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Equity Perspectives

Lord Abbett partner and portfolio manager Thomas O’Halloran talks about where his team is finding opportunities among growth stocks.

(This article is derived from Lord Abbett Insights, a quarterly shareholder publication providing market, investment, and retirement insights.)   

The Lord Abbett Growth Leaders Fund seeks to identify U.S. growth companies whose innovation has the power to transform industries and the potential to provide high returns over time. Lord Abbett Partner and Director Thomas O’Halloran, who was featured in a recent Wall Street Journal report on top-performing actively managed funds, discusses his outlook for U.S. growth equities and describes the Fund’s guiding philosophy and investment process.

Q. Are you bullish on U.S. equities?

A. Yes, we are. Lower corporate taxes and deregulation have had a positive impact overall on U.S. company earnings and profitability. And underlying the market’s strength is the technology revolution that has created tremendous growth opportunities for companies across many different industries that potentially could last for years. Today, we are witnessing broad leadership in the U.S. equity markets, which is now spreading to small-cap stocks,* particularly in the biotechnology sector.

Q. Where does the Growth Leaders Fund see investment opportunity?

A. The technology revolution, which is in full bloom, has provided tremendous growth opportunities, not only within tech itself (such as cloud computing, mobility, and artificial intelligence) but also in consumer (e-commerce), health care (biotech), and manufacturing (robotics) areas.

Q. What is the Fund’s investment philosophy?

A. Our philosophy rests on three pillars of conviction. The first is that companies that are growth leaders have substantial earnings growth potential. Second, that these special companies can deliver potentially attractive returns per unit of risk—when that view is supported by macroeconomic and technical analysis at the company and portfolio level. Third, that an experienced team, using a disciplined fundamental research process, can identify such companies.

Q. How does that translate into practice?

A. We start by using fundamental analysis in an effort to identify the best businesses. The identified companies possess inherently good business models (such as those we believe are capable of annuity-like revenue streams and above-average levels of profitability), are managed by competent and credible people, and are leading or gaining market share in healthy industry environments. We believe companies that score well on these attributes have the potential to compound wealth over time, much more so than average companies.

Q. How flexible is this strategy?

A. We believe that this process is flexible enough to adapt to different market environments by incrementally moving among our preferred secular growth names and cyclical, defensive, and stable growth stocks. We take into account the economic cycle, as well as the stock market environment, when determining how the different companies in different industries and/or market capital­ization segments will likely perform. This may prompt us to over- or underweight certain stocks and/or sectors, as well as market capitalization segments. The market is a discounting mechanism that looks forward, so we will always attempt to forecast which way it is going next.

Q. How do you manage risk?

A. We manage risk in three ways. First, our fundamental process is designed to lead us to companies that have much lower company risk. Second, the portfolio is diversified by company and sector. Third, we have a rigorous sell discipline. One of the most important things we do is seek to take a loss as quickly as possibly when we are wrong.

*As of July 31, 2018, small-cap stocks accounted for 3.1% of the Lord Abbett Growth Leaders Fund’s portfolio.
 

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The Lord Abbett Growth Leaders Fund Class A seeks to deliver long-term growth of capital by investing primarily in stocks of U.S. companies. Learn more.

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