Fund Commentary for the second quarter of 2014 from
The global fixed income market 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
Most 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. As was the case during the first three months of the year, high yield debt was among the best-performing sectors in the second quarter. This occurred against a backdrop of positive corporate fundamentals and low defaults. For the quarter, the BofA Merrill Lynch US High Yield Cash Pay Constrained Index3 (the “Index”) returned 2.49%. From a ratings perspective, B-rated high yield debt generated the weakest results, whereas BB-rated bonds outperformed lower-quality CCC-rated bonds.
For the second quarter of 2014, the Fund posted a net asset value total return of 2.77% and a market price total return of 2.52%. On a net asset value basis, the Fund outperformed the Index, which, as previously stated, returned 2.49% for the quarter.
The largest contributor to performance over the quarter was the Fund's overweight to banks/thrifts, which performed well given improving fundamentals, low defaults and robust demand. Security selection within the steel industry was also additive to performance. Elsewhere, security selection and an overweight to telecommunications was rewarded during the quarter. The use of leverage benefited performance during the period, given the solid performance from the overall high yield market.
On the downside, security selection in super retail was negative for performance. An overweight to services, along with security selection within the sector, detracted from results. Elsewhere, security selection in technology was a drag on performance.
There were no material changes to the portfolio during the quarter. However, we did add to the Fund's allocation to banks/thrifts as we found them to have compelling risk/reward characteristics.
We continue to be broadly positive on high yield as an asset class. While the Fed is expected to complete its tapering of asset purchases by year-end, the central bank remains committed to accommodative policy. We view the backdrop of modestly improving economic growth, coupled with what remains accommodative policy and relatively sound corporate fundamentals, as favorable for high yield bonds. We expect that default rates in the near term will remain low, primarily due to the extent of the refinancing that has already occurred, and we continue to have a broadly stable outlook for corporate fundamentals. The major risk to this view is that technical factors, driven by potential outflows from the asset class and a reduction in liquidity, could lead to short-term volatility.
Overall, we remain in a broadly neutral position from a beta (market risk) perspective versus the benchmark, with active risk primarily driven by the bottom-up views of our credit analyst team. We continue to monitor the new issue market and the increase in merger and acquisition (M&A) activity for any evidence of deteriorating underwriting standards. However, to date we have not seen any material evidence of this occurring. We anticipate investment opportunities to arise through bottom-up issue selection and the avoidance of credit deterioration. Finally, after the second quarter reporting period ended, we observed an increase in outflows from high yield funds. We continue to monitor the situation and may seek to make adjustments to our positioning to take advantage of recent risk aversion and add on weakness.
|Portfolio statistics as of |
|Top ten corporate bonds, including coupon and maturity||Percentage of total portfolio assets|
Pacific Drilling SA, 5.375%, ||0.9|
Credit Suisse Group AG, 7.500%, ||0.8|
|Top five industries||Percentage of total portfolio assets|
|Energy - exploration & production||9.9%|
|Media - cable||6.4|
|Telecom - integrated/services||5.2|
|Support - services||4.7|
|Credit quality5||Percentage of total portfolio assets|
|BB- or higher||46.2%|
|CCC+ and lower||11.3|
|Net asset value per share6|
|Market price per share6|
|Weighted average life||4.95 yrs|
|Weighted average life to maturity||7.12 yrs|
|Duration-leverage adjusted7||5.82 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 BofA Merrill Lynch US High Yield Cash Pay Constrained Index is an unmanaged index of publicly placed nonconvertible, coupon-bearing US dollar-denominated below investment grade corporate debt with a term to maturity of at least one year. The index is market-capitalization weighted, so that larger bond issuers have a greater effect on the index’s return. However, the representation of any single bond issue is restricted to a maximum of 2% of the total index. The index is not leveraged. Investors should note that indices do not reflect the deduction of fees and expenses.
4 The Fund's portfolio is actively managed, and its portfolio composition will vary over time.
5 Credit quality ratings shown in the table are based on those assigned by Standard & Poor’s
6 Net asset value (NAV), market price and yields will fluctuate. NAV yield is calculated by multiplying the current month’s dividend by 12 and dividing by the month-end net asset value. Market yield is calculated by multiplying the current month’s dividend by 12 and dividing by the month-end market price.
7 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. Duration is unadjusted for leverage. Duration-leverage adjusted is estimated by dividing duration by an amount equal to one minus the leverage percentage.
8 As a percentage of adjusted assets. Adjusted net assets equals total assets minus liabilities, excluding liabilities for borrowed money.
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 entails specific risks, such as interest rate risk, the greater credit risks inherent in investing primarily in lower-rated, higher-yielding bonds as well as the increased risk of using leverage (that is, borrowing money to invest in additional portfolio securities). 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.
©UBS 2014. All rights reserved.
The key symbol and UBS are among the registered and unregistered trademarks of UBS
Closed-End Funds Desk: 888-793 8637