FORT DEARBORN INCOME SECURITIES, INC. Fort Dearborn Income Securities, Inc. (the "Fund") (NYSE:FDI) is a closed-end bond fund managed by UBS Asset Management (Americas) Inc. (formerly, 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 of 2016 from UBS Asset Management (Americas) Inc. (“UBS AM”), the Fund’s investment advisor
Market review
The overall US fixed income market posted a strong gain during the first quarter of 2016, as Treasury yields declined across the curve. Despite generally moderating growth overseas, the US economy was relatively resilient over the first three months of the year. US employment growth remained solid and, after contracting for several months, the manufacturing sector again expanded in March 2016. After raising interest rates in December 2015, the US Federal Reserve (the "Fed") kept interest rates on hold at its meetings in January and March 2016. The Fed also downgraded its estimate for gross domestic product ("GDP") growth in 2016, as well as pared the number of rate hikes it expects to make during the year. For the quarter as a whole, the yield on the two-year Treasury fell from 1.06% to 0.73%, whereas the yield on the 10-year Treasury moved from 2.27% to 1.78%.
The overall US bond market, as measured by the Barclays US Aggregate Index (the "Index"), gained 3.03% during the first quarter of 2016.1 Most US investment grade spread sectors posted positive total returns during the period. 2 After generally declining early in the year, lower-quality securities, such as high yield corporate bonds, rallied sharply and ended the quarter in positive territory.
Performance review
During the first quarter of 2016, the Fund posted a net asset value total return of 1.09% and a market price total return of 0.21%. The Fund, on a net asset value total return basis, underperformed the Barclays US Aggregate Index, which, as previously stated, gained 3.03% during the quarter.
The Fund's duration positioning detracted from performance during the first quarter. This was driven by the Fund's underweight duration in January, as rates moved sharply lower during the month. Security selection of commercial mortgage-backed securities ("CMBS"), as well as our corporate credit exposure detracted overall, as strong positive results in March did not fully offset weakness in January and February. On the upside, yield curve positioning was beneficial for performance, driven by our overweight to the long end of the curve. Our allocation to Treasury Inflation-Protected Securities ("TIPS") and agency mortgage-backed securities ("MBS") also contributed to returns, as did our security selection of foreign agency securities.
Several adjustments were made to the portfolio during the quarter. We adjusted the Fund's duration, moving from a short to a generally neutral position versus the Index. From a credit perspective, we added to our energy exposure given more attractive valuations and we actively participated in the new issue market.
Outlook
We believe the US economy will continue to expand but that the pace will likely remain relatively muted. We have seen further improvement in the labor market and manufacturing data has recently improved. Conversely, consumer spending has moderated. Overseas, growth appears to have stabilized in Europe amid further aggressive monetary policy easing by the European Central Bank. We remain cautious regarding growth in Asia. In particular, we are closely monitoring the trajectory of growth in China and its impact on the global economy.
Turning to the fixed income market, after the risk-off environment during the first half of the quarter, investor risk appetite was robust during the second half of the quarter. This trend has continued thus far in the second quarter. In the short-term, we believe the market could be further supported by continued global monetary policy accommodation. However, we have a more cautious intermediate-term outlook. In particular, we believe the credit cycle may have turned, as corporate fundamentals, such as earnings growth and return on assets, have weakened.
The Fund held a special meeting of shareholders on April 18, 2016 at which the shareholders approved the Fund's reorganization into the class P shares of a newly created open-end mutual fund, UBS Total Return Bond Fund (ticker symbol: UTBPX). The reorganization, approved at the Fund's special meeting of shareholders, is currently scheduled for Friday, May 20, subject to satisfaction of certain closing conditions, and will result in FDI shareholders becoming shareholders of UTBPX.
Portfolio statistics as of March 31, 20163 | ||
| Top ten countries4 | Percentage of total portfolio assets (%) | |
| United States | 78.01 | |
| United Kingdom | 3.14 | |
| Mexico | 2.51 | |
| Netherlands | 1.99 | |
| Brazil | 1.71 | |
| Norway | 1.69 | |
| Germany | 1.28 | |
| Canada | 1.27 | |
| Portugal | 1.09 | |
| Ireland | 0.91 | |
Total | 93.60 | |
Portfolio composition | Percentage of total portfolio assets (%) | |
| Corporate bonds | 67.00 | |
| Commercial mortgage-backed securities | 7.98 | |
| Collateralized loan obligations | 3.06 | |
| Mortgage & agency debt securities | 1.49 | |
| Municipal bonds | 1.79 | |
| US government obligations | 12.20 | |
| Preferred stocks | 0.08 | |
| Short-term investments | 3.00 | |
| Cash and other assets, less liabilities | 3.40 | |
| Total | 100.00 | |
| Credit quality5 | Percentage of total portfolio assets (%) | |
| AAA | 0.0 | |
| US Treasury6 | 12.2 | |
| US Agency6,7 | 1.1 | |
| AA | 2.6 | |
| A | 8.4 | |
| BBB | 46.5 | |
| BB | 10.2 | |
| B | 4.6 | |
| CCC and below | 0.7 | |
| Non-rated | 7.4 | |
| Cash equivalents | 3.0 | |
| Other assets, less liabilities | 3.3 | |
| Total | 100.0 | |
Characteristics | |||||
| Net asset value per share8 | 14.73 | ||||
| Market price per share8 | 14.43 | ||||
| Distribution Ratio at NAV8 | 2.99 | ||||
| Distribution Ratio at Market Price8 | 3.05 | ||||
| Duration9 | 5.54 yrs | ||||
| Weighted average maturity | 9.12 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 Fund's portfolio is actively managed, and its portfolio composition will vary over time. | |
| 4 | The Fund, at this time, does not take active currency risk; as of March 31, 2016, the Fund's holdings in foreign fixed income securities were predominately denominated in US dollars. | |
| 5 | Credit quality ratings shown in the table are based on those assigned by Standard & Poor’s Financial Services LLC, a part of McGraw-Hill Financial (“S&P”), to individual portfolio holdings. S&P is an independent ratings agency. Rating reflected represents S&P individual debt issue credit rating. While S&P may provide a credit rating for a bond issuer (e.g. a specific company or country), certain issues, such as some sovereign debt, may not be covered or rated and, therefore, are reflected as non-rated for the purposes of this table. Credit ratings range from AAA, being the highest, to D, being the lowest, based on S&P’s measures; ratings of BBB or higher are considered to be investment grade quality. Unrated securities do not necessarily indicate low quality. Further information regarding S&P’s rating methodology may be found on its website at www.standardandpoors.com. Please note that any references to credit quality made in the commentary preceding the table may reflect ratings based on multiple providers (not just S&P) and thus may not align with the data represented in this table. | |
| 6 | S&P downgraded long-term US government debt on August 5, 2011 to AA+. Other rating agencies continue to rate long-term US government debt in their highest ratings categories. | |
| 7 | Includes agency debentures and agency mortgage-backed securities. | |
| 8 | Net asset value (NAV), market price and yields will fluctuate. Distribution ratio at NAV is calculated by multiplying the current quarter’s dividend by four and dividing by the quarter-end net asset value. Distribution ratio at market price is calculated by multiplying the current quarter’s dividend by four and dividing by the quarter-end market price. | |
| 9 | 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. 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 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.
Investing in the Fund entails specific risks, such as interest rate, credit and US government securities risks as well as derivatives risks. Further information regarding the Fund, including a discussion of principal objectives, 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.
Interest rate risk: An increase in prevailing interest rates typically causes the value of fixed income securities to fall. Changes in interest rates will likely affect the value of longer-duration fixed income securities more than shorter-duration securities and higher-quality securities more than lower-quality securities.
Credit risk: The risk that the strategy could lose money if the issuer or guarantor of a fixed income security, or the counterparty to the guarantor of a derivative contract, is unable or unwilling to meet its financial obligations. This risk is greater for lower-quality investments than for investments that are higher quality.
Derivatives risk: Total return swap transactions involve greater risks than if the Fund had invested in the underlying asset directly. The total rate of return of an investment on which a total return swap agreement is based may exhibit substantial volatility and, in any given period, may be positive or negative for the specified period of the total return swap agreement. In the event the total rate of return of the underlying asset is negative for the specified period of the swap agreement, the Fund will be required to make a payment to the counterparty in addition to the periodic payment required by the swap agreement to cover the decline in value of the underlying asset. The Fund’s risk of loss, therefore, is increased because the Fund could lose an amount equal to the decrease in value of the underlying asset for the specified period of time, in addition to the periodic payments required by the total return swap agreement.
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