Market Review

as of 12/31/2015

Global equity markets rallied in the fourth quarter of 2015. The representative benchmark, the MSCI EAFE Index,1 rose by 4.71% (in U.S. dollar terms). Regionally, Australia, Germany and Belgium were the main outperformers, while Spain, Italy, and the United Kingdom lagged. With regards to sector performance, information technology and industrials outperformed, as materials and energy stocks continued to underperform during 2015.

Following weak performance in the third quarter, global equities rebounded at the beginning of the fourth, in October. European equity markets were bolstered by expectations of further European Central Bank (ECB) monetary stimulus, after ECB president Mario Draghi’s announcement that the ECB would consider extending the quantitative easing (QE) program, depending on economic growth in the eurozone. The ECB subsequently cut the deposit rate in the eurozone, from -0.2% to -0.3%, and extended the QE program for an additional six months, while data over the quarter continued to show an improvement in activity in the services and manufacturing sectors.

Japanese stocks rose, as expectations of further quantitative easing by the Bank of Japan (BoJ) increased, while an upward revision to third quarter GDP growth showed that the country narrowly avoided a technical recession. During the quarter, Prime Minister Shinzo Abe announced that he would increase the country’s minimum wage, while further asset purchases by the BoJ will largely be focused on domestic firms that are making investments in human and physical capital.

In December, the U.S. Federal Reserve raised interest rates by 0.25%, the first such move since 2006, which supported equity markets in aggregate, as economic data points during the quarter continued to suggest a strengthening U.S. economy.

Emerging markets stocks (as represented by the MSCI Emerging Markets Index2) were broadly flat during the quarter. The index rose by 0.04% (in U.S. dollar terms), thereby underperforming developed markets over the course of the fourth quarter. Indonesia and Malaysia outperformed, while South Africa and Greece fell sharply during the period. The People’s Bank of China cut interest rates for the sixth time in a year as it seeks to support economic growth.

Crude oil prices fell further after a very volatile third quarter, with WTI crude oil touching its lowest level in over a decade, pressured by ample North American oil supply, and a negative outcome in the December OPEC meeting, at which the organization failed to cut output limits. Copper and iron ore prices also declined.

Fund Review as of 12/31/2015

The Fund returned 3.23%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended December 31, 2015, compared to its benchmark the MSCI EAFE with Gross Dividends Index,3 which returned 4.75%, and the MSCI EAFE with Net Dividends Index,3 which returned 4.71%. 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, 2015, are: one year: -8.33%; five years: 0.43%; and 10 years: 1.58%.  Expense ratio, gross:  1.30%, 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 telecommunication sector adversely affected relative performance during the fourth quarter of 2015. Shares of South Korean wireless telecommunications operator SK Telecom Co., Ltd. lagged in the period.  The Korean mobile telecom industry is experiencing significant changes, which, despite being long-term positive developments, hurt the stock in the quarter. Consensus estimates for a listed associate of the company also fell, pressuring the earnings outlook for SK Telecom. In addition, Scandinavian telephone and mobile network company TeliaSonera AB saw its share price decline as the firm may suffer from legal and regulatory penalties that could affect the value of its assets. Furthermore, solid and improving fundamentals in TeliaSonera’s core Scandinavian operations have been undermined by weakness in its emerging markets business.

Similarly, our security selection in the industrials sector detracted from the Fund’s relative return. Shares in French multinational aerospace and security company Safran S.A. fell over the quarter after the French government cut its stake in the firm as part of a plan to reduce debt and free up funds. In addition, an overweight to the utilities sector as a whole slightly hurt the Fund’s relative return, given that the sector underperformed the broader index.

Conversely, stock selection in and an overweight to the information technology sector contributed positively to the Fund’s relative performance. Shares of Chinese web services company Baidu.com, Inc. rose sharply after the firm announced better-than-expected earnings growth for the third quarter. Revenue growth was robust, and guidance was in line with expectations. In addition, the share price of German software corporation SAP SE rallied, as the company exceeded third quarter earnings forecasts, with its cloud business a particularly impressive segment over the period.

Security selection in the financials sector also supported returns; Japanese homebuilder Daiwa House Industry Co., Ltd. benefited from a positive earnings report released in November, which showed strong operating profit growth and upwardly revised guidance for the full year. Furthermore, the Fund’s underweight to the materials sector added to relative returns, as the sector was a weak performer in the index during the fourth quarter.

 

Outlook

As 2015 draws to a close, investors are now asking “What’s next?” A strengthening U.S. dollar, rising U.S. interest rates, falling global commodity prices, and a slowing Chinese economy have all added to an uncertain investment outlook for 2016. Most of these concerns are increasingly well understood by markets and investors.

Europe’s economy continues to improve. The ECB’s QE program is less than one year old, and should continue to be supportive of the broader economy. Valuation in many parts of Europe remains attractive, and we continue to find new investments in the region.

Japanese companies showed significant progress with regards to corporate governance in 2015; in our view, they need to remain focused on returning excess cash to shareholders in the future. Cyclical companies with significant exposure to China’s fading investment boom will likely continue to struggle. The Japanese yen is unlikely to continue to weaken materially from current levels, yet the economy will need to find additional drivers for 2016.

Falling commodity prices are generally helpful for the developed world, particularly for consumer-related companies. China’s investment slowdown has had a dramatically negative impact on metals prices. Rising North American supply and political conflicts within OPEC have depressed oil prices for the past 18 months. The Fund remains underweight the energy and mining sectors, as well as the industrials sector, which depends on these two areas for future growth.

China announced an important change to its currency regime in December. In recent years, China has operated with a de facto peg to the U.S. dollar. As a result, China’s currency has appreciated, along with the U.S. dollar, relative to most other global currencies over the past two years. With the change in U.S. interest rate policy, China has signaled that it no longer desires a U.S. dollar peg, favoring tracking a basket of currencies. A weaker Chinese currency, which is increasingly expected, could put additional pressure on the developing world and commodity producers. 

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