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 Fund returned 4.14%, reflecting the performance at the net asset value (NAV) of Class A shares with all distributions reinvested for the period ended December 31, 2015, outperforming its benchmark the Russell 2000® Index,8 which returned 3.59% for the same period.  Average annual total returns, which reflects 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: -6.84%; three years: 8.26%; five years: 6.00%; and 10 years: 7.23%. Expense ratio: 1.20%.

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 consumer discretionary sector contributed to the Fund’s relative performance during the quarter. Shares of Core-Mark Holding Company, Inc., a marketer of supply solutions, increased due to new significant distribution contracts. In addition, shares of Francesca’s Holdings Corporation, a retail clothing holding company, benefited from a positive preliminary announcement of third quarter results.

Also contributing to the Fund’s relative performance was the materials sector. Shares of KapStone Paper and Packaging Corporation, a manufacturer and distributor of corrugated products, increased following a solid third quarter earnings report.

Security selection within the health care sector detracted from the Fund’s relative performance during the quarter. Within the sector, shares of HeathSouth Corporation, an owner and operator of inpatient rehabilitation hospitals, fell as the company missed their EBITDA target and cut guidance. In addition, shares of MEDNAX, Inc., a provider of physician services, fell due to weaker volume growth compared with expectations.

Security selection within the information technology sector also detracted from the Fund’s relative performance during the quarter. Shares of Mentor Graphics Corporation, a supplier of electronic design automation tools, declined due to weakness in its core electronic design automation segment.

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 favorable compared to other developed countries. We remain cautious on companies with significant international exposure, given the continued volatility and uncertainty globally. From a sector perspective, we trimmed the portfolio’s exposure to consumer discretionary and remain underweight the benchmark due to lofty valuations.  Conversely, we increased the Fund’s weight in materials and energy, and remain overweight these sectors. 

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