Market Review as of 03/31/2016

The U.S. equity market (as represented by the S&P 500® Index1) rebounded from its worst start to any year to finish modestly higher during the first quarter of 2016. After the Federal Reserve (the Fed) raised interest rates for the first time since 2006, in December 2015, it decided to hold its benchmark interest rate unchanged during the first quarter, citing global financial market weakness as a concern. A disappointing corporate earnings season contributed to investor uncertainty during the quarter. According to research from FactSet, fourth quarter 2015 earnings suffered a slight year-over-year decline, and less than 70% of companies in the S&P 500 Index reported earnings above their mean estimates. Reasonably constructive economic data during the period helped offset some of this sluggishness. According to the third estimate from the Bureau of Economic Analysis,  U.S. real gross domestic product (GDP) in the fourth quarter expanded by 1.4%,2 an upward revision from previous estimates, with a rise in personal consumption expenditures and residential fixed investment among the primary contributors. 

The Fed noted that U.S. economic activity, as a whole, continued to expand in most districts around the country between December 2015 and February 2016. The majority of districts reported increased consumer spending and positive developments in their residential estate markets. Conversely, manufacturing activity struggled in a number of regions due in large part to further weakness in the energy sector.3

International equities4 also experienced an uneven first quarter, led by notable volatility in China’s capital markets at the beginning of the quarter. Chinese equities suffered sharp losses to start 2016, triggering trading halts, and concerning investors who were already skeptical of the market’s growth prospects. In January, the Bank of Japan introduced negative rates on excess reserves in an effort to stimulate economic growth and support Japanese markets during this tumultuous period. In Europe, markets were bolstered by the European Central Bank’s announcement in March that it would add to its existing monetary easing program.

The S&P 500 returned 1.35% during the first quarter. Of the 10 major sectors, only the health care and financials sectors underperformed the broader market. Value stocks5 outperformed growth stocks,6 while large cap stocks7 outperformed small cap stocks.8

 

Fund Review as of 03/31/2016

The Lord Abbett Fundamental Equity Fund returned -0.42%, reflecting the performance at the net asset value (NAV) of Class A shares with all distributions reinvested for the quarter ended March 31, 2016, compared to the Fund’s benchmark, the Russell 1000® Value Index,9 which returned 1.64% for the same period. Average annual total returns, which reflect performance at the maximum 5.75% sales charge applicable to Class A share investments and include the reinvestment of all distributions, as of March 31, 2016, are: one year: -8.70%; five years: 5.82%; and 10 years: 5.54%. Expense ratio: 0.97%.

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.

Stock selection within the financials sector detracted from relative performance during the period. Shares of Citizens Financial Group, Inc., a retail bank holding company, fell due to changes in expected interest rate movements, despite a solid earnings report.  In addition, shares of East West Bancorp, Inc., a bank holding company, were also negatively affected by interest rate movements this past quarter. Within the consumer staples sector, shares of Mondelez international, Inc., a snack food and beverage company, stumbled due to near-term macroeconomic challenges despite strong organic sales growth.

Stock selection within the consumer discretionary sector contributed to the Fund’s relative performance during the period. Shares of Time Warner Inc., a media and entertainment company, benefited from gains from its HBO segment and additional Turner affiliate fee step-ups. In addition, shares of Target Corporation, a provider of differentiated merchandise at discounted prices, increased following a strong fourth quarter earnings report, as same-store sales were better than expected and traffic was positive for a fifth consecutive quarter. Within the telecommunication services sector, shares of Verizon Communications Inc., a communications and entertainment products and services company, benefited from stable 2016 growth guidance and positive momentum from its AOL segment.

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 believe the domestic equity market as a whole to be near a fairly valued level owing to an improving economic backdrop. However, a number of individual companies are still underappreciated by consensus, allowing for compelling idea generation and driving our belief that individual stock picking should be the primary driver of alpha in the portfolio. We continue to focus on U.S.-centric companies that have financial and capital management flexibility to compete strategically. As a result of this view, we are paying close attention to stock-specific decisions, near-term fundamentals, and focusing on the rigorous execution of our buy/sell discipline. 

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