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U.S. equity markets advanced during the fourth quarter of 2013 amid indications of an acceleration of economic growth. Investors appeared to be comfortable with the prospect that the U.S. Federal Reserve would begin to withdraw monetary accommodation via reduced monthly bond purchases. Indeed, the Fed announced on December 18 that it would start "tapering" at a modest pace during 2014. The outlook for other major global economies was decidedly mixed: the eurozone remained sluggish; Japan's growth rate decelerated despite an enormous stimulus program; and China's growth pace quickened amid government efforts to restructure the economy.
The Fed noted that "the economy continued to expand at a modest to moderate pace" between early October and mid-November, based on reports from the 12 Fed districts. The Fed said manufacturing activity expanded in most districts, with gains noted in the motor-vehicle and high-technology industries. Reports on retail spending were positive, though retailers reported being "hopeful, but cautious" ahead of the holiday season.1 The second estimate for the third quarter of 2013 showed that the economy grew by an annualized rate of 3.6%, above the previous estimate of 2.8%. Second-quarter 2013 growth was 2.5%.2
The S&P 500® Index3 rose 11% during the quarter, reaching an all-time closing high on December 31. Gains occurred in all of the 10 major sectors. The information technology and industrials 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). Large cap stocks (as represented by the Russell 1000® Index6) outperformed small caps (as represented by the Russell 2000® Index7).
The Lord Abbett Mid Cap Stock Fund returned 8.89%, reflecting the 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 benchmarks, the Russell Midcap® Value Index,8 which returned 8.56%, and the S&P MidCap 400®/Citigroup Value Index,9 which returned 8.22%. 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: 22.85%; five years: 16.51%; and 10 years: 7.03%. 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 robust year-to-date gains in equities continued during the fourth quarter, as positive sentiment caused by an improving domestic economic backdrop drove many domestic equity indexes to new all-time highs. This advance occurred despite a 16-day federal government shutdown, tapering of the Fed's asset-purchase program, and elevated U.S. equity valuations.
Positive security selection within the financials sector was a key driver of the Fund's relative outperformance during the period. Within the sector, major contributors to relative performance included Raymond James Financial, Inc. and Lincoln National Corp. Shares of Raymond James rallied to new all-time highs following an impressive earnings report. The financial services company reported a meaningful revenue surprise, aided by strong capital markets, combined with lower operating and acquisition integration expenses. Lincoln National Corp., a leading provider of insurance and retirement solutions, also benefited from favorable capital markets as well as strong execution, leading to a solid quarterly report. The firm's revenues rose due to robust annuity sales and inflows, as well as fees associated with a rising asset base.
Strong security selection within the consumer discretionary sector also contributed to the Fund's relative performance. Shares of Jarden Corp., a noteworthy contributor within the sector, steadily rose over the period as the diversified consumer products company experienced strong organic growth across business segments and raised its outlook to reflect the benefits of the recently closed acquisition of a major candle company.
Conversely, weak stock selection within the information technology sector detracted from the Fund's relative performance. Within the sector, noteworthy laggards included NCR Corp. and Symantec Corp. With respect to NCR, a mixed earnings report, which included revenues shy of expectations and weak organic growth, caused shares of the provider of consumer transaction technologies to slide lower. In the case of Symantec Corp., disruptions associated with a recent sales reorganization coupled with soft sales led to a disappointing earnings release. In addition, management of the data security and storage solutions company lowered 2014 guidance, further pressuring shares.
Stock selection within the consumer staples sector, most notably in Avon Products, Inc., also detracted from the Fund's relative performance. Shares of the women's beauty product company showed significant weakness following a soft earnings report and disclosures regarding the government's Foreign Corrupt Practices Act (FCPA) investigation.
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 will continue modestly to expand in 2014. We believe that strengthening employment, improving consumer confidence, and a diminished impact regarding sequestration should support the progression. However, we continue to closely monitor potential risks to this expansion, including changes to the Fed's monetary policy, U.S. budget politics, and challenging economic conditions in certain emerging markets.
In regards to sector positioning, the health care sector remains the Fund's largest relative overweight, despite decreasing the Fund's exposure. We continue to focus on select health care companies that we believe should benefit from expanded coverage under the Patient Protection and Affordable Care Act, favorable demographic trends, and efforts to mitigate overall health care costs. In addition, the Fund is underweight the financials sector relative to the index. Within the sector, the Fund's largest underweight lies within real estate investment trusts (REITs) due to concerns regarding overall valuations. Also, 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.