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 Fund returned 6.58%, reflecting the performance at the net asset value (NAV) of Class A shares with all distributions reinvested for the period ended December 31, 2014, underperforming the Russell 2000® Index,7 which returned 9.73% for the same period.  Average annual total return, 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, 2014, are one year: -3.97%; three years: 12.38%; five years: 11.32%; and 10 years: 8.70%. Expense ratio: 1.18%.

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

In the fourth quarter, few events grabbed more headlines than oil’s dramatic price decline and the Ebola scare, both of which had positive and negative implications for the market. Early in the quarter the threat of Ebola caused trouble for the airline industry as travelers feared the possibility of infection. Meanwhile health care stocks benefited, especially those directly related to containment and treatment of the virus. Leading into December and the busiest retail season of the year, consumer confidence was on the rise complemented by the decline in gas prices. However, due to the steep decline in the price of oil, energy was the only sector to have a negative return for the quarter.  Also notable for the period was small stocks’ (as measured by the Russell 2000® Index7) rebound from a third quarter in which they lagged their large stock counterparts (as measured by the Russell 1000® Index6) by nearly 800 basis points. Ultimately, small stocks finished the period in positive territory and ahead of large stocks.

Security selection detracted from the Fund’s relative performance during the quarter. Within the consumer discretionary sector, shares of ANN Inc., an owner and operator of women’s apparel, fell as management lowered its 2014 guidance. Company management lowered its third quarter guidance and fourth quarter outlook early in the period reflecting issues pertaining to weak traffic, poor product response and freight disruptions. Another detractor came from within the industrials sector. Shares of Kirby Corp,, a transporter of bulk liquid products, were weakened by challenges presented by the collapse in oil prices, which led to lower fourth quarter and full-year earnings estimates by analysts.

Another meaningful detractor from the Fund’s relative performance was consumer staples holding Andersons, Inc. Shares of the agricultural conglomerate were weaker after a disappointing third quarter earnings report and expectations of headwinds entering the new year.

A significant contributor to the Fund’s relative performance was information technology holding Spansion, Inc. Shares of the flash memory-based systems provider rose over the period due primarily to a merger between itself and a competitor. The merger is expected to enhance market position and reduce material costs for the new entity. Within the financials sector, shares of Pebblebrook Hotel Trust appreciated as the hotel investment trust acquired properties in key markets throughout the quarter.

Also contributing to the Fund’s relative performance was utilities holding IDACORP, Inc. Shares of the electric utility holding company strengthened as its management revised full-year 2014 guidance upward on the heels of higher income tax deductions from which IDACORP expects to benefit.

Please refer to under the “Portfolio” tab for a complete list of holdings of the Fund, including the securities discussed above.


We believe that the U.S. economy maintains the most favorable economic outlook among developed countries. Furthermore, we expect the Fed to begin gradually raising interest rates at some point during 2015 provided that the economy continues to exhibit signs of strength. Conversely, Europe continues to struggle, as does Asia, which must contend with persistently contracting growth in China and stagnation in Japan.

The financials sector remains the Fund’s largest absolute weight.  Within financials, the focus remains on community banks, especially those that have shown strong loan growth and which should benefit from an increase in interest rates, while avoiding regional banks that may be adversely affected by the recent volatility in the energy sector. We reduced the Fund’s exposure to the industrials sector over the period as we eliminated positions in airlines, which we believe had become fairly valued. Additionally, we reduced or eliminated positions in companies affiliated with non-residential construction due to questions surrounding the strength of their recovery. While the Fund’s weighting in materials remained relatively stable, we added a specialty metal producer we believe will add value as it rolls off a capital expenditure cycle.

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