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
- 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.
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”),
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.