Market Review

as of 03/31/2016

Global equity market performance was mixed in the first quarter of 2016. The MSCI EAFE Index1 fell by 3.01% (in U.S. dollar terms). Emerging markets stocks (as represented by the MSCI Emerging Markets Index2) performed positively during the quarter, rising by 5.71% (in U.S. dollar terms), thereby outperforming developed markets over the course of the first quarter.

Within developed markets, the United Kingdom and France were outperformers, while Japan and Germany underperformed. With regards to sector performance, energy and consumer staples outperformed, while financials and health care stocks lagged the broader index. After a difficult start to the year, global equity markets recovered some of the losses in the second half of the quarter as investors were encouraged by stabilizing oil prices, slowing, but positive, economic growth, and accommodative central bank policies.

U.S. dollar weakness was one of the key themes of the quarter; the currency fell by nearly 5% against the euro and by almost 7% against the Japanese yen, marginally reversing the moves seen over the past five years. After the U.S. Federal Reserve raised interest rates in December 2015, it decided to hold its benchmark interest rate unchanged during the first quarter, citing softer global economic growth. The weaker U.S. dollar supported crude oil prices, which rallied in the first quarter, moving closer to $40 per barrel, having fallen throughout 2015, while prices were supported by a drawdown in U.S. crude inventories. Copper and iron ore prices also rose over the period.

Following weak performance in the first two months of the year, European equity markets steadied in March after the European Central Bank announced that it would increase its existing monetary easing program from €60 billion to €80 billion per month. From the time of that announcement to the end of the quarter, the euro rallied against the U.S. dollar.

In January, the Bank of Japan introduced negative rates on excess reserves in an effort to stimulate economic growth. However, despite the action initially supporting the Japanese equity market, expectations of further quantitative easing were not enough to keep returns in positive territory during the quarter.

Fund Review as of 03/31/2016

The Fund returned -2.89%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended March 31, 2016, compared to its benchmark the MSCI EAFE with Gross Dividends Index,3 which returned -2.88%, and the MSCI EAFE with Net Dividends Index,3 which returned -3.01%. 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: -14.18%; five years: -1.01%; and 10 years: 0.38%.  Expense ratio, gross:  1.29%, and net: 1.12%.

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 in the information technology sector contributed positively to the Fund’s relative performance. Shares of Chinese web services company Baidu.com, Inc. rose after the firm announced that it was seeing an improvement in operating margins. The stock was also supported by an improvement in Chinese equity markets in the second half of the quarter. In addition, the share price of Dutch semiconductor company ASML Holding N.V. rallied after the company announced an increased dividend and share buy-back program, while fourth quarter 2015 operating profit and net income results beat consensus estimates.

Security selection in the utilities sector also supported returns. During the quarter, Snam S.p.A., an Italian natural gas infrastructure company, benefited from better than expected net profit for 2015, as well as the announcement of a potential de-merger of its gas distribution business Italgas. Furthermore, the Fund’s underweight to the financials sector added to relative returns, as the sector was a weak performer in the index over the period.

Conversely, stock selection in the industrials sector adversely affected relative performance during the first quarter of 2016. Shares of Ashtead Group plc, a British industrial equipment rental company, lagged in the period.  The stock was hurt by its peer United Rental’s cautious outlook, and analysts’ negative earnings revisions. In addition, French multinational aerospace company Safran S.A. saw its share price decline on the back of lowered earnings expectations across its markets.

Similarly, our security selection in the consumer discretionary sector detracted from the Fund’s relative return. Shares in British media company ITV plc. fell during the quarter, despite the announcement of a special dividend of £0.10 per share. The firm reported a weaker than expected outlook for the first quarter of 2016, while equity markets were concerned about the ongoing “Brexit” risk. In addition, Japanese automaker Honda Motor Co. Ltd. was pressured by ongoing airbag recalls and growing expectations of a peak in global auto sales. An underweight to the materials sector as a whole slightly hurt the Fund’s relative return, given that the sector outperformed the broader index.

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

Global equity markets recovered during the first quarter, as economic news from the United States and China, the world’s two largest economies, was better than expected. Looking forward, the International Monetary Fund continues to see a prolonged period of slow global growth. On balance, continuing economic growth in China and a stable currency would give the developing world a better growth outlook and we shifted the Fund to a broadly neutral position in the materials sector.

Modest global growth has encouraged a number of central banks around the world to enact unconventional monetary policies; almost 25% of global gross domestic product (GDP) is represented by countries with negative central bank interest rates. These negative rates across parts of Europe and Japan have put significant pressure on commercial banks’ profits in these countries. As a result, the Fund is marginally underweight financials, and Japanese equities in aggregate. In addition, the Fund is underweight consumer staples, energy, financials, health care, and utilities, while it is overweight in the consumer discretionary, industrials, information technology, and telecommunications sectors.

As always, there are certain risk events that we are tracking closely.  The referendum on June 23, 2016, on whether the United Kingdom will stay in the European Union is an important event for the United Kingdom, Europe, and the West.  A “leave” vote would cause growth to slow within the United Kingdom, as investment and trade would likely slow. Over the quarter, we shifted the Fund to a broadly neutral position in the United Kingdom, having been overweight previously.

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