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 first quarter 2013 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment advisor
The markets were volatile at times during the first quarter, given uncertainties surrounding US fiscal and monetary policy, geopolitical concerns, inconclusive elections in Italy and a banking crisis in Cyprus. Despite speculation that the US Federal Reserve Board (the “Fed”) may moderate quantitative easing sooner than expected, Fed Chairman Ben Bernanke reiterated his commitment to policy accommodation.
The US spread sectors (non-US Treasury fixed income securities) largely treaded water during the first quarter and generally performed in line with equal duration Treasuries. Two exceptions were high yield corporate bonds and emerging markets debt. High yield corporate bonds generated solid absolute and relative returns, given overall robust demand from investors seeking to generate incremental yield. In contrast, the overall emerging markets debt asset class performed poorly, due to moderating global growth, falling commodity prices and fears of contagion from Europe. The US yield curve steepened during the quarter as short-term yields were flat, while longer-term yields moved higher. All told, the overall US bond market, as measured by the Barclays US Aggregate Index, declined 0.12%, during the first three months of the year.
During the first quarter of 2013, the Fund posted a net asset value total return of -0.67%, and a market price total return of -5.06%. The Fund, on a net asset value return basis, outperformed the Investment Grade Bond Index (the “Index”),1 the Fund’s benchmark, which posted a return of -0.96% for the quarter.
The Fund's spread sector exposure drove its relative performance during the first quarter. In particular, our overweight positions and security selection of high yield corporate bonds and commercial mortgage-backed securities (CMBS) were beneficial for performance. An overweight to investment grade corporate financials was also positive for relative performance. Elsewhere, duration positioning contributed to results, especially in January. The Fund was rewarded for having a shorter duration than its benchmark, as intermediate- and longer-term US rates moved higher during the quarter. There were no meaningful detractors from relative performance during the three-month period.
Overall, we have a positive outlook for the US economy. While the expansion will likely be far from robust, we believe that growth is sustainable, in part due to the rebound in the housing market. This, in turn, should be supportive of consumer spending. Our view for growth outside the US is less encouraging, as Europe's economy remains in a recession and the recent banking crisis in Cyprus illustrates that the region's sovereign debt crisis is far from resolved. Elsewhere, the Bank of Japan has taken aggressive actions to support its economy and end deflation. However, it remains uncertain whether these initiatives will be successful.
We remain constructive for the US corporate bond market, as corporate fundamentals are solid overall, with balance sheets that are oftentimes flush with cash. Many US companies have also taken advantage of historically low interest rates to refinance their debt and extend maturities. Against this backdrop, we expect default rates to remain below their historical average. Finally, given continued Fed policy accommodation, we believe that investor demand will be strong overall. That said, we do not expect to see corporate bond returns to be as robust as they were in 2012. In addition, we are keeping a close eye on event-specific risks in the corporate debt space (such as leveraged buyouts), as well as the potential for investors to rotate a portion of their assets from bonds to stocks in search of higher returns.
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.
1 The Investment Grade Bond Index is an unmanaged index compiled by the Advisor, constructed as follows: From 12/31/81 to present—5% Barclays US Agency Index (7+ years), 75% Barclays US Credit Index (7+ years), 10% Barclays US Mortgage-Backed Securities Index (all maturities) and 10% Barclays US Treasury Index (7+ years). Investors should note that indices do not reflect the deduction of fees and expenses.
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