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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 13.65%, reflecting the performance at the net asset value (NAV) of Class A shares with all distributions reinvested for the period ended March 31, 2013, outperforming the Russell 2000® Value Index,8 which returned 11.63% 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: 5.53%; three years: 9.06%; five years: 6.62%; and since inception (December 13,1995): 12.64%. 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.
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 Index9 returning 13.21% and the Russell 2000® Value Index8 returning 11.63% for the quarter. Consumer discretionary was one of the best performing sectors in the Russell 2000® Value Index,8 while the telecommunication services sector was among the worst.
Stock selection within the health care sector, most notably Community Health Systems, Inc., contributed to the Fund's relative performance during the first quarter. Shares of the owner and operator of hospitals 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 provided in-line guidance for 2013. A major contribution also came from stock selection within the information technology sector, particularly FleetCor Technologies, Inc. The provider of fleet, fueling, and specialized payment solutions released a blowout earnings report that saw broad-based strength in both the North American and International divisions through a combination of organic growth and recently closed acquisitions. Two more key contributions came from the industrials sector in Chicago Bridge & Iron Company N.V. and Avis Budget Group, Inc. Positive momentum continued for Chicago Bridge & Iron as the firm capitalized on several new contract awards. Shares of the energy infrastructure company climbed to a 52-week high following a strong earnings report that saw broad-based revenue gains across multiple divisions. For Avis, strengthening pricing trends outweighed disappointing guidance as the stock rose to new highs. With less competition following recent consolidation within the industry, we believe the car and truck rental company will continue to enjoy positive pricing power which, in turn, should drive earnings.
Stock selection within the consumer discretionary sector detracted from the Fund's relative performance during the first quarter. Within the sector, the chief detractor was Orient-Express Hotels Ltd. Shares of the hotel and travel businesses operator slid following a soft earnings report due to lower revenue and higher than expected renovation costs. Investors also became worried that a previous bid to acquire the company would be rejected by management. We decided to close out the position because we felt that management had no plans to accept the offer. Other major detractors included industrials holdings Blount International, Inc. and II-VI, Inc. Shares of Blount International, Inc., a manufacturer of saw chain and other cutting devices, plummeted following news that the company's largest customer would bring saw chain production in house. The anticipated loss of such a significant customer prompted us to exit the position following the announcement. Shares of II-VI, Inc., a manufacturer of optoelectronic components, slid following a disappointing earnings report. Weak sales and execution issues were cited as reasons for the miss. Materials holding Cabot Corp. also detracted from the Fund's relative performance. After rising for most of January, shares of the specialty chemicals company sold off after a weaker than expected earnings release driven by soft global tire demand. Management also provided cautious comments regarding the future of the tire market. As a result, we reduced our investment in the company while we wait for more clarity on the tire market.
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 are approaching the rally in the market over the past few months with a mixture of cautious optimism and trepidation because we feel we have seen this movie before. Recent history reminds us that the macro winds of change can have a dramatic effect on investor sentiment and resulting psychology. However, despite our apprehension that an unforeseen macroeconomic event could take the wind out of the sails to this most recent rally, we are more confident in the fundamentals and strength of the U.S. economy than we have been in years. Therefore, our focus continues to be on attractively priced companies whose fundamentals should benefit from a strengthening domestic economy, regardless of sector or industry.
Heading into the second quarter, the industrials sector remains our largest relative overweight. Within the sector, we benefited from select investments in companies associated with engineering and construction. Despite the recent strong stock performance in many of these companies, it is our belief that there could still be more room to the upside. Within the health care sector, we continue to focus on companies that should benefit from an industry-wide emphasis on reducing costs. We have reduced our exposure within the information technology (IT) sector. A large portion of this reduction was caused by profit taking, particularly in the IT services industry as prices approached our target levels.
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.