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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 Fund returned 8.46%, reflecting the performance at the net asset value (NAV) of Class A shares with all distributions reinvested for the period ended March 31, 2013, underperforming the Russell 2000® Index,6 which returned 12.39% for the same period. Average annual total return, which reflects 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: 2.67%; three years: 5.77%; five years: 2.67%; and since inception (June 26, 2001): 7.48%. Expense ratio: 1.36%.
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.
[In mid-February, Robert P. Fetch, CFA, Lord Abbett Partner & Director of Domestic Equity Portfolio Management, assumed day-to-day management responsibilities for the portfolio. In addition, the board of directors approved a proposal to reorganize Lord Abbett Small Cap Blend Fund into the Lord Abbett Value Opportunities Fund. The proposal requires the approval of the Lord Abbett Small Cap Blend Fund shareholders. A shareholder meeting has been scheduled for July 12, 2013 to vote on the reorganization.]
This quarter was marked by an apparent shift in investor psychology and behavior. Unlike in recent quarters in which macroeconomic events were the driving force behind market performance, a returned focus on fundamentals appeared to be the predominate factor in investor decisions. Perceived macro headwinds—including the inaction in Washington, D.C., regarding sequestration and the Cypress bank bailout, which may have derailed previous market rallies—were viewed as relative hiccups, at least in the interim. Investors instead focused on improving economic fundamentals in the United States, particularly the continuation of the domestic housing recovery. These factors led to a new all-time closing high for both the Dow Jones Industrial Average and the S&P 500 Index.
Within the small cap universe, growth outperformed value, with the Russell 2000® Growth Index8 returning 13.21% and the Russell 2000® Value Index9 returning 11.63% for the quarter. Health care was one of the best performing sectors in the Russell 2000® Index,6 while the telecommunication services sector was among the worst.
Stock selection within the materials sector, particularly in the metals and mining industry, was a major detractor from the Fund's relative performance. The combination of lower commodity pricing and increasing mining costs caused us to reevaluate our investment thesis. Consequently, we eliminated our exposure within the metal and mining industry. Other notable detractors included energy holding Endeavour International Corp., information technology holding Liquidity Services, Inc., and industrials holding Foster Wheeler, Ltd. Shares of Endeavour, an oil and gas company, faltered following the announcement of more project delays in the firm's Rochelle drilling operations. Due to a series of execution issues and other fundamental concerns, we exited the position in late February. A disappointing earnings report led to a sharp sell-off in shares of Liquidity Services, an online auction marketplace for surplus assets. The firm also lowered its guidance citing higher than expected costs relating to a recent acquisition and diminishing customer flows. As a result of lowered earnings expectations, we exited the position in early March. Shares of Foster Wheeler, an engineering and construction company, were under pressure following a significantly weaker than expected outlook for 2013. The negative guidance was attributed to timing and project mix issues. After a slight recovery in share price, we decided to exit the position in mid-March because we believed there were better opportunities elsewhere.
Stock selection within the industrials sector, most notably Oshkosh Truck Corp. and DXP Enterprises, Inc., contributed to the Fund’s relative performance. Shares of Oshkosh, a specialty vehicle manufacturer, soared following a strong earnings report and a positive revision to guidance. The beneficial quarter was attributed to an increase in new orders in the Equipment Access division and better productivity out of the Defense division. A solid quarterly report led to a significant rally in shares of DXP Enterprises. Management cited strength in the industrial parts distributor's Innovative Pumping Solutions segment as a key driver of revenues.
Within the health care sector, the Fund also experienced a significant contribution from stock selection, most notably Tenet Healthcare Corp. Shares of Tenet Healthcare, a health care services provider, continued to ride the wave of positive momentum in the hospital industry. Investor enthusiasm gained as expectations grew for improved fundamentals based on the implementation of the Patient Protection and Affordable Care Act. The company also released a satisfactory earnings report and reiterated guidance for 2013. Another key contributor to the Fund’s relative performance was information technology holding FleetCor Technologies Inc. Continued accretion from recent international acquisitions, along with stronger than expected organic growth, helped the provider of fleet, fueling, and specialized payment solutions beat earnings expectations for the fourth straight quarter.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
U.S. economic growth continues to outpace expectations, despite continued global political uncertainty and weak international economic growth. Growth in gross domestic product (GDP) has slowly recovered, as monetary stimulus has had a beneficial impact upon cyclical industries in the domestic economy. As a result of this stimulus, consumer durable products, automobile sales, and housing-related industries continue to show recovery in their respective industries. The rebound in these sectors serves as both a psychological boost for the U.S. consumer as well as an important source of job growth. We believe that increases in both housing prices and housing starts will directly and indirectly drive solid growth in the domestic economy.
Political change, both internationally and in the United States, has provided both corporate decision makers and market participants with a level of certainty from which to make decisions. While far from levels that one would prefer, merger activity and the return of capital to investors are indications of an increase in corporate confidence, albeit from a low level. These decisions have translated into increases in the global equity markets, which have come in the face of political turmoil and an extended European debt and banking crisis.
Unfavorable demographics, debt contraction, more stringent bank capital requirements and uncertainty in the corporate and individual tax code have created an environment of fiscal restraint. While severe, we believe that these policy risks and structural growth issues will not be an impediment to domestic economic growth. GDP growth will remain below that of the previous recoveries, but will remain strong enough to wipe out the negative impacts from the prior recession. Therefore, the stage has been set for these economic fundamentals to manifest themselves in a continuation of positive equity returns.
We remain steadfast in our belief that equity valuations are favorable for longer-term investors, especially when compared to other financial alternatives. We continue to look for opportunities in our holdings of stable growth companies, as we expect revenue and earnings growth to remain challenged.
This fund is closed to new investors, with the exception of certain retirement and benefit plans, existing mutual funds advisory programs, and variable annuity programs.
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.