Market Review as of 12/31/2015

The U.S. equity market1 advanced during the fourth quarter of 2015, rebounding from the correction experienced in the previous quarter. Markets were supported during the period by a reasonably positive earnings season in which 74% of the companies in the S&P 500 beat consensus earnings estimates. In December, the U.S. Federal Reserve (Fed) raised interest rates for the first time since 2006, as economic data during the quarter continued to suggest a strengthening domestic economy. Specifically, U.S. real gross domestic product (GDP) in the third quarter expanded by 2.0%2, with a rise in personal consumption expenditures and state and local government spending among the primary contributors. 

The Fed noted that U.S. economic activity, as a whole, continued to increase at a modest pace around the country between October and December. Most districts reported improving growth in consumer activity, and positive developments in their residential and commercial real estate markets. Conversely, manufacturing activity struggled in a number of regions3.

International equities4 also rebounded in the fourth quarter, as generally accommodative monetary policies around the globe helped lift equity markets. In Europe, markets were bolstered by the European Central Bank’s announcement that it would be willing to increase the size of its quantitative easing program. In Japan, expectations of further quantitative easing by the Bank of Japan increased, while an upward revision to third quarter GDP growth showed that the country narrowly avoided a technical recession. Finally, the People’s Bank of China cut interest rates for the sixth time in a year, as it sought to support economic growth in its economy.

The S&P 500 returned 7.04% during the fourth quarter. Of the 10 major sectors, the materials, consumer staples, healthcare, industrials, and information technology sectors outperformed the broader market. Value stocks5 underperformed growth stocks6, while large cap stocks7 outperformed small cap stocks8

 

Fund Review
as of 12/31/2015

The Lord Abbett Alpha Strategy Fund returned 2.18%, reflecting the performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the three-month period ended December 31, 2015, compared to the benchmark, the 85% Russell 2000® Index8/15% S&P Developed Ex-U.S. SmallCap Index,9 which returned 3.86%.  The Fund’s average annual total returns, which reflect performance at the maximum 5.75% sales charge applicable for Class A share investments and include the reinvestment of all distributions, as of December 31, 2015, are: one year: -6.76%; five years: 7.57%; and 10 years: 7.69%. Expense ratio, gross: 1.63%, and net: 1.35%.

Performance data quoted represent past performance, which is no guarantee of future results.  Current performance may be higher or lower than the performance data quoted. The investment return and principal value of an investment in the Fund will fluctuate so that shares, on any given day or when redeemed, may be worth more or less than their original cost.  Most recent performance is published online at each month’s end.  To obtain performance data current to the most recent month-end, call Lord Abbett at 888-522-2388 or visit us at www.lordabbett.com.

The Fund seeks to outperform its benchmark over time by using two broad sources of performance variance.  First, the Fund’s strategic allocation is designed to enhance return opportunities, while using diversification to control risk. Second, the Fund’s actively managed underlying strategies can increase return opportunities by outperforming relative to their respective indexes. 

During the quarter, the performance of underlying investment strategies detracted from relative performance, while the Fund’s strategic allocation contributed to performance.

The Fund’s weighting in domestic small-cap growth equities detracted from relative performance, as this category underperformed the Fund’s benchmark. The Fund’s allocation to small-cap international equities contributed to relative performance, as international small-cap stocks outperformed the Fund’s benchmark.

The Fund’s domestic small-cap growth strategy underperformed relative to its underlying benchmark, thereby detracting from relative performance. The leading detractor from relative performance during the period was security selection in the healthcare sector. Within this sector, the Fund’s holdings of Amicus Therapeutics, Inc., a biopharmaceutical company, detracted most. Shares of Amicus declined in early October after the company revealed that the timeline for the approval and filing of one of its drugs would be delayed. Another detractor within the sector was the Fund’s position in Clovis Oncology, Inc., a biopharmaceutical company focused on anti-cancer agents. Shares of Clovis fell after the company reported disappointing data from a clinical trial on a key lung-cancer drug.

Within the Fund’s international small-cap equity strategy, which outperformed its underlying benchmark, stock selection within the financials and industrials sectors contributed to the Fund’s relative performance during the fourth quarter of 2015. In the financials sector, Swedish financial services company Hoist Finance AB performed very well over the period, having reported robust third quarter results; the stock is supported by a secular trend toward selling nonperforming assets. Within the industrials sector, Swiss airline catering firm Gategroup Holding AG bolstered the Fund’s relative returns. Shares in the company rallied during the quarter, strengthened by solid trading momentum and good sales growth, while the new management team has begun to rebuild credibility in the marketplace.

Please refer to www.lordabbett.com under the “Portfolio” tab for a complete list of holdings of the Fund, including the securities discussed above.

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