Lord Abbett Bank Loan Strategy Second Quarter 2021 Performance Commentary
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Lord Abbett Bank Loan Strategy
Second Quarter 2021 Performance Commentary
Performance Review
For the second quarter of 2021, the Lord Abbett Bank Loan Institutional Composite (+2.00% gross of fees, +1.88% net of
fees) outperformed its benchmark, the Credit Suisse Leveraged Loan Index (+1.44%)*.
Economic Review
The U.S. bond market, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, returned 1.83% over the
second quarter.1 The U.S. Treasury component of the Aggregate Index returned 1.75%. Investment grade corporate bonds 2
returned approximately 3.55% and experienced modest spread tightening throughout the quarter.
High yield bonds3 posted positive performance in the second quarter. High yield spreads tightened 31 basis points from
March month-end levels to 306 basis points at the end of June. Within the asset class, the lowest quality segments of the
high yield market outperformed higher quality tiers. Leveraged loans, as represented by the Credit Suisse Leveraged Loan
Index, underperformed their fixed rate peers over the second quarter amid receding inflation concerns in May and June and
heavy capital market activity. Demand is still strong for the asset class, with loan funds tracking 25 consecutive weeks of
inflows with $25.6bn of YTD inflows.4
The bullish narrative continued for the better part of the second quarter. Investor focus remained on the central bank liquidity
tailwind, fiscal stimulus, vaccine progress, reopening momentum, a strong corporate profit backdrop and robust equity
inflows. Inflation was seemingly the most important and complicated macro theme in Q2. There was an unrelenting flurry of
headlines and corporate commentary about upward pressure on prices from supply chain disruptions, higher raw-materials
costs, shipping constraints and a tightening labor market. Headline consumer prices rose 0.6% m/m in May following a 0.8%
gain in April. Core consumer prices increased 0.7% m/m in May following a 0.9% gain in April. Headline prices were up
5.0% y/y in May, the biggest increase since June 2008, while core prices were up 3.8% y/y, the biggest increase since June
1992.5
While concerns about an inflation overshoot were fairly pervasive, the Fed remained consistent in its messaging around
expectations that price pressures will be transitory and the peak inflation theme gained traction as the quarter progressed
even as economists suggested that ‘transitory’ may be longer than expected. While Fed Chair Powell stuck with the
transitory messaging on inflation, he also conceded that the Fed is cognizant about the risk that inflation could be more
persistent. Powell not surprisingly admitted the Fed has started to talk about tapering. However, he also noted that
"substantial further progress" is still a "a ways" away, a view shared by other Fed leaders. Powell said the central bank will
not raise rates preemptively because it fears the possible onset of inflation. 6 This helped growth and momentum stocks
outperform value and cyclicals.
Despite a late-quarter agreement between the White House and a bipartisan group of Senators on the framework of a
physical infrastructure package, the path to additional fiscal stimulus remained complicated by Democratic leadership's
insistence that the Senate also pass a separate package via reconciliation that includes Democratic priorities surrounding
climate change and human infrastructure.6 Also of note were corporate earnings. As has been the case over the last few
quarters, upside surprises were driven by outsized estimate cuts early in the pandemic, a resilient macro backdrop
underpinned by massive fiscal and monetary stimulus, and elevated profit margins.
1Portfolio Positioning
We continue to have a broadly constructive view on loans despite their underperformance relative to fixed rate securities
as U.S. Treasury yields declined towards the end of the second quarter. The broader credit environment remains supportive
for leveraged loan issuers and demand for the product has been persistent throughout the first half of 2021. Within the loan
space, we maintain our focus on companies in industries that we believe are better positioned to adapt to and benefit from
fundamental structural changes that were accelerated by the COVID-19 pandemic. The portfolio reflects this thesis with
positions in the healthcare and information technology sectors, the two largest allocations in the portfolio, as we believe
these areas are long-term beneficiaries from opportunities created by these structural changes.
We continue to find attractive opportunities in the reopening theme which has performed well over the last twelve months.
We remain constructive in leisure, specifically gaming, which has now expanded from regional gaming investments to a
more national theme as areas like Las Vegas return to pre-pandemic activity. Outside of gaming, we also see value in the
entertainment subsector, targeting issues in resorts and amusement parks, as well as live events that should benefit from
increased consumer demand. However, we have been selective in adding issues tied to reopening as many of these
investments do not offer the same outsized returns as in previous quarters. The portfolio had monetized multiple reopening
investments that were call constrained with minimal price upside. This was significant in the aerospace sector where
valuations had climbed to a level with limited potential for above-average returns. Given these heightened valuations, we
see a return profile primarily driven by enhanced carry in 2H21 rather than catalyst-driven capital raising issues that were
significant return sources over the last twelve months.
Performance
Contributors
Security selection within the aerospace sector contributed to relative performance. The sector was supported amid tailwinds
that included further economic reopening and increased optimism surrounding the resumption of business and personal
travel.
Security selection within the energy sector also contributed to relative performance for the quarter. Specifically, the portfolio
continued to yield strong relative performance from its overweight allocation to the exploration & production (E&P) subsector
due to an ongoing positive outlook for oil prices and continued recovery in global energy demand.
The portfolio also benefited from its allocation to corporate debt, specifically high-yield bonds, as high-yield spreads
tightened more than 30 basis points during the second quarter from March month-end levels.
Detractors
Through the second quarter, security selection within both the service and telecommunications sectors detracted from
relative performance. The portfolio’s underweight position to issues within both sectors that outperformed the broader loan
market, as well as its exposure to issues that underperformed were a headwind.
Strategy Outlook
The current economic landscape is favorable for bank loan issuers supported by solid economic growth (albeit likely to peak
on a y/y basis in Q2) and a positive earnings outlook with low projected default rates. Using the approach of looking to the
distress ratio as a guide, we estimate default loss over the coming 12 months of approximately 1% or less, falling from a
peak of over 6% in late 2020. We believe the declining intensity in the default cycle over time along with the uplift in credit
quality are key ingredients that further support our continued positive outlook on the U.S. leveraged loan sector broadly.
2Specifically, we believe there continues to be opportunity in lower rated tiers of the credit market where valuations have
generally lagged higher rated securities. We view the most attractive opportunities to be in CCC rated credit, which we
believe has the highest upside given historically tight B spread levels and the recent pace of upgrades which has been
meaningfully larger than the pace of downgrades.
*The Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of the U.S. dollar-denominated leveraged loan
market. The CS Leveraged Loan Index, which includes reinvested dividends, has been taken from published sources.
1
As represented by the Bloomberg Barclays U.S. Aggregate Bond Index as of 06/30/2021.
2
As represented by the ICE BofA U.S. Corporate (A-BBB) as of 06/30/2021.
3
As represented by the ICE BofA U.S. High Yield Constrained Index as of 06/30/2021.
4
JP Morgan, data represents U.S.-registered mutual funds.
5
U.S. Bureau of Labor Statistics.
6
Factset.
Past performance is not a reliable indicator or guarantee of future results.
ICE BofA Index Information:
Source: ICE Data Indices, LLC (“ICE”), used with permission. ICE PERMITS USE OF THE ICE BofA INDICES AND RELATED DATA
ON AN "AS IS" BASIS, MAKES NO WARRANTIES REGARDING SAME, DOES NOT GUARANTEE THE SUITABILITY, QUALITY,
ACCURACY, TIMELINESS, AND/OR COMPLETENESS OF THE ICE BofA INDICES OR ANY DATA INCLUDED IN, RELATED TO, OR
DERIVED THEREFROM, ASSUMES NO LIABILITY IN CONNECTION WITH THE USE OF THE FOREGOING, AND DOES NOT
SPONSOR, ENDORSE, OR RECOMMEND LORD ABBETT, OR ANY OF ITS PRODUCTS OR SERVICES.
Bloomberg Barclays Index Information:
Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates
(collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”),
used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices.
Neither Bloomberg nor Barclays approves or endorses this material or guarantees the accuracy or completeness of any information
herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law,
neither shall have any liability or responsibility for injury or damages arising in connection therewith.
Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.
If applicable, “Modestly” is defined as any under or outperformance within 100 basis points (bps) for equity portfolios and
50 basis points (bps) for fixed income portfolios as compared to the strategy's benchmark.
Portfolio discussions are based on the strategy’s representative portfolio.
These materials do not take into account individual client circumstances, objectives, or needs. No determination has been
made regarding the suitability of any securities, financial instruments, or strategies for particular clients or prospects.
The information contained herein is provided on the basis and subject to the explanations, caveats, and warnings set out in
this notice and elsewhere herein. Any discussion of risk management is intended to describe Lord Abbett’s efforts to monitor
and manage risk but does not imply low risk.
These materials do not purport to provide any legal, tax, or accounting advice.
The information provided is not directed at any investor or category of investors and is provided solely as general information
about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information
provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither
3Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give
advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary
about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.”
The views and information discussed in this commentary are as of June 30, 2021, are subject to change, and may
not reflect the views of the firm as a whole. The views expressed regarding the markets are at a specific point in
time, are opinions only, and should not be relied upon as a forecast, research, or investment advice regarding a
particular investment or the markets in general. Information discussed should not be considered a
recommendation to purchase or sell securities.
The Global Investment Performance Standards (GIPS ®) compliant performance results shown represent the investment
performance record for the Lord, Abbett & Co. LLC (Lord Abbett) Bank Loan Institutional Composite. This composite is
comprised of all fully discretionary portfolios managed on behalf of institutional investors investing primarily in floating rate
senior loans. Effective November 2017, only accounts with a value of $20 million or more are included in the composite.
Effective January 2018, accounts funded on or before the 15 th of the month will be included in the Composite effective the
first day of the first following month. Accounts funded after the 15th of the month will be included effective on the first day of
the second following month. Prior to January 2018, other than registered investment companies sponsored by Lord Abbett,
accounts opened/funded on or before the 15th day of the month were included in the Composite effective the first day of the
second following month and accounts opened/funded after 15 th of the month were included effective on the first day of the
third following month. Registered investment companies sponsored by Lord Abbett are included in the Composite in the first
full month of management. Closed accounts will be removed from the Composite after the last full month in which they
were managed in accordance with applicable objectives, guidelines and restrictions. Performance results are expressed in
U.S. dollars and reflect reinvestment of any dividends and distributions. The Composite was created and incepted in 2008.
A list of all composite and pooled fund investment strategies offered by the firm, with a description of each strategy, is
available upon request. The type of portfolios in which each strategy is available (segregated account, limited distribution
pooled fund, or broad distribution pooled fund) is indicated in the description of each strategy. Policies for valuing
investments, calculating performance, and preparing GIPS Reports are available upon request.
For GIPS® purposes, the firm is defined as Lord, Abbett & Co. LLC (“Lord Abbett”). Total Firm Assets are the aggregate
fair value of all discretionary and non-discretionary assets for which the Firm has investment management responsibility.
Accordingly, Total Firm Assets include, but are not limited to, mutual funds (all classes of shares), privately placed
investment funds, non-U.S. domiciled investment funds, separate/institutional portfolios, individual portfolios and separately
managed accounts (“Wrap Fee/SMA Portfolios”) managed by Lord Abbett. Total Firm Assets also include any collateralized,
structured investment vehicle, such as a collateralized debt obligation or collateralized loan obligation, for which Lord Abbett
has been appointed as the collateral manager. For the period prior to January 1, 2000, the definition of the Firm does not
include any hedge fund or SMA program accounts where Lord, Abbett & Co. LLC did not have the records so long as it is
impossible for Lord, Abbett & Co. LLC to have the records (within the meaning of relevant GIPS® standards interpretations).
Total Firm Assets also exclude separately managed program accounts that involve model delivery.
The number of portfolios and total assets in the Composite, and the percentage of total “firm” assets represented by the
Composite at the end of each calendar year for which performance information is provided are as follows:
4Calendar Year Ended 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011
# of Portfolios 3 3 4 4 3 3 3 1 1 1
Total Assets ($M) $5,727 $9,827 $13,249 $12,266 $9,974 $6,208 $7,022 $8,763 $3,956 $2,866
Percentage of Firm Assets 2.57% 4.82% 8.23% 7.86% 7.41% 5.01% 5.17% 6.45% 2.80% 2.70%
Total Firm Assets ($M) $222,535 $204,031 $161,055 $156,110 $134,565 $124,007 $135,945 $135,786 $127,753 $107,449
Dispersion N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Lord Abbett Bank Loan Institutional Composite Gross
-0.92% 8.22% 0.55% 4.70% 10.78% 1.14% 1.74% 6.75% 11.01% 2.30%
(Annual)
Lord Abbett Bank Loan Institutional Composite Gross (3
2.54% 4.45% 5.26% 5.47% 4.46% 3.18% 6.43% 6.63% 7.40% 14.15%
year Annualized Return)
Lord Abbett Bank Loan Institutional Composite Gross (3
9.63% 2.83% 2.81% 2.49% 2.65% 2.08% 2.25% 4.02% 4.31% 6.46%
year Annualized Ex-Post Standard Deviation)
Lord Abbett Bank Loan Institutional Composite Net (Annual) -1.42% 7.68% 0.05% 4.18% 10.23% 0.64% 1.23% 6.22% 10.46% 1.79%
Lord Abbett Bank Loan Institutional Composite Net (3 year
2.03% 3.93% 4.74% 4.94% 3.94% 2.66% 5.90% 6.10% 6.87% 13.58%
Annualized Return)
Credit Suisse Leveraged Loan Index (Annual) 2.78% 8.17% 1.14% 4.25% 9.88% -0.38% 2.06% 6.15% 9.42% 1.80%
Credit Suisse Leveraged Loan Index (3 year Annualized
3.99% 4.48% 5.03% 4.50% 3.76% 2.57% 5.84% 5.75% 7.00% 17.49%
Return)
Credit Suisse Leveraged Loan Index (3 year Annualized Ex-
8.75% 2.66% 2.79% 2.67% 2.82% 2.10% 1.95% 3.56% 4.13% 7.63%
Post Standard Deviation)
Dispersion is represented by the asset-weighted standard deviation, a measure that explains deviations of gross portfolio
rates of return from the asset-weighted composite return. Only portfolios that have been managed within the Composite
style for a full year are included in the asset-weighted standard deviation calculation. The measure may not be meaningful
(N/A) for composites consisting of five or fewer portfolios or for periods of less than a full year.
The performance of the Composite is shown net and gross of advisory fees, and reflects the deduction of transaction costs.
The deduction of advisory fees and expenses (and the compounding effect thereof over time) will reduce the performance
results and, correspondingly, the return to an investor. Net performance of the Composite as presented in the table on the
previous page reflects the deduction of a “model” advisory fee, calculated as the highest advisory fee, borne by any account
(without giving effect to any performance fee that may be applicable) in the Composite (an annual rate of 0.50% of assets)
and other expenses (including trade execution expenses). For example, if $10 million were invested and experienced
a 10% compounded annual return for 10 years, its ending dollar value, without giving effect to the deduction of the
advisory fee, would be $25,937,425. If an advisory fee of 0.50% of average net assets per year for the 10-year period
were deducted, the annual total return would be 9.45% and the ending dollar value would be $24,782,276. The
management fee schedule is as follows: 0.47% on the first $50 million, 0.43% on the next $100 million, 0.38% on
the next $100 million, 0.36% on the next $250 million, and 0.34% on all assets over $500 million. Net-of-fee
performance reflects the deduction of the highest applicable institutional advisory fee that would be charged to a new
institutional client account based on the current fee schedule for this strategy. The composite includes one or more
registered investment companies sponsored by Lord Abbett (“Lord Abbett Funds”) that are subject to fees and expenses
that would be inapplicable to an institutional client account. Therefore, the actual performance of Lord Abbett Fund accounts
included in the composite may be lower than the net-of-fee composite performance presented. Fees and expenses
applicable to the Lord Abbett Funds are disclosed in each Fund’s Prospectus, which is available upon request. Past
performance does not guarantee future results. Certain securities held in portfolios contained in this composite may have
valuations determined using both subjective observable and subjective unobservable inputs. The Firm’s valuation hierarchy
does not materially differ from the hierarchy in the GIPS Valuation Principles.
Lord Abbett claims compliance with the Global investment Performance Standards (GIPS®) and has prepared and
presented this report in compliance with the GIPS standards. Lord Abbett has been independently verified for the periods
1993-2019. A firm that claims compliance with the GIPS standards must establish policies and procedures for complying
with all the applicable requirements of the GIPS standards. Verification provides assurance on whether the firm's policies
and procedures related to composite and pooled fund maintenance, as well as the calculation, presentation, and distribution
of performance, have been designed in compliance with the GIPS standards and have been implemented on a firm-wide
5basis. The Bank Loan Institutional composite has had a performance examination for the periods 2008-2019. The
verification and performance examination reports are available upon request.
The Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of the U.S. dollar-denominated
leveraged loan market. The Credit Suisse Leveraged Loan Index is an unmanaged, trader-priced index that tracks leveraged
loans. The Credit Suisse Leveraged Loan Index, which includes reinvested dividends, has been taken from published
sources. The benchmark has not been examined by Deloitte & Touche LLP.
Past performance is not a reliable indicator or a guarantee of future results. Differences in account size, timing of
transactions, and market conditions prevailing at the time of investment may lead to different results among accounts.
Differences in the methodology used to calculate performance also might lead to different performance results than those
shown. Composite performance is compared to that of an unmanaged index, which does not incur management fees,
transaction costs, or other expenses associated with a managed account.
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