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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 6.64%, reflecting the performance at the net asset value (NAV) of Class A shares with all distributions reinvested for the period ended September 30, 2013, outperforming the Russell 2500™ Value Index,8 which returned 6.43% 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: 21.08%; three years: 11.94%; five years: 10.53%; and since inception (December 30, 2005): 10.14%. Expense ratio: 1.31%.
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 smid cap universe, the Russell 2500™ Growth Index9 outpaced the Russell 2500™ Value Index8 by 5.51%.
Select companies in various sectors contributed to the Fund's relative performance, most notably energy holding Cimarex Energy Co. Positive reports regarding drilling in the Permian basin led enthusiastic investors to drive up the share price of the oil and gas exploration and production company. Adding to the momentum, management released better-than-expected earnings due mainly to higher production volumes coupled with stronger oil prices.
It has been our belief that several market factors would lead to an increase in merger and acquisition (M&A) activity within the smid cap value universe. This quarter shares of financials holding, CapitalSource, Inc., were the beneficiary of this trend. In late July, management announced the provider of commercial lending services had entered into an agreement to be acquired.
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.
Conversely, the Fund's performance suffered from select underperforming investments. One such investment, information technology holding Rovi Corp., sold off following an uninspiring earnings release in which management reported softer-than-expected revenues and lowered its 2013 outlook. Weakness in the firm's Consumer Electronics division due to contract delays and the lack of new customers were cited as reasons for both the revenue miss and negative guidance revision.
Another major detractor from the Fund's performance was consumer discretionary holding Abercrombie & Fitch Co. Similar to other mall-based teen retailers, a severe slowdown in store traffic, particularly in July, coupled with an increasingly competitive environment, led to an earnings miss as demand for the retailer's offerings waned.
Despite hitting a 52-week high in July 2013, shares of Hertz Global Holdings, Inc., pulled back following cautious comments by the automotive and equipment rental company's management. Weaker volumes and issues regarding fleet integration of recently acquired Dollar/Thrifty were cited as reasons for the revision to the industrials holding's earnings outlook.
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, within the financials sector we have reallocated money out of select commercial banks that had seen strong gains on expectations of rising interest rates and equity market values into insurance companies where we perceive a strengthening of fundamentals and improving pricing dynamics. We also increased the Fund’s exposure to the energy sector, focusing 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. In addition, we added to select companies within the consumer discretionary sector where we believe we have identified pockets of strength.
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.