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 third quarter 2012 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment advisor
Risk aversion, which was elevated at times during the second quarter, was largely replaced with robust risk appetite during the third quarter. Economic fundamentals in most developed countries remained weak while numerous macro issues, including the ongoing European sovereign debt crisis, remained. Nevertheless, these headwinds were largely overshadowed by announcements of additional quantitative easing by central banks around the globe, including the US Federal Reserve Board (Fed), the European Central Bank and the Bank of Japan.
The US spread sectors (non-US Treasury fixed income securities) generated strong results during the third quarter and outperformed equal duration Treasuries. The overall US bond market, as measured by the Barclays US Aggregate Index, returned 1.58% during the third quarter. Risk taking was rewarded during the quarter, as lower rated high yield bonds generated superior results. Also posting strong returns were investment grade corporate bonds, commercial mortgage-backed securities (CMBS) and mortgage-backed securities (MBS). More modest gains were registered by government agencies and asset-backed securities.
During the third quarter of 2012, the Fund posted a net asset value total return of 4.55% and a market price total return of 5.96%. 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 3.84% for the quarter.
The Fund's spread sector exposures drove its outperformance during the third quarter. Particularly, the Fund's allocations to investment grade corporate bonds, CMBS, MBS and a small out-of-the-benchmark allocation to high yield were additive for results. In addition, security selection within these sectors was beneficial for performance. Within the investment grade corporate bond space, we added particular value from our overweights to the energy and financials subsectors. Security selection in financials was also a significant contributor to results during the quarter.
Elsewhere, our duration positioning was a slight contributor to performance. The Fund's duration was tactically adjusted and, at times, shorter than that of the Index. However, as of September 30, 2012, the Fund’s duration2 was 10.47 years, modestly longer than the Index’s duration of 10.39 years.
Economic growth in the US has moderated in recent months. While accommodative monetary policy by the Fed and other central banks should be supportive, it cannot mask the fact that economic conditions around the globe are deteriorating. Within the US fixed income market, we envision a "tug of war" of sorts. On one hand, the financial system is full of liquidity as the Fed's near zero interest rate policy is driving investors to riskier assets in order to generate higher returns. On the other hand, weakening fundamentals could test investors' resolve. Against this backdrop, we expect to see periods of volatility, especially in light of the ongoing European sovereign debt crisis and weaker growth in China, as well as uncertainties surrounding the political landscape post the November election and rapidly approaching "fiscal cliff."
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 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“Spreads” refers to differences between the yields paid on US Treasury bonds and other types of debt, such as emerging market bonds.