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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 Lord Abbett Diversified Equity Strategy Fund returned 8.64%, reflecting the performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the three-month period ended December 31, 2013, compared to its benchmark, the 85% Russell 3000® Index8/15% MSCI EAFE Index with Gross Dividends,9 which returned 9.44%. The Fund's 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, 2013, are: one year: 27.25%; five years: 15.74%; and since inception (June 30, 2006): 6.73%. Expense ratio, gross: 1.44%, and net: 1.07%.
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 Fund's strategic allocation detracted from relative performance during the quarter. International equity markets underperformed domestic equity markets, and the Fund's overweight in international equity strategies detracted from relative performance. The Fund's weighting in domestic large cap equity strategies contributed to relative performance, as this category outperformed the Fund's benchmark.
Another detractor from Fund performance was a domestic growth equity strategy that underperformed its underlying benchmark. Within this strategy, security selection in the information technology sector detracted from the strategy's performance relative to its benchmark. The online professional network LinkedIn Corp. was among the largest detractors. Although the company has seen significant user and revenue growth, the company's shares weakened after more than doubling in the first three quarters of the year. The automated network controller Infoblox, Inc. also saw its shares decline, as management disappointed analysts by failing to "beat and raise" guidance for the rapidly growing company. Security selection within the health care sector also detracted from performance within the growth equity strategy. Shares of Medivation, Inc., a developer of therapeutics used in the treatment of cancer, fell in October amid a broad sell-off in oncology-focused biopharmaceutical companies.
Although the international equity markets underperformed domestic equity markets, the Fund's international small cap strategy outperformed its underlying benchmark, thereby contributing to relative Fund performance. Stock selection within the energy and consumer discretionary sectors contributed to this strategy's outperformance relative to its underlying index. Within the energy sector, Norway-based oil and gas exploration company DNO International ASA contributed to performance. The firm's shares benefited from third quarter earnings that beat analysts' expectations and from the possibility of increased production from DNO's Tawke oil field in Iraq. Another energy sector contributor was Hilong Holding, Ltd., a China-based oil and natural gas holding company, which saw its shares rise over the period. Hilong entered into an agreement with Schlumberger's Smith International in the fourth quarter, to which investors reacted positively. A notable contributor within the consumer discretionary sector was REXlot Holdings Ltd., a Hong Kong-based developer and distributor of lottery products. Shares rose after the firm announced the details of a dividend distribution. In addition, the overall gambling industry in southern China continued to see marked expansion, aiding REXlot share's upward trend.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
The Fund invests all of its net assets directly in the underlying funds. The percentages shown are based on individual securities owned in one or more of the underlying funds. The Fund's portfolio is actively managed and therefore, its percentage allocations may change from time to time. Holdings are for informational purposes only and are not a recommendation to buy, sell, or hold any security.
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.