Several of the Fund's spread sector exposures contributed to performance. In particular, allocations to agency MBS, ABS and collateralized debt obligations were additive to results during the second quarter. From a fundamental perspective, we still view the conditions for corporates positively, but we would admit that elements of the fundamental qualifications have begun to slightly weaken. While monetary policy makers continued to act in a manner to stimulate regional and global economies—with the Fed, in particular, expanding their commitment to “Operation Twist” through the end of the year—profit growth among US corporations, while still good, has begun to slow. In turn, an increasing, albeit still small, number of companies have issued profit warnings for the current quarter. We do not view this with much concern, given the still strong balance sheets characteristics of most companies coupled with rather conservative financial strategies by most firms (e.g., little increase in re-leveraging strategies).While the Fund’s allocation to the high yield market was beneficial, our issuer selection slightly detracted. Specifically, the Fund’s holdings in energy, health care and services detracted from results, more than offsetting a positive contribution from gaming. In terms of high yield 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. Lastly, the Fund’s shorter-than-the-Index duration positioning was a drag on results as global government yields continued to decline over the period. Outlook Uncertainties remain in the outlook for the global economy and markets, with Europe continuing to be at the core of these uncertainties. Fears around event risk in Europe have reduced somewhat in recent weeks. However, uncertainty will remain, particularly in terms of the impact on global growth. The continuing deterioration of economic data makes further supportive central bank intervention highly likely. Although economic growth in the US decelerated during the quarter, we believe it has enough momentum to continue expanding during the second half of the year. That said, it is likely growth will be far from robust. We also feel the Fed will maintain its accommodative monetary policy and take further action if deemed necessary. We expect to see continued volatility in the financial markets given a host of global macro economic issues, the uncertainties associated with the upcoming elections in November and the "fiscal cliff' in the beginning of 2013.
We continue to have a positive long-term outlook for the emerging markets debt asset class. Many emerging market countries are experiencing growth, well above the levels of major developed markets. We believe the growth gap will at least continue in 2012, and that this gap, as well as relatively low fiscal deficits, will be favorable for debt dynamics in emerging markets relative to developed markets. While volatility may stay elevated in the near term due to market uncertainty and investor risk aversion, we continue to have a positive long-term outlook for emerging markets investments. In our view, demand for emerging markets bonds is likely to be supported by investors' search for higher-yielding securities and strong sovereign and corporate balance sheets in emerging markets. In our opinion, strong fundamental data, stable reserves, a more solid fiscal situation and lower indebtedness are signs of such strengths, especially for sovereigns, quasi-sovereigns and currencies. 3Disclaimers 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||Spreads refers to differences between the yields paid on US Treasury bonds and other types of debt, such as emerging market bonds.|
|2||The Strategic Global Benchmark is an unmanaged index compiled by the advisor, constructed as follows: 67% Citigroup World Government Bond Index (WGBI) and 33% JPMorgan Emerging Markets Bond Index Global (EMBI Global). Investors should note that indices do not reflect the deduction of fees or expenses.|
|3||Quasi-sovereign bonds are securities issued by entities supported by the local government.|