Market Reviewas of 03/31/2015

Currency movements in both developed and emerging markets continued to reflect the actions, as well as the anticipated actions, of the major central banks, among which monetary policy continued to diverge widely. 

The U.S. Federal Reserve (the “Fed”), in addition to a less accommodative monetary policy manifested, in part, with an end to its asset purchases in October 2014, made clear its quest to limit forward guidance and become more data-dependent—a shift that, in the quarter just ended, increased market uncertainty as to the timing of the first interest-rate hike.

Elsewhere, the European Central Bank began in March to purchase sovereign bonds as part of its attempt to add liquidity to the eurozone economies.  The euro subsequently depreciated significantly as interest rates across the core of the region turned negative for some maturities.

Meanwhile, the U.S. dollar rose almost 9% against the currencies of its major trading partners (as measured by the Dollar Index Spot Rate1) and more than 4% versus emerging market currencies (as measured by the Barclays Global Emerging Market Strategy (GEMS) Index2).

During the first quarter, 12 emerging market central banks reduced interest rates, while six out of 10 central banks in the major currency zones eased policy, magnifying the policy differential between the United States and almost everywhere else.

The Barclays Global Emerging Market Strategy (GEMS) Index (a general proxy for the emerging market currency asset class) returned -3.55% for the three-month period ended March 31, 2015, compared with -4.94% in the fourth quarter of 2014.     

Fund Review as of 03/31/2015

The Fund returned -2.81%, reflecting performance at net asset value (NAV) of Class A shares, with all distributions reinvested, for the three-month period ended March 31, 2015. The Fund’s benchmark, the Barclays Global Emerging Market Strategy (GEMS) Index, returned -3.55% 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 March 31, 2015, are: one year: -10.96%; five years: -1.31%; and 10 years: 1.14%. Expense ratio: 0.98%.

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 to the euro and euro-dependent countries helped performance, as these currencies generally depreciated during the quarter, as the European Central Bank announced a quantitative easing program. The Fund’s overweight to higher-yielding Asian-based currencies benefited, as the yield carry proved beneficial during the quarter. The best performing of these currencies was the Indian rupee. Although the Indian Central Bank was in the midst of an easing monetary policy, the macroeconomic picture had improved to such an extent that the rupee still appreciated. The Fund’s underweights to Singapore and South Korea benefited performance as both countries pursued easy monetary policies.

The primary detractors from performance stemmed from idiosyncratic risk. The Fund’s overweight to Brazil during the first two months of the quarter detracted from performance, as corruption and political scandals outweighed the positive direction of the country’s fiscal policy. An overweight to Turkey also detracted from performance due to unexpected pressure to cut interest rates. We had anticipated that the falling price of oil, a shrinking current account deficit, and lower inflation would lead to an appreciation of the Turkish currency. Lastly, a slight overweight to the Russian ruble during the first few weeks of the quarter was a detriment to performance, as the currency continued to depreciate prior to a rebound later in the quarter in part due to a cease-fire agreement with Ukraine and the stabilization in oil prices.

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

If emerging market central bank accommodation is close to having run its course, the environment might turn more beneficial for EM currencies. This is in contrast to many developed countries, which are likely to face even easier monetary policies, unlike the U.S. where rate hikes are widely anticipated beginning in the second half of 2015.

Oil and commodity prices fell significantly during the latter half of 2014, and remain at depressed levels entering the second quarter of 2015. We anticipate that these lower commodity prices should provide a tailwind to currencies overall, and help promote continued economic expansion. The lower price of oil, in particular, should benefit many emerging market economies, with the exception of those that rely heavily on oil-export revenue. Therefore, we remain focused on those economies that do not rely on oil as an export but are instead net importers of oil.

The Fed’s actions over the next several months will be watched with great scrutiny and these actions will have significant ramifications for emerging market currencies. We anticipate that those countries whose central banks have the capacity to hike interest rates in response to Fed rate hikes likely will benefit in terms of an appreciating currency. As a result, we will focus on countries whose monetary policies are most aligned with those of the United States, such as Mexico and Chile. We anticipate that some countries, such as Russia and Brazil, that have recently hiked interest rates will not have the capacity to continue, and will suffer as a result. 

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