Market Reviewas of 03/31/2015

Emerging markets (EM) local currency bonds largely reflected 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.  Interest rates across the core of the region turned negative for some maturities.  German rates were negative as far out as the seven-year maturity sovereign bond, while other countries experienced negative rates out to five years.  This increased the demand for relatively higher-yielding debt on the periphery of the eurozone, as well as some local currency-denominated EM bonds. 

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 asset class of EM local currency bonds (as represented by the JPMorgan GBI-EM Global Diversified Index1) returned  -3.96% in the three-month period ended March 31, 2015, compared with -5.71% in the fourth quarter of 2014. 

Fund Review as of 03/31/2015

The Fund returned -4.36%, reflecting performance at the 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 JPMorgan GBI-EM Global Diversified Index1, returned -3.96% 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: -14.38%; and since inception, June 28, 2013: -8.65%. Expense ratio, gross: 3.01%, and net: 1.05%.

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.

In general, our foreign currency exposure was the largest detractor to overall performance of the Fund. We maintained an overweight to the Brazilian real and the currency depreciation led to a negative return for the Fund. Turkish bonds and the lira were two of the larger detractors from overall performance, as political pressure from Turkish president Recep Tayyip Erdogan weighed heavily on Turkey’s central bank. Our underweight to the Russian ruble hurt overall performance, outweighing the positive effect of our bond positioning in the region. Despite stumbling in the first few weeks of the quarter, the ruble was one of the top performing currencies of the quarter, as Russia reached a cease-fire deal with Ukraine.

Our bond positioning contributed positively to performance overall. Our pair trade of overexposure to Romanian bonds and underexposure to Polish bonds was a positive contributor. Polish yields reached such low levels that the Polish central bank only cut interest rates once, while Romania cut interest rates several times during the quarter, as its higher risk premium gave the central bank more capacity to ease. Underexposure to the currencies of both Poland and Romania helped Fund performance. Overexposure to bonds more correlated to U.S Treasury yields, such as Indonesia, South Africa, and Russia, benefited performance, as their yields fell in response to falling U.S. Treasury yields. Last, our Asian positioning in currencies helped overall performance.

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

We anticipate the likelihood that the Fed will commence hiking rates in the second half of 2015, which could lead to a more sustained increase in Treasury yields. If central bank accommodation in certain emerging market countries is also close to having run its course, the environment might turn less favorable for their debt.

We will look to focus on bonds in countries where monetary accommodation is still likely. This will include those countries whose monetary policies are not contingent on Fed action. For example, we will look to avoid countries such as Mexico and Chile, which are more likely to hike interest rates in accordance with the United States, and instead will focus on countries whose yields still have room to decline or remain relatively stable.

Certain countries that may be negatively affected by a less accommodative Fed may actually outperform due to macroeconomic improvements resulting from the lower price of oil. Indonesian bonds are one such example that may ultimately end up benefiting from an improving economic picture, despite potential rate hikes in the United States. Brazil is another country that we may look to add exposure to, as the fallout from political and corporate scandals subsides. We will continue to hedge currencies where our views on the bonds and currency diverge.  

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