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The Transformation of Lord Abbett

This old-line fund shop has been going through some major changes in recent years.

David Kathman, CFA, 10/01/2012

Lord Abbett used to be known as a somewhat sleepy value shop dominated by a few large funds, but it has undergone a major transformation in recent years, driven by new management determined to make the firm bigger and more diversified. These changes have made Lord Abbett one of the 20 largest mutual fund companies by assets, with a diverse fund lineup and generally attractive fees, but they also have resulted in a certain amount of turmoil and uncertainty, including the departure of numerous portfolio managers. As the dust continues to settle from this shakeup, it's worth looking at where Lord Abbett has been and where it may be heading going forward.

A Venerable History
Lord Abbett was founded in 1929 and in some ways it still seems like a throwback to the old-school investment culture of yore. It's an independent partnership, owned by 62 partners and led on a day-to-day basis by a managing partner (the equivalent of a CEO), who eventually passes on the reins to a hand-picked successor. Lord Abbett is solely devoted to money management with a research-driven approach that dates back to the firm's earliest days in the 1930s when its two oldest funds, Lord Abbett Affiliated and Lord Abbett Income, were launched.

Within this somewhat traditional infrastructure, Lord Abbett has undergone some significant changes in recent years under the leadership of Bob Dow, who was managing partner from 1996 to 2007 and remains chairman of the fund board, and Daria Foster, who came from a marketing background and succeeded Dow as managing partner in 2007. (Dow had the ad hoc title of "Senior Partner" from 2007 until his retirement on Sept. 30, 2012.) When Dow took over, Lord Abbett had only eight partners and $17 billion in assets, most of it concentrated in a few funds. He increased the number of partners, grew assets under management to more than $100 billion, and expanded the fund lineup into such areas as international stocks and large-growth stocks.

Even so, when Foster took over, Lord Abbett had two thirds of its fund assets in just three funds (Affiliated, Bond-Debenture, and Mid-Cap Value). That's a potentially dangerous situation, given the risk that these funds' styles could go out of favor or key managers could leave, but Foster took steps to remedy it and further diversify the lineup. She initiated a sales and marketing push to promote a broader range of Lord Abbett funds; she reduced costs for many of these funds, including lowering 12b-1 fees and front-end sales charges; and she expanded the distribution channels through which the funds are sold. According to Foster, the aim was not to sell products willy-nilly, but to do a better job of promoting good funds that investors may not have known about, in line with her guiding principle of emphasizing "product quality over product quantity."

New Funds, New Strategies
In addition to these marketing and distribution changes, Foster and her new chief investment officer Bob Gerber have shaken things up on the investment side since 2007. They've launched a few new funds in popular areas, such as Lord Abbett Floating Rate LFRAXShort Duration Tax-Free LSDAX, and International Dividend Income LIDAX. Foster and Gerber also changed the names and mandates of several old funds in 2007, so they essentially became new offerings. Most notably, the firm's intermediate-term and short-term government bond funds became Lord Abbett Income LAGVX and Short Duration Income LALDX, which have substantial corporate-bond stakes in addition to their government holdings. Making big changes like this to existing funds can have both pluses and minuses. While the new strategies may have made the funds more relevant or have been improvements over the old strategies, it's not always the best approach to pull a quick change on shareholders who may have had a different role for a fund.

Starting in 2008, Gerber also created a centralized research team of about 20 analysts to support all of the lineup's large- and mid-cap domestic equity funds, replacing the small, dedicated teams that each fund used to have. However, he kept the old arrangement for small-cap funds, which he believes can benefit more fromindividual analyst teams. In 2010, he implemented a similar plan on the fixed-income side, creating a large, centralized credit research team that serves all of the lineup's taxable bond funds. Gerber also built a team of quantitative analysts, led by Walter Prahl, to provide support across the Lord Abbett lineup.

Growth and Departures
All of these changes have had significant effects so far. On the one hand, the lineup has definitely become more diversified in terms of assets; as of September 2012, there were 13 Lord Abbett funds with at least $2 billion in assets and 20 with more than $1 billion, many more than a decade ago. The new and revamped funds have been especially impressive growers: Short Duration Tax-Free has more than $2.5 billion in assets, Floating Rate has more than $3 billion, and Short Duration Income has a staggering $25 billion, up from just over $100 million before it got its current name and mandate in 2007.

That kind of exponential growth is alarming, though there's little reason to think that the managers of Short Duration Income can't handle the inflows, given the liquidity of the short-term bonds that the fund holds. A skeptic might argue that Lord Abbett has launched funds in popular areas in order to gather assets, though to be fair, the firm mostly has been leveraging its existing resources in response to investor demand, and short-term bond funds are a core part of any fixed-income fund lineup. Short Duration Income and Short Duration Tax-Free have benefited from good timing, as many short-term bond funds, especially those with relatively high yields, have seen big inflows in an environment of rock-bottom interest rates.

David Kathman, CFA, is a senior fund analyst with Morningstar.
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