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 Reviewas of 03/31/2016

The Lord Abbett Diversified Equity Strategy Fund returned -1.11%, reflecting the performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the three-month period ended March 31, 2016, compared to its benchmark, the 85% Russell 3000® Index9/15% MSCI EAFE Index with Gross Dividends,10 which returned 0.39%. The Fund’s 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: -10.20%; five years: 5.67%; and since inception (June 30, 2006): 5.56%. Expense ratio, gross: 1.34%; and net: 1.00%.

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-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 and the Fund’s strategic allocation both detracted from performance. The Fund’s weighting in domestic large-cap growth stocks hurt the performance, as they underperformed the Fund’s benchmark. The Fund’s allocation to U.S. large-cap value equities contributed to relative performance, as value stocks outperformed the Fund’s benchmark.

The domestic large-cap growth equity strategy underperformed its underlying benchmark, thereby detracting from relative performance. The leading detractor from relative performance during the period was security selection in the information technology sector. The Fund’s position in Salesforce.com, Inc., a provider of enterprise cloud-computing solutions, detracted most. Shares of Salesforce.com fell amid a broad-based sell-off in software stocks after a notable peer reported a surprising quarterly revenue deceleration. Salesforce.com proved that investors’ fears regarding its business were unfounded when it later reported continued revenue acceleration that was above consensus estimates. Gogo, Inc., an aero-communications service provider, was another detractor within the information technology sector. Shares of GoGo fell after a large client threatened litigation against the company in an attempt to terminate its contract.    

Within the Fund’s U.S. large cap value equity strategy, which outperformed its underlying benchmark during the period, security selection in the communications sector was the largest contributor to performance during the quarter. Within this sector, the Fund’s holdings of Verizon Communications contributed most. Shares of Verizon increased after reporting that fourth-quarter revenue rose 3.2% year over year, driven by growth in Wireless and FiOS consumer broadband. Long a leader in wireless communication, Verizon is increasing market share within the cable industry adding to its attractiveness. The Fund’s overweight position in Whirlpool Corp., a home appliances company, was another contributor to relative performance.  During the period, management successfully overcame recent execution challenges in the United States, while continuing to integrate recent acquisitions in Europe and Asia.

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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