Market Review as of 09/30/2015

Major categories of U.S. fixed-income securities posted mixed returns in the third quarter of 2015, as high-grade fixed income rallied and higher-yielding categories posted declines.  The market continues to speculate on the timing of the U.S. Federal Reserve’s (the Fed) interest-rate hikes, as the September meeting of the Fed’s policy-setting arm, the Federal Open Market Committee (FOMC), seemed to provide more questions than answers and left interest rates unchanged. Global equity markets initially rallied, sending high-quality fixed-income assets lower, but subsequently fell drastically, causing a flight-to-quality, as investors became uneasy regarding overarching global strength. While 13 out of 17 of the Fed’s own officials still predict that a rate hike will occur in 2015, the number is down from June, when 15 out of 17 officials held that view.

Following its policy meeting on September 16–17, the Fed released a statement suggesting that U.S. economic growth had expanded moderately, as household spending and business fixed investment increased. However, the Fed noted that exports have been soft and that inflation continues to run below the FOMC’s longer-run objective. During the meeting, the Fed decided to keep the targeted fed funds rate at 0–0.25%, and reiterated that it would not be appropriate to raise the target range until it sees further improvement in the labor market and is “reasonably confident” that inflation will move back to the stated objective of 2% annually over the medium term.1 Fed policymakers’ median estimate for the fed funds rate was reduced to 0.4% for the end of 2015, although this still implies a rate hike later this year.2

Weak economic data, particularly out of China, combined with the Fed’s decision to hold rates steady during its September meeting was a tailwind for debt of the U.S. government.  U.S. Treasuries (as represented by the BofA Merrill Lynch U.S. Treasury Index3) posted a return of 1.90% for the three-month period ended September 30, 2015.  Despite pockets of distress in high-profile issuers such as Illinois, Puerto Rico, and New Jersey, the municipal bond market (as represented by the BofA Merrill Lynch U.S. Municipal Securities Index4) returned 1.70%. Overall creditworthiness in the municipal bond market continues to improve, as most states’ finances experienced rising revenues while maintaining balanced budgets.

Government-related securities of the fixed-income market outperformed credit-sensitive segments in the third quarter, as the market experienced a general flight-to-quality. The high-yield bond market (as represented by the BofA Merrill Lynch U.S. High Yield Constrained Index5) posted a return of -4.88% for the quarter. The floating-rate loan market (as represented by the Credit Suisse Leveraged Loan Index6) returned -1.23%, reflecting strong relative performance against the high-yield bond market. The convertible bond market (as represented by the BofA Merrill Lynch All Convertibles, All Qualities Index7) returned -7.14%, suffering from underlying declines in equities, in large part due to the fears of an economic slowdown in China.

Among higher credit-quality securities, investment-grade corporate debt (as represented by the Barclays U.S. Corporate Bond Index8) posted a return of 0.83%. Agency mortgage-backed securities (as represented by the Barclays MBS Index9) gained 1.30%. Commercial MBS (CMBS) (as represented by the Barclays U.S. CMBS Investment Grade Index10) returned 1.54%.

U.S. inflation declined in the third quarter due largely to a sharp decline in gasoline prices. However, the Consumer Price Index (CPI)11  for all items, less food and energy, increased 0.1% in both July and August, the overall CPI increased 0.2% over the 12-month period ending in August 2015, and remains below the Fed’s target of 2.0%. The CPI, excluding volatile food and energy prices, remained stable at 1.8%.12

The U.S. labor market continued to strengthen in the third quarter, albeit at a slower pace. The U.S. Bureau of Labor Statistics reported that non-farm payrolls increased by 173,000 in August, below the average monthly gain of 247,000 over the prior 12 months, while the unemployment edged down to 5.1%.13

High-yield new-issue volume was subdued in the third quarter, and totaled only $59.7 billion, a 38% decline from the previous quarter and the lowest quarterly total since the second quarter of 2012. Year to date, high-yield issuance has been $251 billion, down approximately 12% year over year.  Institutional loan issuance totaled a little more than $266 billion, down 35% on a year-over-year basis.  J.P Morgan Securities is forecasting the high-yield default rate to rise, to 3.0%, in 2016, although this is largely due to expected defaults in the troubled energy sector.  Excluding energy, they forecast high-yield bond and loan default rates of 1.5% for 2015 and 2016, both of which are well below their long-term averages of 3.6% and 3.3%, respectively.

Fund Review as of 09/30/2015

The Fund returned -9.63%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended September 30, 2015. The Fund’s benchmark, the BofA Merrill Lynch All Convertibles, All Qualities Index,7 returned -7.14% in the same period. Average annual total returns, which reflect performance at the maximum 2.25% sales charge applicable to Class A share investments and include the reinvestment of all distributions, as of September 30, 2015, are: one year: -8.94%; five years: 5.74%; and 10 years: 4.46%. Expense ratio, gross: 1.11%, and net: 1.06%.    

Performance data quoted represent past performance, which does not guarantee 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 1-888-522-2388 or visit us at

Volatility in the health care sector during the second half of the quarter detracted from performance. The health care sector, especially the specialty pharmaceutical industry, underperformed due to growing concerns over political issues, including Congressional investigations relating to drug pricing. Security selection within the energy sector early in the quarter was also a drag on relative performance. In particular, Penn Virginia Corporation, an independent oil and gas company, faced convertible and share price declines as commodity prices remained subdued and the company was unable to find suitable bids for its sizable oil and gas assets.

The Fund’s underweight allocation to the energy sector helped offset the negative security selection within the sector. Energy and energy related firms continued to struggle amid persistent softness in commodity markets throughout the period. Additionally, security selection within the telecommunications sector, and particularly an overweight position in T-Mobile U.S. Inc., contributed positively to performance. T-Mobile, a mobile communications service provider, has been profitably taking share from incumbent service providers and could be an attractive strategic asset in the domestic wireless business.

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


We maintain a positive outlook for the U.S. consumer and continue to position the Fund overweight in the consumer discretionary sector as a result.  Low commodity prices, a strengthening currency, and an improving employment outlook should be a tailwind to discretionary income domestically. Additionally, we remain positively disposed to the health care sector, although we have notably reduced the Fund’s overweight throughout the quarter. Within health care, we continue to particularly favor biotechnology and specialty pharmaceutical companies with late stage pipelines, viewing the recent downturn as an overreaction to headlines and a potential buying opportunity for select firms within the industry.

Credit markets globally experienced heightened volatility in the later part of the third quarter of 2015.  We expect volatility to remain elevated until investors become more comfortable with the broader macroeconomic conditions. Given this market environment, we are closely monitoring near-term developments in credit with an emphasis on fundamental valuations and earnings trends.  Additionally, we reduced the Fund’s delta, or equity sensitivity, to become more in-line with the broader market until we see conditions become more favorable. 

Convertible issuance slowed in 3Q15 from a strong start to the year. However, in the U.S. we have seen new issue terms improve as coupons have increased and conversion premiums have fallen. Corporate mergers and acquisitions have recently slowed from their brisk pace earlier this year. We do not think we’ve seen the last of this activity, particularly in sectors like healthcare where valuations are more favorable and the likely acquirers still have ample access to capital.  We would expect convertible issuance to continue being an attractive vehicle to finance any M&A activity. 

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