The Board of Directors of the Company, 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 the 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 as 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 the portfolio management teams conducted 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 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 one or more groups of funds with similar objectives and of similar size (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 Small Cap Value Fund, the Board considered the investment performance of its Class A shares in relation to two different performance universes, the first consisting of small-cap core funds and the second consisting of small-cap value funds. The Board observed that the investment performance of the Class A shares of the Fund was in the fifth quintile of the first performance universe for the eight-month period, the fourth quintile for the one-year and three-year periods, the second quintile for the five-year period, and the first quintile for the ten-year period. The Board observed that the investment performance was in the fourth quintile of the second performance universe for the eight-month period, the third quintile for the one-year period, the fourth quintile
Approval of Advisory Contract (continued)
for the three-year period, and the first quintile for the five-year and ten-year periods. The Board also observed that the investment performance was lower than that of each of the Lipper Small-Cap Core Index and the Lipper Small-Cap Value Index for the eight-month, one-year, and three-year periods and higher than that of those Indexes for the five-year and ten-year periods.
As to Classic Stock Fund, the Board observed that the investment performance of its Class A shares was in the fifth quintile of its performance universe for the eight-month and one-year periods, the fourth quintile for the three-year period, the third quintile for the five-year period, and the second quintile for the ten-year period. The Board also observed that the investment performance was lower than that of the Lipper Large-Cap Core Index for the eight-month, one-year, and three-year periods and higher than that of the Index for the five-year and ten-year period.
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 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 also noted that in 2009 Gerald S.E. Heffernan, Jr., had become lead portfolio manager for the Small Cap Value Fund, replacing Robert Fetch. 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 Small Cap Value Fund, the Board considered the management fees and the total expenses of the Fund in comparison to two peer groups, the first consisting of small-cap core funds and the second consisting of small-cap value funds. As to the first peer group, the Board observed that for the fiscal year ended November 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 the same as the median of the peer group. The Board observed that for the fiscal year ended November 30, 2010 the total expense ratio of Class A was approximately four basis points below the median of the peer group, the total expense ratios of Class B and Class C were each approximately seven 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, the total expense ratio of Class I was approximately one basis point above the median of the peer group, the total expense ratio of Class P was approximately seventeen basis points below the median of the peer group, the total expense ratio of Class R2 was approximately three basis points below the median of the peer group, and the total expense ratio of Class R3 was approximately twelve basis points below the median of the peer group. As to the
46
Approval of Advisory Contract (continued)
second peer group, the Board observed that for the fiscal year ended November 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 five basis points above the median of the peer group and the actual management and administrative services fees were approximately the same as the median of the peer group. The Board observed that the total expense ratio of Class A was approximately two basis points below the median of the peer group, the total expense ratios of Class B and Class C were each approximately twelve basis points below the median of the peer group, the total expense ratio of Class F was approximately five basis points below the median of the peer group, the total expense ratio of Class I was approximately six basis points above the median of the peer group, the total expense ratio of Class P was approximately seven basis points below the median of the peer group, the total expense ratio of Class R2 was approximately seven basis points above the median of the peer group, and the total expense ratio of Class R3 was approximately two basis points below 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 groups.
As to Classic Stock Fund, the Board observed that for the fiscal year ended November 30, 2010 the contractual management and administrative services fees were approximately six basis points above the median of the peer group and the actual management and administrative service fees, when calculated as a percentage of a hypothetical common asset level that approximated the Fund’s average net assets, were approximately twenty-four basis points below the median of the peer group. The Board observed that for the fiscal year ended November 30, 2010 the total expense ratio of Class A was approximately eighteen basis points below the median of the peer group, the total expense ratios of Class B and Class C were each approximately twenty-eight basis points below the median of the peer group, the total expense ratio of Class F was approximately twenty-four basis points below the median of the peer group, the total expense ratio of Class I was approximately twenty-one basis points below the median of the peer group, the total expense ratio of Class P was approximately twenty-two basis points below the median of the peer group, the total expense ratio of Class R2 was approximately eight basis points below the median of the peer group, and the total expense ratio of Class R3 was approximately eighteen basis points below the median of the peer group. The Board noted that for the period from April 1, 2011 through March 31, 2012, Lord Abbett had contractually agreed to waive all or a portion of its management fee and, if necessary, reimburse the Fund’s other expenses to the extent necessary so that the total net annual operating expenses for each class, excluding 12b-1 fees, do not exceed an annual rate of 0.63%. The Board also noted that Lord Abbett proposed to renew the agreement through March 31, 2013. The Board considered how those expense 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 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
47
Approval of Advisory Contract (concluded)
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 Fund. The Board observed that Distributor receives 12b-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 12b-1 fees from the Funds, and receives a portion of the sales charges on sales and redemptions of some classes of shares. In addition, the Board observed that Lord Abbett accrues certain benefits for its business of providing investment advice to clients other than the Lord Abbett Funds, but that 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. The Board also took into consideration the investment research that Lord Abbett receives as a result of Fund brokerage transactions.
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.
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. 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.
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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 Research Fund, Inc.
Lord Abbett Classic Stock Fund
Small-Cap Value Series | | LARF-3-0512
(07/12) |
| |
Item 2: | Code of Ethics. |
| Not applicable. |
| |
Item 3: | Audit Committee Financial Expert. |
| Not applicable. |
| |
Item 4: | Principal Accountant Fees and Services. |
| Not applicable. |
| |
Item 5: | Audit Committee of Listed Registrants. |
| Not applicable. |
| |
Item 6: | Investments. |
| Not applicable. |
| |
Item 7: | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
| Not applicable. |
| |
Item 8: | Portfolio Managers of Closed-End Management Investment Companies. |
| Not applicable. |
| |
Item 9: | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. |
| Not applicable. |
| |
Item 10: | Submission of Matters to a Vote of Security Holders. |
| Not applicable. |
| |
Item 11: | Controls and Procedures. |
| | |
| (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. |
| | |
| (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. |
| | |
| (a)(1) | Amendments to Code of Ethics – Not applicable. |
| | |
| (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. |
| | |
| (a)(3) | Not applicable. |
| | |
| (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.
| | |
| LORD ABBETT RESEARCH FUND, INC. |
| |
| By: | /s/ Robert S. Dow |
| | Robert S. Dow |
| | Chief Executive Officer and Chairman |
Date: July 24, 2012
| | |
| By: | /s/ Joan A. Binstock |
| | Joan A. Binstock |
| | Chief Financial Officer and Vice President |
Date: July 24, 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.
| | |
| By: | /s/ Robert S. Dow |
| | Robert S. Dow |
| | Chief Executive Officer and Chairman |
Date: July 24, 2012
| | |
| By: | /s/ Joan A. Binstock |
| | Joan A. Binstock |
| | Chief Financial Officer and Vice President |
Date: July 24, 2012
