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In the fourth quarter of 2013, fixed-income markets continued to be influenced by investor expectations about the fate of the U.S. Federal Reserve's quantitative easing (QE) program. Yields on longer-maturity Treasury issues climbed as the market anticipated the effect of a prospective "tapering" of the Fed's $85 billion in monthly purchases of Treasury securities and agency mortgage-backed securities (MBS), the focal point of the central bank's efforts to hold down long-term interest rates.
As many market participants expected, the Fed announced on December 18 that it would begin to taper its bond purchases at a "modest" pace, with reductions of $5 billion per month in its purchases of both agency mortgage-backed securities and longer-term Treasury securities.1 The Fed viewed improvements in economic activity and labor market conditions since its September policy meeting as "consistent with growing underlying strength in the broader economy."
The government sector continued to be pressured by investor fears about a sustained rise in interest rates. U.S. Treasuries (as represented by the BofA Merrill Lynch U.S. Treasury Index2) posted a loss of 0.9% for the three months ended December 31, according to Bloomberg. In contrast, the municipal bond market (as represented by the BofA Merrill Lynch U.S. Municipal Securities Index3) posted a return of 0.4%. The gain came despite continued outflows from tax free mutual funds, based on Investment Company Institute data.
Credit-sensitive segments of the fixed-income market continued to outperform interest rate-sensitive groups in the fourth quarter. The high-yield bond market (as represented by the BofA Merrill Lynch High Yield Master II Constrained Index4) posted a 3.49% return for the quarter. The convertible bond market (as represented by the BofA Merrill Lynch All Convertibles Index5) posted a return of 6.02%, while the floating-rate loan market (as represented by the Credit Suisse Leveraged Loan Index6) returned 1.82%.
Agency mortgage-backed securities (as represented by the Barclays MBS Index7) returned -0.42%. Commercial MBS (CMBS) (as represented by the Barclays CMBS ERISA-Eligible Index8) returned 0.53%. Investment-grade corporate debt (as represented by the Barclays U.S. Corporate Bond Index9) returned 1.52%.
Inflation measures remained subdued in the fourth quarter. In November, the overall Consumer Price Index (CPI)10 increased 1.2% over the prior 12 months, below the Fed's target.11 Excluding food and energy, the index rose 1.7% over the prior 12 months.
Labor-market data showed an uptick in U.S. employment growth. The U.S. Bureau of Labor Statistics reported that non-farm payrolls increased by 203,000 in November, above the average monthly gain of 195,000 over the prior 12 months, while the unemployment rate dropped to 7.0%, as labor force participation posted a slight improvement.12
Corporate credit quality remained consistent with an improving economic environment as the default rate in the high-yield bond market was expected to remain below 2% in 2014 and 2015, according to J.P. Morgan. These estimates are well below the market's average long-term default rate of 4.0%.
The Fund returned 1.69%, reflecting performance at the net asset value (NAV) of Class A shares, with all distributions reinvested, for the quarter ended December 31, 2013. The Fund's benchmark, the Credit Suisse Leveraged Loan Index,6 returned 1.82%, for the same period. Average annual total returns, which reflect performance at the maximum 2.25% sales charge applicable to Class A share investments and include the reinvestment of all distributions, as of December 31, 2013, are: one year: 3.47%; three years: 4.97%; five years: 10.59%; and since inception (December 31, 2007): 4.50%. Expense ratio: 0.81%.
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.
Detracting from absolute performance during the quarter was Weight Watchers International, Inc., a weight management services company, which encountered increased competition and deteriorating fundamentals. Infogroup, Inc., a data and marketing services company, also detracted from absolute performance; however, we believe the company will be able to work through its issues as a new management team has been executing according to plan. There were no sectors which detracted from performance on an absolute basis.
Contributing to absolute performance during the quarter was Neiman Marcus Group, Inc., which benefited from a skillful management team that has been able to manage through difficult economic environments, while maintaining a strong brand identity. The portfolio's short maturity position in Clear Channel Communications also added to absolute performance, providing an attractive yield. On a sector basis, media/telecom, gaming/leisure, and information technology added the most to absolute performance.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
We believe the economy is doing reasonably well and that credit conditions should continue to remain benign. Much of the economic data has surprised to the upside, and we believe that the default rate will remain low. Supply within the bank loan market has been fairly tight given the demand, and many of the names have benefited, leading to little dispersion across credit qualities. We have been looking for opportunities to trade into higher-quality names at appealing valuations. We have maintained discipline as to which new issues we buy, since pricing and the structure of the deals have not always met our criteria. We have seen terms become less favorable to investors and structures more aggressive, which all point to the importance of thorough credit analysis. We believe individual credit decisions will become increasingly important in this type of environment. Though most of the changes we’ve made in the portfolio have been security specific, we have been finding attractive opportunities in the metals/mining sector.
We will continue to seek yield-enhancement additions to the portfolio primarily across the non-investment-grade credit curve relative to the portfolio's benchmark, the Credit Suisse Leveraged Loan Index. We believe that loans will continue to attract investors to the asset class, given their superior position in the capital structure and the yield they provide.
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.