Fund Commentary for the first quarter of 2014 from
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 some disappointing economic data and several flights to quality. At its meetings in January and
Most spread sectors1 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 spreads2 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.
After a challenging start, the emerging markets debt asset class rallied and generated solid results for the first quarter. Risk aversion was elevated at times in January against a backdrop of concerns regarding global growth. While there was no one catalyst, the asset class then rallied sharply in February. Despite a number of headline risks, including
For the first quarter of 2014, the Fund posted a net asset value total return of 1.80% and a market price total return of 3.77%. On a net asset value total return basis, the Fund underperformed its benchmark, the Strategic Global Benchmark (the “Index”),3 which returned 2.94% over the quarter. As of
Both security selection and asset allocation detracted from performance during the first quarter. The Fund's security selection of inflation-linked bonds (both US dollar and emerging market "linkers") and Treasury securities were negative for performance. The Fund's selection of agency mortgage-backed securities ("MBS") also detracted from results.
Conversely, security selection of investment grade corporate bonds was beneficial. From an asset allocation perspective, the Fund's more limited exposure to non-US dollar interest rate markets was a negative for performance. In particular, an underweight to euro-denominated debt was a drag on results. On the upside, out-of-benchmark allocations to commercial mortgage-backed securities ("CMBS") and collateralized debt obligations ("CDO") were rewarded.
The Fund tactically adjusted its duration over the period, but generally remained shorter than that of the benchmark. This detracted from performance as rates largely declined during the first quarter. From a currency perspective, an underweight position in the Japanese yen detracted from performance as the currency strengthened relative to the US dollar while an out-of-index allocation to certain emerging market currencies was rewarded.
From an emerging markets debt perspective, exposure to Argentinian US dollar-denominated debt performed strongly, particularly in March. On the other hand, an underweight allocation to US dollar-denominated Venezuelan debt added to results in January but detracted later in the period following strong market performance in February and March. Lastly, while the Fund maintained an underweight allocation to Russian debt, its exposure to local Russian government debt slightly detracted from results.
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
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 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. 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, their returns will likely be less robust in 2014. Given relatively wider spreads, we see select opportunities in euro-denominated credit.
We maintain a cautious near-term outlook for the emerging markets asset class. Improving growth in developing countries could have a positive impact on emerging market exports. However, this has yet to occur. While certain geopolitical issues have been priced into the market, in our view, we expect to see continued periods of elevated volatility. That being said, the potential impact of higher rates in the US could be somewhat more muted in 2014 versus last year, as the Federal Reserve has indicated it will continue to taper its asset purchases. Within the asset class, we feel US dollar-denominated debt should outperform local debt for the year as a whole.
|Portfolio statistics as of |
|Top ten countries (bond holdings only)5||Percentage of net assets|
Top ten currency exposures (includes all securities and other
|Percentage of net assets|
|United States Dollar|
|Credit quality6||Percentage of net assets|
|CCC and Below||0.8|
|Cash and other assets, less liabilities||1.4|
|Net asset value per share9|
|Market price per share9|
|NAV distribution rate (DR)9|
|Market distribution rate (DR)9|
|Weighted average maturity||8.2 yrs|
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 Strategic Global Benchmark is an unmanaged index compiled by the advisor, constructed as follows: 67%
4 The Fund’s portfolio is actively managed, and its portfolio composition will vary over time.
5 Excludes exposures obtained via derivatives (e.g., swaps).
6 Credit quality ratings shown in the table are based on those assigned by Standard & Poor’s
7 S&P downgraded long-term US government debt on
8 Includes agency debentures and agency mortgage-backed securities.
9 Net asset value (NAV), market price and distribution rates will fluctuate. NAV distribution rate (DR) is calculated by multiplying the current month’s regular monthly distribution by 12 and dividing by the month-end net asset value. Market distribution rate (DR) is calculated by multiplying the current month’s regular monthly distribution by 12 and dividing by the month-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. 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 entails specific risks, such as interest rate, credit and the risks associated with investing in the securities of non-US issuers, including those located in emerging market countries.The value of the Fund's investments in foreign securities may fall due to adverse political, social and economic developments abroad and due to decreases in foreign currency values relative to the US dollar. 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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