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 2.03%, 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 All Country World Ex-U.S. Value Index with Gross Dividends,3 which returned 1.50%, and the MSCI All Country World Ex-U.S. Value Index with Net Dividends,3 which returned 1.43%.  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: -16.80%; five years: -0.59%; and since inception (June 30, 2008): -0.90%. Expense ratio, gross: 1.16%, 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 financials and telecommunications sectors contributed to the Fund’s relative performance during the fourth quarter of 2015. Within the financials sector, the Fund was supported by investments in the Asia-Pacific real estate space as well as the European insurance sector. The share price of Australian real estate firm Mirvac Group increased after its chairman announced that the company was looking at ways to fully realize the value of its business, which was a positive development in the eyes of the market. In addition, Longfor Properties Co. Ltd., a real estate development company headquartered in Beijing, saw its share price rise on the back of strong rental income growth.

Shares of Israeli telecommunications group Bezeq International Ltd. rose, given the company’s competitive product line up and strong cash flows. The company’s recent outperformance was driven by regulatory developments in Israel, where the government may allow Bezeq to merge its artificially separated wireless, fixed, international, and cable businesses, which could provide significant cost savings. Spark New Zealand Ltd. was another strong performer, having delivered substantial growth in its mobile business in a very short period. Estimates have been upgraded, and free cash flows also improved, while the firm finished its share buyback program in December.

Conversely, stock selection and a slight overweight position within the energy sector detracted from the Fund’s relative performance. Within the sector, share-price declines were experienced by Canadian oil and natural gas producers Whitecap Resources Inc. and ARC Resources Ltd. The price of oil fell significantly as the quarter progressed, which hurt both companies, and this prompted concerns among investors about the sustainability of the companies’ dividends and cash flows. Indeed, Whitecap Resources trimmed its capital expenditure outlook for 2016.

Finally, stock selection in the information technology sector hurt the Fund on a relative basis. Shares of VTech Holdings Ltd., a Hong Kong-based cordless phone manufacturer, dropped, after the company’s database was hacked by an unauthorized party.

 

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, holding overweight positions in Belgium, Spain, and Switzerland, which have relatively high dividend yields. The United Kingdom remains a country of particular interest, given the high dividend payout ratios.

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. We maintain the Fund’s underweight position in Japan for these reasons, as well as the fact that, in aggregate, companies tend to have lower payout ratios.

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 maintains an underweight to the mining sector, and in the past quarter has moved to an underweight in the energy sector, given the muted outlook for the energy forward price in 2016, 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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