Portfolio Manager Commentary: Multi-Asset Balanced Opportunity
Narrator: This is Lord Abbett's Portfolio Commentary.
Mike Weldon: This is Mike Weldon, Partner and Director of Marketing at Lord Abbett. Joining me today is Steve Lipper, Investment Strategist. Steve, a lot of interest over the last several years in multi asset funds, the sort of go anywhere type category, you know, for the moderate investor that's looking for a balance of both growth and income--these have become very attractive. So maybe let's start with what makes our Balanced Opportunity Fund a little bit different.
Steve Lipper: Yeah, I think there are probably two differences, Mike. One, what we include in the portfolio and the second is how we adapt it. So in terms of what we include, for example, on the fixed income side we generally tend to focus or favor a little bit more corporate bonds. Those type of bonds tend to do well in flat to rising interest rate environments compared to more interest rate sensitive bonds so that's one point of distinction.
Then additionally, we include some specialty asset classes or those that aren't found as much in other balanced portfolios. Two examples of that are convertible securities and mid-cap value stocks. We like them because each of them over the long-term we think has attractive return properties but they also bring with them attractive risk reduction diversifying. So, as we assemble the portfolio we have that opportunity. Then once the portfolio's assembled, we adjust it ongoingly to take advantage of where we see the biggest relative value opportunities around the world.
Mike Weldon: Okay. And so as you're looking around the globe today where are finding value?
Steve Lipper: Yes, so one of our greatest convictions about relative value is actually the U.S. dollar is that we think we're in an environment where we're going to have continued dollar strength. Let me share with you what our perspective about that is. One of the things that has an effect on relative price of currencies is what central banks do in their various countries. So, the U.S. Federal Reserve, though they did postpone beginning the tapering in September, we expect eventually to do that. When they do that that will be somewhat less accommodative as an environment and probably will cause a bit interest rates to go up here.
At the same time, the ECB has cut interest rates and we think that that is just the first of what may be a number of steps of increased accommodation over there. So less accommodation in the U.S. combined with more accommodation for the ECB means that it's likely that the U.S. dollar, in our view, will increase in value relative to developed currencies and also, we actually think emerging market currencies.
Mike Weldon: Okay. So as you look at the breakdown of the portfolio let's start with fixed income. Where are you seeing opportunities in that area?
Steve Lipper: Yes, there's one unusual area of opportunities, from our perspective, which is municipal bonds. After the decline in prices in municipal bonds, we actually went to our board of directors. And for the first time ever in the management of these portfolios we asked them to expand the prospectus to give us the allowance to add these asset classes in because we wanted to take advantage of what we thought was a great opportunity.
There are two reasons that--or two areas that we think that are attractive. First, the overall municipal market, the yields sell relatively high compared to treasury yields at historically high levels. And then within that, if you look at high yield munis, high yield muni spreads are above their long-term average and that contrasts with high yield corporates, which are at, or in many cases, below their long-term averages. So, we think that munis may be the best area of relative value in fixed income.
Mike Weldon: Okay. And now turning to the equity markets where do we see opportunity there?
Steve Lipper: Yes, where we start with equities is that--and this may be a bit of a contrarian stance. Despite a really great equity advance it has been mostly led by an expansion of PE multiples over the course of the last year. We think that valuations, PE multiples can continue to expand and our rationale for that is that we expect continued low inflation. And if you look historically at periods of low inflation, say 1 to 2% inflation, stocks have historically sold at even higher multiples than they are today so that historic perspective allows us to be optimistic on stocks even from these levels.
Mike Weldon: Okay. So can you give the viewers maybe two things, a quick summary of where are you seeing value, how does that all wrap up and then maybe just what does the portfolio look like from a high level in terms of allocation.
Steve Lipper: Right, so the number one decision we need to make in the portfolio is what's our weighting of stocks versus bonds? And within the allowable range, we are emphasizing stocks because we think we have greater advance in stocks versus bonds in the upcoming year. That's our expectation. Within bonds our expectation is the credit sensitive, whether that's muni or taxable, bonds will do better than interest rate sensitive. Within stocks, we expect U.S. to outperform international. Within currencies, we expect the U.S. dollar to appreciate versus most currencies around the world and that reflects where the portfolio is today.
Mike Weldon: Okay, thanks very much, Steve. This has been Lord Abbett's Portfolio Commentary. Thanks for watching.
Narrator: For more information on this topic, or to access other videos, audio files, articles or commentary, please explore Lordabbett.com.
A Note About Risk: The Fund invests in underlying funds that may engage in a variety of investment strategies involving certain risks; this fund of funds may be subject to those particular risks of the underlying funds in proportion to which the Fund invests in them. Performance may be lower than the performance of the asset class that they were selected to represent. Because the Lord Abbett Multi Asset Balanced Opportunity Fund is a balanced allocation among fixed-income funds and equity funds, it will be affected by risks associated with equity and fixed-income investments. The value of the underlying funds will fluctuate in response to various market and economic factors related to the equity and fixed-income markets, as well as the financial condition and prospects of issuers in which the underlying funds invest. Investing internationally involves risks not associated with investing solely in the United States, such as currency fluctuation, political risk, differences in accounting and the limited availability of information. High yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. These factors can affect Fund performance.
Additional Risks to Consider:
Equity - The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. Mid cap company stocks tend to be more volatile and less liquid than large cap company stocks. Mid cap companies typically experience a higher risk of failure than large cap companies.
Fixed Income - The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall. Fixed-income securities may also be subject to call, credit, liquidity, and general market risks. Convertible securities have both equity and fixed-income risk characteristics. Like all fixed-income securities, the value of convertible securities is susceptible to the risk of market losses attributable to changes in interest rates. Generally, the market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline.
Municipal - The income derived from municipal securities may be subject to the Alternative Minimum Tax. Federal, state, and local taxes may apply. There is a risk that a bond issued as tax-exempt may be reclassified by the IRS as taxable, creating taxable rather than tax-free income.
International - Foreign currency exchange rates may fluctuate significantly over short periods of time. They generally are determined by supply and demand in the foreign exchange markets and relative merits of investments in different countries, actual or perceived changes in interest rates, and other complex factors. Currency exchange rates also can be affected unpredictably by intervention (or the failure to intervene) by U.S. or foreign governments or central banks, or by currency controls or political developments. The securities markets of emerging countries tend to be less liquid, especially subject to greater price volatility, have a smaller market capitalization, have less government regulation and may not be subject to as extensive and frequent accounting, financial and other reporting requirements as securities issued in more developed countries.
Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes.
Asset allocation does not guarantee a profit or protect against loss in declining markets.
The Fund's portfolio is actively managed and may change significantly over time.
The market may not perform in a similar manner under similar conditions in the future.
P/E Ratio is a valuation ratio of a company's current share price compared to its per-share earnings.
The source for the reference to municipal yields as represented by Thomson Reuters Municipal Market Data, selling relatively high compared to treasury yields is Thomson Reuters, as of November 30, 2013.
The source for high yield muni spreads as represented by the Barclays High Yield Municipal Bond Index over investment grade municipal bond yields as represented by the Barclays Investment Grade Municipal Bond Index being above their long-term averages is Barclays Index Data, as of November 30 2013.
The source for high yield corporate spreads relative to Treasuries (as represented by the Credit Suisse High Yield Index) being at or below their long-term averages is Credit Suisse, as of November 30, 2013.
The source for the reference to stocks having historically sold at higher multiples in periods of low inflation is Bureau of Economic Analysis, FactSet and Bloomberg.
The Barclays High Yield Municipal Bond Index is an unmanaged index consisting of noninvestment-grade, unrated or below Ba1 bonds. The Barclays High Yield Municipal Bond Index is a subset of the Barclays Municipal Bond Index; a rules-based, market-value-weighted index engineered for the long-term tax-exempt bond market.
The Credit Suisse High Yield Index is an unmanaged, trader-priced index constructed to mirror the characteristics of the high-yield market. The index includes issues rated BB and below by S&P or Moody's, with par amounts greater than $75 million.
The Barclays Investment-Grade Municipal Index is an unmanaged index composed of municipal securities with the following criteria applied:
*Bonds must have at least one year to maturity.
*Non-credit enhanced bonds (municipal debt without a guarantee) must be rated investment grade (Baa3/ BBB-/BBB- or better) by looking to the middle rating of Moody's, S&P, and Fitch (after dropping the highest and lowest available ratings) to determine a security's index eligibility.
Prior to using this two out of three rating criterion in July 1, 2005, we first used Moody's ratings as the primary source and then the more conservative of Moody's and S&P's ratings.
*Securities must have an outstanding par value of at least $7 million and be issued as part of a transaction of at least $75 million. Prior to January 1, 2005, the liquidity constraint was $50 million/$5 million.
The liquidity constraint for several lower capitalized state-specific benchmarks is $20 million deal size and $2 million issue size.
*Taxable municipal bonds, remarketed issues, bonds with floating-rates, and derivatives are excluded.
*Bonds with a dated-date of January 1, 1991, and later are eligible for inclusion into the benchmark.
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