NEW YORK--(BUSINESS WIRE)--Managed High Yield Plus Fund Inc. (NYSE:HYF) (the “Fund”) is a closed-end management investment company seeking high income, and secondarily, capital appreciation, primarily through investments in lower-rated, income-producing debt and related equity securities.
Fund Commentary for the first quarter 2014 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment manager
Despite expectations for continued headwinds, the global fixed income market generated positive results during the first quarter. The yield on the 10-year Treasury fell from 3.04% to 2.73% over the first three months of the year amid disappointing economic data, geopolitical issues and several flights to quality. At its meetings in January and March 2014, the Federal Reserve Board (the "Fed") announced that it would further taper its purchases of longer-term Treasuries and agency mortgage-back securities. In each case, the Fed said it planned to pare its purchases by a total of $10 billion a month. At its meeting in March, the central bank also backed off its previous statement that raising short term interest rates could be tied to a 6.5% unemployment rate. In its official statement, the Fed said "This assessment [of when to raise rates] will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments." All told, the overall US bond market, as measured by the Barclays US Aggregate Index, gained 1.84% during the first quarter.
Most spread sectors1 generated positive returns during the first three months of the year. Supporting the spread sectors were declining long-term yields, continued economic growth, modest inflation and overall solid demand from investors looking to generate incremental yield. As was the case in 2013, one of the best performing sectors during the first quarter was high yield debt. This occurred against a backdrop of positive corporate fundamentals and very low defaults. For the quarter, the BofA Merrill Lynch US High Yield Cash Pay Constrained Index2 (the “Index”) returned 2.99%. From a ratings perspective, B-rated high yield debt generated the weakest results, whereas BB-rated bonds modestly outperformed lower-quality CCC-rated bonds.
For the first quarter of 2014, the Fund posted a net asset value total return of 4.16% and a market price return of 6.60%. On a net asset value basis, the Fund outperformed the Index, which, as previously stated, returned 2.99% for the quarter.
One of the largest contributors to performance over the quarter was the Fund's security selection in broadcasting. Security selection within building materials was additive to performance and more than offset the negative impact from having an overweight allocation to the lagging sector. Within the metals and mining sector, security selection and an underweight position to the sector contributed to the Fund's results. The use of leverage benefited performance during the quarter, given the solid performance from the overall high yield market.
On the downside, an overweight to super retail, along with security selection within the sector, detracted from results. An underweight and security selection in diversified media was a modest drag on performance, as was selection in the aerospace sector.
There were no material changes to the portfolio during the quarter. After modestly reducing the Fund's leverage during the fourth quarter, we have not made further adjustments over the first three months of 2014. (The leverage ratio on the following page is slightly lower than that reported in the prior quarter's press release not because of a decrease in the dollar amount borrowed, but because the value of the Fund's assets increased.) We may look to opportunistically increase the Fund's leverage on market weakness.
Despite experiencing headwinds from severe winter weather, we believe the US economy has enough momentum to continue expanding and to accelerate somewhat as the year progresses. Regardless of some weaker-than-expected economic data and geopolitical issues, the Fed appears on track to continue paring its monthly asset purchases and potentially ending this phase of quantitative easing during the fourth quarter of 2014. While the market has been rather fixated on when the Fed will move to raise rates, we do not see this occurring until sometime in 2015. Although fundamentals may have peaked, we believe there is ample support for the high yield market. In our view, lower-rated credit should be supported by generally strong investor demand, overall solid corporate balance sheets and defaults that remain well below their historical average. Still, we will continue to closely monitor credit metrics, such as leverage and liquidity, and plan to adjust the portfolio accordingly should we see deteriorating fundamentals.
|Portfolio statistics as of March 31, 20143|
|Top ten corporate bonds, including coupon and maturity||Percentage of total portfolio assets|
|SquareTwo Financial Corp., 11.625%, 04/01/2017||1.4%|
|International Lease Finance Corp., 7.125%, 09/01/2018||1.1|
|Sabine Pass Liquefaction LLC, 5.625%, 02/01/2021||1.1|
|Midstates Petroleum Co., Inc. 10.750%, 10/01/2020||1.0|
|First Data Corp., 12.625%, 01/15/2021||0.9|
|Pacific Drilling SA, 5.375%, 06/01/2020||0.9|
|DISH DBS Corp., 7.875%, 09/01/2019||0.9|
|Credit Suisse Group AG, 7.500%, 12/11/2023 (contingent convertible bond)||0.8|
|Intelsat Jackson Holdings SA, 7.250%, 10/15/2020||0.8|
|Nova Chemicals Corp., 8.625%, 11/01/2019||0.7|
Top five industries
|Percentage of total portfolio assets|
|Energy - exploration & production||10.0%|
|Support - services||5.6|
|Media - cable||5.2|
|Telecom - integrated/services||5.0|
|Credit quality4||Percentage of total portfolio assets|
|BB- or higher||44.3%|
|CCC+ and lower||14.1|
|Net asset value per share5||$2.31|
|Market price per share5||$2.12|
|Weighted average life||4.85 yrs|
|Weighted average life to maturity||7.21 yrs|
|Duration-leverage adjusted6||7.17 yrs|
1 A spread sector refers to non-government fixed income sectors, such as investment grade or high yield bonds, commercial mortgage-backed securities (CMBS), etc.
2 The BofA Merrill Lynch US High Yield Cash Pay Constrained Index is an unmanaged index of publicly placed nonconvertible, coupon-bearing US dollar-denominated below investment grade corporate debt with a term to maturity of at least one year. The index is market-capitalization weighted, so that larger bond issuers have a greater effect on the index’s return. However, the representation of any single bond issue is restricted to a maximum of 2% of the total index. The index is not leveraged. Investors should note that indices do not reflect the deduction of fees and expenses.
3 The Fund's portfolio is actively managed, and its portfolio composition will vary over time.
4 Credit quality ratings shown in the table are based on those assigned by Standard & Poor’s Financial Services LLC, a part of McGraw-Hill Financial (“S&P”), to individual portfolio holdings. S&P is an independent ratings agency. Credit ratings range from AAA, being the highest, to D, being the lowest based on S&P’s measures; ratings of BBB or higher are considered to be investment grade quality. Unrated securities do not necessarily indicate low quality. Further information regarding S&P’s rating methodology may be found on its website at www.standardandpoors.com. Please note that any references to credit quality made in the commentary preceding the table may reflect ratings based on multiple providers (not just S&P) and thus may not align with the data represented in this table.
5 Net asset value (NAV), market price and yields will fluctuate. NAV yield is calculated by multiplying the current month’s dividend by 12 and dividing by the month-end net asset value. Market yield is calculated by multiplying the current month’s dividend by 12 and dividing by the month-end market price.
6 Duration is a measure of price sensitivity of a fixed income investment or portfolio (expressed as % change in price) to a 1 percentage point (i.e., 100 basis points) change in interest rates, accounting for optionality in bonds such as prepayment risk and call/put features. Duration is unadjusted for leverage. Duration-leverage adjusted is estimated by dividing duration by an amount equal to one minus the leverage percentage.
7 As a percentage of adjusted assets. Adjusted net assets equals total assets minus liabilities, excluding liabilities for borrowed money.
Any performance information reflects the deduction of the Fund’s fees and expenses, as indicated in its shareholder reports, such as investment advisory and administration fees, custody fees, exchange listing fees, etc. It does not reflect any transaction charges that a shareholder may incur when (s)he buys or sells shares (e.g., a shareholder’s brokerage commissions).
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 Fund’s 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.
Investing in the Fund entails specific risks, such as interest rate risk, the greater credit risks inherent in investing primarily in lower-rated, higher-yielding bonds as well as the increased risk of using leverage (that is, borrowing money to invest in additional portfolio securities). Further detailed 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.
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