SUPPLEMENT DATED FEBRUARY 29, 1996 TO THE CURRENT STATEMENT OF ADDITIONAL
INFORMATION FOR LORD ABBETT TAX-FREE INCOME FUND, INC.
This page, together with the Fortune Magazine article and The Bond Buyer
article, constitutes the entire supplement dated February 29, 1996 to Lord
Abbett Tax-Free Income 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>
Reprinted from
--------------
THE BOND BUYER
---- THE DAILY NEWSPAPER OF MUNICIPAL FINANCE ----
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Monday, December 18, 1995
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PORTFOLIO MANAGER PROFILE
Long-Maturity, Cushion Bonds' Disfavor Doesn't Faze Fund
By Elizabeth Roy
Other investors may be rejecting long-maturity and cushion bonds -- but that has
only made them more attractive to Lord, Abbett & Co., said John Mousseau,
manager of the company's $651 million Tax-Free Income Fund National Series, and
Zane Brown, the firm's head of fixed income.
Long-maturity bonds have fallen victim to uncertainty about tax reform,
Mousseau and Brown said. And cushion bonds are out of favor both because of
their high price and because many investors, convinced that the rally will
continue, want discounts instead.
But long-maturity and cushion bonds meet Lord's requirement of high
liquidity, essential to the company's total-return approach to investing,
Mousseau and Brown explained.
The fact that their prices have come down to attract buyers only
recommends them more, they said.
No matter what tax reform proposal ultimately becomes law, investors can
profit from buying long-maturity municipals at current levels, especially
because any changes are unlikely to occur within the next few years, Mousseau
and Brown said.
Because the yield ratio between municipals and the 30-year Treasury bond
is over 90%, Mousseau said: "We feel that this has really been an opportunity
to buy municipal yields on a relative basis that you normally would not be able
to buy them at."
Five Months of Consternation
As wonderful as municipals' relative value is, it has actually been available
for going on five months -- "a time period much longer than other periods of
consternation that have been driven my tax reform." Mousseau said.
Mousseau and Brown acknowledge that support for tax reform is
widespread. But, they said, even if a flat tax that exempts all unearned income
from taxation is enacted, municipals would emerge unscathed.
"At the levels that municipals are at now, they would offer good value
even if that worst possible case happens." Mousseau said.
Assuming that that scenario would include elimination of the mortgage
interest deduction and lower rates overall, interest rates would drop
substantially, Mousseau said.
In that case municipals would not rally as much as Treasuries, but they
would rally nonetheless, they said.
More to the point, however, Mousseau and Brown said, the worst case
scenario is unlikely to become law -- in which case investors who bought
municipals during this period of uncertainty will be glad.
"If no tax reform winds up being passed, or a much more modified version
of those [plans] being proposed, you could see municipal bonds return to a more
traditional percentage of Treasuries than they've been in past years,"
Mousseau said.
In any case, the tax code is unlikely to undergo any major changes in
the near term, Mousseau and Brown say.
In the meantime, Mousseau said: "People are enjoying tax-exempt income
at levels that, on a taxable equivalent basis, are pretty hard to believe."
Waiting for Prerefundings
Cushion bonds fit Mousseau and Brown's approach to the market because of
the high returns they can offer regardless of the direction of interest rates,
and
[PHOTO ZANE E. BROWN]
'The portfolio you put in
place today is probably not the
best portfolio for the
environment that's likely to
exist six months from now,'
says Zane Brown of
Lord Abbett.
<PAGE>
INVESTORS & INVESTING
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because investor unwillingness to pay high dollar prices has cheapened the
bonds.
"We like cushion bonds a lot," Mousseau said. "We like to buy bonds that
have a good chance of being prerefunded in an environment of lower interest
rates" -- and thus undergoing capital appreciation. Some of the fund's holdings
have seen this happen in recent weeks, he added.
By the same token, Mousseau said "Buying a more or less defensive-type
instrument provides good income."
Cushion bonds have been particularly attractive because other investors
have disdained them, preferring discount bonds instead, Mousseau said.
"Even in the last month and a half, the emphasis has been on discount
bonds," he said.
"Up until the last couple of days, you saw discount bonds getting bids
15 to 20 basis points or more through current coupon bonds. That tells you that
current coupon bonds probably offer you some attractive levels.
"That's where we see value regardless of what interest rates are doing,"
Mousseau said.
THE IMPORTANCE OF BEING LIQUID
Because Lord Abbett takes a total return approach to investing,
liquidity is paramount, Brown explained. To preserve liquidity, the fund buys
high quality, avoids the 10- to 20-year maturity segment of the yield curve, and
prefers revenue to general obligation bonds, he said.
All the fund's holdings are investment grade, and among them, triple-B
rated bonds are rare, Brown said.
As for maturity, the fund avoids the 10 to 20-year segment because,
dominated by property and casualty insurance companies, "value and price
movement in that area is frequently a function of [those companies']
willingness to buy or sell securities and less a function of the direction of
interest rates and what's going on the economy," Brown said.
In other words, he said, liquidity also means predictability, and the
intermediate-maturity sector lacks that.
To balance the volatility of its long maturity holdings, Brown said, the
fund also invests in the five- to 10-year portion of the curve.
More than 70% of the portfolio comprises revenue bonds, while general
obligation debt makes up less than 6%, Mousseau said.
The managers prefer revenue over general obligation bonds because
revenue bonds are less susceptible to "tax backlash," Brown said.
Revenue bonds, he said, fulfill the wish for "an identifiable revenue
stream that we can rely on despite what hap-
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LORD ABBETT TAX-FREE INCOME FUND
NATIONAL SERIES
Total assets: $651 million
Allocation by credit quality
------------------------------------------
[PIE CHART APPEARS HERE] Percentage of portfolio
on Sept. 30:
Triple-A 64.7%
Double-A 22.3
Single-A 5.7
Triple-B 7.4
Allocation by sector
------------------------------------------
[PIE CHART APPEARS HERE] Percentage of portfolio
on Sept. 30:
Prerefunded 21.4%
General obligation 5.8
Water and sewer 11.0
Health 10.3
Transportation 8.9
Power 8.6
Other 34.0
Top holdings as of Sept. 30
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Issue per value
Metropolitan Nashville Water and Sewer RIBs
(inverse floaters) 8.013s of 2022 $22.0 million
Rochester, Minn., Mayo Health/Link 6.02s of 2015 $19.8 million
Piedmont, S.C., Municipal Power/AMBAC insured,
prerefunded 9.25s of 2019 $15.0 million
Capital Region, Va., Airport revenue AMBAC insured
8.125s of 2014 $14.1 million
New York City Water/Sewer RIBs (inverse floaters) $13.9 million
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Source: Lord Abbett
<PAGE>
pened in Orange County and those kinds of situations."
Most of the fund's revenue bonds are essential service bonds, including
water and sewer, power, transportation and other infrastructure issues, Mousseau
said.
Mousseau has avoided uninsured solid waste bonds due to the politics
currently surrounding them.
"When the market is being driven by politics and not by economics, those
are the kind of markets I'd rather steer clear of," he said.
In addition to offering higher yields, revenue bonds also deliver better
price performance than general obligation bonds, Mousseau added.
Avoiding Distorted Markets
With general obligation bonds, he said, "you get into very distorted
markets, because a larger section of issuance tends to be revenue bonds."
In such "sloppy markets" as last year's, Mousseau said, yield spreads
between general obligation and revenue bonds widen even further.
Then, when the market rallies again, as it has this year, revenue bonds
are generally the first to be prerefunded.
"That also adds a good capital gains aspect to what we're trying to do
in terms of total return," Mousseau said.
The managers seeks coupon income to the extent possible, Brown said.
But, he added, "we will not compromise total return to pursue an exclusive high
level of income."
By investing for total return, investors can make the most of constantly
shifting market conditions, Brown explained.
A total return approach flies in the face of traditional wisdom, he
conceded.
"Most people grow up thinking that bonds have a coupon attached to them,
and that's why you should buy bonds," he said.
But, Brown continued: "If you start managing bonds, you quickly realize
that just like stocks, the portfolio you put in place today is probably not the
best portfolio for the environment that existed six months ago or the
environment that's likely to exist six months from now."
Looking Ahead
Mousseau said he asks himself: "Do I own the best bond values that I
recognize, and are these going to be the best bond values going forward into a
market that I envision?"
For example, Mousseau said, investors could have bought housing bonds
with 7.5% coupons at par when the market bottomed out at the end of last year.
At the time most other revenue bonds offered only 7%.
Now these bonds are worth as much as 106.
Similarly, a typical call-protected bond bought at par a year ago might
now be worth 115, he said.
Investing for total return, Mousseau said, "is being able to recognize
junctures where bonds are overpriced or underpriced.
"It doesn't necessarily mean you're an active trader, but it means
you're an active thinker," he added.
The Fund's portfolio is managed continuously and its holdings are subject to
change. As of 9/30/95, each of the top five holdings (listed in the article)
represented the following percentage of the Fund's total net assets:
Metropolitan Nashville Water and Sewer, 3.43%; Rochester, Minn. Mayo Health,
3.05%; Piedmont, S.C. Municipal Power, 2.40%; Capital Region, VA Airport, 2.62%;
and New York City Water/Sewer, 1.90%. For more information about Lord Abbett
Tax-Free Income Fund-National Series, please call 800-874-3733 for a prospectus
which contains more complete information about the Fund's charges and expenses.
You should read the prospectus carefully before investing.
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JOHN MOUSSEAU
Lord, Abbett & Co.
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Position: Director of municipal bond management
Time in job: Two and a half years
Previous position: Director of municipal bond portfolio analysis and review,
Shearson Lehman Brothers
Education: BA, Georgetown University; MA in economics, Brown University
Age: 39
Home: Maplewood, N.J.
Family: Married with three children
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ZANE BROWN
Lord, Abbett & Co.
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Position: Director of fixed income
T1me in job: Four years
Previous position: Executive vice president in charge of fixed income at
Equitable Capital Management Corp.
Education: MBA, Colorado State; BA in management and marketing, Clarion
University, Pa.
Age: 44
Home: Mountain Lakes, N.J.
Family: Married with one child
<PAGE>
LORD ABBETT'S TAX-FREE PORTFOLIOS
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Lord Abbett has been investing money for clients since 1929 and currently
manages over $2 billion in tax-free portfolios. We offer the following municipal
bond funds:
National, California, Connecticut, Florida, Georgia, Hawaii, Michigan,
Minnesota, Missouri, New Jersey, New York, Pennsylvania, Texas and
Washington
A portion of income derived from these portfolios may be subject to the
alternative minimum tax. For each portfolio, any capital gains realized would be
subject to the usual taxes.
[MAP APPEARS HERE]
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.
LORD, ABBETT & CO.
Investment Management
The GM Building
767 Fifth Avenue . New York, NY 10153-0203
800-426-1130
