Performance ReviewDuring the fourth quarter of 2012, the Fund posted a net asset value total return of 1.44%, and a market price total return of 2.02%. 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 0.93% for the quarter.
The Fund's spread sector exposures drove its outperformance during the fourth quarter. While the Fund's underweight versus the Index to investment grade corporate bonds was a drag on relative performance given their solid results, the Fund benefited from its overweights to high yield corporate bonds and commercial mortgage-backed securities (CMBS). Security selection was also positive for performance during the quarter. Within the investment grade corporate bond sector, the Fund's holdings in the financial subsector were the most beneficial. In addition, we experienced positive results from security selection in CMBS. Lastly, the Fund’s shorter-than-the-Index duration positioning contributed to results as US rates moved higher during the quarter.
OutlookWe have a constructive outlook for the global economy, although pockets of weakness remain. Despite fiscal cliff-related headwinds, we feel that reasonable growth is sustainable in the US. However, we are less positive on growth in Europe given ongoing issues related to the European sovereign debt crisis. Japan also faces continued challenges, as it has fallen back into a recession.
We have a generally positive view on the fixed income markets in 2013. In particular, we like the prospects for the credits markets given largely supportive fundamentals and supply/demand technicals. That said, given the amount of spread 2 compression since the financial crisis, credit returns are not expected to be as robust in 2013. As was the case last year, we anticipate periods of heightened risk aversion to continue this year. A number of macro issues remain, including the situation in Europe, US federal government spending cuts and continued negotiations regarding the raising of the US debt ceiling.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.