We began the second quarter with overweights to services, gaming, energy and chemicals, and underweights to diversified financials, building materials, health care and consumer products sectors. We ended the quarter with overweights to services, gaming and telecommunications, and underweights to building materials, banking, consumer products and health care sectors.Over the second quarter, we continued to express a preference for better quality issuers and issues. We added exposure to bonds rated BBB and above and held elevated levels of cash, while reducing exposure to bonds rated B and BB. We also added modestly to CCC- and below-rated bonds. From a sector perspective, we added exposure to telecommunications, diversified financials and health care. In contrast, we reduced the Fund's exposure to energy, gaming, food/beverage and banks and thrifts. We also reduced the extent of our small opportunistic position in commercial mortgage-backed securities (CMBS) that had been added during the prior quarter based on attractive relative valuations. Over the quarter, issue selection was the primary driver of negative relative returns, while duration positioning was a modest positive contributor, and sector allocation was neutral overall. In terms of issue selection, our holdings in energy, health care and services detracted from results, more than offsetting a positive contribution from gaming. In terms of sector allocation, our positioning within industrials, technology, telecommunications and services contributed to results, while our positioning within financials—driven by insurance and diversified financials—detracted from performance. Outlook We believe credit fundamentals remain supportive for high yield, with companies reporting solid earnings and maintaining manageable corporate leverage and debt profiles overall. In our opinion, current high yield spreads 2 should provide a sufficient cushion should defaults rise moderately from their current levels, which remain below historical averages. We continue to anticipate periods of heightened market volatility as we face a number of macro uncertainties. As a consequence, we prefer to position the portfolio with a defensive bias from sector and quality perspectives. The risk to this defensive view is that demand for high yield securities continues to escalate, potentially based on further fundamental issuer quality improvements in what remains a low interest rate environment. 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 BofA Merrill Lynch US High Yield Cash Pay Constrained Index is an unmanaged index of publicly placed non-convertible, coupon-bearing US dollar denominated below investment grade corporate debt with a term to maturity of at least one year. The index is market weighted, so that larger bond issuers have a greater effect on the index’s return. However, the representation of any single bond issue is restricted to a maximum of 2% of the total index. The index is not leveraged. Investors should note that indices do not reflect the deduction of fees and expenses.2 Spread measures the difference in yield between a fixed income security and a government bond of similar duration.