Lord Abbett Continues to Build

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 B. What follows is Morningstar's analysis of the firm's corporate culture, for which Lord Abbett receives a C. 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 Advisor Workstation(SM), Morningstar Office(SM), and Morningstar Direct(SM).

Founded in 1929, Lord Abbett is an independent partnership, today owned by more than 60 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, launched.

Within this somewhat traditional infrastructure, Lord Abbett underwent significant changes 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. When Dow took over, Lord Abbett had only eight partners and $17 billion in assets, mostly 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 that growth, Lord Abbett's fund lineup remained fairly top-heavy when Daria Foster succeeded Dow as managing partner in 2007. At the time, two thirds of the firm's assets resided in three funds (Lord Abbett Affiliated,

In addition to marketing and distribution changes, Foster and chief investment officer Bob Gerber shook things up on the investment side. Starting in 2008, Gerber implemented significant changes to the structure underlying many Lord Abbett funds, particularly on the equity side. He created a centralized research team of analysts to support the firm's entire lineup of large- and mid-cap domestic-equity funds, replacing small dedicated teams that previously ran each fund. Gerber kept the old arrangement for small-cap funds, however, which he believes can benefit more from the smaller analyst teams. The transition to a more team-based approach and a more rigorous performance focus wasn't smooth across the board, and there were a number of meaningful manager departures between 2008 and 2011.

Since then manager turnover has slowed significantly. Now, in an effort to improve performance in some areas and move toward a global model, Lord Abbett is turning its attention to the structure of its entire equity group. It is focused on creating an integrated global equity team, with domestic- and international-stock analysts working together more closely. In December 2015, the firm hired a lead portfolio manager for global equity strategies, Dider Rosenfeld, a nearly 20-year industry veteran. That team is expected to expand significantly in the coming years with plans to hire a number of international-equity analysts. The equity team has grown over the years to 28 analysts, and that growth should continue. As such, Lord Abbett's equity research effort remains something of a work in progress, and it remains to be seen if the firm can maintain its recent level of stability in the ranks and extend its strides on the performance front.

On the fixed-income side, Gerber started to build out the firm's team and in 1997 hired Rob Lee, who was recently named deputy CIO in advance of Gerber's impending retirement (the firm had not announced a retirement date for Gerber as of December 2015). Lee previously was the firm's director of taxable fixed income. Gerber and Lee worked with a small team to build a platform for analysis and establish a Lord Abbett way of doing fixed-income research. In 2010, Gerber implemented a plan on the fixed-income side similar to his 2008 efforts on the domestic-equity side, creating a large, centralized credit research team that serves all of the lineup's taxable-bond funds. The transition on the fixed-income side was smoother, though a number of notable bond portfolio managers left the firm during that period, some because of poor performance and others because they did not like the new team-based approach. While the departure of underperforming managers is better for investors in the long run, it can be disconcerting to see managers depart.

Gerber also built out a team of quantitative analysts to provide risk management and other support across the Lord Abbett lineup. That team, led by Walter Prahl, includes about a half dozen analysts plus Prahl, up from four analysts in 2007.

Overall, Gerber and Foster implemented a more consistent and rigorous environment for portfolio management and performance evaluation. While this significant shift caused some managers and analysts to depart and others to be fired for not meeting the higher standards, Foster believes the turnover has been a net positive for the firm. Much of the turnover took place between 2007 and 2011; since then the teams have mostly stabilized and grown.

Foster made significant changes to the firm's fund lineup over the years as well. On the fixed-income side, the firm shifted the team's focus from government securities to credit-sensitive securities, relying more heavily on quantitative tools and fundamental bottom-up analysis. For example, the firm retooled Lord Abbett Short Duration Income in December 2007 from a focus on short-term government debt to a broader investment mandate that generally includes a healthy dose of structured fare. That fund has been wildly successful, gathering assets at an impressive pace. It had more than $34 billion in assets as of December 2014--roughly the same size as today--up from just $116 million in November 2007, though the pace of asset growth has slowed considerably in recent years. The firm hasn't closed this or any of its fixed-income funds. In all, since 2007, the firm launched eight new fixed-income strategies, including Lord Abbett Emerging Markets Corporate Debt LCDAX and Lord Abbett Emerging Markets Local Bond LEMAX in 2013 and Lord Abbett Short Duration High Yield Municipal Bond SDHAX and Lord Abbett Core Plus Bond LAPLX in 2015.

Equity funds launched since 2007 were generally much smaller in size than the bond funds launched, but the firm was more aggressive in merging away or rebranding underperforming equity funds. Lord Abbett Calibrated Large Cap Value LCAAX and Lord Abbett Calibrated Mid Cap Value LVMAX, comanaged by Prahl and Rick Ruvkun, were launched at the end of 2011. These funds combine fundamental research from the centralized research analysts and quantitative risk controls from Prahl's team. Then, the firm rebranded the former Capital Structure fund as Lord Abbett Calibrated Dividend Growth LAMAX in September 2012, and the $7 billion Lord Abbett Affiliated was turned over to the Calibrated team in June 2013. Lord Abbett also merged away the struggling Lord Abbett Large Cap Value, Lord Abbett Stock Appreciation, and Lord Abbett Small Cap Blend funds in order to make more-efficient use of its investment resources, and it merged away Lord Abbett Classic Stock for similar reasons.

Lord Abbett has also parted ways with portfolio managers while keeping their funds around. The firm let go of Gerard Heffernan of Lord Abbett Small Cap Value LRSCX in June 2013 and brought back longtime skipper Bob Fetch until a permanent replacement could be found. In October 2013, Tom Maher and Justin Maurer, managers of micro-cap and small/mid-cap strategies for the firm, took over the fund, which simultaneously reopened to new investors. Such moves have been part of Lord Abbett's efforts to address underperforming funds more aggressively and proactively. Nonetheless, the firm's five-year manager-retention rate has improved slightly to 91%, but that's still a bit below average compared with the broad industry average as well as the average for large mutual fund managers.

All these changes have had significant effects so far. On the one hand, the lineup is more diversified in terms of assets; as of December 2015, there were 13 Lord Abbett funds with more than $2 billion in assets and 24 with more than $1 billion, many more than a decade ago. It is encouraging to see the firm's manager turnover slow and a net positive growth in its investment staff over the years. The efforts on the fixed-income side have been particularly fruitful. On the other hand, the impending retirement of Gerber and the transition to a new CIO should be closely monitored, as should the firm's build-out of its global equity team. Overall, Lord Abbett is a solid fund firm with many good qualities and earns a Corporate Culture grade of C.

This article is the Corporate Culture portion of the Morningstar Stewardship Grade for funds for this fund family. Visit our corporate website to see Morningstar's Stewardship Grade methodology.