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U.S. Equity markets climbed during the first quarter of 2013, as investors focused on solid growth in corporate earnings and continued monetary accommodation from the Federal Reserve. The gains came against a backdrop of continued uncertainty regarding the European sovereign debt crisis, and signs of improved economic growth in China and other key emerging markets.
The Fed noted that the U.S. economy "generally expanded at a modest to moderate pace" in January and early February, based on reports from the 12 Fed districts. The Fed said most districts reported expansion in consumer spending, although retail sales slowed in several districts. The manufacturing and service sectors showed improvement.1 The third estimate for the fourth quarter of 2012 showed that the economy grew by an annualized rate of 0.4%, versus the previous estimate of an increase of 0.1%. Third-quarter 2012 growth was 3.1%.2
The S&P 500® Index3 rose 10.6% during the quarter, reaching an all-time closing high on March 28. Gains occurred in all of the 10 major sectors. The consumer discretionary, consumer staples, financials, health care, industrials, and utilities sectors outperformed the broader market. Value stocks (as represented by the Russell 3000® Value Index4) outperformed growth stocks (as measured by the Russell 3000® Growth Index5). Small cap stocks (as represented by the Russell 2000® Index6) outperformed large caps (as represented by the Russell 1000® Index7).
The Lord Abbett Mid Cap Stock Fund returned 12.26%, reflecting the 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 benchmarks, the Russell Midcap® Value Index,8 which returned 14.21%, and the S&P MidCap 400®/Citigroup Value Index,9 which returned 14.83%. 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: 8.68%; five years: 5.27%; and 10 years: 8.71%. Expense ratio: 1.13%.
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.
The broad market finished the quarter at a record high, supported by the "fiscal cliff" deal on the New Year's holiday, strong U.S. employment reports, the improving U.S. housing market, and better than expected corporate earnings. Value stocks outperformed the broad market for the quarter, and most U.S. value equity indexes ended with double-digit returns. However, stock-specific issues detracted from our relative performance and the portfolio underperformed the index.
Stock selection within the information technology and consumer staples sectors detracted from relative performance during the period. Within information technology, shares of Broadcom Corporation, a global semiconductor company, fell in January following management's announcement of disappointing guidance for the first quarter of 2013. Management highlighted macro weakness, which is exacerbating normal seasonal business fluctuations. Within consumer staples, shares of Bunge Ltd., a global agribusiness and food company, underperformed after the company reported fourth quarter results below consensus expectations. The agribusiness and sugar divisions were the main drivers of weakness. Stock selection within the health care sector also hurt relative performance. Shares of Mylan Inc., a generic and specialty pharmaceuticals company, underperformed during the quarter due to investor concerns about increasing competition in some key product lines.
Contributing to the portfolio's relative performance was strong stock selection within the materials and consumer discretionary sectors. Within materials, shares of Axiall Corp., a global manufacturer of chemicals and building products that was created following the January 2013 merger between PPG Industries and Georgia Gulf, rose following the merger transaction and on the anticipation of a continued recovery in the U.S. housing market. Within consumer staples, shares of Tupperware Brands Corp., a direct seller of products of multiple brands through an independent sales force worldwide, rose as strong organic sales growth resulted in better than expected fourth quarter results. Management also announced plans to repurchase additional shares and increase dividends by 72%. Stock selection within the industrials sector also had a positive impact on relative performance. The share price of engineering and construction firm Jacobs Engineering Group, Inc. steadily increased as the company reported solid operating margins and continued backlog growth.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
We continue to execute a time-tested, bottom-up investment process predicated on valuation analysis and independent fundamental research. We expect that the U.S. economy will expand modestly in the coming year, supported by the improving U.S. housing market, strengthening employment trends, and a rise in U.S. energy production. We continue to monitor several risk factors, including the possible negative impact of sequestration and continued uncertainty in Europe and China.
The health care sector remains the largest overweight in the portfolio, primarily concentrated in the health care providers and services industry. We continue to focus on select health care providers that we believe should benefit from the implementation of the Patient Protection and Affordable Care Act. The industrials sector is also an overweight, and we recently added to holdings within the aerospace and defense industry that we believe will benefit from a recovery in the business jet market. In addition, the financials sector is the largest absolute exposure in the portfolio. Within this sector, we are overweight insurance companies and banks, while remaining underweight real estate investment trusts. The consumer staples sector is underweight relative to the index. We reduced our exposure to the food products and beverages segments following strong performance of our holdings within these categories. The utilities and telecommunication services sectors remain large underweights in the portfolio, as we continue to find more compelling investment opportunities in other segments of the market.
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.