Market Review as of 12/31/2014

The U.S. equity market (as represented by the S&P 500® Index1) advanced during the fourth quarter of 2014, bolstered by reports indicating growing strength in the U.S. economy. But the market became more volatile as well, with falling oil prices and global economic weakness raising concerns. U.S. real gross domestic product (GDP) in the third quarter expanded 5.0%, (according to the third estimate by the U.S Bureau of Economic Analysis), exceeding Wall Street expectations.2  Business investment and consumer spending, particularly on durable goods, were among the primary contributors. 

The Federal Reserve (the “Fed”) noted that U.S. economic activity expanded around the country, with most districts reporting gains in employment and advances in consumer spending. Manufacturing, construction, and real estate activity also expanded, while lower oil prices presented concerns in two districts.3

Elsewhere, the eurozone narrowly avoided slipping back into recession, and falling prices led to concerns about deflationary pressures.  In Japan, economic activity contracted, making it likely that this year’s planned tax hike will be delayed. In China, the economy appeared to decelerate to its slowest pace in nearly 25 years, prompting the central bank to cut its official interest rate for the first time in two years.

The S&P 500 Index rose 4.9% during the quarter, but remained below new highs set earlier in the quarter. Gains occurred in seven of 10 major sectors. The energy, materials, and telecom sectors underperformed the broader market. Value stocks (as represented by the Russell 3000® Value Index4) edged out growth stocks (as represented by the Russell 3000® Growth Index5). Large cap stocks (as represented by the Russell 1000® Index6) underperformed small caps (as represented by the Russell 2000® Index7). 

Fund Review as of 12/31/2014

The Lord Abbett Mid Cap Stock Fund returned 6.48%, reflecting the 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 benchmarks, the Russell Midcap® Value Index,8 which returned 6.05%, and the S&P MidCap 400® Value Index,9 which returned 6.88%.  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: 5.19%; five years: 13.61%; and 10 years: 5.90%. Expense ratio: 1.01%.

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.

Security selection within the materials and information technology sectors was a primary driver behind the Fund’s relative outperformance. Shares of materials holding Axalta Coating Systems Ltd., a coating and paint system provider, experienced robust appreciation following its initial public offering (IPO) in November. Its IPO coincided with the steep decline in oil prices, which in turn is expected to reduce input costs that are tightly correlated to the price of oil. Another notable contributor from the materials sector was International Paper Co., a global paper and packaging manufacturer. International Paper’s stock price appreciated after the company announced strong third quarter earnings in addition to plans to explore the feasibility of converting parts of the company’s operations to a Master Limited Partnership, a structure change that would advantageously affect shareholders.

Additionally, information technology holding Electronic Arts Inc. contributed to the Fund’s performance. Shares of the game software developer rose after a positive earnings report that resulted in an increase in analysts’ estimates based on expectations for continued strong sales and margin expansion.

Conversely, security selection within the industrials and health care sectors detracted from the Fund’s relative performance. In particular, shares of industrials holding Armstrong World Industries, Inc., a producer of flooring and ceiling products, fell early in the quarter as Armstrong was forced to lower its outlook due to weakness in its flooring unit, specifically its European flooring business. Shares of fellow industrials holding Alliant Techsystems Inc., an aerospace and armament company, also fell for the period. Alliant’s fiscal-year second quarter earnings report revealed a drop in recreational ammunition sales that came in short of analysts’ forecasts.

From the healthcare sector, hospital operator Community Health Systems, Inc. experienced a slump in its share price despite reporting solid third quarter earnings. November brought a number of challenges to Community Health Systems including the results of mid-term congressional elections, as well as the U.S. Supreme Court agreeing to hear a case against the Affordable Care Act (ACA), both of which present potential challenges for the ACA.

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 that the U.S. economy maintains the most favorable economic outlook among developed countries. Furthermore, we expect the Federal Reserve to begin raising interest rates at some point during 2015 provided that the economy continues to strengthen as it has over the course of 2014. Conversely, Europe continues to struggle, as does Asia, which must contend with slower growth in China and stagnation in Japan.

The materials sector, and the specialty chemicals and steel-related industries in particular, is now the Fund’s largest overweight relative to its benchmark, the Russell Midcap® Value Index, because of attractive company-specific investment opportunities within these groups. In addition, the Fund’s investments in the steel industry should benefit from an uptick in U.S. non-residential construction. The portfolio remains overweight the industrials sector relative to its benchmark with an emphasis on aerospace companies, which may benefit from an extended aerospace cycle as well as potential consolidation, and trucking companies, which we believe may gain from favorable U.S. demand and pricing dynamics. The portfolio is underweight in the consumer staples sector relative to its benchmark, as rich valuations and a lack of strong fundamental drivers led us to seek value elsewhere. The utilities sector remains the Fund’s largest underweight because of concerns regarding rising interest rates, expensive valuations, and the expansion of distributed generation.

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