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.
All 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 August 2013, there were 13 Lord Abbett funds with at least $2 billion in assets and 22 with more than $1 billion, many more than a decade ago. The new and newly revamped funds have been especially impressive growers: Short Duration Tax Free and International Dividend Income each has more than $2 billion in assets, Floating Rate has more than $7.5 billion, and Short Duration Income has a staggering $32.6 billion, up from just more than $100 million before it got its current name and mandate in 2007.
That kind of exponential growth is actually a bit 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 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 has mostly been leveraging its existing resources in response to investor demand. Floating Rate, Short Duration Income, and Short Duration Tax Free in particular have benefited from good timing, as many bank-loan funds and short-term bond funds, especially those with relatively high yields, saw big inflows over the past few years, in an environment of rock-bottom interest rates.
A bigger downside to all the changes at Lord Abbett in recent years has been a marked increase in turnover of portfolio managers and other investment personnel, over and above the firings and other changes initiated by the firm. Ed von der Linde left in June 2008 to start his own firm after 20 years managing Lord Abbett Mid Cap Stock, while Eli Salzmann, longtime manager of Affiliated, stepped down from that fund in mid-2009 and left the firm entirely at the end of 2010 for a position at Neuberger Berman. A steady stream of key fixed-income managers have left: Maren Lindstrom of Convertible (LACFX) in late 2009, Michael Goldstein of High Yield (LHYAX) in late 2010, and Beth McLean and Jason Duko of Floating Rate in March 2011, as well as others such as Michael Lesesne, who headed up the centralized credit research team and left in early 2012. In several cases, the replacements for departed managers have themselves left within a few months. Lord Abbett hired Vanguard veteran Reid Smith for the muni-bond team in May 2011 after the death of Scott Smith, but he left after six months; similarly, Joel Serebransky left as comanager of Floating Rate little more than a year after he had been recruited to replace McLean and Duko.
The stated reasons for these manager departures have varied, but it seems clear that tensions over the recent changes at Lord Abbett have been a contributing factor in at least some of them. That's not to say that the changes have necessarily been bad or that some of the departures wouldn't have happened anyway, but it's unsettling to see so many key people heading out the door in such a short period of time. Rightly or wrongly, such turnover is naturally going to make some investors wary about who might leave next, or whether Lord Abbett can continue to attract talented people. There's no need to panic yet; the firm still has a good bench of talent in most areas, and there have been no new manager departures in the past year other than those that Lord Abbett initiated. Even so, the fallout has been significant enough that Lord Abbett will need to demonstrate that it has righted the ship and stabilized its investment team over a longer period of time before it earns our full confidence.
This article is the Corporate Culture portion of the Morningstar Stewardship Grade for Funds for Lord Abbett. Click here to see Morningstar's Stewardship Grade methodology.
David Kathman, CFA does not own shares in any of the securities mentioned above.
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