An Update for Our Clients & Business Partners from our Managing Partner, Doug Sieg

To Our Clients and Business Partners:

On behalf of everyone at Lord Abbett, I am reaching out in the sincere hope that you and your family remain healthy and safe. As you know from my communication at the start of the Covid-19 crisis, Lord Abbett began its transition from our Jersey City office 10 weeks ago and transitioned seamlessly to a fully remote work environment six weeks ago. During this time we have seen the situation shift from a rapidly spreading global health crisis to a humanitarian crisis, and then a full-blown financial crisis, which has now led to the largest post-World War II U.S. unemployment rate (over 14%, with over 20 million more people out of work). As I write this, a moral crisis has begun to grip the nation as we struggle to balance economic and physical health. This unnatural state of isolation, combined with mounting job losses, may now lead us to a mental health crisis. In my previous communication, I mentioned the two lessons I have learned from previous crises: first, they last longer than you think; and second, they tend to be more painful than you anticipate. All of these facets of the current situation underscore the need for resiliency in individuals, organizations, and communities.

Remaining Agile in the Ongoing Crisis

With every new development, Lord Abbett has been able to respond in an agile manner as a result of our strong foundation of preparedness. Over the past two years, we created a principles-based environment that empowers our people to use their best judgment in making informed decisions; we launched flexible workplace principles that allow our people to work remotely whenever necessary; and we enhanced our technology infrastructure to provide all employees with remote access to the resources and capabilities necessary to serve our clients. Together, these preparations have enabled our organization to operate in the current environment without disruption. Currently, we are operating remotely at full capacity on behalf of you and your clients.

Preparing for the Future

As we continue to navigate the uncertainties of the current environment, we are also thoughtfully planning for the future. In early April we convened a cross-organizational group to examine the future state of what may lie ahead for our industry and our business. I am a firm believer that a sound strategy starts with an understanding of the shaping forces likely to drive the industry, the economy, and the overall markets in the years to come. With this in mind, we have identified four shaping forces, which I want to share with you as we all prepare for the future.

• The Operating Environment. We are currently in the toughest operating environment one could possibly imagine, yet we transitioned seamlessly and continue to manage successfully. Going forward, we believe the new operating environment can be delineated into two distinct phases. In Phase One, the remote nature of our workforce will continue to be the norm until an effective vaccine becomes widely available. This phase will require resolute leadership to keep the firm motivated and focused. Through our leadership studies at West Point, our Partnership has learned the crucial importance of leading from the decisive point of the battle, wherever it may be. The dispersed work environment will challenge even the best leaders as they seek to lead their teams and advance key initiatives remotely. This phase will also be marked by the friction between hopefulness about returning to the physical work environment and the realities of the pandemic, which will likely result in periodic lockdowns. To help navigate the challenges of Phase One in a prudent manner, we established a working group to develop a plan for re-entering our offices at the appropriate time. Phase Two will begin when an effective vaccine is widely available and will likely redefine organizations as they reimagine their physical workspace, leverage technology that enables collaboration without compromise, and develop a new generation of leaders. I believe these factors will inform a comprehensive reassessment of the traditional office environment, leading to accelerated diversity and inclusion in our industry due to more flexible principles and policies. Equally significant, this reassessment of the workplace will unlock a new wave of innovation in our industry that we believe will benefit all investors. We welcome the opportunity to compete in this new world.
• The Capital Markets Environment. We asked a senior group of our investment professionals, led by our chief investment officer, to evaluate the impact of the crisis on the future economic and business environment. In our analysis, we examined the following key elements and potential outcomes:
  • Macro Forces: We expect a continuation of broad pre-crisis themes; specifically, low interest rates, low inflation, and a flat interest rate curve. However, the probability of either outright deflation or high inflation has increased due to rising global debt levels, aggressive monetary and fiscal stimulus, and supply/demand imbalances. We believe the protracted low-yield environment will drive a partial repositioning into equities, which will likely favor innovative growth companies, U.S. dividend growth companies, and higher quality companies. Globalization will increase the dispersion of the investment outcomes globally and strengthen the case for global investment scope and diversification in both equities and fixed income. This emphasis on diverse returns will support flexible strategies in terms of sectors and regions, and we anticipate secular tailwinds for healthcare and technology that will provide opportunities for alpha.
    
  • Government and Central Bank Intervention: In terms of the capital markets, we believe these entities will most likely attempt to return to their pre-crisis level of involvement when they deem it prudent to do so. However, history shows that government relief actions tend to be complex and long-lasting, as demonstrated by the post-World War II level of involvement, which did not fully unwind until the Reagan years, and, more recently, with the Troubled Asset Relief Program (TARP) during the global financial crisis. More entrenched asset ownership could lead to “safety and soundness” regulations. In light of this scenario, we believe investors will take duration, credit, and/or liquidity risk to achieve their objectives. Spread products are likely to benefit from a low rate environment and will emphasize higher quality. In addition, multi-sector and global strategies are positioned to capitalize on the dispersion of growth and investment outcomes.
    
  • Corporate, Consumer, and Investor Behavior: In our view, businesses will emphasize resiliency over efficiency. We believe that disincentives on buy-backs and dividends could encourage more merger & acquisition activity. In addition, consumers will adopt new technologies and seek to “future proof” through increased savings. We also see investors placing a premium on quality and stability. In terms of the U.S. municipal bond market, we anticipate significant federal government support, but we expect a wider range of outcomes. From our perspective, investment-grade munis will benefit from government backing and demographics. In addition, attractive credit spreads in lower-rated bonds reflect the uncertain outlook colored by the impact of the economic slow-down.
• The battle for relevance and relationships. For the last decade, our base case assumption has been a widening gap between alpha-generators and beta factories that is forcing active managers to demonstrate their value propositions. While beta factories are all about size and scale, the emergence of true active managers offering relevant products to clients—combined with the capital markets environment—is creating a wave that will enable active managers to continue adding alpha to portfolios. In a world where creating new relationships is increasingly difficult, the ability to serve clients in a meaningful way will become more important than ever. While beta factories will continue to add scale in order to win a potential price war heading to zero, the alpha-generators will focus on providing relevant products and performance to investors. I believe that the best alpha-generators will succeed as a result of their strong cultures, which will empower their people to achieve peak performance, deliver a level of client experience that forges lasting relationships, and embrace their higher purpose as investors through authentic ESG integration, demonstrable diversity and inclusion, and a positive impact on their global communities.
• Government Actions. On August 12, 1986, President Ronald Reagan said, “The nine most terrifying words in the English language are ‘I’m from the government and I’m here to help.’” That statement signaled an end to government involvement in industry and a massive change in the stance on taxes. Clearly, those days are now over. While the government is taking necessary action, history shows that government involvement is complicated at best. Look no further than the implementation of the Paycheck Protection Program, the parameters of which continue to shift on a daily basis. While some government programs will, no doubt, work well, there is confusion around others. Regardless of which side of the political aisle you are on, all of us can foresee a sharp increase in tax policy and broad-based government involvement in many industries for years to come. While this new reality will be daunting for the industries affected, these government actions will probably narrow the wealth gap, bring about a welcome focus on ESG (particularly with respect to governance), and spawn new industries in areas outside of government control. The government can stabilize and support industries in need, but it can never match the intensity and drive of an entrepreneur focused on stakeholders.

Viewed together, these shaping forces provide an illuminating backdrop as we use the crisis as an opportunity to re-examine and refine our strategic approach, which we would be more than happy to discuss with you.

Everywhere I turn, I hear the phrase, “the world will never be the same.” While I agree that the seismic shock that hit our world will have a lasting impact, I also recognize that this is a once-in-a-generation moment for all of us. Rather than being daunted by this reality, I have encouraged everyone at Lord Abbett to embrace it as an opportunity. I believe wholeheartedly in the energy and ingenuity of the human spirit, which, when faced with obstacles, always rises to new heights. No doubt, the world will be changed, but there are some essential strengths that I believe will endure. The power of relationships will endure. In fact, I truly believe the power of the handshake will return, perhaps even more meaningfully, along with the essential trust that is built by in-person meetings. We are fortunate as a firm to have continued such a relationship with you in these times, and we look forward to making it even stronger as we move ahead together with confidence.

In closing, I want to recognize the most inspiring example of the human spirit throughout the pandemic—the heroic actions of the people on the front lines of the crisis. Their bravery continues to exemplify the very best of humanity. To help do our part to support their courageous efforts in our local communities and beyond, the Partners and I agreed to donate $1 million in earnings to the Jersey City Medical Center, the City of Jersey City, the NYP/Weill Cornell Medical Center in Manhattan, and the Red Cross.

Stay safe. Stay focused. Stay strong.

Sincerely,

Douglas B. Sieg

Managing Partner