Over the quarter, we also increased portfolio leverage to improve the level of income generated by the Fund. When the quarter began we had a bias toward higher quality issuers and issues. During the period, as we added leverage, we increased the Fund's exposure to lower-rated bonds, including bonds rated B and, to lesser extents, bonds rated BB and those rated CCC and below. From a sector perspective, we increased the Fund's exposure to energy, diversified financials, banks and thrifts. In contrast, we reduced our exposure to chemicals and, to lesser extents, paper and capital goods. Finally, we reduced the Fund's cash position during the quarter.We began the third quarter with overweights to services, gaming and telecommunications, and underweights to building materials, banking, consumer products and health care sectors. We ended the quarter with overweights to energy, services and telecommunications, and underweights to consumer products, building materials and restaurants. Outlook Credit fundamentals remain supportive for high yield, with companies generally reporting solid earnings and manageable corporate leverage and debt profiles. We remain concerned that the lowest quality issuers could suffer in a persistent slow economic growth environment or from any near term economic shock. Credit spreads have tightened, driving yields to historic lows. 2 In our view, despite relatively low yields, investors remain well-compensated for default risk. While room remains for further spread tightening, we continue to anticipate periods of heightened volatility, given the macro uncertainties we face. As a consequence, we retain a slightly defensive stance from an issuer and industry perspective with a preference for less cyclical issuers and industries. The potential downside to this defensive stance is that demand for high yield could continue to escalate, based on further fundamental improvement or strong technicals, 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 leas one year. The index is market weighted, so that larger bond issuers have 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 “Spreads” refers to differences between the yields paid on US Treasury bonds and other types of debt, such as high yield bonds.