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Fixed-Income Insights

Lord Abbett partner and portfolio manager Steven F. Rocco discusses an approach that may be well suited for today’s market environment.

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

Investors who want to reduce exposure to the volatility of the equity markets or who may be concerned about having a pure high-yield strategy might want to consider the potential benefits of a flexible, multi-sector approach. A diversified, multi-sector approach that includes a mix of investment-grade, high-yield, and equity-related securities can be less volatile than pure equity or high-yield strategies. Lord Abbett partner and portfolio manager Steven F. Rocco discusses the strategy of the Lord Abbett Bond Debenture Fund (LBNDX), a multi-sector bond fund with a 45-year track record of performance in a variety of market environments.

Q. What is the investment objective of the Bond Debenture Fund?

A. The Fund’s investment objective is to seek high current income and the opportunity for capital appreciation to produce a high total return.

Q. What is the strategy employed to achieve that objective?

A. It starts with the strategic portfolio design. Our quantitative research, risk management, and investment teams undertake a rigorous analytical process to identify the right mix of asset classes that puts us in the best position to outperform our multi-sector peers over the long term. That process establishes a strategic allocation to asset classes that the strategy will tend to invest in over time. But this is just the starting point. The investment team has the flexibility to adjust allocations to be properly positioned for the current market environment.

Q. What is the breakdown of the portfolio in terms of asset-class allocation?

A. As of March 29, 2018, the largest percentage of the portfolio is in investment-grade and high-yield corporate bonds (of U.S. and non-U.S. issuers), and in equities. Depending on valuations and the market environment, the Fund may also have smaller allocations to other sectors, including mortgage-backed securities (MBS), sovereign debt, taxable municipal bonds, and bank loans.

Q. Why does the Bond Debenture Fund include equities in its portfolio?

A. The Fund has always had an allocation to equity-related securities; historically, this was achieved through convertible bonds. In recent years, however, the size of the investment-grade portion of that asset class has declined, and has become more concentrated in a few sectors. Investing in common stocks allows the Fund to get the same exposure to equity-related sensitivity in a much larger, diverse, and liquid asset class, and that, in turn, enhances our ability to offer investors the potential for attractive risk-adjusted returns over a full market cycle.

Q. How would a flexible allocation strategy be helpful in this volatile market?

A. A flexible allocation strategy has a number of potential applications in a portfolio. For example, a strategy with a diversified position in high-yield bonds, bank loans, and equities—all of which historically have been negatively correlated to U.S. Treasuries—may offer some stability during periods of rising rates. In addition, a diversified multi-sector approach also may be suitable for investors seeking a lower exposure to high-yield bonds and/or a volatile equity market, while still having access to the upside potential of one or both of these asset classes.

 

A Note about Risk: The Fund is subject to the general risks and considerations associated with investing in debt securities, including market, credit, liquidity, and interest rate risk. The value of your investment will change as interest rates fluctuate and in response to market movements. When interest rates fall, the prices of debt securities tend to rise, and when rates rise, the prices of debt securities are likely to decline. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. The Fund may make substantial investments in high-yield debt securities and may invest in senior loans which may be primarily below investment grade. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in timely payment of interest and expenses. 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. Convertible securities are subject to the risks affecting both equity and fixed-income securities, including market, credit, liquidity, and interest rate risk. These factors can affect Fund performance.

The Bond Debenture portfolio breakdown as of March 29, 2018, consisted of U.S. high yield corporate (29.5%), U.S. investment-grade corporate (19.3%), equity (15.7%), non-U.S. high-yield corporate (10.6%), non-U.S. investment-grade corporate (7.4%), bank loans (5.0%), sovereign (4.1%), municipals (3.9%), commercial mortgage-backed securities (3.0%, asset-backed securities (2.3), mortgage-backed securities (1.2%), U.S. government related (1.0%), convertibles (0.3%), and cash (-3.1%).

Due to rounding, the percentage allocation of the portfolio breakdown may not equal 100%. Accordingly, cash may appear as a negative allocation as a result of forward-settling instruments such as currency forwards, certain mortgage-backed securities, and treasury futures.

The Fund's portfolio is actively managed and portfolio characteristics, such as individual holdings and sector weightings may change significantly over time. The portfolio data is for information only. It does not constitute a recommendation or an offer for a particular security or fund, nor should it be taken as a solicitation or recommendation to buy or sell securities or other investments.

Past performance is not a reliable indicator or a guarantee of future results and should not be the sole factor of consideration when selecting a product. Diversification and asset allocation may not protect you fully against market risk.

Glossary of Terms

Negative correlation is a relationship between two variables in which one variable increases as the other decreases, and vice versa.

The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

Important Information

Keep in mind that all investments carry a certain amount of risk including possible loss of the principal amount invested. No investment strategy, including diversification and asset allocation, guarantees a profit or protects against a loss.

This commentary may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

The credit quality of the securities are assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor's, Moody's, or Fitch, as an indication of an issuer's creditworthiness. Ratings range from 'AAA' (highest) to 'D' (lowest). Bonds rated 'BBB' or above are considered investment grade. Credit ratings 'BB' and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer's ability to pay interest and principle on these securities.

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.

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 Bond Debenture Fund seeks to deliver high current income and long-term growth of capital. View prospectus and more.

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