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U.S. equity markets advanced during the third quarter of 2013 amid indications of continued economic expansion. The market saw some choppiness during the quarter as investors anticipated that the U.S. Federal Reserve (the "Fed") would begin to withdraw monetary accommodation via reduced bond purchases, though the Fed held off on such a move at its policy meeting on September 18. The U.S. gains came against a generally positive global backdrop: the eurozone economy moved out of recession; Japan's stimulus program spurred renewed optimism that the country will see stronger growth; and China's economy recovered from a June 2013 credit squeeze.
The Fed noted that "national economic activity continued to expand at a modest to moderate pace" between early July and late August, based on reports from the 12 Fed districts. The Fed said manufacturing activity expanded modestly. Consumer spending rose in most Fed districts, reflecting, in part, strong demand for automobiles and housing-related goods.1 The third estimate for the second quarter of 2013 showed that the economy grew by an annualized rate of 2.5%, in line with the previous estimate. First-quarter 2013 growth was 1.1%.2
The S&P 500® Index3 rose 5.2% during the quarter, reaching an all-time closing high on September 18. Gains occurred in all of the 10 major sectors. The materials, industrial, consumer discretionary, health care, and information technology sectors outperformed the broader market. Growth stocks (as represented by the Russell 3000® Growth Index4) outperformed value stocks (as represented by the Russell 3000® Value 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 4.73%, reflecting the performance at the net asset value (NAV) of Class A shares with all distributions reinvested for the quarter ended September 30, 2013, compared to its benchmarks, the Russell Midcap® Value Index,8 which returned 5.89%, and the S&P MidCap 400®/Citigroup Value Index,9 which returned 6.97%. 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 September 30, 2013, are: one year: 18.21%; five years: 9.24%; and 10 years: 7.37%. 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.
As investor anxieties caused by the anticipation of the Fed tapering bond purchases and U.S. involvement in an escalating military conflict in Syria subsided, at least in the near term, domestic equity markets extended their strong performance in 2013, reaching new highs in September. These markets continue to reflect an improving U.S. economy supported by advancing corporate earnings, strengthening in housing data, and improving employment trends.
Detracting from the Fund's relative performance was stock selection within the energy sector. Within energy, oil refiner Tesoro Corp. was among the most notable detractors. This period was a challenging one for U.S.-based refiners as significant headwinds, including a tightening of crude oil spread prices, led to negative investor sentiment and a subsequent sell-off in shares.
Also detracting from the Fund's relative performance was stock selection within the consumer discretionary sector, particularly Abercrombie & Fitch Co. and Macy's, Inc. Similar to other mall-based teen retailers, a severe slowdown in store traffic at Abercrombie, particularly in July, coupled with an increasingly competitive environment, led to an earnings miss as demand for the retailer's offerings waned. In the case of Macy's, its shares were under pressure following a disappointing earnings report. The retailer missed consensus estimates due primarily to weaker-than-expected sales as unseasonably cool weather and a tough retail environment caused a slowdown in store traffic.
Positive stock selection within the information technology sector, most notably NCR Corporation and Arrow Electronics, Inc., contributed to relative performance during the period. NCR Corp., a technology company that provides much of the automation to bank ATM machines and self-checkout systems, has seen its shares move higher as banks and retailers continue to increase automation in an effort to reduce costs. Shares of Arrow Electronics received a boost after management reported positive earnings due to higher-than-expected revenues. Management of the global electronics component distributor also announced a major acquisition that should allow the company to expand into previously untapped geographies.
In addition, the Fund's underweight within the financials sector, specifically real estate investment trusts (REITs), was a key contributor to relative performance. Heading into the quarter, we had positioned the portfolio to be meaningfully underweight REITs due to expensive valuations. As the industry sold off because of a spike in interest rates caused by the anticipation of a shift in monetary policy, the Fund's significant underweight contributed to 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.
We continue to execute a time-tested, bottom-up investment process predicated on valuation analysis and independent fundamental research. We expect the U.S. economy to expand modestly in the coming year, supported by the improving U.S. housing market and strengthening consumer confidence. We remain aware of several risk factors, including the possible negative impact of a rapid rise in interest rates, budget issues in the United States, and continued uncertainty in Europe and emerging markets.
In regards to sector positioning, health care remains the largest overweight, 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 an increase in the insured population due to the implementation of the Patient Protection and Affordable Care Act. Within the financials sector, we maintained the portfolio's significant underweight to the REITs industry due to concerns regarding overall valuations. We reduced the portfolio's exposure to the materials sector, mostly within the chemicals industry, as select companies' reward-to-risk ratios no longer justified an investment. The utilities sector remains a large underweight, as we 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 effect of fee waivers or expense limitation arrangements.