Market Review as of 12/31/2014

International equity markets generally ran into stiff headwinds in the fourth quarter of 2014.  When factoring in the strong U.S. dollar and weak foreign currencies, total returns for the MSCI EAFE Index1 (in U.S. dollars) were -3.5% for the quarter.  Further signs of a slowdown in Europe and China negatively affected equities across Europe, Latin America, and parts of Asia. Investors were particularly skittish about the potential impact of the sharp drop in the price of crude oil, which fell by 42% during the fourth quarter alone.  As a result, equities in oil-producing countries such as Russia, Norway, Brazil, and Columbia were especially hard hit.   Japan’s economy muddled through recession, dealing a blow to Prime Minister Shinzo Abe's much vaunted stimulus and economic reform package, but, nevertheless, his ruling party won a landslide victory in a snap parliamentary election on December 14.  Aside from oil prices, the strong U.S. dollar was a consistent theme during the quarter, with the dollar rallying by approximately 4% versus both the euro and the British pound and by 9% versus the Japanese yen.  On the positive side, equity markets in Turkey, China, India, Indonesia, and New Zealand (all oil importers) posted gains during the fourth quarter (in U.S. dollar terms).  China gained ground after the People's Bank of China indicated that it would take more steps to support economic growth/stimulus.  

The correction in equity markets was primarily felt in the cyclical sectors, especially in commodity areas such as energy and metals. What sets the current energy environment apart from past down-cycles has been the dramatic increase in production from the United States and Canada, thanks to advanced technology that allows more production from shale deposits and oil sands.  Defensive sectors such as health care and utilities also struggled, having outperformed earlier in the year.  The sole sector to post positive returns during the quarter was consumer discretionary, which includes autos and retail, and benefits from lower energy prices.

Fund Review as of 12/31/2014

The Fund returned -5.37%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended December 31, 2014, compared to its benchmark the MSCI EAFE with Gross Dividends Index,1 which returned -3.53%, and the MSCI EAFE with Net Dividends Index,1 which returned -3.57%. 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 December 31, 2014, are: one year: -14.66%; five years: 2.26%; and since inception (December 31, 2003): 4.40%.  Expense ratio, gross:  1.36%, 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 within the financials and telecommunication services sectors detracted from the Fund’s relative performance during the fourth quarter of 2014. Within the financials sector, Norway’s largest bank, DNB ASA, faced significant headwinds during the period given the substantial drop in oil prices. The current operating environment continues to present hurdles for DNB.  In addition, shares of Japan-based Sumitomo Mitsui Financial Group, Inc. have lagged the export led rally benefiting many Japanese stocks.

Stock selection within the telecommunications services sector also detracted from the Fund’s relative performance. Following a strong first nine months of the year, Korea-based SK Telecom Co., Ltd., a telecommunications services company, saw its share price underperform due to lingering competition concerns within the Korean market and negative earnings revisions.

Conversely, stock selection and a tactical underweight within the energy sector contributed to the Fund’s relative performance. By tactically shifting the Fund’s allocation to larger multinational oil and gas companies like Netherlands-based Royal Dutch Shell plc, the Fund was better able to weather the substantial drop in oil prices.

The Fund also benefited from stock selection and an underweight to the materials sector. During the quarter, shares of Asahi Kasei Corp., a Japan-based chemical company, benefited from a weakening yen. A lower yen has improved the competiveness of Japanese products in the global marketplace. 

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

Peering into 2015, global asset markets continue to be driven by macroeconomic and political factors. Growth expectations for Europe and China continue to be reduced, and the potential for another political crisis in Europe has increased, with the call for a snap election in Greece on January 25. The Greek polls are currently led by the far-left Syriza party, whose policies are likely to cause a clash with the European leadership.

Central bank policy is another area of uncertainty for 2015.  While the U.S. Federal Reserve has signaled an eventual increase in interest rates, Japan is moving in the opposite direction.  The European Central Bank remains officially undecided, but has made unofficial statements about the need for quantitative easing in the eurozone.  China also recently announced a number of easier monetary policy changes.  Expectations of divergent central bank policies have created a strong U.S. environment; this may continue through 2015.  A stronger U.S. dollar historically has been difficult for commodity prices and commodity-producing countries, many of which are developing nations.

Despite the top-down turbulence, 2014 was a solid year for corporate profits growth across most of the developed world.  A stronger U.S. dollar is positive for earnings across the United Kingdom, Europe, and Japan, as many companies have a high percentage of overseas sales.  Non-U.S. equity valuations appear attractive, relative to historical and current bond yields. 

From a sector standpoint, the Fund remains underweight both energy and materials, although we recognize that value is emerging in these areas.  The Fund is overweight health care, information technology, telecom, and utilities.

From a regional standpoint, we remain underweight Europe and the United Kingdom.  The Fund’s primary overweight is the Pacific ex-Japan region.  Emerging markets represent approximately 11% of the Fund.

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