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:
Fund Commentary for the second quarter 2012 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment advisor
The US spread sectors (non-US Treasury fixed income securities) experienced periods of volatility during the second quarter, but produced positive absolute returns. In sharp contrast to the first three months of the year when risk appetite was generally robust, risk aversion largely ruled the markets in late April and May. This reversal in investor sentiment was triggered by signs that the US economy was decelerating, as well as fears of contagion from Europe. Risk appetite returned in late June, given some positive developments in Europe and expectations for another round of quantitative easing by the Federal Reserve Board (Fed). All told, the overall US bond market, as measured by the Barclays US Aggregate Index, returned 2.06% during the second quarter, and the spread sectors produced mixed results versus equal duration Treasuries. US Treasuries closed the quarter with an exceptionally strong return (2.83% measured by the Barclays US Treasury Index) as yields continued declining—reaching record lows in early June—and investors fled to safety, away from risk assets.
The Fund posted a net asset value total return of 3.91% and a market price total return of 2.52% for the second quarter of 2012. The Fund, on a net asset value return basis, underperformed the Investment Grade Bond Index (the “Index”),1 the Fund’s benchmark, which posted a return of 4.38% for the quarter.
The Fund's positioning in the investment grade corporate bond sector detracted from relative performance during the quarter. In particular, the Fund's exposure to the financials sector was a drag on results, as we emphasized more liquid, higher beta (higher risk) bank holding companies. This was a detractor as these companies were subject to more headline risk and weaker investor confidence as a result of elevated fears of contagion from the European sovereign debt crisis. Our exposure to utilities was also a modest negative for performance.
Elsewhere, our defensive duration positioning was a slight detractor from performance. The Fund's duration was largely neutral or tactically shorter than that of the Index when we felt US yields would move higher. Overall, duration positioning detracted from results when US Treasury yields moved lower during the quarter, given weakening economic growth and an investor flight-to-safety amid the challenging macro environment. As of June 30, 2012, the Fund’s duration2 was 10.4 years versus the Index’s duration of 10.3 years.
Finally, the Fund’s exposure to high quality spread sectors, such as investment grade corporate and securitized debt, was beneficial in helping generate current income.
Although economic growth in the US economy decelerated during the quarter, we believe it has enough momentum to continue expanding during the second half of the year. That said, it is likely growth will be far from robust. We also feel the Fed will maintain its accommodative monetary policy and take further action if it deems it necessary to do so. We expect to see continued volatility in the financial markets, given a host of global macro issues, as well as the uncertainties associated with the upcoming elections in November and the "fiscal cliff' in the beginning of 2013.
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. 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 Capital 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.
2 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.