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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 Fund returned 6.51%, reflecting the performance at the net asset value (NAV) of Class A shares with all distributions reinvested for the period ended September 30, 2013, underperforming the Russell 2000® Value Index,8 which returned 7.59% 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 September 30, 2013, are one year: 18.267%; three years: 11.77%; five years: 8.56%; and 10 years: 11.55%. Expense ratio: 1.23%.
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 continued their strong performance in 2013, reaching new highs in September. During the period, growth stocks outperformed value stocks across all market capitalizations. More specifically, within the small cap universe, the Russell 2000® Growth Index9 outpaced the Russell 2000® Value Index8 by 5.21%.
Among the largest detractors from the Fund's relative performance was materials holding Axiall Corp. Axiall Corp. disappointed for the second straight quarter as industry headwinds continue to plague the integrated chemicals and building products company. While a slight earnings beat restored some investor confidence, deterioration in caustic soda and chlorine pricing, coupled with a seasonal slowdown in construction markets, outweighed any positive momentum garnered from the earnings report.
Two poor performing health care-related stocks also detracted from the Fund's relative performance. The first, financials holding ProAssurance Corp., is one of the largest writers of professional medical liability insurance in the United States. Share price was under pressure following a weak earnings report in which underwriting performance missed consensus estimates. The second, health care holding Team Health Holdings, Inc., is a provider of outsourced physician staffing solutions for hospitals in the United States. Since hitting a 52-week high in June 2013, shares of the company pulled back as negative sentiment and weaker anticipated volumes adversely affected hospital related stocks. Fears over weaker volumes were confirmed in July as management released a lower-than-expected earnings report due mainly to lower utilization.
Select companies in various sectors contributed to the Fund's relative performance, most notably consumer discretionary holding Penske Automotive Group, Inc., and industrial holding Oshkosh Corp. Shares of Penske Automotive Group ascended throughout the quarter as the automotive retailer continued to execute on improving industry fundamentals. The company handily beat earnings estimates, driven in part by strength in the Parts and Services division. Investors also lauded management's decision to acquire an Australian commercial vehicle dealership, which further diversifies the company into new geographies and markets. In the case of Oshkosh Corp., a strong quarter and significant raise in guidance sparked a rally in share price. The Wisconsin-based company designs and manufactures specialty trucks used in defense, fire and emergency, construction, and refuse hauling as well as access equipment (aerial work platforms, telehandlers, scissor lifts, etc.). The recent earnings beat was driven by a solid performance in the Access Equipment division as North American demand outpaced consensus estimates.
In addition, the Fund's underweight within the financials sector, specifically real estate investment trusts (REITs), was a key component of relative performance. Already heavily underweight REITs heading into the quarter, we further reduced the Fund's relative exposure based on expensive valuations. As the industry sold off due to 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.
The fragile but resilient U.S. economy continues to show signs of life, bolstered by an improving housing market and strengthening consumer confidence. Despite threats to the recovery, such as the looming congressional budget debates and rising interest rates (possibly leading to a spike in volatility), we believe the domestic economy will continue to expand, albeit at a modest pace. In addition, we believe conditions in the eurozone appear to be leveling out. Therefore, we are exploring opportunities in which an increase in economic activity in Europe may act as a tailwind. Furthermore, in an era of moderate growth, we believe companies whose growth outpaces the general market will be disproportionately rewarded. With this in mind, we continue to seek attractively priced, fundamentally sound companies that we believe should perform well in this type of environment.
In regards to the Fund's positioning, the health care sector remains the Fund's largest relative overweight. Within the sector, the Fund remains significantly overweight the health care providers and services industry, based on the belief these types of companies should benefit from the implementation of health care reform. Conversely, the financials sector remains the Fund's largest relative underweight with the majority as a result of a significant underweight within the REIT industry. However, we increased the Fund's overweight within the commercial bank industry, particularly to select banks with attractive geographies that should be able to grow through accretive mergers and acquisitions. With respect to the industrials sector, uncertainties regarding a slowdown in Asian economies and the sluggish pace of the domestic recovery have caused us to reduce the Fund's exposure, particularly to businesses associated with the transportation of goods.
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.