Our Views on Value Equities in a Volatile Market | Lord Abbett
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Equity Perspectives

Lord Abbett value equity experts discuss the challenges—and potential opportunities—in the current market.

As part of a continuing series surveying Lord Abbett portfolio managers for their views on crucial macroeconomic and investment topics (read views on U.S. Federal Reserve policy and growth and dividend equities), we asked Lord Abbett Portfolio Manager Eli Rabinowich, who is responsible for managing all of the firm’s value equity strategies across the capitalization spectrum, to discuss how he and his team see the current market—and where they are seeing potential opportunities.

Throughout the recent period of historic volatility in the equity markets related to the global spread of COVID-19, the value team at Lord Abbett has remained focused on identifying opportunities to own high quality businesses at attractive normalized free cash flow yields. From our perspective the reaction to this crisis has been truly unique. It has moved from one initially focused on public health to include the broader economic impacts, exacerbated in the near-term by the move to more aggressive social distancing, and the knock on credit implications.

The equity of value companies have been particularly hard hit during this period as credit spreads have widened to levels not seen since the depths of 2008-09 financial crises. As a point of reference, the normalized free cash flow of the top quintile of the Russell 1000® Index has widened from 6% at the end of February to greater than 10% as of March 24, with outsized weakness in sectors and companies with greater exposure to cyclicality and higher levels of leverage. Historically, periods where we have seen this type of dispersion have created the greatest opportunities to own value stocks.  

Compared to the Global Financial Crisis, we have seen governments and central banks around the world respond quickly to the developing situation. And while the risks have not yet begun to abate, there have been some early signs that their actions are beginning to have some stabilizing influence on the credit markets, though time will tell.

Given our longer-term orientation and the focus we place on normalized free cash flow, we believe we have a unique ability to look through some of the shorter-term impacts on companies due to the global pandemic, and we continue to look for opportunity in the volatility. As a result, we have been able to methodically upgrade our portfolios in sectors that have been particularly affected—consumer, industrials, and financials—by sticking to our process. It is our view that once the economy is able to move through the transitory (though significant) impact of COVID-19 into a more normalized environment, we will look back on this period as another historic opportunity to own the equity of high quality companies at very attractive prices.  

 

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The Lord Abbett Value Opportunities Fund seeks to deliver long-term growth of capital by investing primarily in stocks of small & mid-sized U.S. companies.
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