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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 Fund returned 9.75%, reflecting the performance at the net asset value (NAV) of Class A shares with all distributions reinvested for the period ended December 31, 2013, outperforming the Russell 2500™ Value Index,8 which returned 8.83% 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 December 31, 2013, are one year: 28.29%; three years: 10.48%; five years:17.58%; and since inception (December 30, 2005): 11.09%. Expense ratio: 1.28%.
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. Investors shrugged off a 16-day federal government shutdown, the Fed's planned "tapering" of its asset-purchase program, and elevated U.S. equity valuations. Instead, positive sentiment caused by an improving domestic economic backdrop that included lower unemployment and higher Gross Domestic Product (GDP) growth drove many domestic equity indexes to new all-time highs.
Security selection, particularly within the financials sector, was the key reason for the Fund's relative outperformance during the period. Within the sector, CapitalSource, Inc. was among the top contributors. Shares of the commercial lender continued to move higher as investors remained enamored with the growth prospects and potential operational synergies of the company's upcoming merger with a mid-sized financial services company. In addition, management released a better-than-expected earnings report that included net interest margin expansion and solid loan growth.
Furthermore, other significant contributors to the Fund's relative performance included consumer discretionary holding Jarden Corp. and industrials holding United Rentals, Inc. Shares of Jarden Corp. steadily rose over the period as the diversified consumer products company experienced broad strength across business segments driven by robust organic growth. Management also raised its outlook to reflect the benefits of the recently closed acquisition of a major candle company. In the case of United Rentals, shares of the equipment rental company traded at all-time highs, sparked by management's announcement of a $500 million share-repurchase program. The larger-than-expected buyback combined with management's reaffirmation of guidance and an improving demand for equipment rentals allowed for increased investor confidence and subsequent advancing stock prices.
Despite strong overall security selection amongst most sectors, security selection within the information technology sector negatively affected the Fund's relative performance. Two notable laggards within the sector included NCR Corp. and Akamai Technologies, Inc. Even though shares of NCR Corp. hit a 52-week high in October, a mixed earnings report, which included revenues shy of expectations and weak organic growth, caused shares to slide lower. Share price in the provider of consumer transaction technologies experienced further weakness following management's conservative release of expected long-term growth estimates. Similarly, shares of Akamai Technologies also traded to a 52-week high in October before experiencing a substantial sell-off. In this case, concerns regarding the contract renegotiation of a major media customer outweighed a strong earnings release, causing shares to move lower.
A third notable detractor was energy holding Helix Energy Solutions Group, Inc. Although management released a strong earnings report that beat consensus estimates, the stock performance of the provider of offshore oilfield services was lackluster. The weakness may have derived from investor concerns over older-generation ultra-deep water drill ships moving into the well intervention market resulting in oversupply. However, we believe these fears to be largely overblown, given the difficulty and expense in retrofitting these older-generation ships.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
Although overall equity valuations have trended higher, making it slightly more challenging to uncover compelling opportunities, we remain constructive on the prospect of a continued U.S. economic recovery providing opportunities to invest in companies that meet our investment process while allowing for favorable reward to risk characteristics. In addition, macroeconomic shocks that once sent stocks reeling have recently had a much more muted effect on world markets. Therefore, we believe that in this environment, investors will likely place more emphasis on company-specific fundamentals than in more recent periods. Furthermore, we believe investors who are able to discover opportunities in quality 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 have the appropriate attributes to outperform their peers over the next 12–18 months.
In regards to the Fund's positioning, the financials sector remains the Fund's largest relative underweight despite an increased exposure. Within the sector, we increased the Fund's exposure to commercial banks, while maintaining a significant underweight to real estate investment trusts, as we believe there may be a steepening of the Treasury yield curve. Conversely, the Fund's largest overweight falls within the consumer discretionary sector. Because we believe the domestic housing recovery will continue, much of this overweight is in the household durables industry, particularly in companies that should benefit from a strong housing market. We also slightly increased the Fund's exposure to the energy sector, as we remain focused on companies that should benefit from continued strength in the international and offshore drilling markets as well as a reemergence in North American onshore drilling activity.
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.