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Equity Perspectives

The Lord Abbett Growth Leaders Fund seeks market-leading companies with high return potential. Thomas O’Halloran, Lord Abbett Partner & Director, explains. 

(Note: an abridged version of this interview will appear in the October 2017 issue of Lord Abbett Insights.)

Q. What defines Growth Leaders?
A.
Growth Leaders are generally companies whose innovation has the power to transform industries, and we believe it is a great time to invest in them. Take, for example, the technology revolution, which is in full bloom, providing tremendous growth opportunities, not only within tech itself (cloud computing, mobility, artificial intelligence) but also in consumer (e-commerce), health care (biotech), and manufacturing (robotics). Low interest rates should continue to help such companies grow at a significant pace.   

Q.  What is the Fund’s investment philosophy?
A.
Our philosophy rests on three pillars. The first is that special companies have substantial earnings growth potential. Second is that we have an experienced team that utilizes a disciplined fundamental research process to identify such companies. Third, we believe that these special companies can deliver attractive returns per unit of risk—when that view is supported by macroeconomic and technical analysis at the company and portfolio level.

Q. How does that translate into practice?
A.
We start by using fundamental analysis to identify the best businesses. The identified companies possess inherently good business models (such as those 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. Companies that score well on these attributes can compound wealth over time much more so than average companies. The premise of our philosophy is that these companies help enable us to achieve our performance goal to outperform the Russell 1000® Growth Index1 over a full market cycle. But we can never forget that we own stocks, not companies. That is why technical analysis is critical for both the pursuit of return and the management of risk.

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 always have to attempt to forecast which way it is going next.

Q. How do you guard against growth stocks that may be value “traps”?
A.
Although valuation is an important part of our process, we have no objection to buying great companies at full price. We would, however, rather own what we deem to be a special company at a high valuation than an average one for a discount. Oftentimes, an attractive valuation is illusory because the earnings estimates are too high. Technical analysis can be helpful in identifying such pitfalls. 

Q. How do you manage risk?
A.
We manage risk in three ways. First is that 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 take a loss as quickly as possibly when we are wrong. In addition, Lord Abbett has a dedicated risk management team that helps our managers understand all the risks they are taking (such as stock, sector, and macroeconomic risks) and how to mitigate those that could be unintended.

 

1The Russell 1000® Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies, including market, liquidity, currency, and political risks. Mid and small cap company stocks tend to be more volatile and may be less liquid than large cap company stocks. Mid and small cap companies also may have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large companies. However, larger companies may have slower rates of growth than smaller successful companies. Investments in growth companies can be more sensitive to the company’s earnings and more volatile than the stock market in general.

The Fund engages in active and frequent trading of its securities, which may result in increased transaction fees, reduced investment performance, and higher taxes. These factors can adversely affect Fund performance.

The Fund’s portfolio is actively managed and portfolio characteristics may change significantly over time. No investing strategy can overcome all market volatility or guarantee future results.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

Past performance is not a reliable indicator or a guarantee of future results.

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, contact your investment professional, Lord Abbett Distributor LLC, at 888-522-2388 or visit us at www.lordabbett.com. Read the prospectus carefully before you invest.

The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

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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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