The dust is still settling from a shakeup of Lord Abbett's venerable investment culture.
Morningstar recently issued a new Stewardship Grade for Lord Abbett. The firm's overall grade--which considers corporate culture, fund board quality, fund manager incentives, fees, and regulatory history--is a C. What follows is Morningstar's analysis of the firm's corporate culture. This text, as well as analytical text on the other four Stewardship Grade criteria, is available to subscribers of Morningstar's software for advisors and institutions: Morningstar Principia®, Morningstar Advisor Workstation(SM), Morningstar Office(SM), and Morningstar Direct(SM).
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 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 LAFFX and Lord Abbett Income LAGVX, were originally 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 chairman of the fund board until the end of 2012, 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 to 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 set out to grow and diversify the lineup and had some significant success on that front. The firm's assets under management grew to more than $100 billion under his watch, and the fund lineup expanded into such areas as international stocks and large-growth stocks. The number of partners also grew, giving more people a financial stake in the firm's success.
Despite all this, Lord Abbett's fund lineup remained fairly top-heavy when Foster took over, with two thirds of its assets in just three funds (Affiliated, Bond-Debenture LBNDX, and Mid Cap Stock LAVLX). 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 a number of 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, both retail and institutional, through which the funds are sold. According to Foster, the aim in all this 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."
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. Starting in 2008, Gerber implemented some significant changes to the structure underlying many of the Lord Abbett funds. He 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, but he kept the old arrangement for small-cap funds, which he believes can benefit more from smaller, dedicated analyst teams. In 2010 he implemented a similar plan on the fixed-income side, creating a large, centralized credit research team that serves all the lineup's taxable-bond funds. Gerber also built out a team of quantitative analysts, led by Walter Prahl, to provide risk management and other support across the Lord Abbett lineup.
There have also been significant changes to the fund lineup. The firm has launched several new funds since 2007, notably Lord Abbett Floating Rate LFRAX, Short Duration Tax Free LSDAX, and International Dividend Income LIDAX. More recently it launched the Calibrated funds, comanaged by Prahl and Rick Ruvkun, which combine fundamental research from the centralized research analysts and quantitative risk controls from Prahl's team. Calibrated Large Cap Value and Calibrated Mid Cap Value launched in late 2011, then the former Capital Structure fund was rebranded as Calibrated Dividend Growth in September 2012, and the $7 billion Lord Abbett Affiliated was turned over to the Calibrated team in June 2013.
On the other side of the coin, Lord Abbett has also eliminated some funds that weren't working out. In 2007 the firm merged away all but three of its single-state municipal-bond funds, which were seen as too risky. More recently, it also merged away the struggling Large Cap Value, Stock Appreciation, and Small Cap Blend funds in order to make more-efficient use of its investment resources, and it will soon merge away Classic Stock for similar reasons. In other cases, Lord Abbett has fired portfolio managers while keeping their funds around, as when the firm let go of Gerard Heffernan of Small Cap Value LRSCX in June 2013 and brought back longtime skipper Bob Fetch until a permanent replacement could be found. (Tom Maher and Justin Maurer of Value Opportunities LVOAX are taking over Small Cap Value on Oct. 1.) Such moves have been part of Lord Abbett's efforts to address underperforming funds more aggressively and proactively.
Rather than merging away or liquidating a struggling fund and launching an entirely new one, Lord Abbett under Foster and Gerber has often preferred to rebrand an existing fund (usually a struggling one) so that it essentially becomes a new offering. In 2007 the Global Income fund became Emerging Markets Currency LDMAX; 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; and Global Equity became Global Allocation LAGEX, a fund of funds managed by Gerber. 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 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.