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Fourth quarter equity market performance was essentially a microcosm of the entire 2013 year. With a gradually recovering global economy and accommodative monetary policies as the backdrop, developed market equities performed strongly over the quarter and propelled returns for the broad indexes such as MSCI EAFE Index1 and MSCI World Index2 above 20% for the year. Emerging markets were essentially flat over the quarter and were generally poor performers through the year as their growth faded, currencies weakened and tighter liquidity conditions negatively affected the most indebted countries.
For all their past troubles, equities markets in Egypt, Greece, and Ireland morphed into some of the best performers of the quarter. Then there was Spain, the fourth largest economy in the eurozone, which continued to recover from a two-year recession thanks to exports, and enabled stocks to finish with a healthy double-digit gain for the year.
Among larger countries, other significant gainers during the period included India, China, Germany, and Mexico. India rebounded from a period of currency free-fall and capital flight. China's exports rose beyond analyst expectations and inflation declined, which dampened fears of tighter government policies. Germany's central bank upgraded its economic projections for 2014.
In U.S. dollar terms, Japan stalled during the fourth quarter amid concerns about the timing of promised structural reforms, yet the Japanese market, led by the Bank of Japan's aggressive monetary policy, still managed to finish as one of the biggest gainers in Asia for the year. China completed its highly anticipated Third Plenum, a once a decade meeting of top leaders, with generally positive reviews. Key highlights included lower future credit growth, a more market-based approach across a range of government controlled companies, and a gradual end to China's one-child policy.
The best performing sectors during the fourth quarter of 2013 included telecom services, (driven by increased expectations of M&A activity), information technology (weak yen beneficiaries in Japan), and health care (M&A activity). Consumer staples, materials, and utilities all eked out modest gains.
The Fund returned 7.65%, reflecting the 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 S&P Developed Ex-U.S. SmallCap® Index,3 returned 5.76% in the same period. 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: 23.49%; five years: 17.89%; and 10 years: 8.46%. Expense ratio: 1.47%.
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.
Overall, stock selection from the consumer discretionary and energy sectors was the reason for the Fund's relative outperformance, versus its benchmark, during the fourth quarter of 2013. One contributor from the energy sector was Norway-based oil and gas exploration company DNO International ASA. The firm 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 contributor from the energy sector was Hilong Holding, Ltd., a China-based oil and natural gas holding company, which saw its shares rise over the period. After a year of garnering global exposure through major contracts, including a drilling services contract with Shell, 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 of the firm 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.
Detracting from relative performance was stock selection in the consumer staples and utilities sectors. From the consumer staples sector, Japan-based wig manufacturer Aderans Co. Ltd. was a notable detractor. Aderans' domestic business was in line with analysts' estimates; however its American brand, Bosley, has faced headwinds in the form of increased advertising costs which resulted in a reduction in the amount of advertising Bosley purchased. Since Bosley's business model historically has been marketing-heavy, the brand saw a reduction in sales. Sundrug Co. Ltd., a Japan-based pharmacy and drug store operator from the consumer staples sector, also detracted from the Fund's relative performance. Investors reacted poorly to third quarter earnings as Sundrug's same-store sales were soft, though reasons for the poor sales numbers were more related to consumers' taste and weather, rather than business fundamentals. Australia-based gas and electricity utility investment company Duet Group did not perform well after it was announced in late November that asset manager Macquarie Group Limited would reduce roughly 3% of its shares from Duet, which coincided with the drop in Duet's share price during the period.
Please refer to www.lordabbett.com under the "Portfolio" tab for a complete list of holdings of the Fund, including the securities discussed above.
Confidence has returned to the developed world's equity markets. While U.S. equities have been strong performers for each of the past three years, Europe and Japan both delivered strong returns during 2013. Economic news flow has improved across the developed world, major risks have receded and expectations for better economic outcomes have increased.
Strong equity market performances have dragged valuation levels up to mid cycle/average for many countries and sectors across Europe and Japan. From our perspective, this means that earnings now matter a great deal; it is difficult to see stocks higher in 2014 without an uplift in corporate profits. The liquidity environment remains supportive in both Europe and Japan, and investor sentiment is increasingly positive.
Emerging markets continue to struggle in both absolute and relative terms. Gross Domestic Product (GDP) growth expectations have slowed, commodity prices have been weak, and capital flows have been weak due to the change in U.S. Federal Reserve policy. All of these factors are now well-understood by the markets, and valuations are attractive in many areas. We continue to be very selective across the emerging markets, with a current focus on companies in North Asia (Korea, Taiwan, China). Many of the headwinds facing the developing world could begin to dissipate during 2014. Given the low valuations and low investor expectations, this could create an attractive entry point.
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.