Market Reviewas of 12/31/2015

Emerging markets (EM) had faced serious headwinds in the end of the third quarter of 2015, which was dominated by the People’s Bank of China’s (PBC) surprising decision to devalue the yuan in August 2015 and the consequent ripple effect it had on the world economy, and emerging markets in particular.

The beginning of the fourth quarter, however, marked a strong turnaround for EM currencies with positive effects spilling into local bond markets as well. The JPMorgan GBI-EM (GBI-EM) Global Diversified Index1 (a general proxy for the EM domestic currency government bonds) returned 4.52% in October 2015, compared with -2.97% in the previous month. The rally was fueled by a combination of technical support from investors covering their short positions and accommodative central bank policies in the majority of the emerging markets countries. The dovish tone from the U.S. Federal Reserve (Fed) in the beginning of the quarter and expectations of further easing from the European Central Bank (ECB) further contributed to the reversal of the selling trend, which ran out of steam at the end of September. As fears about Chinese growth abated somewhat, Asian currencies performed well in the first two months of the fourth quarter with the Indonesian rupiah being a prominent outperformer. Latin American currencies also rebounded somewhat, albeit at a slower pace.

Toward the end of the period, the Fed’s tone turned considerably more hawkish, as U.S officials signaled their intention to raise interest rates for the first time in years. Overall, the effect on EM currencies was muted, as the move was extensively telegraphed and, more importantly, the Fed had indicated that upcoming interest rate hikes would be moderate and gradual. The Barclays Global Emerging Markets Strategy (GEMS) Index2 (a general proxy for the emerging markets currency asset class) returned 2.45% for the three-month period ended December 31, 2015, compared with -6.79% in the third quarter of 2015. The effect of the Fed policy on the local bond markets, however, was much more profound. After a strong start of the quarter, local currency sovereign bonds, as measured by GBI-EM Index, declined in November and December to finish the quarter flat.

The weakness in commodities continued in the fourth quarter, resulting in increased pressure on EM currencies, especially toward the end of the period. Idiosyncratic risks remained, as economic and political situation further deteriorated in Russia, Brazil, and South Africa, resulting in currency underperformance in these countries. The presidential elections in Argentina ended with a surprise win for the opposition. The new president announced a number of measures to revive the economy, including the elimination of foreign exchange-control mechanisms for the currency, which resulted in the sharp devaluation of the Argentine peso at the end of the quarter.

Fund Review as of 12/31/2015

The Fund returned -0.18%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the three-month period ended December 31, 2015. The Fund’s benchmark, the JPMorgan GBI-EM Global Diversified Index,1 returned -0.01% 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, 2015, are: one year: -18.20%; and since inception (June 28, 2013): -11.00%. 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.

Overall, the Fund’s exposure to commodity price-driven currencies, such as the Colombian peso and the Russian ruble, detracted from the performance in the quarter. The Fund’s overweight position in South African bonds also hurt performance, as the political situation there deteriorated, causing investors to further question the credibility of the government and its economic policies. 

We continued to maintain a reduced exposure to U.S. interest rates for most of the quarter, which contributed to performance, as the Fed delivered on its monetary policy guidance and raised interest rates in December. We remained underweight in Latin America, Brazil in particular, during the quarter. This underweight contributed to performance, as political instability and economic woes continued to plague the country and the region.

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 Fed reasserted itself as the major guiding policy force in the fourth quarter, particularly within fixed-income markets. While the Fed’s liftoff provided some clarity, there still remains uncertainty regarding the pace with which the FOMC will continue to raise rates. Most market participants expect a slow and gradual rise, as has been indicated by Fed language. However, the effectiveness of the tools at the Fed’s disposal remains a cause for concern, as it seeks to normalize policy after unprecedented levels of quantitative easing in recent years. As uncertainty persists regarding the state of the global economy, investors increasingly are calling into question how insulated U.S. growth can remain from the broader global economy still seeking to fully recover from the financial crisis of 2008–09.

Overall, entering 2016, we are cautiously optimistic about emerging markets. We expect some stabilization in commodity prices to occur this year which should be supportive of EM, hence we continue to maintain slight overweight to commodity price-driven currencies in the portfolio. China remains an area of significant concern, as the country has the ability to disrupt global markets, and the situation there has a particularly profound effect on emerging markets economies.

Finally, we do not expect additional significant monetary stimulus from ECB or the Bank of Japan in 2016 on top of the already announced measures.  We think that monetary divergence theme will start fading in 2016 and will not be as significant a factor as it proved to be in 2015.

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