Fund Profile: Lord Abbett Alpha Strategy A
by Ann C. Logue
The Lord Abbett Alpha Strategy Fund is a fund of funds, something you don’t see too often in the mutual fund world. Instead of a portfolio manager picking stocks, assets in this fund are divided among several different Lord Abbett small capitalization funds. This gives investors exposure to the small-cap sector of the market without having to make find decisions about whether to be in small caps or microcaps, growth or value. Let’s face it, mutual funds have become highly specialized, and that can be confusing to an investor who just wants to put some money away in the hopes of long-term capital appreciation. A fund of funds is a way to mimic a basic fund that has basic market exposure. As an added bonus, the Alpha Strategy fund is one of the few ways that investors can get into several closed Lord Abbett funds.
The fund has currently invested 20.6% in the Lord Abbett International Opportunities Fund, which can be as much as 25% of holdings; 19.8% in the closed Lord Abbett Small Cap Value Fund; 19.8% in the Developing Growth fund; 10% in the closed Micro Cap Value Fund; 10% in the closed Small Cap Blend Fund; 9.9% in the Value Opportunities Fund; and 9.9% in the closed Micro Cap Growth Fund. Alpha Strategy assets may also be invested in Lord Abbett’s Growth Opportunities Fund, but none are right now. Robert Gerber leads the committee that makes the asset allocation decisions; the underlying fund managers go from there. And, despite the range of strategies used in the fund’s different investments, Morningstar categorizes the fund as Small Growth, not Small Blend. Go figure.
Funds of funds have long been controversial for two reasons. The first is that prior to the stock market crash in 1929, funds of funds were common and used leverage to increase potential returns. After the market crash, though, investors wanted nothing to do with them, and post-crash mutual fund companies wanted to distinguish themselves from their fallen brethren. It’s ancient history, but shibboleths die hard. The more modern concern is duplicative fees, because a fund of funds has its own fees, as do each of the funds where it puts money. Alpha Strategy’s A shares have a 12b-1 fee of 0.35%, a management fee of 0.10%, and other expenses of 0.39%, as well as taking on the 1.14% average expense ratio of the underlying funds, which adds up to a hefty 1.98%! To soften the blow, Lord Abbett has agreed to waive its fees in order to keep the total expense ratio capped at 1.60%, where it is now. (For comparison, the underlying funds have expense ratios ranging from 1.19% to 1.54 %.)
The Class A shares are sold through financial advisors with a front load of 5.75% and the first breakpoint at $50,000, with no sales charge on investments of $1 million or more. Other share classes come with no front load, contingent deferred sales charges and different 12b-1 fees. Lord Abbett Alpha Strategy has a minimum investment of $1000 for most investors and $250 for retirement accounts or for participants in automatic investment programs (with a $50 minimum subsequent investment requirement).
Portfolio turnover tends to be low, at just 39.09% for the year ending Oct. 31, 2007. In December of 2007, the fund declared a dividend of $0.76 per share and a capital gain payout of $1.49 per share. The current yield is 3.26%. Alpha Strategies is a small fund, with assets of $321.54 million. Although it is underperforming in its sector so far this year (down 12.44% compared to a category decline of 9.16%), its longer-term performance is impressive. For the last five years, the fund posted an average annual return of 19.86%, compared to annual average of 14.96% for the category and 11.63% for the S&P 500 Index.
The Lord Abbett Alpha Strategy Fund isn’t the cheapest way to get exposure to broad portfolio of small-cap stocks, but the performance to date has made up for the layered costs. The low turnover eases the tax burden often felt by small-cap investors holding money in taxable accounts. The recent weak performance, no surprise given current market conditions, creates a nice buying opportunity.
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