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Convertible Fund

Summary

Summary

What is the Convertible Fund?

The Fund seeks to deliver current income and the opportunity for capital appreciation by investing primarily in convertible securities.

Yield

12-Month Dividend Yield 1 as of 08/29/2016  

  Subsidized3 Un-Subsidized4
w/o sales charge 3.52% 3.46%
w/ sales charge 3.45% 3.39%

30-Day Standardized Yield 2 as of 07/31/2016  

  Subsidized5 Un-Subsidized6
w/o sales charge 1.24% 1.17%

Expense Ratioas of 07/31/2016

Fund Basicsas of 07/29/2016

Total Net Assets
$573.84 M
Inception Date
06/30/2003
Dividend Frequency
Quarterly
Number of Holdings
108
CUSIP
543916753
Minimum Initial Investment
$1,500+

Fund Expense Ratio :

Gross 1.12%

Net 1.06%

YTD 1-YR 3-YR 5-YR 10-YR Since Inception 06/30/2003
w/o sales charge 7.11% -1.91% 4.35% 5.98% 5.12% 5.79%
Lipper Category Avg. Convertible Securities Funds 5.11% -1.02% 4.52% 6.09% 5.32% -
BofA Merrill Lynch All Convertible Index 6.65% 0.23% 7.20% 8.61% 6.87% 7.30%
w/ sales charge 4.65% -4.08% 3.57% 5.51% 4.89% 5.60%

Fund Expense Ratio :

Gross 1.12%

Net 1.06%

Fund Expense Ratio :

Gross 1.12%

Net 1.06%

YTD 1-YR 3-YR 5-YR 10-YR Since Inception 06/30/2003
w/o sales charge 1.78% -8.17% 4.36% 4.30% 4.49% 5.41%
Lipper Category Avg. Convertible Securities Funds 0.96% -5.19% 4.56% 4.79% 4.93% -
BofA Merrill Lynch All Convertible Index 2.01% -4.46% 7.16% 7.15% 6.42% 6.98%
w/ sales charge -0.55% -10.25% 3.57% 3.83% 4.25% 5.23%

Fund Expense Ratio :

Gross 1.12%

Net 1.06%

RELATED CONTENT

Market View: Bonds—How Have Key Sectors Performed During Rising Rates?
Market View: Bonds—How Have Key Sectors Performed During Rising Rates?
February 24, 2014

Short-term corporate credit, high-yield bonds, floating-rate loans, and convertibles have historically performed well when rates rise.

Type Assets
Convertible Bonds
Convertible Preferred Stock
Common Stock
Corporate Bonds
Cash
Maturity Assets
S.T & N.O.A
1 - 5 YEARS
6 - 10 YEARS
11 - 20 YEARS
21 - 30 YEARS
31 + YEARS
PFD(EQUITY)

Credit Quality Distribution as of 07/29/2016 View Portfolio

Rating Assets
AAA
A
BBB
BB
B
CCC
Not Rated

Investment Team

Alan Kurtz
Alan Kurtz

Portfolio Manager

16 Years of Industry Experience

Steven F. Rocco
Steven F. Rocco, CFA

Partner & Portfolio Manager

15 Years of Industry Experience

Robert A. Lee
Robert A. Lee

Partner & Chief Investment Officer

25 Years of Industry Experience

Supported By 54 Investment Professionals and 13 Years Avg. Industry Experience

Contact a Representative

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Performance

Performance

12-Month Dividend Yield 1 as of 08/29/2016  

  Subsidized3 Un-Subsidized4
w/o sales charge 3.52% 3.46%
w/ sales charge 3.45% 3.39%

30-Day Standardized Yield 2 as of 07/31/2016  

  Subsidized5 Un-Subsidized6
w/o sales charge 1.24% 1.17%

Fund Expense Ratio :

Gross 1.12%

Net 1.06%

YTD 1-YR 3-YR 5-YR 10-YR Since Inception 06/30/2003
w/o sales charge 7.11% -1.91% 4.35% 5.98% 5.12% 5.79%
Lipper Category Avg. Convertible Securities Funds 5.11% -1.02% 4.52% 6.09% 5.32% -
BofA Merrill Lynch All Convertible Index 6.65% 0.23% 7.20% 8.61% 6.87% 7.30%
w/ sales charge 4.65% -4.08% 3.57% 5.51% 4.89% 5.60%

Fund Expense Ratio :

Gross 1.12%

Net 1.06%

Fund Expense Ratio :

Gross 1.12%

Net 1.06%

YTD 1-YR 3-YR 5-YR 10-YR Since Inception 06/30/2003
w/o sales charge 1.78% -8.17% 4.36% 4.30% 4.49% 5.41%
Lipper Category Avg. Convertible Securities Funds 0.96% -5.19% 4.56% 4.79% 4.93% -
BofA Merrill Lynch All Convertible Index 2.01% -4.46% 7.16% 7.15% 6.42% 6.98%
w/ sales charge -0.55% -10.25% 3.57% 3.83% 4.25% 5.23%

Fund Expense Ratio :

Gross 1.12%

Net 1.06%

Best returns

Durations Fund Returns Blended Index
3-Mo 13.49 21.66
1-Yr 37.26 53.24

Worst returns

Durations Fund Returns Blended Index
3-Mo -29.91 -34.03
1-Yr -35.49 -39.76
Year Fund Returns BofA Merrill Lynch All Convertible Index
2015 -8.10% -2.99%
2014 5.98% 9.44%
2013 25.91% 24.92%
2012 12.18% 14.96%
2011 -9.00% -5.18%
2010 14.66% 16.77%
2009 35.44% 49.12%
2008 -31.62% -35.73%
2007 9.08% 4.53%
2006 9.03% 12.83%
2005 3.79% -
2004 7.24% -
2003 10.76% -
Year Q1 Q2 Q3 Q4 Yearly Returns
2016 -1.46% 3.29% - - 8.44%
2015 2.45% -0.57% -9.63% -0.17% -8.10%
2014 2.12% 3.86% -1.29% 1.22% 5.98%
2013 6.59% 3.04% 7.83% 6.32% 25.91%
2012 9.39% -4.06% 4.68% 2.11% 12.18%
2011 4.65% -1.35% -14.61% 3.23% -9.00%
2010 3.25% -7.29% 11.08% 7.83% 14.66%
2009 1.88% 11.34% 12.83% 5.82% 35.44%
2008 -7.36% 3.48% -16.39% -14.68% -31.62%
2007 2.31% 3.98% 2.20% 0.32% 9.08%
2006 6.00% -2.19% 0.60% 4.53% 9.03%
2005 -2.15% 0.95% 5.12% -0.05% 3.79%
2004 2.49% -1.23% -1.59% 7.66% 7.24%
2003 - - 1.97% 8.63% 10.76%

Growth of $10,000 as of 07/31/2016

NAV Historical Prices

Date Net Asset Value

Portfolio

Portfolio

Rating Assets
Convertible Bonds
Convertible Preferred Stock
Common Stock
Corporate Bonds
Cash
Rating Assets
S.T & N.O.A
1 - 5 YEARS
6 - 10 YEARS
11 - 20 YEARS
21 - 30 YEARS
31 + YEARS
PFD(EQUITY)

Credit Quality Distribution as of 07/29/2016

Rating Assets
AAA
A
BBB
BB
B
CCC
Not Rated

Portfolio Positioning as of 06/30/2016

  • Despite elevated volatility during the second quarter of 2016, equity markets continued to rally; as such, we maintained the portfolio’s equity-sensitivity at a level generally above that of the broader convertible market for much of the period. Later in the quarter, after the United Kingdom (UK) indicated its intention to depart from the European Union (EU), we reduced the portfolio’s exposure to some of the more cyclical parts of the market, as we expect some projects and investments to get delayed amid the uncertainty. 
  • This continued volatility provided opportunities to invest tactically during the period. In particular, we believe the outlook for the energy sector has improved, especially for those firms that have reduced their cap-ex budgets and have divested their non-core businesses in response to the low commodity-price environment. As such, we selectively increased the portfolio’s energy exposure during the second half of the period, focusing on companies with high-quality assets and improving leverage profiles within the exploration and production segment.  We also increased the portfolio’s exposure to oilfield service providers, as they right-size their cost structures to survive at this decreased level of drilling activity. 
  • We continue to maintain the portfolio’s overweight position in the materials sector.  In particular, we favor miners of precious metals whose earnings are benefiting from increasing commodity prices.  We expect this trend to continue, as central banks use ever-increasing amounts of accommodative monetary policy to combat persistently weak economic growth. 
  • We continue to view the health care sector favorably, particularly medical device manufacturers. As the U.S. employment rate improves and medical insurance coverage expands, fewer people are postponing medical procedures.  In addition, several years of subpar growth in the industry has led to an uptick in M&A, as companies seek to bolt-on newer products that can accelerate their growth profile.  We see upside to both earnings estimates and valuations as these trends continue.

Portfolio Details as of 07/29/2016

Total Net Assets
$573.84 M
Number of Issues
108
Average Coupon
1.99%
Average Maturity
6.35 Years

Dividends & Cap Gains

Dividends & Cap Gains

Dividend Payments

For
YTD Dividends Paidas of 08/29/2016
$0.127
Dividend Frequency
Quarterly
Record Date Ex-Dividend Date Reinvest & Payable Date Dividend Reinvest Price
06/29/2016 06/30/2016 06/30/2016 $0.06290 $10.71
03/30/2016 03/31/2016 03/31/2016 $0.06500 $10.43

Upcoming Dividend Payment Dates

This section lists all anticipated income and Capital Gain distribution dates and any actual distributions are subject to adequacy of earnings and must be approved by the Board of Directors/Trustees. Please note that dates are subject to change.

Record Date Ex-Dividend Date Reinvest & Payable Date
09/29/2016 09/30/2016 09/30/2016
12/29/2016 12/30/2016 12/30/2016

Capital Gains Distributions

For
Record Date Reinvest & Payable Date Long-term Short-term * Total Reinvest Price
12/18/2014 12/19/2014 $0.5336 $0.7849 $1.3185 $12.08

Upcoming Capital Gain Distribution

This section lists all anticipated income and Capital Gain distribution dates and any actual distributions are subject to adequacy of earnings and must be approved by the Board of Directors/Trustees. Please note that dates are subject to change.

Record Date Ex-Dividend Date
12/15/2016 12/16/2016

Fees & Expenses

Fees & Expenses

Sales Charge Schedule as of 08/29/2016

  Sales Charge Dealer's Concession Prices at Breakpoint
Less than $100,000 2.25% 2.00% $11.67
$100,000 to $249,999 1.75% 1.50% $11.61
$250,000 to $499,999 1.25% 1.00% $11.55
$500,000 to $999,999 0.00% 1.00% $11.41
$1,000,000 to $5,000,000 0.00% 1.00% $11.41

Expense Ratioas of 07/31/2016

Fund Review

Fund Review

Market Review as of 06/30/2016

Major categories of U.S. fixed income securities posted positive returns for the second quarter of 2016, with high yield credit outperforming investment grade bonds, driven by the recovery in commodity prices and the continued search for yield. Volatility increased towards the end of the quarter, capped off by the United Kingdom’s decision to exit the European Union. After side-stepping for the most part the landmine that was “Brexit,” securities markets grinded higher into the end of the quarter, buoyed by accommodative central banks.

Following its policy meeting on June 14–15, the U.S. Federal Reserve (Fed) released a statement indicating that the pace of improvement in the labor market had slowed, noting that job gains had diminished despite the lower unemployment rate. On the other side, growth in economic activity appeared to have picked up, driven by growth in household spending. The Fed again noted that inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but is expected to rise to 2% over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. During the June meeting, the Fed decided to maintain its target for the Federal Funds Rate  in the range of 0.25–0.50%, and declared “the stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2% inflation.”1 Fed policymakers’ median projected estimate for the fed funds fell to 0.9% for the end of 2016.2

U.S. inflation continued to struggle in reaching the Fed’s 2% inflation target, as the overall Consumer Price Index (CPI)3 increased just 1.0% over the 12-month period ended May 2016. CPI (excluding food and energy prices) increased 2.2% over the same 12-month period.4

The U.S. Bureau of Labor Statistics reported that non-farm payrolls increased by just 38,000 in May, below the trailing three-month average monthly gain of 116,000. The change in total nonfarm payroll employment for March and April were also revised lower, resulting in employment gains that were 59,000 less than had been previously reported over these two months. Despite the slowing pace of job growth, the unemployment rate declined from 5.0 to 4.7%.5

U.S. Treasuries (as represented by the BofA Merrill Lynch U.S. Treasury Index6) posted a return of 2.24% for the three-month period ended June 30, 2016.  The high yield bond market (as represented by the BofA Merrill Lynch U.S. High Yield Constrained Index7) posted a positive return of 5.88% for the quarter, and is now positive 9.32% year to date. The floating rate loan market (as represented by the Credit Suisse Leveraged Loan Index8) returned 2.86%, outperforming the broad Barclays U.S. Aggregate Bond Index9, with performance driven by lower rated loans. The convertible bond market (as represented by the BofA Merrill Lynch All Convertibles, All Qualities Index10) returned 3.63%, also benefitting from a rally in risk assets.

Among higher credit quality securities, investment grade corporate debt (as represented by the Barclays U.S. Corporate Bond Index11) posted a return of 3.57%. Corporate bond spreads continued to tighten during the quarter from the wide levels reached in early February, a period of extreme risk aversion. Agency mortgage-backed securities (as represented by the Barclays MBS Index12) returned 1.11%. Commercial MBS (CMBS) (as represented by the Barclays U.S. CMBS Investment Grade Index13) returned 2.22%.

The municipal bond market (as represented by the BofA Merrill Lynch U.S. Municipal Securities Index14) posted a 2.72% return, outperforming the BofA Merrill Lynch U.S. Treasury Index, even before accounting for the tax exempt status of municipal bonds. Overall creditworthiness in the municipal bond market continues to improve, as most states’ finances experienced rising revenues, while maintaining balanced budgets.

Within emerging markets, the major drivers of strong performance included a dovish Fed, a weaker U.S. dollar, and a strong rally in commodity prices. Thus, U.S. dollar-denominated emerging markets corporate debt (as measured by the JP Morgan Corporate Emerging Markets Bond Index Broad Diversified Index15) returned 3.33%, underperforming most U.S.-centric, fixed income asset classes.                                        

According to J.P. Morgan Securities, high yield new issue volume tapered somewhat in June with the Brexit vote serving as an overhang. High yield issuance totaled $104.1 billion for second quarter 2016, which was a 19% decrease from the year-ago quarter, but a 103% improvement from the first quarter of 2016. June’s institutional loan issuance was the heaviest in more than three years, reaching $73.0 billion, a by-product of a big increase in re-pricing and refinancing activity.  Institutional loan volume has climbed, to $161.0 billion year to date, compared with $207.5 billion a year ago. Default activity fell in June, to a year-to-date-low, as two companies defaulted, totaling $1.4 billion. This marked the lowest number of defaults since October 2015, and is the third consecutive month-over-month decline. Year to date, 37 companies have defaulted, with debt totaling $43.8 billion ($35.2 billion in bonds and $8.6 billion in loans), which is already 16% higher than full-year 2015’s $37.7 billion of total default volume. It should be noted that default activity has been driven by companies in the energy and metals/mining sectors, with over 80% of this year’s default volume coming from commodity-related names, according to J.P. Morgan Securities.

Fund Review as of 06/30/2016

The Fund* modestly underperformed its benchmark, the BofA Merrill Lynch All Convertibles, All Qualities Index,10 with all distributions reinvested, for the quarter ended June 30, 2016.    

Despite elevated volatility during the second quarter of 2016, equity markets continued to rally; as such, we maintained the Fund’s equity-sensitivity at a level generally above that of the broader convertible market for much of the period. Later in the quarter, after the United Kingdom indicated its intention to depart from the European Union, we reduced the Fund’s exposure to some of the more cyclical parts of the market, as we expect some projects and investments to get delayed amid the uncertainty. 

Security selection within the health care sector, and more specifically the Fund’s exposure to biotech companies, was a headwind to relative performance. In particular, the Fund’s allocation to Gilead Sciences, Inc., a research-based biopharmaceutical company, detracted from performance during the period. Shares of Gilead fell at the start of the quarter, after the company reported earnings below expectations. Although the company continued to face headwinds related to drug pricing, we see upside to both earnings estimates and valuations, given Gilead’s strong pipeline.

Security selection within the consumer discretionary sector was a contributor to relative performance. Specifically, the Fund’s underweight allocation to Fiat Chrysler Automobiles N.V., an automobile company, contributed to relative performance. Fiat Chrysler’s convertible bonds were down significantly during the quarter, as the company continued to struggle hitting sales estimates.   

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

Outlook

The United Kingdom’s decision to depart from the European Union has introduced a great deal of uncertainty into the market; as such, we believe central banks will remain accommodative in order to stabilize markets and foster global growth. Further accommodation and a global search for yield should benefit risk assets, as long as central bank actions remain consistent with one another. Although fears have abated to a degree about China’s economic slowdown, and the possibility of a disruptive currency devaluation, the economic situation there remains another area of uncertainty. The Chinese economy is a critical component of the global economy, and particularly for the Asian region.  Further instability has the potential to disrupt global markets.

We continue to maintain an overweight position in the materials sector.  In particular, we favor miners of precious metals whose earnings are benefiting from increasing commodity prices.  We expect this trend to continue, as central banks use ever-increasing amounts of accommodative monetary policy to combat persistently weak economic growth. We continue to view the health care sector favorably, particularly medical device manufacturers. As the U.S. employment rate improves and medical insurance coverage expands, fewer people are postponing medical procedures.  In addition, several years of subpar growth in the industry has led to an uptick in M&A, as companies seek to bolt-on newer products that can accelerate their growth profile.  We see upside to both earnings estimates and valuations as these trends continue.

Although convertible issuance got off to a rough start this year amid heightened volatility and perpetually low interest rates, the pace has ramped up recently. Looking ahead, while “Brexit”-related volatility could have a negative impact on issuance, we believe this will be short-lived. Suppressed borrowing costs, a dovish Fed, and recovering equity valuations could spark a resurgence in convertible issuance, with favorable terms for investors. M&A financed with convertible debt has abated from its elevated pace in 2015, although we continue to believe that M&A could be a viable option for acquirers with access to capital and looking to expand their market share.    

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Class A  Except as noted below, returns with sales charges reflect a maximum sales charge of 5.75% for equity funds, 2.25% for all tax-free income funds, fixed income funds and multi-asset class funds. There are also ongoing 12b-1 service fees (and, in certain cases, distribution fees).

Class A Shares purchased subject to a front-end sales charge have no contingent deferred sales charge (CDSC). However, certain purchases of Class A shares made without a front-end sales charge may be subject to a CDSC of 1% if the shares are redeemed before the first day of the month in which the one year anniversary of the purchase falls. The CDSC is not reflected in the performance with maximum sales charge.

The BofA Merrill Lynch All Convertibles Index contains issues that have a greater than $50 million aggregate market value. The issues are U.S. dollar-denominated, sold into the U.S. market and publicly traded in the United States.

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