Image alt tag

Error!

X

There was a problem contacting the server. Please try after sometime.

Sorry, we are unable to process your request.

Error!

X

We're sorry, but the Insights and Intelligence Tool is temporarily unavailable

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Error!

X

We're sorry, but the Literature Center checkout function is temporarily unavailable.

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Tracked Funds

You have 0 funds on your mutual fund watch list.

Begin by selecting funds to create a personalized watch list.

(as of 12/05/2015)

Pending Orders

You have 0 items in your cart.

Subscribe and order forms, fact sheets, presentations, and other documents that can help advisers grow their business.

A verification Email Has Been Sent

Close

An email verification email has been sent to .
Follow the instructions to complete the email validation process.

I have not received my verification email

Check your SPAM mailbox and make sure that twelcome@lordabbett.com is allowed to send you mail.

I'm still having trouble

If you're still having trouble verifying your email address. feel free to contact us.

1-888-522-2388
clientservices@lordabbett.com


OK

We're sorry. We found no record of the email address you provided.

Close

Register For a LordAbbett.com Account
Using Your Email Address.

  • Registered Financial Advisors gain access to:
  • Our data mining tool, Insight & Intelligence
  • Best in-class practice management content
  • Educational events, videos and podcasts.
  • The Lord Abbett Review - Subscribe now!

Registered but Having Problems?

If you believe you are registered and are having problems verifying your email address, feel free to contact us.

1-888-522-2388 clientservices@lordabbett.com

Terms & Condition

X

These Terms of Use ("Terms of Use") are made between the undersigned user ("you") and Lord, Abbett & Co. ("we" or "us"). They become effective on the date that you electronically execute these Terms of Use ("Effective Date").

A. You are a successful financial consultant that markets securities, including the Lord Abbett Family of Funds;

B. We have developed the Lord Abbett Intelligence System (the "Intelligence System"), a state of the art information resource that we make available to a limited community of broker/dealers through the Internet at a secure Web site (the "LAIS Site"); and

C. We wish to provide access to the Intelligence System to you as an information tool responsive to the demands of your successful business pursuant to these Terms of Use. Accordingly, you and we, intending to be legally bound, hereby agree as follows:]

1. Overview. · Scope. These Terms of Use (which we may amend from time to time) govern your use of the Intelligence System. · Revisions; Changes. We may amend these Terms of Use at any time by posting amended Terms of Use ("Amended Terms of Use") on the LAIS Site. Any Amended Terms of Use will become effective immediately upon posting. Your use of the Intelligence System after any Amended Terms of Use become effective will be deemed to constitute your acceptance of those Amended Terms of Use.We may modify or discontinue the Intelligence System at any time, temporarily or permanently, with or without notice to you. Purpose of the Intelligence System. The Intelligence System is intended to be an information resource that you may use to contribute to your business research. The Intelligence System is for broker/dealer use only; it is not to be used with the public in oral, written or electronic form. The information on the Intelligence System and LAIS Site is for your information only and is neither the tax, legal or investment advice of Lord Abbett or its third-party sources nor their recommendation to purchase or sell any security.

2. Your Privileges. · Personal Use. Your use of the Intelligence System is a nontransferable privilege granted by us to you and that we may deny, suspend or revoke at any time, with or without cause or notice. · Access to and Use of the Intelligence System. The User ID and password (together, an "Access ID") issued by us to you (as subsequently changed by you from time to time) is for your exclusive access to and use of the Intelligence System. You will: (a) be responsible for the security and use of your Access ID, (b) not disclose your Access ID to anyone and (c) not permit anyone to use your Access ID. Any access or use of the Intelligence System through the use of your Access ID will be deemed to be your actions, for which you will be responsible. · Required Technology. You must provide, at your own cost and expense, the equipment and services necessary to access and use the Intelligence System. At any time, we may change the supporting technology and services necessary to use the Intelligence System. · Availability. We make no guarantee that you will be able to access the Intelligence System at any given time or that your access will be uninterrupted, error-free or free from unauthorized security breaches.

3. Rights in Data. Our use of information collected from you will be in accordance with our Privacy Policy posted on the LAIS Site. Our compliance with our Privacy Policy will survive any termination of these Terms of Use or of your use of the Intelligence System.

4. Your Conduct in the Use of the Intelligence System. You may access, search, view and store a personal copy of the information contained on the LAIS Site for your use as a broker/dealer. Any other use by you of the Intelligence System and the information contained on the LAIS Site these Terms of Use is strictly prohibited. Without limiting the preceding sentence, you will not: · Engage in or permit any reproduction, copying, translation, modification, adaptation, creation of derivative works from, distribution, transmission, transfer, republication, compilation or decompilation, reverse engineering, display, removal or deletion of the Intelligence System, any portion thereof, or any data, content or information provided by us or any of our third-party sources in any form, media or technology now existing or hereafter developed, that is not specifically authorized under these Terms of Use.

· Remove, obscure or alter any notice, disclaimer or other disclosure affixed to or contained within the Intelligence System, including any copyright notice, trademark and other proprietary rights notices and any legal notices regarding the data, content or information provided through the Intelligence System.

· Create a hyperlink to, frame or use framing techniques to enclose any information found anywhere on the LAIS Site without our express prior written consent.

· Impersonate any person, or falsely state or otherwise misrepresent his or her affiliation with any person in connection with any use of the Intelligence System.

· Breach or attempt to breach the security of the Intelligence System or any network, servers, data, or computers or other hardware relating to or used in connection with the Intelligence System; nor (b) use or distribute through the Intelligence System software or other tools or devices designed to interfere with or compromise the privacy, security or use of the Intelligence System by others or the operations or assets of any person.

· Violate any applicable law, including, without limitation, any state federal securities laws. 5. Your Representations and Warranties. You hereby represent and warrant to us, for our benefit, as of the time of these Terms of Use and for so long as you continue to use the Intelligence System, that (a) you are, and will continue to be, in compliance with these Terms of Use and any applicable laws and (b) you are authorized to provide to us the information we collect, as described in our Privacy Policy.

6. Disclaimer of Warranties.

· General Disclaimers.

THE INTELLIGENCE SYSTEM, THE LAIS SITE AND ALL DATA, INFORMATION AND CONTENT ON THE LAIS SITE ARE PROVIDED "AS IS" AND “AS AVAILABLE” AND WITHOUT ANY REPRESENTATIONS OR WARRANTIES OF ANY KIND. WITHOUT LIMITING THE PRECEDING SENTENCE, LORD ABBETT, ITS AFFILIATES, AGENTS, THIRD-PARTY SUPPLIERS AND LICENSORS, AND THEIR RESPECTIVE EMPLOYEES, CONTRACTORS, DIRECTORS, OFFICERS AND SHAREHOLDERS (COLLECTIVELY, THE “LORD ABBETT GROUP”) EXPRESSLY DISCLAIM ALL WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY, INCLUDING THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, TITLE, AND NONINFRINGEMENT. YOU EXPRESSLY AGREE THAT YOUR USE OF THE LAIS SITE, THE INTELLIGENCE SYSTEM, AND THE DATA, INFORMATION AND CONTENT PRESENTED THERE ARE AT YOUR SOLE RISK AND THAT THE LORD ABBETT GROUP WILL NOT BE RESPONSIBLE FOR ANY (A) ERRORS OR INACCURACIES IN THE DATA, CONTENT AND INFORMATION ON THE LAIS SITE AND THE INTELLIGENCE SYSTEM OR (B) ANY TERMINATION, SUSPENSION, INTERRUPTION OF SERVICES, OR DELAYS IN THE OPERATION OF THE LAIS SITE OR THE INTELLIGENCE SYSTEM.

· Disclaimer Regarding Investment Research.

THE INTELLIGENCE SYSTEM INCORPORATES DATA, CONTENT AND INFORMATION FROM VARIOUS SOURCES THAT WE BELIEVE TO BE ACCURATE AND RELIABLE. HOWEVER, THE LORD ABBETT GROUP MAKES NO CLAIMS, REPRESENTATIONS OR WARRANTIES AS TO THE ACCURACY, TIMELINESS, COMPLETENESS OR TRUTHFULNESS OF SUCH DATA, CONTENT AND INFORMATION. YOU EXPRESSLY AGREE THAT YOU ARE RESPONSIBLE FOR INDEPENDENTLY VERIFYING YOUR INVESTMENT RESEARCH PRIOR TO FORMING YOUR INVESTMENT DECISIONS OR RENDERING INVESTMENT ADVICE. THE LORD ABBETT GROUP WILL NOT BE LIABLE FOR ANY INVESTMENT DECISION MADE BY YOU OR ANY OTHER PERSON BASED UPON THE DATA, CONTENT AND INFORMATION PROVIDED THROUGH THE INTELLIGENCE SYSTEM OR ON THE LAIS SITE.

· Survival.

THIS SECTION 6 SHALL SURVIVE ANY TERMINATION OF THESE TERMS OF USE OR YOUR USE OF THE INTELLIGENCE SYSTEM..

7. Limitations on Liability.

NONE OF THE MEMBERS OF THE LORD ABBETT GROUP WILL BE LIABLE TO YOU OR ANY OTHER PERSON FOR ANY DIRECT, INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE, SPECIAL OR EXEMPLARY DAMAGES (INCLUDING LOSS OF PROFITS, LOSS OF USE, TRANSACTION LOSSES, OPPORTUNITY COSTS, LOSS OF DATA, OR INTERRUPTION OF BUSINESS) RESULTING FROM, ARISING OUT OF OR IN ANY WAY RELATING TO THE INTELLIGENCE SYSTEM, THE LAIS SITE OR YOUR USE THEREOF, EVEN IF THE LORD ABBETT GROUP HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. THIS SECTION 7 WILL SURVIVE ANY TERMINATION OF THESE TERMS OF USE OR YOUR USE OF THE INTELLIGENCE SYSTEM.

8. Miscellaneous Provisions.

· Governing Law. This Agreement will governed by and construed in accordance with the laws of the State of New York, without giving effect to applicable conflicts of law principles.

THE UNIFORM COMPUTER INFORMATION TRANSACTIONS ACT OR ANY VERSION THEREOF, ADOPTED BY ANY STATE, IN ANY FORM ("UCITA") WILL NOT APPLY TO THESE TERMS OF USE. TO THE EXTENT THAT UCITA IS APPLICABLE, THE PARTIES HEREBY AGREE TO OPT OUT OF THE APPLICABILITY OF UCITA PURSUANT TO THE OPT-OUT PROVISION(S) CONTAINED THEREIN.

The Intelligence System is not intended to be used by consumers, nor are the consumer protection laws of any jurisdiction intended to apply to the Intelligence System. You agree to initiate and maintain any action, suit or proceeding relating to these Terms of Use or arising out of the use of the Intelligence System exclusively in the courts, state and federal, located in or having jurisdiction over New York County, New York.

YOU HEREBY CONSENT TO THE PERSONAL JURISDICTION AND VENUE OF THE COURTS, STATE AND FEDERAL, LOCATED IN OR HAVING JURISDICTION OVER NEW YORK COUNTY, NEW YORK. YOU AGREE THAT YOU WILL NOT OBJECT TO A PROCEEDING BROUGHT IN YOUR LOCAL JURISDICTION TO ENFORCE AN ORDER OR JUDGMENT OBTAINED IN NEW YORK.

· Relationship of Parties. The parties to these Terms of Use are independent contractors and nothing in these Terms of Use will be construed as creating an employment relationship, joint venture, partnership, agency or fiduciary relationship between the parties.

· Notice. All notices provided under these Terms of Use will be in writing and will be deemed effective: (a) when delivered personally, (b) when received by electronic delivery, (c) one business day after deposit with a commercial overnight carrier specifying next day delivery, with written verification of receipt, or (d) three business days after having been sent by registered or certified mail, return receipt requested. We will only accept notices from you in English and by conventional mail addressed to: General Counsel Lord, Abbett & Co. 90 Hudson Street Jersey City, N.J. 07302-3973 We may give you notice by conventional mail or electronic mail addressed to the last mail or electronic mail address transmitted by you to us.

· Third-Party Beneficiaries. The members of the Lord Abbett Group are third-party beneficiaries of the rights and benefits provided to us under these Terms of Use. You understand and agree that any right or benefit available to us or any member of the Lord Abbett Group hereunder will also be deemed to accrue to the benefit of, and may be exercised directly by, any member of the Lord Abbett Group to the extent applicable.

· Survival. This Section 8 will survive any termination of these Terms of Use or your use of the Intelligence System. The undersigned hereby signs these Terms of Use. By electronically signing and clicking "Accept" below, these Terms of Use will be legally binding on me. To sign these Terms of Use, confirm your full name and enter your User ID and Password (as your electronic signature) in the fields indicated below and click the “I Accept” button.

Reset Your Password

Financial Professionals*

Your password must be a minimum of characters.

Confirmation Message

Your LordAbbett.com password was successully updated. This page will be refreshed after 3 seconds.

OK

 

Retirement Perspectives

Designing a quality lineup requires recognizing certain biases and knowing the performance characteristics of equity subclasses. 

 

In Brief

  • Equities could play an important role in retirement portfolios by helping provide inflation protection—a particular concern over the long term.

  • Building a better lineup of equity funds requires knowledge of participant and sponsor biases, combined with an understanding of “what works” in each sub-asset class.

  • Behavioral biases in the selection of plan options can result in less-than-optimal participation and performance. Sponsors may, for example, offer too many fund choices, which can discourage participation.

  • Plan sponsors also may inadvertently offer funds that hold too many of the same stocks. This can result in an unintentional double weighting of holdings within a participant’s portfolio. In the large cap sector, for example, the holdings of many large cap growth funds overlap substantially with those of large cap core funds.

  • Plan sponsors may avoid some plan participant biases by careful selection of investment options. “Naïve diversification,” in which plan participants allocate equal amounts to each plan fund, may be prevented by refraining from offering too many choices, particularly in relatively volatile categories such as small caps.

  • Plan sponsors also should consider the performance characteristics unique to each sub-asset class.

  • Key takeaways—In the large cap growth category, focusing on the fastest growers prevents overlap with funds in the large cap core category; in large cap core, dividend growth strategies historically have offered higher returns with less volatility; in large cap value, research shows that funds that avoid macro bets historically have performed better. Finally, plan sponsors should consider small caps as well as large caps, as the former historically have offered greater returns and diversification benefits, but with similar volatility.

 

It is believed equities are essential for building long-term wealth in a retirement plan. That is not a new concept, given their historical importance, which have delivered strong absolute and inflation-adjusted returns. Determining an optimal lineup of funds, however, may prove to be challenging, given the proliferation of both traditional and niche equity funds over the past few decades, along with investor angst in response to two severe bear markets in 2000–02 and 2008.  

While every plan has its own objectives, constraints, and structure, we believe there are common themes to consider in developing a lineup of equity funds. In this article, the second in our “Building Better Lineups” series (the other articles in this series explore crafting an effective overall plan design and selecting an optimal array of fixed-income investment options for a DC plan), we’ll discuss the following issues, which may benefit plan sponsors as they consider how best to structure a lineup:

  • The role of equities in participant portfolios

  • Typical biases of plan sponsors that can hinder the building a well-designed lineup of investments, which in turn can result in less-than-optimal plan participation and performance

  • Recognition that even within an equity sub-asset class, approaches are not all uniform. Successful funds in each class offer distinct characteristics that historically have benefited investors.

Why Own Equities? 
Owning equities is believed to be a crucial component of investing for retirement. And despite the short-term volatility of the asset class, historical returns have demonstrated the profound difference between owning equities versus other investments. The two charts and table below illustrate this concept. On an absolute dollars basis (“nominal”), $1 invested in the stock market in 1949 would have appreciated to nearly $1,000 today, whereas if invested in government bonds, it would have produced only $41. 

Perhaps more important, on an inflation-adjusted basis—which measures the true purchasing power of invested money over the years as inflation rises—historically stocks dramatically outperformed more conservative asset classes, demonstrating their particular importance to retirement investing.

 


Source: Bloomberg and Lord Abbett research.  Large company stocks represent the performance of the S&P 500; government bonds represent the performance of the Barclays Government Bond Index; cash represents the performance of the BofA Merrill Lynch US 3-Month Treasury Bill Index. Stocks are subject to greater risk and market volatility, while bonds are subject to greater risk of default and interest rate volatility.
The historical data are for illustrative purposes only, do not represent the performance of any Lord Abbett mutual fund or any particular investment, and are not intended to predict or depict future results. Investors may experience different results. Returns during other times may vary. Due to market volatility, the market may not perform in a similar manner in the future.
The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest-rate, and general market risks. 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.
Indexes are unmanaged and are not available for direct investment.

 

Understanding Common Behavioral Biases
Whether you are a plan sponsor for a multibillion-dollar defined contribution plan or a small, $20 million plan, building the right fund lineup is a significant challenge and an important responsibility. But a plan sponsor can fall victim to behavioral biases, which may affect participant investment performance. For example:

  • Comfort in numbers—buying what everyone else buys. Survey data from Pensions & Investments1 shows that a large portion of defined contribution assets are concentrated in a handful of funds, many of which have middling to uncompetitive performance and/or which have had portfolio manager turnover in recent years. These characteristics typically would lead to changes in fund options; however, the increase in fiduciary concerns that accompanies a change in funds may tempt plan sponsors to seek comfort in numbers even if a popular fund is chronically underperforming.

  • Too many options. Studies2 consistently show a negative correlation between the number of fund options in a defined contribution plan and the employee participation rates in the plan.  Too many options may overwhelm employees who are not familiar with investing, and may cause them not to participate at all.  

  • Too many equity funds with the same stocks. Large cap indexes that are market cap-weighted are dominated by mega-cap companies, so large cap funds may own large amounts of many of the same names—even if they use different benchmark indexes. For example, a large cap growth fund that tracks the Russell 1000® Growth Index may have similar names as in an S&P 500® Index fund.3 If a plan offers both investment options, and participants allocate to them, they may be unintentionally double-weighting the same stocks.

Similarly, many studies4 of 401(k) and 403(b) participants outline the behavioral pitfalls many typically will fall into that cause them to chronically underperform. For example, research has shown that assets in defined contribution plans flow most heavily into equity portfolios when the stock market peaks and decline most when the market declines.5 That is, participants tend to chase after performance, which results in buying high and selling low.

Plan participants also tend to invest in funds related to the industry in which they work. In effect, they are over-allocating to the asset class by putting their investment money into the same category as their career, leaving them especially vulnerable if that industry experiences a downturn. 

More important for plan sponsors wanting to build a better lineup, however, is the tendency of participants to engage in “naïve diversification,” otherwise known as 1/n diversification. Studies6 routinely have shown that given any number of fund options, the majority of plan participants will allocate money somewhat evenly across all of them. So, if a plan has 10 options, the participant—perhaps assuming that such a lineup is an implied recommendation to do so—invests one-tenth of assets into each option.

And so, for defined contribution plans, the question then becomes what types of equity funds should be offered that potentially will deliver long-term capital growth, while avoiding the biases we’ve outlined above. With this backdrop, we now turn to take a look at key characteristics of major equity categories that we believe can help plan sponsors develop a strategy for a well-diversified lineup.

Key Considerations on the Performance of Equity Sub-asset Classes
In selecting investment options, it is important to recognize that even within an equity sub-asset class, not all approaches are alike. Successful funds in each class have benefited investors by offering distinct performance characteristics.

Large cap growth—As we noted above, the holdings of large cap growth funds may overlap substantially with those of large cap core funds by virtue of the fact that many of the same mega-cap stocks are found in both the Russell 1000 Growth Index and the S&P 500. Moreover, these mega-cap holdings tend to be very mature companies that have slower growth rates. 

As a solution to this structural issue, we believe plan sponsors would be well served to seek out growth managers that focus on the fastest-growing revenue companies. This approach is supported by historical data. As seen below, the top 10% of the most rapidly growing revenue-growth companies have produced nearly three times the total return relative to the bottom 90%, despite having a higher price-to-earnings ratio.

High Growth Companies Historically Have Been Worth Their Premium

Three-Year Rolling Averages (01/01/2004 – 12/31/2013)



Source: FactSet, Lord Abbett research. The average top 10% of high-revenue-growth stocks were chosen by screening all companies with a market capitalization greater than $10 billion at the end of each three-year time period and then stack ranking the companies according to their revenue growth over that three-year time period.
Past performance is no guarantee of future results. The historical data are for illustrative purposes only, do not represent the performance of any Lord Abbett mutual fund or any particular investment, and are not intended to predict or depict future results. Investors may experience different results. Returns during other times may vary. Due to market volatility, the market may not perform in a similar manner in the future.

 

Naturally, identifying these fastest-growing companies requires significant skill in stock picking and risk management to understand where to find growing companies, while avoiding those with only fleeting success. A manager who invests in this “high growth” space may be able to both identify faster-growing companies and also allow investors to avoid double-ownership of stocks also in core equity funds.

Large cap core—Over the past two decades, the large cap core space has come to be dominated by S&P 500 Index funds, due in part to the belief that active managers in this space could not consistently outperform that benchmark. However, this assessment applies primarily to traditional active managers, not to less-conventional approaches in this space. The preference for index funds in this category also ignores the volatility that characterizes this category. 

An alternative approach that may be particularly appealing to defined contribution plans is to select a manager that seeks out only those companies that consistently grow their dividend every year, regardless of what is going on in the markets. Theoretically, by investing only in these companies, a manager is isolating the most durable, high-quality companies that—even in a year like 2008—continue not only to maintain their dividends but also to increase them. Empirically, the data back up this concept, as can be seen in the charts below. By segmenting out consistent dividend-growing stocks from those that are cutting their dividend or not paying one at all, a manager may achieve performance that is significantly better while also reducing a portfolio’s volatility and also reduce a portfolio’s volatility.

 

Risk/Return in the S&P 500 Index
(01/31/1972 - 09/30/2014)


Source: Ned Davis Research.
Ned Davis Research, Inc. © Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. See NDR disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo. Annualized total returns and annualized standard deviation are based on the subcomponents of the S&P 500 Index, equal-weighted on a total return basis, January 31, 1972–September 30, 2014.
Past performance is no guarantee of future results.  The chart uses actual annual dividends to identify dividend-paying stocks and is rebalanced annually. The dividend policy for each stock is determined on a rolling 12-month basis. The periods shown do not represent the full history of the S&P 500 Index. Dividends are not guaranteed and may be increased, decreased or suspended altogether at the discretion of the issuing company.
Indexes are unmanaged, do not reflect the deduction of fees and expenses, and are not available for direct investment.
The historical data are for illustrative purposes only, do not represent the performance of any Lord Abbett mutual fund or any particular investment, and are not intended to predict or depict future results. Investors may experience different results. Returns during other times may vary. There is no guarantee that investors will experience the type of performance reflected above. Due to market volatility, the market may not perform in a similar manner in the future.

 

Moreover, this type of high-quality approach historically has added value through various environments, adding the most value during periods of high inflation. It can help participants avoid periods of significant declines, which may appeal to them, particularly as they get older and are concerned more about protecting the total value of a larger account than they are about the benefits of dollar-cost averaging during a market downturn.

 

Performance During Different Periods of Inflation
(12/31/1972 – 09/30/2014) 

Source: Ned Davis Research.
Ned Davis Research, Inc. © Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. See NDR disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo. Annualized total returns and annualized standard deviation are based on the subcomponents of the S&P 500 Index, equal-weighted on a total return basis, December 31, 1972–September 30, 2014.
Past performance is no guarantee of future results.  The chart uses actual annual dividends to identify dividend-paying stocks and is rebalanced annually. The dividend policy for each stock is determined on a rolling 12-month basis. The periods shown do not represent the full history of the S&P 500 Index. Dividends are not guaranteed and may be increased, decreased or suspended altogether at the discretion of the issuing company.
Indexes are unmanaged, do not reflect the deduction of fees and expenses, and are not available for direct investment.
The historical data are for illustrative purposes only, do not represent the performance of any Lord Abbett mutual fund or any particular investment, and are not intended to predict or depict future results. Investors may experience different results. Returns during other times may vary. There is no guarantee that investors will experience the type of performance reflected above. Due to market volatility, the market may not perform in a similar manner in the future.

 

Value investingOn the value side of the market, our research has found that the managers with the most success over the long run are those that focus primarily on stock picking, but not on large bets related to macro or sector themes. Value managers traditionally focus on understanding which stocks are most undervalued by the marketplace relative to what a manager believes is the true “intrinsic” value of the company. If the manager is correct, the market eventually will recognize this true value, and the stock likely will, over time, appreciate to that intrinsic value.

This approach—which some would compare to “hitting singles and doubles” rather than trying to hit big “home runs”—can be significantly altered should the portfolio manager decide to also make large bets in a sector or a “factor” that is outside the scope of individual stock picking. But large bets of this kind can bring large risks. For example, a manager may decide that the housing market and subprime loans look like a “can’t miss” bet, and so he or she may decide to make a huge overweight in financials and homebuilders relative to the benchmark. Certainly, this type of macro bet worked well in 2006, when financial stocks soared, but would have overwhelmed any positive stock picking in 2008. 

Thus, within value equity, we believe investors are best served by a style-pure approach that maximizes the skill of the manager isolating stock picking, while avoiding large macro bets.

Small and mid cap stocks—Another key bias we highlighted at the outset was that of naïve diversification, also known as 1/n diversification. The basic premise in this phenomenon is that any lineup of funds offered by a plan could be construed as a recommended portfolio. As such, the participant could allocate equal or similar amounts to each fund. One key problem with this approach is the potential for an unintended overweight into riskier segments of the equity market. Should a plan sponsor choose to include investment options across the spectrum of mid cap and small cap stocks, for instance, it could, for example, end up with three mid cap options and three small cap options. Should a participant choose to put money in all those funds, which typically are highly correlated with one another, that participant could be loading up on higher-risk funds.

One solution to this potential bias is to select a “smid” fund that combines both small cap and mid cap stocks, with the flexibility to invest across value, core, and growth. Another advantage of this type of approach is that the manager likely has the flexibility to own “winners” in the small cap space longer as the company becomes a mid cap company. Often, a small cap manager will need to sell a stock that becomes too large and no longer fits into the prospectus guidelines.

International—International equity investing was somewhat of a novelty back in the 1990s. Today, however, it is universally recognized as a necessity for proper exposure to global markets for U.S. investors. One overlooked part of the international market, however, is small cap equities. Much like in the U.S. market, small caps in international markets make up a separate and distinct asset class that has compelling investment characteristics. 

By the end of the 1990s, much of the diversification benefit from international stocks had dissipated, as correlations with U.S. stocks rose from the 1970s to the 1990s, meaning that international and U.S. stocks were moving more in lockstep. Because of globalization, the fates of U.S. and international corporations were becoming increasingly intertwined. As a result, many investors looked to emerging markets for diversification. They got this, but they also got a healthy dose of volatility.

 

Lower Risk Than Emerging Markets; Higher Return Than Large Caps
Historical Risk/Return

Source: Bloomberg.
Past performance is no guarantee of future results. The historical data are for illustrative purposes only, do not represent the performance of any Lord Abbett mutual fund or any particular investment, and are not intended to predict or depict future results. Investors may experience different results. Returns during other times may vary. Due to market volatility, the market may not perform in a similar manner in the future.
Investing in international securities generally poses greater risk than investing in domestic securities, including greater price fluctuations and higher transaction costs. Special risks are inherent to international investing, including those related to currency fluctuations and foreign, political, and economic events. The securities markets of emerging countries tend to be less liquid, to be especially subject to greater price volatility, to have a smaller market capitalization, and to 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.
Indexes are unmanaged and are not available for direct investment.

 

By contrast, international small cap stocks have experienced a similar level of volatility as large caps, but with higher returns and lower correlations with the U.S. equity markets. This benefit may help defined contribution investors to gain access to an opportunistic asset class with lower volatility than emerging market equities.

Summary: In Each Asset Class, Minimize Biases and Maximize Opportunities, While Diversifying Globally
In sum, we believe that putting together a lineup of equity funds requires knowledge of participant behavior combined with an understanding of “what works” in each sub-asset class. Here is a quick summation of what we’ve discussed in this paper.  

 

1 Pensions & Investments Research Center, top defined contribution mutual funds
2 “2014 Quantitative Analysis of Investor Behavior,” Dalbar, 2014; “How Do Employers’ 401(k) Mutual Fund Selections Affect Performance?” Boston College Center for Retirement Research, 2013.
3 Lord Abbett research.
4 Plan Sponsor Council of America, “PSCA’s 2014 403(b) report,” chapters 54-55; Bernartzi & Thaler, “Heuristics and Biases in Retirement Savings Behavior”, University of Chicago Booth School of Management, 2006.
5 “2014 Quantitative Analysis of Investor Behavior,” Dalbar, 2014; “How Do Employers’ 401(k) Mutual Fund Selections Affect Performance?” Boston College Center for Retirement Research, 2013.
6 “Heuristics and Biases in Retirement Savings Behavior,” University of Chicago Booth School of Management, 2006; “How Do Employers’ 401(k) Mutual Fund Selections Affect Performance?” Boston College Center for Retirement Research, 2013.

 

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 and/or sectors in the economy. Mid and small cap companies typically experience higher risk of failure than large cap companies. However, larger companies may have slower rates of growth than smaller successful companies. 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. Foreign securities generally pose greater risk than domestic securities, including greater price fluctuations and higher transaction costs. Foreign investments also may be affected by changes in currency rates or currency controls. With respect to certain foreign countries, there is a possibility of nationalization, expropriation, or confiscatory taxation, imposition of withholding or other taxes, and political or social instability that could affect investments in those countries. The securities markets of emerging countries tend to be less liquid, to be especially subject to greater price volatility, to have a smaller market capitalization, and to 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. Further, investing in the securities of issuers located in certain emerging countries may present a greater risk of loss resulting from problems in security registration and custody or substantial economic or political disruptions.

Important Information

Glossary of Terms

Real Return is the annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external effects.

Nominal Return is amount of money generated by an investment before expenses such as taxes, investment fees, and inflation are factored in.

Inflation Adjusted Return is the measure of return that accounts for the return period's inflation rate.

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. Although U.S. government securities are guaranteed as to payments of interest and principal, their market prices are not guaranteed and will fluctuate in response to market movements.

A stock is classified as a dividend payer if it paid a cash dividend any time during the previous 12 months, a dividend grower if it initiated or raised its cash dividend at any time during the previous 12 months, and non-dividend payer if it did not pay a cash dividend at any time during the previous 12 months.

Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company.

Dividend yield is equal to the dividend divided by the stock price. Dividend yield is one measure of a stock's value. A high dividend yield may indicate that a stock is relatively inexpensive.

Standard deviation is a measure of a measure of volatility. It indicates the variability of an investment's returns.

No investing strategy can overcome all market volatility or guarantee future results.

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.

Barclays U.S. Government Bond Index is a market value-weighted index composed of all publicly issued, nonconvertible, domestic debt of the U.S. government or any agency thereof, quasi-federal corporations, or corporate debt guaranteed by the U.S. government. Flower bonds and pass-through issues are excluded. Total return consists of price appreciation/depreciation plus income as a percentage of the original investment. Indexes are rebalanced monthly by market capitalization.

The BofA Merrill Lynch US 3-Month Treasury Bill Index is comprised of a single issue purchased at the beginning of the month and held for a full month. At the end of the month that issue is sold and rolled into a newly selected issue. The issue selected at each month-end rebalancing is the outstanding Treasury Bill that matures closest to, but not beyond, three months from the rebalancing date. To qualify for selection, an issue must have settled on or before the month-end rebalancing date. While the index will often hold the Treasury Bill issued at the most recent 3-month auction, it is also possible for a seasoned 6-month Bill to be selected.

S&P Developed Ex-U.S. Small Cap Index captures the bottom 15% of companies domiciled in the developed markets excluding the United States within the S&P Global BMI with a float-adjusted market capitalization of at least US$100 million and a value traded of at least US$50 million for the past 12-months at the time of the annual reconstitution. Stocks are excluded if their market capitalization falls below US$75 million, or if the value traded is less than US$35 million at the time of reconstitution.

MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following 21 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

MSCI EAFE Small Cap Index is an equity index which captures small cap representation across Developed Markets countries* around the world, excluding the US and Canada. With 2,162 constituents, the index covers approximately 14% of the free float-adjusted market capitalization in each country.

MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 23 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

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

RELATED TOPICS

RELATED CONTENT

Please confirm your literature shipping address

Please review the address information below and make any necessary changes.

All literature orders will be shipped to the address that you enter below. This information can be edited at any time.

Current Literature Shipping Address

* Required field