Market Reviewas of 12/31/2014

The U.S. equity market (as represented by the S&P 500® Index1) advanced during the fourth quarter of 2014, bolstered by reports indicating growing strength in the U.S. economy. But the market became more volatile as well, with falling oil prices and global economic weakness raising concerns. U.S. real gross domestic product (GDP) in the third quarter expanded 5.0%, (according to the third estimate by the U.S Bureau of Economic Analysis), exceeding Wall Street expectations.2  Business investment and consumer spending, particularly on durable goods, were among the primary contributors. 

The Federal Reserve (the “Fed”) noted that U.S. economic activity expanded around the country, with most districts reporting gains in employment and advances in consumer spending. Manufacturing, construction, and real estate activity also expanded, while lower oil prices presented concerns in two districts.3

Elsewhere, the eurozone narrowly avoided slipping back into recession, and falling prices led to concerns about deflationary pressures.  In Japan, economic activity contracted, making it likely that this year’s planned tax hike will be delayed. In China, the economy appeared to decelerate to its slowest pace in nearly 25 years, prompting the central bank to cut its official interest rate for the first time in two years.

The S&P 500 Index rose 4.9% during the quarter, but remained below new highs set earlier in the quarter. Gains occurred in seven of 10 major sectors. The energy, materials, and telecom sectors underperformed the broader market. Value stocks (as represented by the Russell 3000® Value Index4) edged out growth stocks (as represented by the Russell 3000® Growth Index5). Large cap stocks (as represented by the Russell 1000® Index6) underperformed small caps (as represented by the Russell 2000® Index7). 

Fund Review
as of 12/31/2014

The Lord Abbett Alpha Strategy Fund returned 5.48%, 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, 2014, compared to the benchmark, the 85% Russell 2000® Index7/15% S&P Developed Ex-U.S. SmallCap Index8, which returned 7.84%.  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, 2014, are: one year: -3.02%; five years: 13.05%; and 10 years: 9.53%. Expense ratio, gross: 1.66%, and net: 1.37%.

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 as a result of two broad sources of performance variance.  First, the Fund’s strategic allocation is designed to enhance return opportunities, while using diversification to help manage risk. Second, the Fund’s actively managed underlying strategies can increase return opportunities by outperforming relative to their respective indexes. 

During the three-month period, both the Fund’s strategic allocation and the performance of underlying investment strategies detracted from relative performance.  The Fund’s allocation to value equities detracted from relative performance, as small cap value and micro-cap value stocks underperformed the Fund’s benchmark.  The Fund’s weighting in micro-cap growth stocks contributed to performance, as they outperformed their underlying benchmark and the Fund’s benchmark. 

The Fund’s small cap value strategy underperformed relative to its underlying benchmark, thereby detracting from relative performance. Security selection, particularly within the consumer discretionary sector, detracted from relative performance.  Within the sector, shares of ANN Inc., an owner and operator of women’s apparel, fell as management lowered its 2014 guidance. Company management lowered its third quarter guidance and fourth quarter outlook early in the period reflecting issues pertaining to weak traffic, poor product response and freight disruptions. Another detractor from consumer discretionary was thermal management technology developer Gentherm, Inc. Despite four straight quarters of beating analysts’ estimates, and management’s forewarning of a slowdown in growth, investors were disappointed when third quarter earnings were not as robust as prior quarters.

The Fund’s domestic micro-cap growth strategy outperformed relative to its underlying benchmark, thereby contributing to relative performance. Security selection within the healthcare sector was the primary contributor to relative performance. Within the sector, bluebird bio, Inc., a biopharmaceutical company specializing in gene therapy, contributed most. The company saw its share price surge following the announcement of strong data from one of its clinical trials at a major biotech conference in early December. Another contributor within the sector was Receptos, Inc., a biopharmaceutical company focused on therapeutics for immune disorders.  The firm reported solid quarterly earnings and strong data from multiple trials during the quarter, which helped drive its shares higher.

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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