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U.S. equity markets advanced during the fourth quarter of 2013 amid indications of an acceleration of economic growth. Investors appeared to be comfortable with the prospect that the U.S. Federal Reserve would begin to withdraw monetary accommodation via reduced monthly bond purchases. Indeed, the Fed announced on December 18 that it would start "tapering" at a modest pace during 2014. The outlook for other major global economies was decidedly mixed: the eurozone remained sluggish; Japan's growth rate decelerated despite an enormous stimulus program; and China's growth pace quickened amid government efforts to restructure the economy.
The Fed noted that "the economy continued to expand at a modest to moderate pace" between early October and mid-November, based on reports from the 12 Fed districts. The Fed said manufacturing activity expanded in most districts, with gains noted in the motor-vehicle and high-technology industries. Reports on retail spending were positive, though retailers reported being "hopeful, but cautious" ahead of the holiday season.1 The second estimate for the third quarter of 2013 showed that the economy grew by an annualized rate of 3.6%, above the previous estimate of 2.8%. Second-quarter 2013 growth was 2.5%.2
The S&P 500® Index3 rose 11% during the quarter, reaching an all-time closing high on December 31. Gains occurred in all of the 10 major sectors. The information technology and industrials sectors outperformed the broader market. Growth stocks (as represented by the Russell 3000® Growth Index4) outperformed value stocks (as represented by the Russell 3000® Value Index5). Large cap stocks (as represented by the Russell 1000® Index6) outperformed small caps (as represented by the Russell 2000® Index7).
The Fund returned 9.79%, reflecting the performance at the net asset value (NAV) of Class A shares, with all distributions reinvested for the quarter ended December 31, 2013, compared to its benchmark, the Russell 1000® Value Index,8 which returned 10.01% for the same period. Average 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, 2013, are: one year: 23.48%; and since inception (December 29, 2011): 22.21%. Expense ratio: gross, 1.12%; net: 0.75%.
Performance data quoted represent past performance, which does not guarantee 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 1-888-522-2388 or visit us at www.lordabbett.com.
The performance of individual stocks drove relative performance during the quarter, as the Fund continued to invest according to the central investment tenets of the Calibrated approach, which seeks to focus exclusively on stock-specific opportunities. The Fund's overweight position in Ford Motor Co., one of the world's largest auto manufacturers, detracted from relative performance. Shares of the firm declined as elevated inventory levels and intense competition have led to a weaker pricing environment.
The Fund's overweight position in Atwood Oceanics, Inc., a contract operator of offshore oil and gas drilling rigs, also detracted from relative performance during the quarter. Although the firm posted quarterly results that exceeded revenue and margin expectations, management warned that rig maintenance projects will increase rig downtime and impact margins in 2014. Shares of Jabil Circuit, Inc., a contract electronics manufacturer that produces several components for Apple's iPhone, also detracted from relative performance during the quarter after management projected a revenue decline in two key business segments. The operational weakness was attributed to a shift in demand related to a single customer.
Contributing to relative performance was the Fund's overweight position in Valero Energy Corp., an oil refiner with a large presence on the Gulf Coast of the United States, as the firm's share price reached its highest level in over five years. Because Valero sources most of its input—crude oil—from within the United States and sells its output—refined products—at prices that are linked to global crude oil prices, the firm benefits when U.S. crude oil trades at a discount to global oil prices. Shares of the firm increased in value during the quarter as this spread widened and the firm continued to exploit its cost advantage over other domestic refiners.
Also contributing to relative performance were shares of Cardinal Health, Inc., a distributor of drugs and medical supplies to pharmacies, hospitals, and other healthcare providers. The shares rose as strategic moves to improve margins overshadowed the impact of high-profile account losses that have occurred over the past 18 months. One of these strategic initiatives is a new joint venture with CVS Caremark that was announced during the quarter and will combine the purchasing power of the two entities in the generic drug market. The Fund's overweight position in LSI Corp., which designs semiconductors and software for use in personal computers, servers, and data centers, also contributed to relative performance following the announcement that the firm would be acquired by Avago Technologies.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
Performance data quoted is historical. Past performance is not indicative of future results. Current performance may be higher or lower than the performance 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 quarter-end, go to quarter ending performance on our Website or call Lord Abbett at (888) 522-2388.
1 The Fund’s dividend yield is shown without sales charges (at NAV) and with maximum sales charges (at MOP). The Fund’s dividend yield takes into account any fee waiver or expense limitation arrangements, if any. Without such fee waivers or expense limitation arrangements, the Fund’s dividend yield would have been lower. Information regarding any fee waivers or expense limitation arrangements applicable to the Fund is provided with the Fund’s expense ratio information.
2 The Fund’s unsubsidized dividend yield is shown without sales charges (at NAV) and with maximum sales charges (at MOP). The Fund’s unsubsidized dividend yield reflects what the yield would have been without the effect of fee waivers or expense limitation arrangements.