Market Review as of 12/31/2015

The U.S. equity market1 advanced during the fourth quarter of 2015, rebounding from the correction experienced in the previous quarter. Markets were supported during the period by a reasonably positive earnings season in which 74% of the companies in the S&P 500 beat consensus earnings estimates. In December, the U.S. Federal Reserve (Fed) raised interest rates for the first time since 2006, as economic data during the quarter continued to suggest a strengthening domestic economy. Specifically, U.S. real gross domestic product (GDP) in the third quarter expanded by 2.0%2, with a rise in personal consumption expenditures and state and local government spending among the primary contributors. 

The Fed noted that U.S. economic activity, as a whole, continued to increase at a modest pace around the country between October and December. Most districts reported improving growth in consumer activity, and positive developments in their residential and commercial real estate markets. Conversely, manufacturing activity struggled in a number of regions3.

International equities4 also rebounded in the fourth quarter, as generally accommodative monetary policies around the globe helped lift equity markets. In Europe, markets were bolstered by the European Central Bank’s announcement that it would be willing to increase the size of its quantitative easing program. In Japan, expectations of further quantitative easing by the Bank of Japan increased, while an upward revision to third quarter GDP growth showed that the country narrowly avoided a technical recession. Finally, the People’s Bank of China cut interest rates for the sixth time in a year, as it sought to support economic growth in its economy.

The S&P 500 returned 7.04% during the fourth quarter. Of the 10 major sectors, the materials, consumer staples, healthcare, industrials, and information technology sectors outperformed the broader market. Value stocks5 underperformed growth stocks6, while large cap stocks7 outperformed small cap stocks8

 

Fund Review
as of 12/31/2015

The Lord Abbett Mid Cap Stock Fund returned 2.92%, reflecting the 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 benchmarks, the Russell Midcap® Value Index,9 which returned 3.12%, and the S&P MidCap 400® Value Index,10 which returned  2.21%.  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: -9.10%; five years: 7.77%; and 10 years: 4.69%. 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.

The performance of select individual positions in the information technology and industrials sectors contributed to the Fund’s underperformance, relative to its benchmark, the Russell Midcap® Value Index, during the three-month period. Specifically within the information technology sector, Fidelity National Information Services, Inc., a global provider of banking and payments technologies, detracted from relative performance. A disappointing earnings report, caused largely by poor management execution, resulted in shares of Fidelity National selling off during the quarter. However, we continue to believe the company has attractive organic growth prospects and the potential for margin expansion.  In addition, the recent acquisition of SunGard brings incremental cross-selling and cost-cutting opportunities. The Fund’s position in CSRA, Inc. an information technology company also detracted from relative performance. A market dislocation, related to CSRA’s separation from Computer Sciences Corp., caused shares of CSRA to decline during the period. Longer term, we believe CSRA remains undervalued.

Within the industrials sector, Kennametal, Inc., a supplier of tooling, engineered components, and advanced materials detracted from relative performance.  During the period, company management issued a warning related to its fiscal 2016 outlook, caused by further deterioration in its end-markets.

Conversely, security selection to the financials sector contributed to the Fund’s relative performance. Specifically within the financials sector, XL Group plc, a global property and casualty insurer and reinsurer, contributed to relative performance. Shares of XL Group continue to benefit from synergies related to the acquisition of Catlin Group Limited. The Fund’s position in Duke Realty Corp., a real estate investment trust, also contributed to relative performance. Duke Realty continues to benefit from its re-positioned industrial and medical office property portfolio and improving balance sheet.

Also contributing to the Fund’s relative performance was stock selection in the energy sector. Shares of Newfield Exploration Co., an independent energy company, advanced during the period, as the market gained a better appreciation for the company’s mid-continent assets.

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 economic outlook for the United States remains muted, but favorable relative to most global economies, given the continued volatility and uncertainty around macroeconomic and geopolitical issues. We continue to closely monitor risks to the Fund, including central bank-policy decisions, commodity price instability, and currency/interest rate volatility.  

The information technology sector is the Fund’s largest overweight position, relative to its benchmark, the Russell Midcap® Value Index. The Fund is overweight communication services and IT services, while remaining underweight the software industry. The Fund also is overweight the consumer discretionary sector. The Fund is overweight hotels and leisure, housing, and housing-related business, while remaining underweight retail and media industries. The industrials sector remains one of the Fund’s largest underweight positions, due to deteriorating fundamentals in companies with exposure to weak commodity end-markets. Within industrials, the Fund is overweight the aerospace and defense industry. The Fund, relative to its benchmark, is also broadly underweight the materials sector, with the exception of the containers and packaging industry. The sector continues to be affected by global overcapacity and weak prices. 

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