividends have contributed approximately 50% of any major equity market's total return over any 10-year time period going back to 19002.
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.