USG & GSE Money Market Fund (LACXX) - Class A

With relief that the worst of the "fiscal cliff" had passed without calamity, investors embraced risk throughout much of the first quarter of 2013. As a result, major equity indexes surged, highlighted by several record-high closing levels.

Despite the equity market's milestones, the Treasury market remained range bound, with the 10-year note yielding about 1.85%, according to Bloomberg. The Federal Reserve's program to purchase $85 billion in Treasury securities and agency mortgage-backed securities (MBS) per month may have limited the increase in yields, even as Fed members became more vocal about the potential risks of further quantitative easing.

Some suggestions about how policy might be adjusted were discussed at the Federal Open Market Committee in late January 2013. In addition to proposing to vary the pace of the asset purchases, another suggestion was that the Fed could hold securities on its balance sheet for longer than initially planned.

Discussions about adjusting monetary policy were held amid a notable improvement in labor market conditions. In particular, the U.S. Bureau of Labor Statistics reported that non-farm payrolls increased by 236,000 in February, while the unemployment rate fell to 7.7%. Many observers regarded this as an encouraging report, considering that it reflected the looming sequestration of $85 billion in automatic federal spending cuts that took effect on March 1, as well as the 2% hike in payroll taxes and the increase in the top marginal tax rate that were part of the tax package that passed in early 2013.

Meanwhile, the annual rate of inflation in February 2013 remained consistent with the Fed's stated long-term target of 2.0%. The Consumer Price Index (CPI)¹—on an all-items basis and core basis, which excludes food and energy—rose by 2.0%, according to the Bureau of Labor Statistics.

Investors' increased comfort with risk was reflected in fixed-income asset classes, as the convertible bond market posted a quarterly return of nearly 7.6%, followed by the high-yield bond market with a gain of about 2.9%, and the floating-rate loan market with a positive return of about 2.4%. The municipal bond market managed a positive return of 30 basis points (bps), and government securities posted a loss of about 16 bps, according to Bloomberg.

The Fund's Class A shares ended the first quarter of 2013 with total net assets of $564 million and a seven-day current yield of 0.02%.² The Fund returned 0.00%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended March 31, 2013. Its peer group, the Lipper U.S. Government Money Market Funds Average,³ returned 0.00% in the same period. The Fund's average annual total returns, which include the reinvestment of all distributions, as of March 31, 2013, are: one year: 0.02%; five years: 0.21%; and 10 years: 1.36%. Expense ratio: 0.66%. (An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corp. or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund.)

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 Fund maintained its strategy of investing in short-term, liquid government and government-sponsored enterprise securities, including agency discount notes, Treasury notes, repurchase agreements collateralized by Treasuries, and overnight cash deposits.

Rates on discount notes with maturities of three months issued by the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal Home Loan Banks (FHLBs) remain historically low. During the last weeks of the first quarter, discount note yields were depressed due to low supply. Through the first quarter of 2013, the effective fed funds rate remained in the middle of the policy range of 0–0.25%.

The Fund's yield to maturity at the end of the first quarter was 0.12%, compared with 0.15% at the end of the fourth quarter of 2012. Cash comprised approximately 11% of the portfolio and was invested in collateralized repurchase agreements that mature at the start of each business day. The average maturity was 51 days at the end of the first quarter, down from 53 days at the end of the fourth 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.

Outlook
At its late January Federal Open Market Committee meeting, the Fed committed to keeping rates low and continuing its policy of quantitative easing, purchasing $85 billion of agency MBS and Treasuries per month, for as long as it takes to bring unemployment down to below 6.5% as long as inflation remains under 2.5%. That implies the fed funds rate might remain near zero for as long as another two years. During the meeting the Fed also discussed various ways it might adjust monetary policy including varying the pace of asset purchases and holding securities on its balance sheet for longer than initially planned. In the meantime, there is still the backdrop of recessionary conditions and debt problems in Europe—with Cyprus replacing Greece as the poster child of fiscal irresponsibility, ongoing unrest in the Middle East, and decelerating economic activity in the emerging markets, all with the potential to roil the financial markets.