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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 9.57%, 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 2000® Value Index,8 which returned 9.30% 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: 26.00%; three years: 9.94%; five years: 16.84%; and 10 years: 10.71%. 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.
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.
A major component of the Fund's relative outperformance was security selection within the financials sector. Two notable contributors within the sector included PacWest Bancorp and Western Alliance Corp. Shares of PacWest 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 commercial lending company. In addition, the financial services company released a solid earnings report that included net interest margin expansion and modest loan growth. Shares of Western Alliance Corp. also steadily climbed higher, trading to a new 52-week high during the period. The Los Angeles-based bank holding company has capitalized on the relatively strong economic recovery in the southwestern United States. Western Alliance's meaningful presence in this market allowed the firm to experience solid revenue growth and significant improvement in asset credit quality.
A third substantial contributor to the Fund's relative performance was consumer staples holding Anderson's Inc. Shares of the diversified company, with interests including grain and plant nutrients, railcar leasing, and ethanol operations, continued an impressive run, hitting an all-time high during the period. Performance was driven by stellar profits within the Ethanol Group, which handily beat expectations. Strength within the Grain Group and Rail Group also contributed to a solid earnings report.
Meanwhile, stock selection within the energy sector was the largest detractor from the Fund's relative performance. Within the sector, a noteworthy laggard was Rex Energy Corp. The independent energy company engages in the exploration and production of oil, natural gas, and natural gas liquids, primarily within the Appalachian and Illinois regions. Despite trading to a 52-week high in October, shares exhibited weakness following a slight earnings miss driven by weaker-than-expected pricing and higher-than-anticipated costs.
Other significant detractors included consumer discretionary holding Select Comfort Corp. and industrials holding II-VI, Inc. In regards to Select Comfort Corp., shares of the adjustable-firmness mattress company slid lower as weak traffic, soft sales, and troubles in the specialty mattress industry led to a disappointing quarter. Management also cut its guidance, which added even more pressure to shares. Shares of II-VI also reacted negatively to a downbeat outlook, despite posting earnings in line with consensus. Management of the manufacturer of infrared laser optical components cited higher operating expenditures and more modest expected growth rates as reasons for the revision.
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 health care sector remains the Fund's largest relative overweight, even with reducing the overall exposure. Within the sector, we continue to focus on select companies that we believe should benefit from the implementation of the Patient Protection and Affordable Care Act. Conversely, despite an increased exposure, the financials sector remains the Fund's largest relative underweight. Within the sector, we maintained the Fund's overweight to commercial banks and a significant underweight to real estate investment trusts, as we believe there may be a steepening of the treasury yield curve. Within the energy sector, 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.
Investors should carefully consider the investment objectives, risks charges and expenses of the Lord Abbett Funds. This and other important information is contained in the fund's summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, you can click here; contact your investment professional or Lord Abbett Distributor LLC at (888) 522-2388. Read the prospectus carefully before you invest or send money.
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.