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 first quarter 2014 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment advisor
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 due to disappointing economic data and several flights to quality. At its meetings in January and March 2014, the Federal Reserve Board (the "Fed") said it would further taper its asset purchases, in each case paring its purchases a total of $10 billion a month. Beginning in April, the Fed said it would purchase a total of $55 billion a month ($25 billion per month of agency mortgage-backed securities and $30 billion per month of longer-term Treasuries). At its meeting in March, the US 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. 1
Most spread sectors2 generated positive returns during the first quarter. 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 amid a backdrop of continued positive corporate fundamentals and very low defaults. Investment grade corporate debt also posted solid results as their spreads3 narrowed over the quarter. Within securitized debt, agency residential mortgage-backed securities ("MBS"), asset-backed securities ("ABS") and commercial mortgage-backed securities ("CMBS") all generated modest gains during the first quarter, although MBS underperformed equivalent duration Treasuries.
For the first quarter of 2014, the Fund posted a net asset value total return of 2.48%, and a market price total return of 5.51%. The Fund, on a net asset value total return basis, outperformed the Barclays US Aggregate Index (the "Index") which, as previously stated, returned 1.84% during the quarter.
The Fund's spread sector exposure drove its outperformance during the first quarter. Security selection and a substantial overweight allocation to investment grade corporate bonds—with a focus on financials—contributed to performance. An overweight to and selection of high yield corporate bonds was also beneficial. Elsewhere, an overweight to, and security selection in, CMBS was beneficial to results, albeit to a lesser extent.
On the downside, the Fund's duration positioning detracted from results. We tactically adjusted the Fund's duration during the quarter but remained shorter than that of the benchmark. This was a drag on performance, as rates generally declined during the first quarter. As of March 31, 2014, the Fund’s duration was 4.59 years versus the 5.54 year duration of the Index.
There were no significant adjustments made to the portfolio's sector positioning over the first three months of the year. However, we started to employ certain derivatives, including US Treasury and Eurodollar futures and options to more effectively manage the Fund's duration and yield curve positioning. The Fund also utilized certain credit default swaps to add to its CMBS market exposure. Elsewhere, the Fund initiated a position in collateralized loan obligations during the quarter.
Despite experiencing headwinds from severe winter weather, we believe the US economy has enough momentum to continue expanding and will accelerate somewhat as the year progresses. Overseas, a modest economic recovery in Europe is occurring, although deflation remains a concern. Elsewhere, growth in China has decelerated, which could negatively impact the global economy.
Turning to the fixed income market, regardless of some weaker than expected economic data and geopolitical issues, the Fed appears on track to continue paring its monthly asset purchases, 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. However, the market may begin to "price in" rising rates prior to the Fed taking action. We maintain our generally positive outlook for the spread sectors. US credit fundamentals continue to be strong and defaults should remain well below their historical average. That being said, spreads in the US are significantly tighter than they were during the financial crisis. As such, returns will likely be less robust in 2014. Given relatively wider spreads, we see select opportunities in euro-denominated credit. That said, at this time the Fund does not take active currency risk, so we anticipate hedging any foreign currency exposure back to the US dollar.
|Portfolio statistics as of March 31, 20144|
|Top ten countries5||
Percentage of total portfolio assets
|Commercial mortgage-backed securities||7.78|
|Mortgage & agency debt securities||3.66|
|US government obligations||0.15|
|Non-US government obligations||1.40|
|Cash and other assets, less liabilities||0.58|
|Credit quality6||Percentage of total portfolio assets|
|CCC and Below||0.6|
|Other assets, less liabilities||0.6|
|Net asset value per share9||$15.96|
|Market price per share9||$14.41|
|Weighted average maturity||8.78 yrs|
1 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.
2 A spread sector refers to non-government fixed income sectors, such as investment grade or high yield bonds, commercial mortgage-backed securities (CMBS), etc.
3 “Spread” refers to differences between the yield paid on US Treasury bonds and other types of debt, such as corporate or emerging market bonds.
4 The Fund's portfolio is actively managed, and its portfolio composition will vary over time.
5 The Fund does not take active currency risk; as of March 31, 2014, the Fund's holdings in foreign fixed income securities were denominated in US dollars.
6 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. Rating reflected represents S&P individual debt issue credit rating. While S&P may provide a credit rating for a bond issuer (e.g., a specific company or country); certain issues, such as some sovereign debt, may not be covered or rated and therefore are reflected as non-rated for the purposes of this table. 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.
7 S&P downgraded long-term US government debt on August 5, 2011 to AA+. Other rating agencies continue to rate long-term US government debt in their highest ratings categories.
8 Includes agency debentures and agency mortgage-backed securities.
9 Net asset value (NAV), market price and yields will fluctuate. NAV yield is calculated by multiplying the current quarter’s dividend by 4 and dividing by the quarter-end net asset value. Market yield is calculated by multiplying the current quarter’s dividend by 4 and dividing by the quarter-end market price.
10 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.
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 entail specific risks, such as interest rate, credit and US government securities risks as well as derivatives risks. Further information regarding the Fund, including a discussion of principal objectives, 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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