Fund Commentary for the fourth quarter 2013 from
The global fixed income market finished a challenging year by posting generally weak results during the fourth quarter. Both short- and long-term US Treasury yields moved higher, as economic data was generally solid. Also driving yields higher was the
Despite rising interest rates, most spread sectors1 generated modest gains during the fourth quarter. The quarter began on a positive note, as investor sentiment remained positive following the Fed's surprise decision in September to delay tapering its asset purchase program. However, for some spread sectors, a portion of those gains were given back in November and December, as economic data often exceeded expectations and the Fed announced that it would start paring its asset purchases. As was the case for the year as a whole, one of the best performing sectors during the fourth quarter was high yield debt. Supporting the high yield market were continued solid corporate fundamentals, low defaults and overall solid demand.
While investment-grade corporate debt posted a negative absolute return, it outperformed equivalent duration US Treasuries as spreads2 contracted over the quarter, driven by demand for yield. Similarly, within securitized debt, agency residential mortgage-backed securities ("MBS") had a negative return for the quarter but outperformed US Treasuries. Commercial mortgage-backed securities ("CMBS") had another strong quarter, outperforming both asset-backed and residential agency MBS.
For the fourth quarter of 2013, the Fund posted a net asset value total return of 2.08%, and a market price total return of 2.37%. The Fund, on a net asset value return basis, outperformed the Barclays US Aggregate Index (the "Index")3 which, as previously stated, declined 0.14% during the quarter.
The Fund's spread sector exposure drove its relative performance during the fourth quarter. Our significant overweight allocation of investment grade corporate bonds (with a focus on financials) contributed to performance, as did our overweight to high yield corporate bonds. An overweight to and security selection of CMBS was also beneficial for results, albeit to a lesser extent. Elsewhere, underweights to US Treasuries and non-US sovereigns contributed to the Fund's relative performance. On the downside, the Fund's yield curve positioning detracted from results. In particular, our overweight to the intermediate-term portion of the curve was not rewarded, as its performance lagged both the short and long portions of the curve during the fourth quarter.
Several adjustments were made to the portfolio over the last three months of the year. We modestly reduced the Fund's duration4 given our expectations for rising rates in light of the Fed's asset purchase tapering. As of
The US economy was resilient last year and we expect it to continue growing at a solid pace in 2014. We have a generally positive outlook for the spread sectors. In particular, we could experience an environment where investors maintain their exposures just to earn coupon and perhaps benefit from modest spread tightening during the year. Risks to this outlook include uncertainties regarding the pace of the Fed's transition from policy accommodation to policy normalization and the potential for rates to continue moving higher. We are also monitoring a potential investor rotation from fixed income to equities. Against this backdrop, we expect to further reduce the Fund's duration.
As noted in prior press releases, on
Thank you for voting your shares and continuing to support the Fund. We are pleased to see these proposals approved and believe that this additional investment flexibility should help the Fund remain competitive and well-positioned, as market dynamics shift. We look forward to continue serving your future investment needs.
|Portfolio statistics as of |
|Top ten countries6|
Percentage of total portfolio assets
|Commercial mortgage-backed securities||5.09|
|Mortgage & agency debt securities||4.42|
|US government obligations||1.64|
|Non-US government obligations||1.38|
|Cash and other assets, less liabilities||0.86|
|Credit quality7||Percentage of total portfolio assets|
|US Treasury 8||1.6|
|CCC and Below||0.7|
|Other assets, less liabilities||0.8|
|Net asset value per share10|
|Market price per share10|
|Weighted average maturity|
1 A spread sector refers to non-government fixed income sectors, such as high yield bonds, commercial mortgage-backed securities (CMBS) and investment grade corporate bonds.
2 “Spread” refers to differences between the yield paid on US Treasury bonds and other types of debt, such as corporate or emerging market bonds.
3 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.
4 Duration measures a portfolio's sensitivity to interest rate changes.
5 The Fund's portfolio is actively managed, and its portfolio composition will vary over time.
6 The Fund does not take active currency risk; as of
7 Credit quality ratings shown in the table are based on those assigned by Standard & Poor’s
8 S&P downgraded long-term US government debt on
9 Includes agency debentures and agency mortgage-backed securities.
10 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.
11 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.
Investing in the Fund entail specific risks, such as interest rate, credit and US government securities 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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