Market Review as of 03/31/2016

The U.S. equity market (as represented by the S&P 500® Index1) rebounded from its worst start to any year to finish modestly higher during the first quarter of 2016. After the Federal Reserve (the Fed) raised interest rates for the first time since 2006, in December 2015, it decided to hold its benchmark interest rate unchanged during the first quarter, citing global financial market weakness as a concern. A disappointing corporate earnings season contributed to investor uncertainty during the quarter. According to research from FactSet, fourth quarter 2015 earnings suffered a slight year-over-year decline, and less than 70% of companies in the S&P 500 Index reported earnings above their mean estimates. Reasonably constructive economic data during the period helped offset some of this sluggishness. According to the third estimate from the Bureau of Economic Analysis,  U.S. real gross domestic product (GDP) in the fourth quarter expanded by 1.4%,2 an upward revision from previous estimates, with a rise in personal consumption expenditures and residential fixed investment among the primary contributors. 

The Fed noted that U.S. economic activity, as a whole, continued to expand in most districts around the country between December 2015 and February 2016. The majority of districts reported increased consumer spending and positive developments in their residential estate markets. Conversely, manufacturing activity struggled in a number of regions due in large part to further weakness in the energy sector.3

International equities4 also experienced an uneven first quarter, led by notable volatility in China’s capital markets at the beginning of the quarter. Chinese equities suffered sharp losses to start 2016, triggering trading halts, and concerning investors who were already skeptical of the market’s growth prospects. In January, the Bank of Japan introduced negative rates on excess reserves in an effort to stimulate economic growth and support Japanese markets during this tumultuous period. In Europe, markets were bolstered by the European Central Bank’s announcement in March that it would add to its existing monetary easing program.

The S&P 500 returned 1.35% during the first quarter. Of the 10 major sectors, only the health care and financials sectors underperformed the broader market. Value stocks5 outperformed growth stocks,6 while large cap stocks7 outperformed small cap stocks.8

 

Fund Review as of 03/31/2016

The Fund returned 6.06%, reflecting the performance at the net asset value (NAV) of Class A shares, with all distributions reinvested for the quarter ended March 31, 2016, compared to its benchmark, the S&P 900® 10-Year Dividend Growth Index,9 which returned 6.16% for the same period. Average annual total returns, which reflect performance at the maximum 5.75% sales charge applicable to Class A share investments and include the reinvestment of all distributions, as of March 31, 2016, are: one year: -2.29%; five years: 8.30%; and 10 years: 6.44%. Expense ratio, gross: 1.07%; and net: 0.85%. (Please note: Effective September 27, 2012, the Lord Abbett Capital Structure Fund underwent an investment strategy change and became the Lord Abbett Calibrated Dividend Growth Fund. Therefore, the performance of the Fund for periods prior to September 27, 2012, is not representative of the Fund’s current strategy.)

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. 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.

Consistent with our Calibrated investment approach, which seeks to achieve excess returns through a focus on security selection, individual stock positions drove relative performance during the quarter. The Fund underperformed relative to its benchmark, the S&P 900® 10-Year Dividend Growth Index, during the three-month period. 

The Fund’s underweight position in Exxon Mobil Corp., a diversified energy company, detracted from relative performance. Shares of Exxon advanced as oil prices rallied and management restated its commitment to value creation and financial discipline. Another detractor to relative performance was the Fund’s underweight position to restaurant company Yum! Brands, Inc. Shares of Yum! Brands advanced during the period, driven by a potential 20% sale of its Chinese unit, Yum! China, to KKR & Co. Last, an overweight position in Cardinal Health, Inc., a healthcare services company, detracted from relative performance as broad industry weakness pushed shares of Cardinal Health lower during the quarter. Although shares traded lower, Cardinal Health reported a strong quarter in which revenues came in better than expected, driven by growth from existing and new customers as well as the acquisitions of Metro Medical and The Harvard Drug Group.

Conversely, the Fund's overweight position in Hasbro Inc., a provider of leisure-time products and services, contributed to relative performance.  Hasbro reported increases in sales and margins in the fourth quarter, while overcoming stiff foreign-exchange headwinds. Revenues tied to Star Wars were a key driver, coming in ahead of estimates. The Fund’s overweight position in Valspar Corp., a coatings and paint company, also contributed to relative performance.  In March, it was announced that Sherwin-Williams would be acquiring the firm in an all-cash deal worth $113 per share, representing a significant premium. Finally, the Fund’s overweight position in Accenture Ltd., a provider of management and technology consulting services and solutions, contributed to relative performance during the quarter. Accenture reported fourth quarter revenues that exceeded investor expectations. We believe the company remains well-positioned to gain market share in the outsourcing industry.

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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