We began the fourth quarter with overweights to energy, services and telecommunications, and underweights to consumer products, building materials and restaurants. We ended the quarter with overweights to energy, cable television, gaming and services, and underweights to broadcasting, consumer products, steel and diversified media.Outlook Fundamentals in the high yield market remain generally solid, with sound corporate balance sheets and manageable financing requirements. We continue to look for warning signs, such as increasing leverage, weaker earnings and deterioration in the quality of underwriting standards. Primary market activity was particularly robust in 2012, as corporations sought to take advantage of the low-rate environment amid strong demand for high yield bonds to refinance outstanding debt. As most high yield companies currently have limited refinancing needs, the risk of a spike in defaults from their current low levels is limited. While we expect defaults to remain below historical averages, lower quality issuers could be susceptible to persistently slow economic growth or a macro shock. Throughout the year we saw spreads tighten leading yields toward historically low levels. While the potential for a degree of further spread tightening based on technical demand remains, periods of heightened volatility could be triggered by political, macro or economic challenges. In our view, despite relatively low yield levels, investors remain more than compensated for default risk, although trading liquidity remains poor by historical standards. 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 "Spreads” refers to differences between the yield paid on US Treasury bonds and other types of debt, such as emerging market bonds.