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