Market Reviewas of 03/31/2016

The first quarter of 2016 was a tale of two halves for emerging markets (EM). The beginning of the quarter was a carryover from the difficult end of 2015. Continued weakness in commodities, concerns over weaker global growth, and macro imbalances in China contributed to significant downward pressure on EM currencies. The sentiment remained poor in January, and the market environment didn’t improve until early February, when the People’s Bank of China (PBC) signaled that it would not pursue a potentially disorderly devaluation of the yuan, thereby reducing fears of a global currency “war.” The stabilization of the Chinese currency, combined with the fresh monetary and fiscal stimulus measures announced by PBC, stemmed the outflows and finally calmed the markets.

What started as a rebound from PBC actions turned instead into a strong rally when commodity prices, and oil in particular, found the bottom in mid-February, after OPEC (Organization of the Petroleum Exporting Countries) signaled that an agreement to freeze oil production levels was in the works. The U.S. dollar started to weaken on the news, helping local currency returns and reducing risk perception from the adverse impact of EM currency depreciation.

Dovish monetary policies by major central banks were another factor that aided the performance of EM currencies during the period. The Bank of Japan and the European Central Bank demonstrated that they were determined to continue searching for the right combination of negative interest rates and credit-easing measures that would both support more rapid economic growth and increase inflation. The tone of the U.S. Federal Reserve (Fed) turned progressively more dovish leading into its March policy meeting, which dampened interest rate hike expectations and resulted in lower U.S. government bond yields and a weaker dollar; this further fueled the rally in EM currencies, which experienced one of the best monthly returns on record. The Barclays Global Emerging Markets Strategy (GEMS) Index1 (a general proxy for the emerging markets currency asset class) returned 4.52% for the three-month period ended March 31, 2016, compared with 2.45% in the fourth quarter of 2015. 

Fund Review as of 03/31/2016

The Fund returned 4.12%, reflecting performance at net asset value (NAV) of Class A shares, with all distributions reinvested, for the three-month period ended March 31, 2016. The Fund’s benchmark, the Barclays Global Emerging Market Strategy (GEMS) Index1, returned 4.52% 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, 2016, are: one year: -4.68%; five years: -3.12%; and 10 years: 1.27%. 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.

Overall, we increased the risk in the Fund at the beginning of the quarter in anticipation of the rebound in EM currencies. As the sentiment improved toward the middle of the period, we added risk in higher beta names in Latin America and trimmed our defensive positions in Asia.

We expected some stabilization in oil prices and commodities in general during the quarter; hence, the Fund’s overweight positioning in the Russian ruble and Colombian peso was a detriment to relative performance in the beginning of the quarter, as oil prices continued to decline in January. The Fund remained underweight the euro-tied currencies for most of the quarter, which hurt performance, as the currencies team expected the ECB to announce further stimulus measures targeting the euro.

The Fund positions in commodity linked currencies, such as Russian ruble and Colombian peso, were the biggest contributors to performance in the second half of the period, more than offsetting losses incurred in January. We increased the Fund’s positioning in Latin American currencies, which contributed to performance, as stabilization of the Chinese yuan, the recovery in oil prices, and a dovish Fed fueled the rally in higher beta currencies in the region. We increased the Fund’s position in the Korean won at the beginning of February, which helped performance. In our view, fears of a slowdown of the Chinese economy were overblown, and the South Korean currency benefited from the relative stabilization of yuan and stimulus measures announced by PBC.

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 U.S. Federal Reserve remained a driving force within fixed income markets in the first quarter of 2016. While the Fed’s liftoff provided some clarity at the end of 2015, it was followed by mostly dovish statements by Fed officials, which eventually proved to be beneficial for risk assets this quarter. We think there still remains much uncertainty regarding the pace at which the Federal Open Market Committee, the Fed’s policy-setting arm, will continue to raise rates. Most market participants expect a slow and gradual rise, as has been indicated by Fed statements.  However, the effectiveness of the tools at the Fed’s disposal, coupled with increased instability in the global financial markets, China in particular, remain a cause for concern, as Fed officials seek to normalize policy after unprecedented levels of quantitative easing in recent years.

Despite the initial overall positive market reaction to the Fed’s decision to raise rates in December 2015, investor sentiment soon turned negative, as worries about China’s sluggish growth and continued uncertainty regarding deflation in the eurozone resurfaced at the beginning of the year. The subsequent sell-off in risk assets raised doubts about the pace of the monetary policy normalization plan as laid out by the Fed late in 2015. As sentiment improved toward the end of the quarter, investors likely will continue to monitor closely key economic data, with a particular focus on inflation, for an indication that the Fed might have sufficient justification to accelerate its interest rate tightening cycle. Similarly, investors will be looking for reassurance that if U.S. growth stagnates, the Fed will slow its progression in order to support the economy. Finally, although fears have abated about China’s economic slowdown, and a consequent “hard landing,” the economic situation there remains an area of concern, as the country has the ability to disrupt global markets, including U.S.-centric fixed income and equity markets.

Emerging markets have been the biggest beneficiary in the recent reduction in volatility and we are near term constructive on the asset class. Although fundamentals remain lackluster, we think that the risk sentiment turned more supportive, as commodity prices rebounded from the lows and stabilization in the Chinese currency should continue to serve as a major positive contributor to the performance of emerging markets. It remains to be seen, however, if the current positive sentiment is sustainable in the long run, thus later in the quarter we started to tactically reduce exposure to commodity sensitive currencies in order to realize gains and reduce portfolio risk.  

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