Fort Dearborn Income Securities, Inc. – Fund Commentary And Portfolio Statistics

NEW YORK--()--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 2014 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment advisor

Market Review

The fixed income market again generated positive results during the second quarter. The yield on the US 10-year Treasury fell from 2.73% to 2.53% over the period amid mixed economic data, geopolitical issues and several flights to quality. At its meetings in April and June 2014, the Federal Reserve Board (the "Fed") announced that it would further taper its purchases of longer-term Treasuries and agency mortgage-backed securities. In each case, the Fed stated it planned to pare its purchases by a total of $10 billion per month. In its official statement following its June meeting, the Fed stated, "Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months. Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated. Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow." All told, the overall US bond market, as measured by the Barclays US Aggregate Index,1 gained 2.04% during the second quarter.

Most US spread sectors2 generated positive returns during the second quarter. Spread sectors were supported by declining long-term yields and overall solid demand from investors looking to generate incremental yield. Among the strongest performers were investment grade and high yield corporate bonds, and mortgage-backed securities ("MBS"). Commercial mortgage-backed securities ("CMBS") and asset-backed securities ("ABS") also posted positive results during the quarter.

Performance Review

During the second quarter of 2014, the Fund posted a net asset value total return of 2.88%, and a market price total return of 4.38%. The Fund, on a net asset value total return basis, outperformed the Barclays US Aggregate Index (the "Index") which, as previously stated, returned 2.04% during the quarter.

As was the case for the first three months of the year, the Fund's spread sector exposure drove outperformance during the second quarter. Security selection and a substantial overweight allocation to investment grade corporate bonds—both financials and industrials—contributed to performance. An overweight to high yield corporate bonds was also beneficial. Elsewhere, an overweight to, and security selection in, CMBS was beneficial to results. Finally, the Fund's yield curve positioning was additive to performance during the quarter. In particular, an overweight to the long end of the curve and an underweight to the short end of the curve enhanced the Fund's results.

On the downside, the Fund's duration positioning detracted from results. We tactically adjusted the Fund's duration during the quarter but it remained shorter than that of the Index. This was a drag on performance, as rates generally declined during the second quarter. As of June 30, 2014, the Fund’s duration was 5.0 years versus the 5.5 year duration of the Index.

There were no significant adjustments made to the Fund's sector positioning during the quarter. That said, we added to our CMBS exposure, largely through the use of CMBX derivatives. We also increased the Fund's position in collateralized loan obligations (CLOs), as we felt they offered good fundamental value.

Outlook

We believe that the US economy remains on a positive trajectory, as the housing market continues to improve and unemployment is slowly declining. In addition, consumer spending has been solid. While Europe is still in a recession, there have been some signs of stabilization, in part due to ongoing support from the European Central Bank. Japan's economy has shown signs of recent strength, although it is too early to tell if the Bank of Japan's highly accommodative monetary policy will lead to a sustainable expansion and an end to its lengthy deflationary cycle. Elsewhere, while growth in China has moderated, we feel that the country can avoid a hard landing for its economy.

We believe that the generally improving economic backdrop will be a positive for the spread sectors and that we could see some additional spread tightening. However, if growth gains additional momentum we could see interest rates move higher and negatively impact the overall fixed income market. We are also closely monitoring a potential investor rotation from fixed income to equities. Given these potential headwinds we expect to maintain the Fund's short duration.

Portfolio statistics as of June 30, 20143

 

Top ten countries4  

Percentage of total portfolio assets

United States   71.81%
United Kingdom   5.60
Cayman Islands   5.29
Brazil   4.28
Mexico   3.25
Netherlands   3.07
Norway   1.59
Sweden   0.94
Canada   0.89
Spain   0.71
Total   97.43
 

Portfolio composition

   
Corporate bonds   79.77%
Asset-backed securities   2.8
Commercial mortgage-backed securities   8.74
Collateralized Loan Obligations   0.61
Mortgage & agency debt securities   3.12
Municipal bonds   2.60
US government obligations   0.00
Non-US government obligations   0.87
Common stocks   0.05
Preferred stocks   0.09
Short-term investments   0.78
Options Purchased   0.07
Cash and other assets, less liabilities   0.50
Total   100.00
 
Credit quality5   Percentage of total portfolio assets
AAA   0.0%
US Treasury6   0.0
US Agency6,7   2.5
AA   2.5
A   11.9
BBB   57.4
BB   13.4
B   1.4
CCC and Below   1.0
Non-rated   8.7
Cash equivalents   0.8
Other assets, less liabilities   0.4
Total   100.0
 

Characteristics

   
Net asset value per share8   $16.27
Market price per share8   $14.89
NAV yield8   3.69%
Market yield8   4.03%
Duration9   4.95 yrs
Weighted average maturity   9.39 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 The Fund's portfolio is actively managed, and its portfolio composition will vary over time.

4 The Fund does not take active currency risk; as of June 30, 2014, the Fund's holdings in foreign fixed income securities were denominated in US dollars.

5 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.

6 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.

7 Includes agency debentures and agency mortgage-backed securities.

8 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.

9 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.

©UBS 2014. All rights reserved.

The key symbol and UBS are among the registered and unregistered trademarks of UBS.

Contacts

UBS Global Asset Management
Closed-End Funds Desk, 888-793 8637
www.ubs.com

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Contacts

UBS Global Asset Management
Closed-End Funds Desk, 888-793 8637
www.ubs.com