Fort Dearborn Income Securities, Inc. – Fund Commentary
NEW YORK--(BUSINESS WIRE)-- Fort Dearborn Income Securities, Inc. (the "Fund") (NYSE: FDI) is a closed-end bond fund managed by UBS Global Asset Management (Americas) Inc. The Fund invests principally in investment grade, long-term fixed income debt securities. The primary objective of the Fund is to provide its shareholders with:
- A stable stream of current income consistent with external interest rate conditions; and
- A total return over time that is above what they could receive by investing individually in the investment grade and long-term maturity sectors of the bond market.
Fund Commentary for the second quarter 2013 from UBS Global Asset Management (Americas) Inc. (UBS Global AM), the Funds investment advisor
After generating positive results in April, the global fixed income market sold off in May and June. Triggering this turnaround were indications from the Federal Reserve Board (the Fed) that it may begin to taper its asset purchase program sooner than previously anticipated. This caused US Treasury yields to move sharply higher across the curve. Also impacting the fixed income market were the ongoing concerns regarding the European sovereign debt crisis, moderating growth in China and several geopolitical issues. The US yield curve steepened, as short-term yields remained anchored while longer-term yields increased during the quarter. The overall US bond market, as measured by the Barclays US Aggregate Index, declined 2.32% during the quarter.
Against this backdrop, the US spread sectors (non-US Treasury fixed income securities) performed poorly during the second quarter. Most spread sectors declined in line with equal duration Treasuries. Among the weakest performers were US Treasury Inflation-Protected Securities (TIPS) and emerging markets debt. While high yield corporate bonds also generated a negative absolute return, they modestly outperformed equal duration Treasuries during the quarter.
Recent investment policy changes
On May 24, 2013, the Fund announced that, based upon a recommendation made by UBS Global Asset Management (Americas) Inc. (UBS Global AM), the Funds investment advisor, the Board of the Fund approved the following, effective June 1, 2013: 1) changing the Funds benchmark from the Investment Grade Bond Index1 to the Barclays US Aggregate Index; 2 and 2) adjusting the Funds portfolio duration3 range. With these adjustments, UBS Global AM sought to reduce the Funds interest rate risk profile. In addition to attempting to reduce the Funds interest rate risk profile by changing its benchmark to a different index with a lower duration bias, UBS Global AM also expanded the range within which the Fund will typically maintain its duration from +/- two years to +/-3 years of the benchmark index.
During the second quarter of 2013, the Fund posted a net asset value (how much one share in a mutual fund is worth) total return of -4.31%, and a market price (the price the market is willing to pay for shares of a fund at a given time, and may be influenced by a range of factors, including supply and demand market conditions) total return of -6.41%. The Funds prior benchmark, the Investment Grade Bond Index, posted a return of -5.23% for the quarter while the Funds new benchmark which became effective June 1, 2013 returned -2.32% for the same time period. The FDI Fund Index4, an unmanaged index compiled by the Advisor which measures the performance of the Funds prior benchmark until June 1, 2013 and the Funds new benchmark effective June 1, 2013, returned -2.80% for the second quarter. The Fund, on a net asset value return basis, underperformed the FDI Fund Index during the quarter.
A number of adjustments were made to the portfolio during the quarter given the previously discussed changes approved by the Fund's Board of Directors. The most significant change was lowering the Fund's duration in an attempt to reduce its interest rate risk profile. When the quarter began, the Fund's duration was 9.2 years and was pared to 5.58 years at the end of June. This change was implemented by reducing the Fund's allocation to longer duration but lower-yielding Treasuries and credit securities (both investment grade and high yield corporate bonds). In contrast, we increased the Fund's exposure to commercial mortgage-backed securities (CMBS) and lower duration but higher-yielding credits. These adjustments were largely implemented toward the end of May and in June.
The Fund's spread sector (i.e., non-US Treasury fixed income securities) exposure drove its relative performance during the second quarter. Our overweight position and security selection of investment grade corporate bonds detracted the most from performance. After a positive start during the first half of the quarter, these gains were more than offset by the sharp decline in the credit market that occurred during the second half of the period. In particular, our overweight to higher beta (higher risk) BBB-rated securities in the basic industry, financials and energy sectors was detrimental to performance. The Fund's duration positioning modestly detracted from results; however, this negative impact would have been larger if the Fund had not reduced its portfolio duration during the second quarter.
We continue to have a positive outlook for the US economy and believe that growth will continue, albeit at a fairly modest pace. That being said, we are closely monitoring the impact of moderating growth outside the US, as this could have a negative impact on exports. We are also keeping a close eye on consumer and business spending in light of higher interest rates in recent months.
In terms of the Fed, we were not surprised by its talk of tapering future asset purchases. If overall US economic data remains positive and there are continued gains in the labor market, we would expect to see the Fed begin to taper its asset purchases later this year. Given the uncertainties regarding the timing and magnitude of Fed tapering, we anticipate periods of heightened volatility as we move through the remainder of the year. As such, we have a bias to maintain duration underweight in the Fund.
Disclaimers Regarding Fund Commentary - The Fund Commentary is intended to assist shareholders in understanding how the Fund performed during the period noted. The views and opinions were current as of the date of this press release. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the Fund and UBS Global AM reserve the right to change views about individual securities, sectors and markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Funds future investment intent.
Past performance does not predict future performance. The return and value of an investment will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. Any Fund net asset value ("NAV") returns cited in a Fund Commentary assume, for illustration only, that dividends and other distributions, if any, were reinvested at the NAV on the payable dates. Any Fund market price returns cited in a Fund Commentary assume that all dividends and other distributions, if any, were reinvested at prices obtained under the Fund's Dividend Reinvestment Plan. Returns for periods of less than one year have not been annualized. Returns do not reflect the deduction of taxes that a shareholder would pay on Fund dividends and other distributions, if any, or on the sale of Fund shares.
Further information regarding the Fund, including a discussion of principal objectives, principal investment strategies and principal risks, may be found in the fund overview located at http://www.ubs.com/closedendfundsinfo. You may also request copies of the fund overview by calling the Closed-End Funds Desk at 888-793 8637.
1 The Investment Grade Bond Index is an unmanaged index compiled by the Advisor, constructed as follows: from 12/31/81 to present5% Barclays US Agency (7+ years), 75% Barclays US Credit Index (7+ years), 10% Barclays US Mortgage-Backed Securities Index (all maturities) and 10% Barclays US Treasury Index (7+) years.
2 The Barclays US Aggregate Index is an unmanaged broad-based index designed to measure the US dollar-denominated, investment grade, taxable bond market. The index includes bonds from the Treasury, government-related, corporate, mortgage-backed, asset-backed and commercial mortgage-backed sectors.
3 Duration measures a portfolios sensitivity to interest rate changes.
4 The FDI Fund Index is an unmanaged index compiled by the Advisor, constructed as follows: From 12/31/81 to 5/31/2013 5% Barclays US Agency Index (7+ years), 75% Barclays US Credit Index (7+ years), 10% Barclays US Mortgage-Backed Securities Index (all maturities) and 10% Barclays US Treasury Index (7+ years). From 6/1/2013 to present 100% Barclays US Aggregate Index. Investors should note that indices do not reflect the deduction of fees and expenses.
UBS Global Asset Management
Closed-End Funds Desk: 888-793-8637
Source: Fort Dearborn Income Securities, Inc.Copyright Business Wire 2013