SUPPLEMENT DATED FEBRUARY 29, 1996 TO THE CURRENT STATEMENT OF ADDITIONAL
INFORMATION FOR LORD ABBETT DEVELOPING GROWTH FUND, INC.
This page, together with the Fortune Magazine article and Big Opportunities
sales piece, constitutes the entire supplement dated February 29, 1996 to Lord
Abbett Developing Growth Fund's current statement of additional information.
<PAGE>
FEBRUARY 5, 1996
F O R T U N E
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TWO PROS ON WHERE
THE DOW IS HEADED
Reprinted through the courtesy of the Editors of FORTUNE
(C)1996 Time Inc.
<PAGE>
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PERSONAL FORTUNE
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TWO PROS ON WHERE THE DOW IS HEADED
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The new year had scarcely begun before a selloff in technology stocks led
to a one-day 97-point tumble for the Dow. No wonder investors are left
wondering whether the bull market has finally run its course. To help settle
their jitters, we lassoed a pair of veteran Wall Streeters: the professorial
Robert Farrell, Merrill Lynch's senior investment adviser, and value maven
Wayne Nordberg, partner and senior portfolio manager at Lord Abbett. FORTUNE'S
John Wyatt moderated the discussion as the two sat down together to debate the
stock market's future course--and shared their wisdom on where bargains can
still be found.
What do you make of the big drop, Wayne?
W.N.: We know the market is always a balancing act between fear and greed,
and this correcting process is a normal phenomenon even in a bull market.
There's no question that the speculative fervor that typified technology
investing back in the summer represented a major mania where expectations got
way out of line. We're now in the process of correcting that. The market also
assumed that the path to a budget accord was going to be simpler than it has
turned out to be.
But I think this kind of short-term pessimism will lead to attractive
prices that will encourage long-term investors to buy the fallen stocks.
Personally, I wouldn't be unhappy to see the market sell off another 150 points
or so in the days ahead. It would really clear the air.
So many indicators point to stretched equity valuations. Yet despite some
recent jitters, investors keep buying. Bob, is this the fabled "new paradigm"?
R.F.: I have a favorite saying, which is that there are no new eras, only
old eras that go to new excesses. So I don't think this is a new paradigm. We
are in a mature secular cycle and setting all kinds of benchmarks. But whenever
we've had a market like this in the past, it has eventually corrected.
Even with this recent selloff, I don't think the alarm bells have rung.
When you look at stocks in a general sense, it's still a bull market in decent
health. Valuation measures don't tell you timing, all they tell you is degree of
risk. We have to look at such things as money flows and interest rates to see
whether we are now coming to a point where the upward trend will end. Interest
rates are favorable; we still haven't seen money come in from foreigners; and
though the individual is getting pretty well invested, as a percentage of total
financial assets, investment by individuals is still below prior peaks.
I think the indexes will go up this year, but there will be more
volatility like what we are seeing--at least one, maybe two 5% to 10%
corrections. It will he a stock picker's game, though I guess Wayne would say
it's always a stock pickers market.
We know you agree on that point, Wayne. But give us the big-picture view,
for now. Are your valuation models sounding any alarms?
W.N.: Not really. The key is the environment that equitites live in, which is
still favorable. The conditions are comparable to the late Fifties and the early
Sixties: Inflation was 1.5%, Treasury bonds were yielding 4%, and the market
traded between 15 and 22 times earnings for some seven years. Now equity
valuations, at some 15 to 16 times earnings, offer fair value. We think stocks
can return 10% to 12% overall in 1996 without becoming egregiously overpriced.
That's a bold statement. Explain?
W.N.: Even with profits peaking now, if we are right, long-term interest
rates can stay at 6%, or maybe even drop to 5.75%, while short-term rates could
come down another 50 basis points to 5% or less. Since stocks aren't valued in
a vacuum, those low yields make equity--the security with the longest
duration--relatively more attractive.
Low inflation is the key to that interest rate outlook, and I think it
can fall to 2.5% or even further. The demise of communism is one of the most
deflationary forces to be unleashed on the world in decades, basically freeing
up some two billion people who want to be part of the free-market system, and
keeping the potential for wage hikes in the U.S., Europe, and Japan next to nil.
I also think the market last year was only belatedly recognizing and
catching up with some improved fundamentals that had been under the surface for
some time. American industry has been restructuring for ten years. We have
totally superseded the Japanese in terms of technological leadership. There is
a culture of cost cutting that is central to U.S. management today. That bodes
well for our ongoing competitiveness.
Okay, let's focus in. Where would you invest now, Bob?
R.F.: For the past 18 months, large-cap stocks have been the more consistent
performers, but I expect small caps to regain the lead as they did from 1990 to
1993. The market always sets us up for something, and I don't want to base my
philosophy on what worked last year.
The problem is that the money has moved toward the big stocks, much of
it to the consumer staples, which are the international franchise companies. But
I think these companies may be negatively affected by the slowdowns abroad and
by a stronger dollar. On a relative basis, the small-cap stocks are better
values, and I think a capital gains tax cut might trigger an upward move. The
bigger potential profit taking will be in the large stocks.
Wayne, which sectors will be gaining, and which will lose?
W.N.: Well, I agree completely with Bob that the nice tail-
<PAGE>
wind U.S. multinationals got from a weak dollar and from faster growth
overseas is coming to an end. I think one of 1996's big surprises will be the
strength of the dollar, so we are fairly skeptical of the stocks of consumer
companies that generate a large part of their earnings overseas.
Even though financial stocks have done well, they still sell at just
two-thirds the market multiple, with dividend yields that are some 50% higher
than the market, and show earnings growth of anywhere from 8% to 12% as a class.
The industry is also in a dynamic state of consolidation. Among the ones we like
are BankAmerica, Cigna, and California S&Ls such as Great Western Financial.
No mention of technology? Bob, have those stocks fallen from their pedestal?
R.F.: I think we will see technology stocks do well again in 1996. But we are
in a sorting-out process now, which means there'll be fewer standouts. I like
the computer service companies that are benefiting from out-sourcing. Fiserv,
SunGard Data Systems, Paychex, and others provide special services for different
industries. As corporations focus on core businesses, they farm out data-
processing tasks. We estimate the total value of these contracts is ballooning
from $20 billion last year to $27 billion or so this year.
W.N.: That makes sense to us too. EDS [listed as GME] is one of our largest
holdings, and we agree, the outlook for that company, particularly now that it
is going to be spun off from GM, is outstanding. To give you some idea of the
scale of business opportunities here, when GM bought EDS ten years ago it paid
$2 billion. Today, EDS is bidding for a $3 billion, ten-year contract to
outsource J.P. Morgan's computer business.
Wayne, you also own AT&T. Will the spinoff pay dividends?
W.N.: The spinoff enhances the story. There's no question that when AT&T,
the long-distance company, is competing with the RBOCs [regional Bell operating
companies] and telephone companies all around the world, and at the same time
AT&T, the big equipment maker, is trying to sell to these same companies, you
have a major conflict of interest. So the move is very rational. We're not sure
how the computer business will fare, but long distance and equipment will
clearly benefit from independence.
Bob, you're keen on natural resources companies. How do the energy stocks
stack up?
R.F.: There's much debate about where oil and natural gas prices are going,
but I think we'll see prices edge higher as global demand rises. I've been
quite bullish on the oil drillers and service companies in particular.
Drilling-rig rates have been on the floor since 1986. Some 800 rigs operate now,
down from over 4,000 in 1980.1 like Smith International and Weatherford
International, both of which are cutting costs, improving efficiency, and
adding new technologies. I'd play them first, then the producers.
Thank you both.
<PAGE>
Investing in the
LORD ABBETT
Family of Funds
GROWTH
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INCOME
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GROWTH FUNDS
Developing Growth Fund
Value Appreciation Fund
Global Fund-Equity Series
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GROWTH & INCOME FUNDS
Affiliated Fund
Fundamental Value Fund
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BALANCED FUND
Investment Trust-Balanced Series
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INCOME FUNDS
U.S. Government Securities Fund*
Bond-Debenture Fund
Global Fund-Income Series
Investment Trust-Limited Duration U.S. Government Securities Series*
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TAX-FREE INCOME FUNDS
. National
. California
. Connecticut
. Florida
. Georgia
. Hawaii
. Michigan
. Minnesota
. Missouri
. New Jersey
. New York
. Pennsylvania
. Texas
. Washington
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MONEY MARKET FUND
U.S. Government Securities Money Market Fund+
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FINDING THE RIGHT MUTUAL FUND CAN BE CONFUSING. AT LORD, ABBETT & CO., WE
BELIEVE YOUR FINANCIAL ADVISER PROVIDES VALUE IN HELPING YOU IDENTIFY AND
UNDERSTAND YOUR INVESTMENT OBJECTIVES AND, ULTIMATELY, OFFERING FUND
RECOMMENDATIONS SUITABLE FOR YOUR INDIVIDUAL NEEDS.
A current prospectus containing more complete information about any of the
portfolios listed above (including charges, expenses and any fees waived and/or
expenses assumed by Lord, Abbett & Co.), may be obtained by calling your
financial adviser or Lord, Abbett & Co. at 800-874-3733. An investor should read
the prospectus carefully before investing.
WHEN YOU INVEST IN A FAMILY OF FUNDS, YOU BENEFIT FROM:
DIVERSIFICATION. You and your financial adviser can diversify your
investments between equity and income funds.
FLEXIBILITY. As your investment goals change, your financial adviser can
help you reallocate your portfolio.
As an investor in the Lord Abbett Family of Funds, you have access to 25
portfolios designed to meet a variety of investment needs. While you may
reallocate your assets among our funds at any time, we recommend speaking with
your financial adviser to help you customize your investment plan.
* An investment in this Fund is neither insured nor guaranteed by the U.S.
Government.
+ An investment in this Fund is neither insured nor guaranteed by the U.S.
Government and there can be no assurance that this Fund will be able to
maintain a stable net asset value of $1.00 per share. This Fund is managed to
maintain, and has maintained, its stable $1.00 per share price.
The information contained in this article with respect to Lord, Abbett & Co's
positions regarding the stock market and related matters is based upon
information which has been compiled from sources believed to be reliable; but
Lord, Abbett & Co. makes no representation as to the accuracy or completeness
of, and assumes no responsibility for any action or omission to act in
reliance on, such information. Each Lord Abbett portfolio is managed
continuously and such holdings are subject to change. Any mention in this
article of a specific issuer's stock held by any Lord Abbett-managed fund is as
of year-end 1995 and, in the ordinary course of managing a fund, such
position(s) will change.
[LOGO] LORD, ABBETT & CO.
Investment Management
A Tradition of Performance Through Disciplined Investing
The GM Building . 767 Fifth Avenue . New York, NY 10153-0203 LAFR-40-296
(2/96)
<PAGE>
...BIG OPPORTUNITIES
LORD ABBETT DEVELOPING GROWTH FUND'S goal is to identify small, dynamic
companies offering outstanding investment potential. Consider the big
opportunities present in small company growth stocks:
[GRAPHIC APPEARS HERE]
Dynamic
Small
Companies...
. Small company stocks,
on average, have outper-
formed large company
stocks on a total return
basis over the long term.
. Small, growing compa-
nies tend to be highly
specialized niche compa-
nies positioned to exploit
fast-growing sectors in
the economy.
. Our research indicates
that small company
stocks are attractively
valued.
CONSIDER THE BIG OPPORTUNITIES WITH LORD ABBETT DEVELOPING GROWTH FUND
Honorable Mention:
Mutual Funds Magazine (Dec. 1995) listed Developing Growth Fund as one of
"America's Hottest Funds": it is one of only 62 funds that beat the S&P 500 over
each of the last one-,two-,three-,four- and five-year periods based on total
returns./(1)/
/(1)/Data as of 10/2/95.
<PAGE>
LORD ABBETT When you compare Lord Abbett Developing Growth Fund against the
DEVELOPING Lipper Small Company Growth Fund Index and the unmanaged S&P 500
GROWTH Index, one thing is clear. The Fund's focus on small, growing
FUND: A companies has provided rewarding results.
History Of
Competitive
Returns
Average Annual Total Returns at Net Asset Value for Periods Ended 12/31/95
<TABLE>
<CAPTION>
Developing Lipper Small Company Unmanaged
Growth Fund Growth Fund Index* S&P 500 Index
----------- -------------------- -------------
<S> <C> <C> <C>
Measurement PT -
1 Year 45.7 % 31.4 % 37.5 %
3 Years 20.3 % 15.2 % 15.3 %
5 Years 21.4 % 20.4 % 16.6 %
</TABLE>
Total return is the percent change in value assuming the reinvestment of all
distributions.
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Average annual rates of total return at the maximum sales chare of 5.75% for the
periods ended 12/31/95 were:
1 Year: 37.30% 5 Years: 20.00% 10 Years: 10.77%
Past results are not an indication of future results. The investment return and
principal value of an investment in the Fund will fluctuate so that shares, on
any given day or when redeemed, may be worth more or less than their original
cost.
*Source: Lipper Analytical Services.
<PAGE>
Systematic Combine disciplined portfolio management with a disciplined
Investing investment program, and take a look at what a difference dollar-
Has Been A cost averaging can make. The chart below shows how an initial
Rewarding investment of $10,000 combined with systematic investments of
Strategy $500 every month grew to $633,292 over the last 20 years./(2)/
12/31/75 9426
1976 17168
1977 25780
1978 41175
1979 59895
1980 88323
1981 101051
1982 138581
1983 178641
1984 144046
1985 171813
1986 178073
1987 184544
1988 196614
1989 230510
1990 221309
1991 353213
1992 348513
1993 398925
1994 429864
12/31/95 633292
/(2)/The total amount invested in the above example was
$130,000. All distributions were reinvested. All
investments were made at the applicable maximum sales
charge of 5.75% for account values up to $50,000 and at the
applicable reduced sales charges thereafter under rights of
accumulation. Making periodic investments does not
guarantee against a loss of principal or guarantee a
profit. Past performance is no indication of future
results.
An Your financial adviser can help determine if small company
Opportunity stocks have a place in your portfolio. If they do, consider a
For You? managed, diversified portfolio of small company stocks with a
proven track record: Lord Abbett Developing Growth Fund.
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Results quoted herein represent past performance and reflect
appropriate Rule 12b-1 Plan expenses from commencement of the
Plan. Tax consequences are not reflected. The S&P 500 is an
unmanaged index, consisting of the stocks of 500 companies
widely followed by the investment community. Performance figures
for the unmanaged S&P 500 do not reflect transaction costs or
management fees. An investor cannot invest directly in an index,
such as the S&P 500. In the past, Lipper Analytical Services has
categorized Lord Abbett Developing Growth Fund as either a
small company growth fund or a mid-cap fund. Historically, small
companies have experienced wider swings in earnings and stock
prices than large companies. The Fund's current sales charge has
changed from the past. A current prospectus, containing more
complete information about the Fund, including charges and
expenses, can be obtained by calling your financial adviser or
Lord, Abbett & Co. at 800-874-3733. An investor should read the
prospectus carefully before investing. If used after 3/31/96,
this literature must be accompanied by Lord Abbett's Performance
Quarterly for the most recently completed calendar quarter.
<PAGE>
LORD ABBETT DEVELOPING GROWTH FUND'S RESEARCH DRIVEN STRATEGY
[GRAPHIC APPEARS HERE]
Because these stocks tend to be more volatile than larger company stocks, you
need to have confidence in your fund's manager and the investment process
employed. The research team is led by portfolio manager, Stephen J. McGruder,
who has over 25 years of experience investing in the small-cap arena. His
disciplined stock selection process is driven by thorough research. Primarily,
he looks for:
. Companies with a consistent growth rate of 12% or higher. Their managements
should be solid, with a proven commitment to growth.
. Companies with exciting prospects in unique new markets with tremendous
potential (many have patents, copyrights or special licensings).
. Companies with undervalued assets that, despite having a strong proprietary
position, are overlooked by the market.
[LOGO] Lord, Abbett & Co.
Investment Management
A Tradition of Performance Through Disciplined Investing
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The GM Building . 767 Fifth Avenue . New York, NY 10153-0203 . 800-426-1130
[GRAPHIC - COMPUTER MOTHER BOARD]
LORD ABBETT
DEVELOPING
GROWTH
FUND:
small
companies...
