The Board of Directors of the Company (the "Board"), including all of the Directors who are not interested persons of the Company or Lord, Abbett & Co. LLC ("Lord Abbett"), annually considers whether to approve the continuation of the existing management agreement between each Fund and Lord Abbett. In connection with its most recent approval, the Board reviewed materials relating specifically to each Fund’s management agreement, as well as numerous materials received throughout the course of the year, including information about the Fund’s investment performance compared to the performance of its benchmark. Before making its decision with respect to each Fund, the Board had the opportunity to ask questions and request further information, taking into account its familiarity with Lord Abbett gained through meetings and discussions. These meetings and discussions included the examination of each Fund’s portfolio management team by members of the Contract Committee, the deliberations of the Contract Committee, and discussions between the Contract Committee and Lord Abbett’s management.
The materials received by the Board as to each Fund included, but were not limited to: (1) information provided by Lipper Inc. regarding the investment performance of the Fund compared to the investment performance of a group of funds within the same investment classification/objective (the "performance universe") and to the investment performance of an appropriate benchmark; (2) information on the expense ratios, contractual and effective management fee rates, and other expense components for the Fund and similar funds (the "peer group"); (3) information provided by Lord Abbett on the projected expense ratios, management fee rates, and other expense components for the Fund; (4) sales and redemption information for the Fund; (5) information regarding Lord Abbett’s financial condition; (6) an analysis of the relative profitability of the management agreement to Lord Abbett; (7) information provided by Lord Abbett regarding the investment management fees Lord Abbett receives from its other advisory clients maintaining accounts with a similar investment strategy as the Fund; (8) information regarding the distribution arrangements of the Fund; and (9) information regarding the personnel and other resources devoted by Lord Abbett to managing the Fund.
As to High Yield Municipal Bond Fund, the Board observed that the investment performance of the Class A shares of the Fund was in the fifth quintile of its performance universe for the eight-month, one-year, three-year and five-year periods. The Board also observed that the investment performance was lower than that of the Lipper High Yield Municipal Debt Index for each of those periods.
Approval of Advisory Contract (continued)
As to Intermediate Tax Free Fund, the Board observed that the investment performance of the Class A shares of the Fund was in the first quintile of its performance universe for the eight-month, three-year, and five-year periods, and the second quintile for the one-year period. The Board also observed that the investment performance was higher than that of the Lipper Intermediate Municipal Debt Index for each of those periods.
As to National Tax Free Income Fund, the Board observed that the investment performance of Class A shares of the Fund was in the third quintile of its performance universe for the eight-month and three-year periods, and the fourth quintile for the one-year, five-year, and ten-year periods. The Board also observed that the investment performance was lower than that of the Lipper General Municipal Debt Index for each of those periods.
As to Short Duration Tax Free Fund, the Board observed that the Fund had begun investment operations in December 2008 and commenced performance on December 31, 2008, and thus it was not possible to draw definitive conclusions regarding its investment performance. The Board observed that the investment performance of the Class A shares of the Fund was in the second quintile of its performance universe for the eight-month period and the period since inception and the first quintile for the one-year period. The Board also observed that the investment performance was higher than that of the Lipper Short Municipal Debt Index for each of those periods.
As to AMT Free Municipal Bond Fund, the Board observed that the Fund had a performance inception date of October 29, 2010, and thus it was not possible to draw definitive conclusions regarding its performance based on the relatively short operating history. The Board observed that the investment performance of the Class A shares of the Fund was in the first quintile of its performance universe for the eight month period and the period since inception and higher than that of the Lipper General Municipal Debt Index for each of those periods.
As to California Tax Free Income Fund, the Board observed that the investment performance of the Class A shares of the Fund was in the fourth quintile of its performance universe for the eight-month, one-year, and three-year periods, and the fifth quintile for the five-year and ten-year periods. The Board also observed that the investment performance was lower than that of the Lipper California Municipal Debt Index for each of those periods.
As to New Jersey Tax Free Income Fund, the Board observed that the investment performance of the Class A shares of the Fund was in the fourth quintile of its performance universe for the eight-month period and the fifth quintile for the one-year, three-year, five-year, and ten-year periods. The Board also observed that the investment performance was lower than that of the Lipper New Jersey Municipal Debt Index for each of those periods.
As to New York Tax Free Income Fund, the Board observed that the investment performance of the Class A shares of the Fund was in the third quintile of its performance universe for the eight-month and ten-year periods, the fourth quintile for the one-year and five-year periods, and the second quintile for the three-year period. The Board also observed that the Fund’s investment performance was higher than that of the Lipper New York Municipal Debt Index for the eight-month, one-year, and three-year periods and lower than that of the Index for the five-year and ten-year periods.
Lord Abbett’s Personnel and Methods. The Board considered the qualifications of the personnel providing investment management services to each Fund, in light of its investment objective and discipline. Among other things, the Board considered the size, experience, and
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Approval of Advisory Contract (continued)
turnover of Lord Abbett’s investment management staff, Lord Abbett’s investment methodology and philosophy, and Lord Abbett’s approach to recruiting, training, and retaining investment management personnel. The Board determined that Lord Abbett had the expertise and resources to manage each Fund effectively.
Nature and Quality of Other Services. The Board considered the nature, quality, costs, and extent of compliance, administrative, and other services performed by Lord Abbett and Lord Abbett Distributor LLC ("Distributor") and the nature and extent of Lord Abbett’s supervision of third party service providers, including each Fund’s transfer agent and custodian.
Expenses. The Board considered the expense level of each class of shares of each Fund and the expense levels of one or more corresponding peer groups. The Board considered the fiscal periods on which the peer group comparison or comparisons were based, and noted that the fiscal years of many funds in each Fund’s peer group did not coincide with the Fund’s fiscal year. It also considered the projected expense levels of each Fund. It also considered the amount and nature of the fees paid by shareholders.
As to High Yield Municipal Bond Fund, the Board observed that for the fiscal year ended September 30, 2010 the contractual management and administrative services fees, when calculated as a percentage of a hypothetical common asset level that approximated the Fund’s average net assets, were approximately the same as the median of the peer group and the actual management and administrative services fees were approximately one basis point above the median of the peer group. The Board observed that for the fiscal year ended September 30, 2010 the total expense ratio of Class A was approximately five basis points below the median of the peer group, the total expense ratio of Class B was approximately three basis points below the median of the peer group, the total expense ratio of Class C was approximately five basis points below the median of the peer group, the total expense ratio of Class F was approximately the same as the median of the peer group, and the total expense ratio of Class P was approximately eight basis points above the median of the peer group. The Board considered the projected expense ratio of each class and how those ratios would relate to those of the peer group.
As to Intermediate Tax Free Fund, the Board observed that for the fiscal year ended September 30, 2010 the contractual management and administrative services fees, when calculated as a percentage of a hypothetical common asset level that approximated the Fund’s average net assets; were approximately two basis points below the median of the peer group and the actual management and administrative services fees were approximately six basis points below the median of the peer group. The Board observed that for the fiscal year ended September 30, 2010 the total expense ratio of Class A was approximately nine basis points below the median of the peer group, the total expense ratio of Class B was approximately one basis point above the median of the peer group, the total expense ratio of Class C was approximately five basis points below the median of the peer group, the total expense ratio of Class F was approximately six basis points below the median of the peer group, and the total expense ratio of Class P was approximately twenty-four basis points above the median of the peer group. The Board noted that effective February 1, 2011 the Fund and Lord Abbett had agreed to a management fee waiver and expense limitation agreement whereby the total expense ratio, excluding 12b-1 fees and interest related expenses, of each class was limited to no more than 0.45%. The Board noted that Lord Abbett proposed to enter into a new management fee waiver and expense limitation agreement through January 31, 2013 under which the expense ratio of each class would be limited to a level that was two basis points higher. The Board also considered what
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Approval of Advisory Contract (continued)
the expense ratio of each class would be at the new expense reimbursement level proposed by Lord Abbett and how those expense ratios would relate to those of the peer group.
As to National Tax Free Income Fund, the Board observed that for the fiscal year ended September 30, 2010 the contractual management and administrative services fees, when calculated as a percentage of a hypothetical common asset level that approximated the Fund’s average net assets; were approximately two basis points above the median of the peer group and the actual management and administrative services fees were approximately three basis points above the median of the peer group. The Board observed that for the fiscal year ended September 30, 2010 the total expense ratio of Class A was approximately one basis point below the median of the peer group, the total expense ratio of Class B was approximately three basis points above the median of the peer group, the total expense ratio of Class C was approximately seven basis points below the median of the peer group, and the total expense ratio of Class F was approximately two basis points above the median of the peer group. The Board also considered the projected expense ratio of each class and how those ratios would relate to those of the peer group.
As to Short Duration Tax Free Fund, the Board observed that for the fiscal year ended September 30, 2010 the contractual management and administrative services fee, when calculated as a percentage of a hypothetical common asset level that approximated the Fund’s average net assets; were approximately one basis point below the median of the peer group and the actual management and administrative services fees were approximately four basis points below the median of the peer group. The Board observed that for the fiscal year ended September 30, 2010 the total expense ratio of Class A was approximately nineteen basis points below the median of the peer group, the total expense ratio of Class C was approximately one basis point above the median of the peer group, the total expense ratio of Class F was approximately four basis points below the median of the peer group, and the total expense ratio of Class I was approximately five basis points below the median of the peer group. The Board noted that effective February 1, 2011 the Fund and Lord Abbett had agreed to a management fee waiver and expense limitation agreement whereby the total expense ratio, excluding 12b-1 fees (if any) and interest related expenses, of each class was limited to no more than 0.39%. The Board noted that Lord Abbett proposed to enter into a new management fee waiver and expense limitation agreement through January 31, 2013 under which the expense ratio of each class would be limited to a level that was two basis points higher. The Board also considered what the expense ratio of each class would be at the new expense reimbursement level proposed by Lord Abbett and how those expense ratios would relate to those of the peer group.
As to AMT Free Municipal Bond Fund, the Board observed that for the period ended August 31, 2011, the contractual management and administrative services fees, when calculated as a percentage of a hypothetical common asset level that approximated the Fund’s average net assets; were approximately one basis point above the median of the peer group and the actual management and administrative services fees were approximately forty-seven basis points below the median of the peer group. The Board observed that for the period ended August 31, 2011 the total expense ratio of Class A was approximately thirty-five basis points below the median of the peer group, the total expense ratio of Class C was approximately thirty basis points below the median of the peer group, the total expense ratio of Class F was approximately twenty-three basis points below the median of the peer group, and the total expense ratio of Class I was approximately thirty-one basis points below the median of the peer group. The Board noted that effective October 26, 2010 the Fund and Lord Abbett had agreed to a management
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Approval of Advisory Contract (continued)
fee waiver and expense limitation agreement whereby the total expense ratio, excluding 12b-1 fees (if any) and interest related expenses, of each class was limited to no more than 0.30%. The Board noted that Lord Abbett proposed to enter into a new management fee waiver and expense limitation agreement through January 31, 2013 under which the expense ratio of each class would be limited to a level that was five basis points higher. The Board also considered what the expense ratio of each class would be at the new expense reimbursement level proposed by Lord Abbett and how those expense ratios would relate to those of the peer group.
As to California Tax Free Income Fund, the Board observed that for the fiscal year ended September 30, 2010 the contractual management and administrative services fees, when calculated as a percentage of a hypothetical common asset level that approximated the Fund’s average net assets; were approximately one basis point below the median of the peer group and the actual management and administrative services fees were approximately one basis point above the median of the peer group. The Board observed that the total expense ratio of Class A was approximately seven basis points below the median of the peer group, the total expense ratio of Class C was approximately eight basis points below the median of the peer group, and the total expense ratio of Class F was approximately twelve basis points above the median of the peer group. The Board considered the projected expense ratio of each class and how those ratios would relate to those of the peer group.
As to New Jersey Tax Free Income Fund, the Board observed that for the fiscal year ended September 30, 2010 the contractual management and administrative services fees, when calculated as a percentage of a hypothetical common asset level that approximated the Fund’s average net assets; were approximately three basis points below the median of the peer group and the actual management and administrative services fees were approximately one basis point below the median of the peer group. The Board also observed that for the fiscal year ended September 30, 2010 the total expense ratio of Class A was approximately the same as the median of the peer group and the total expense ratio of Class F was approximately five basis points above the median of the peer group. The Board also considered the projected expense ratio of each class and how those ratios would relate to those of the peer group.
As to New York Tax Free Income Fund, the Board observed that for the fiscal year ended September 30, 2010 the contractual management and administrative services fees, when calculated as a percentage of a hypothetical common asset level that approximated the Fund’s average net assets; were approximately the same as the median of the peer group and the actual management and administrative services fees were approximately two basis points above the median of the peer group. With respect to Class F, the Board noted that the peer group constituted California municipal debt funds due to the limited number of New York municipal debt funds with the same distribution expense structure. The Board also observed that for the fiscal year ended September 30, 2010 the total expense ratio of Class A was approximately six basis points below the median of the peer group, the total expense ratio of Class C was approximately seven basis points below the median of the peer group, and the total expense ratio of Class F was approximately twelve basis points above the median of the peer group. The Board considered the projected expense ratio of each class and how those ratios would relate to those of the peer group.
Profitability. As to each Fund, the Board considered the level of Lord Abbett’s profits in managing the Fund, including a review of Lord Abbett’s methodology for allocating its costs to its management of the Fund. The Board concluded that the allocation methodology had a
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Approval of Advisory Contract (concluded)
reasonable basis and was appropriate. It considered any profits realized by Lord Abbett in connection with the operation of each Fund, including the fee Lord Abbett receives from the Fund for providing administrative services to the Fund, and whether the amount of profit was fair for the management of the Fund. The Board also considered the profits realized from other business segments of Lord Abbett, which may benefit from or be related to each Fund’s business. The Board considered Lord Abbett’s profit margins in comparison with available industry data, both accounting for and ignoring marketing and distribution expenses, and how those profit margins could affect Lord Abbett’s ability to recruit and retain investment personnel. The Board recognized that Lord Abbett’s profitability was a factor in enabling it to attract and retain qualified investment management personnel to provide services to each Fund. The Board noted that Lord Abbett’s overall profitability had increased in its 2011 fiscal year. The Board concluded that Lord Abbett’s profitability overall and as to each Fund was not excessive.
Economies of Scale. As to each Fund, the Board considered whether there had been any economies of scale in managing the Fund, whether the Fund had appropriately benefited from any such economies of scale, and whether there was potential for realization of any further economies of scale. The Board concluded that each existing management fee schedule, with its breakpoint(s) in the level of the management fee, adequately addressed any economies of scale in managing the applicable Fund.
Other Benefits to Lord Abbett. As to each Fund, the Board considered the character and amount of fees paid by the Fund and the Fund’s shareholders to Lord Abbett and Distributor for services other than investment advisory services. The Board also considered the revenues and profitability of Lord Abbett’s investment advisory business apart from its mutual fund business, and the intangible benefits enjoyed by Lord Abbett by virtue of its relationship with the Funds. The Board observed that Distributor receives Rule12b-1 fees from certain of the Lord Abbett Funds as to shares held in accounts for which there is no other broker of record, may retain a portion of the Rule12b-1 fees from the Funds, and receives a portion of the sales charges on sales and redemptions of some classes of shares. The Board observed that, in addition, Lord Abbett accrues certain benefits for its business of providing investment advice to clients other than the Lord Abbett Funds, but that business also benefits the Funds. The Board also noted that Lord Abbett, as disclosed in the prospectuses of the Funds, has entered into revenue sharing arrangements with certain entities that distribute shares of the Funds and other Lord Abbett funds.
Alternative Arrangements. As to each Fund, the Board considered whether, instead of approving the continuation of the management agreement, it might be in the best interests of the Fund to implement one or more alternative arrangements, such as continuing to employ Lord Abbett, but on different terms. In considering whether to approve the continuation of the management agreements, the Board did not identify any single factor as paramount or controlling. This summary does not discuss in detail all matters considered.
After considering all of the relevant factors, the Board unanimously found that continuation of the existing management agreements was in the best interests of each Fund and its shareholders and voted unanimously to approve the continuation of the management agreements.
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Householding
The Company has adopted a policy that allows it to send only one copy of each Fund’s prospectus, proxy material, annual report and semiannual report to certain shareholders residing at the same "household." This reduces Fund expenses, which benefits you and other shareholders. If you need additional copies or do not want your mailings to be "householded," please call Lord Abbett at 888-522-2388 or send a written request with your name, the name of your fund or funds and your account number or numbers to Lord Abbett Family of Funds, P.O. Box 219336, Kansas City, MO 64121.
Proxy Voting Policies, Procedures and Records
A description of the policies and procedures that Lord Abbett uses to vote proxies related to each Fund’s portfolio securities, and information on how Lord Abbett voted each Fund’s proxies during the 12-month period ended June 30 are available without charge, upon request, (i) by calling 888-522-2388; (ii) on Lord Abbett’s Website at www.lordabbett.com; and (iii) on the Securities and Exchange Commission’s ("SEC") Website at www.sec.gov.
Shareholder Reports and Quarterly Portfolio Disclosure
The Funds are required to file their complete schedule of portfolio holdings with the SEC for their first and third fiscal quarters on Form N-Q. Copies of the filings are available without charge, upon request on the SEC’s Website at www.sec.gov and may be available by calling Lord Abbett at 888-522-2388. You can also obtain copies of Form N-Q by visiting the SEC’s Public Reference Room in Washington, DC (information on the operation of the Public Reference Room may be obtained by calling 800-SEC-0330).
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This report, when not used for the general information of shareholders of the Fund, is to be distributed only if preceded or accompanied by a current fund prospectus.
Lord Abbett mutual fund shares are distributed by LORD ABBETT DISTRIBUTOR LLC.
| | Lord Abbett Municipal Income Fund, Inc.
Lord Abbett Short Duration Tax Free Fund Lord Abbett Intermediate Tax Free Fund Lord Abbett AMT Free Municipal Bond Fund Lord Abbett National Tax-Free Income Fund Lord Abbett High Yield Municipal Bond Fund Lord Abbett California Tax-Free Income Fund Lord Abbett New Jersey Tax-Free Income Fund Lord Abbett New York Tax-Free Income Fund | | LATFI-3-0312 (05/12) |
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Item 2: | Code of Ethics. |
| Not applicable. |
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Item 3: | Audit Committee Financial Expert. |
| Not applicable. |
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Item 4: | Principal Accountant Fees and Services. |
| Not applicable. |
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Item 5: | Audit Committee of Listed Registrants. |
| Not applicable. |
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Item 6: | Investments. |
| Not applicable. |
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Item 7: | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
| Not applicable. |
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Item 8: | Portfolio Managers of Closed-End Management Investment Companies. |
| Not applicable. |
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Item 9: | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. |
| Not applicable. |
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Item 10: | Submission of Matters to a Vote of Security Holders. |
| Not applicable. |
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Item 11: | Controls and Procedures. |
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| (a) | Based on their evaluation of the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) as of a date within 90 days prior to the filing date of this report, the Chief Executive Officer and Chief Financial Officer of the Registrant have concluded that such disclosure controls and procedures are reasonably designed and effective to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to them by others within those entities. |
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| (b) | There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting. |
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| (a)(1) | Amendments to Code of Ethics – Not applicable. |
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| (a)(2) | Certification of each principal executive officer and principal financial officer of the Registrant as required by Rule 30a-2 under the Investment Company Act of 1940 is attached hereto as a part of EX-99.CERT. |
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| (a)(3) | Not applicable. |
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| (b) | Certification of each principal executive officer and principal financial officer of the Registrant as required by Section 906 of the Sarbanes-Oxley Act of 2002 is provided as a part of EX-99.906CERT. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| LORD ABBETT MUNICIPAL INCOME FUND, INC. |
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| By: | /s/ Robert S. Dow |
| | Robert S. Dow |
| | Chief Executive Officer and Chairman |
Date: May 17, 2012
| | |
| By: | /s/ Joan A. Binstock |
| | Joan A. Binstock |
| | Chief Financial Officer and Vice President |
Date: May 17, 2012
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
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| By: | /s/ Robert S. Dow |
| | Robert S. Dow |
| | Chief Executive Officer and Chairman |
Date: May 17, 2012
| | |
| By: | /s/ Joan A. Binstock |
| | Joan A. Binstock |
| | Chief Financial Officer and Vice President |
Date: May 17, 2012