Market Reviewas of 12/31/2014

The fourth quarter was marked by a return of volatility across both developed and emerging markets.  The U.S. Federal Reserve added to the jittery investor mood by officially ending its asset purchases in October, which in turn generated speculation among investors as to the timing of the first interest rate hike as well as the extent of the next rate-hiking cycle. 

Also adding to investor concern was the collapse in oil prices, which affected inflation globally.  While good news for most of the world’s oil importers and consumers,  the fall in the price of oil was detrimental to those economies heavily dependent on oil exports, such as Russia, Colombia, and Norway.  The currencies of those countries were hit hard as worries grew about their deteriorating external and fiscal balances.  For Russia, in particular, the fall in oil prices compounded an already very difficult situation brought on by the tensions in Ukraine and the resulting Western economic sanctions.  The depreciation of the ruble against the U.S. dollar was the steepest since Russia defaulted in 1998.  To defend the currency and stem capital flight, the Russian central bank was forced to raise interest rates, by 9% in the fourth quarter alone, marking an overall increase of 11.5% for the year 2014.

The U.S. dollar strengthened across the board throughout the quarter.  Positive economic data solidified the United States as the fastest growing developed economy, with positive momentum heading into 2015. European economic data continued to disappoint, especially on the inflation front, which moved further below the European Central Bank’s (ECB) target of 2%.  Although the ECB did begin an asset purchase program, including buying covered bonds and asset-backed securities, the market has been waiting for definite signs that sovereign bond purchases would also start soon.  In anticipation, investors pushed the euro down against the U.S. dollar, sending the eurozone currency to its lowest level against the greenback since 2012, which adversely affected the currencies of Central and Eastern European emerging markets as well.  The Japanese yen hit its lowest level against the U.S. dollar since 2007 after the Bank of Japan surprised the markets with additional monetary easing, while also embarking on more fiscal stimulus, including the postponement of the next consumption tax hike. 

The Barclays Global Emerging Market Strategy (GEMS) Index1 (a proxy for the asset class) returned -4.94% for the three-month period ended December 31, 2014, compared with -4.47% in the prior quarter.   

Fund Review as of 12/31/2014

The Fund returned -4.42%, reflecting performance at net asset value (NAV) of Class A shares, with all distributions reinvested, for the three-month period ended December 31, 2014. The Fund’s benchmark, the Barclays Global Emerging Market Strategy (GEMS) Index, returned -4.94% in the same period. The Fund’s 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 December 31, 2014, are: one year: -7.56%; five years: -0.27%; and 10 years: 1.16%. Expense ratio: 0.99%.

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.

The Fund’s underweight position in the Colombian peso provided the largest benefit to performance in the fourth quarter. Due to Colombia’s high reliance on oil exports, and the subsequent decline in oil prices, the currency depreciated substantially. In addition, the Fund’s underweight to the euro, and euro-dependent currencies such as Hungary and Poland, aided performance. The euro suffered due to the anticipation of increasing bond purchases by the European Central Bank, lower inflation, and weak economic growth. An underweight to the Malaysian ringgit also helped performance as the currency underperformed due to Malaysia being the only net oil exporter in Asia.

The primary detractor from performance was the Fund’s overweight to the Russian ruble. Anticipating a recovery of the ruble after the currency had hit unprecedented lows due to Western sanctions and continuing tensions in the Ukraine, the Fund reversed an underweight from the previous quarter prematurely as the ruble continued to slide. The volatility in the ruble was augmented by the slide in oil and the central bank’s unwillingness to provide support to the currency. Overweight positions in both the Turkish lira and Indian rupee hurt performance, despite the benefit that the declining oil price provides to net importers such as Turkey and India. The fall of the rupee and lira can be tied mainly to broader U.S. dollar strength and its impact on emerging market currencies in general. An overweight position in the Brazilian real detracted due to volatility around the presidential election and the delay in implementing policy changes in response to rising inflation and impending recession.

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

After a challenging quarter for emerging market currencies, we anticipate that central banks are beginning to recognize the need to address the rapid depreciation of their currencies. Several emerging market governments have begun taking steps to minimize depreciation though intervention. Mexico, for example, restarted a program created in 2009 to sell options in order to limit depreciation of the currency. In order to stem declines in its currency the peso, Colombia halted a program that had regularly purchased U.S. dollars over the last three years. These countermeasures reflect the fearful sentiment of central banks throughout emerging economies in the face of not only currency depreciation, but also rising interest rates. We believe this is a positive sign for currencies as we move into 2015, as this fear will continue to drive central banks to action and lead to an eventual bottom in the broad decline across currencies.

Weakness in oil prices was the major factor driving currencies in the latter half of 2014; however, we believe most emerging market countries will ultimately benefit from this weakness. Several countries maintain fuel subsidies and as oil prices have dropped, these subsidies have been removed. In many cases, despite the removal of subsidies, fuel prices have nonetheless moved lower. Further, by removing fuel subsidies, government balance sheets are improving through lower spending.  

The divergence we witnessed in the third quarter was derailed in the fourth quarter as the fall in oil prices depressed emerging market currencies across the board. Since many countries will ultimately benefit from lower oil prices, we believe that the most important factor going forward is stability. If oil prices begin to stabilize, we believe divergences between countries will reemerge and currency movements will normalize.  

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