FDI Fort Dearborn Income Securities, Inc.

Fort Dearborn Income Securities, Inc. (the "Fund") (NYSE:FDI) is a closed-end bond fund managed by UBS Asset Management (Americas) Inc. (formerly, UBS Global Asset Management (Americas) Inc.). The Fund invests principally in investment grade, long-term fixed income debt securities. The primary objective of the Fund is to provide its shareholders with:

• A stable stream of current income consistent with external interest rate conditions; and
• A total return over time that is above what they could receive by investing individually in the investment grade and long-term maturity sectors of the bond market.

Fund Commentary for the third quarter of 2015 from UBS Asset Management (Americas) Inc. (“UBS AM”), the Fund’s investment advisor

Market review

The overall US fixed income market posted a positive return during the third quarter of 2015. While US economic data generally improved, the Federal Reserve Board (the "Fed") kept rates on hold at its September meeting. In the Fed's official statement it said, "The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad." In her press conference following the meeting, Fed Chair Janet Yellen said that policy makers had decided to take “a little bit more time to evaluate the likely impacts” of recent market volatility on the US before raising interest rates. For the quarter as a whole, the yield on the two-year Treasury was unchanged at 0.64%, whereas the yield on the 10-year Treasury fell from 2.35% to 2.06%.

The overall US bond market, as measured by the Barclays US Aggregate Index (the "Index"), gained 1.23% during the third quarter of 2015.1 Most US investment grade spread sectors posted positive total returns during the period, whereas lower-quality securities, such as high yield corporate bonds, generated weak results.2

Performance review

During the third quarter of 2015, the Fund posted a net asset value total return of -2.31% and a market price total return of 3.42%. The Fund, on a net asset value total return basis, underperformed the Barclays US Aggregate Index which, as previously stated, gained 1.23% during the quarter.

The Fund’s credit exposure was the largest detractor from results during the quarter. In particular, overweight allocations to investment grade and high yield corporate bonds were negative for performance, as their spreads widened. Security selection of investment grade and high yield corporate bonds also detracted from results, and this was especially the case for higher risk credits. Elsewhere, an allocation to collateralized loan obligations ("CLOs") and non-corporate credit exposure—including foreign agencies, supranational entities and sovereign local authorities—detracted from performance. Finally, our duration positioning detracted from results. We tactically adjusted the Fund’s duration, but it was shorter than that of the Index during the quarter. This was not rewarded given generally declining rates.

Among the contributors to the Fund's performance was its yield curve positioning. In particular, having a yield curve flattening bias was beneficial as we had overweights to the intermediate and long portions of the curve and an underweight to the short end of the curve. An allocation to Treasury Inflation-Protected Securities ("TIPS") was also additive for performance.

Several adjustments were made to the portfolio during the quarter. We increased the Fund's duration, moving from a short position to being close to neutral versus the benchmark. We also pared the Fund's credit allocation.

Outlook

We maintain our view that the US economy will continue to expand, albeit at a fairly modest pace. We also expect inflation to remain relatively muted. In terms of the Fed interest rate "liftoff," it appears that it will commence late in 2015, or perhaps in early 2016. Turning our attention overseas, growth is slowly improving in Europe. However, with minimal inflation pressure we believe the European Central Bank will maintain its accommodative monetary policy. We are cautious regarding growth in Asia. In particular, we are concerned about moderating growth in China and the potential spill over to other emerging market countries, especially those with commodity-driven economies.

Turning to the fixed income market, credit spreads have widened, partially driven by a challenging supply/demand technical environment. In addition, earnings growth has slowed and we may be getting closer to the end of the credit cycle. That said, valuations are attractive given current spreads and may lead to compelling entry points for certain securities.

On October 13, 2015, based on the recommendation of UBS AM, the Fund's investment advisor, the Fund's Board of Directors announced its intention to pursue a conversion of the Fund from a closed-end fund to an open-end fund. It is anticipated that the Fund’s conversion to an open-end fund will be accomplished through a tax-free reorganization of the Fund into an open-end fund created for the purpose of the conversion (“Fund Reorganization”). A Fund Reorganization requires the approval of shareholders, and it is expected that a Fund Reorganization proposal will be submitted to shareholders for approval at a special shareholder meeting of the Fund to be called in the first half of 2016. If the Fund Reorganization is approved, shareholders of the Fund will become shareholders of a new open-end fund.

 

 

 

Portfolio statistics as of September 30, 20153

  Top ten countries4  

Percentage of total portfolio assets (%)

United States   73.46 United Kingdom   5.46 Brazil   3.76 Mexico   2.43 Netherlands   1.92 Canada   1.78 Norway   1.68 Germany   1.19 Portugal   1.07 Sweden   1.01 Total   93.76

 

Portfolio composition

  Percentage of total portfolio assets (%) Corporate bonds   75.98 Commercial mortgage-backed securities   7.23 Residential mortgage-backed securities   0.45 Collateralized loan obligations   3.93 Mortgage & agency debt securities   1.53 Municipal bonds   2.32 US government obligations   2.62 Non-US government obligations   0.73 Common stocks   0.05 Preferred stocks   0.09 Short-term investments   1.77 Options purchased   0.06 Cash and other assets, less liabilities   3.24 Total   100.00

 

Credit quality5   Percentage of total portfolio assets (%) AAA   0.0 US Treasury6   2.6 US Agency6,7   1.5 AA   0.6 A   9.8 BBB   52.9 BB   15.9 B   3.0 CCC and below   0.6 Non-rated   8.1 Cash equivalents   1.8 Other assets, less liabilities   3.2 Total   100.0

Characteristics

    Net asset value per share8   $14.98 Market price per share8   $14.10 NAV yield8   4.34% Market yield8   4.61% Duration9   5.88 yrs Weighted average maturity   8.77 yrs

1 The Barclays US Aggregate Index is an unmanaged broad-based index designed to measure the US dollar-denominated, investment grade, taxable bond market. The index includes bonds from the Treasury, government-related, corporate, mortgage-backed, asset-backed and commercial mortgage-backed sectors.

2 A spread sector refers to non-government fixed income sectors, such as investment grade or high yield bonds, commercial mortgage-backed securities (CMBS), etc.

3 The Fund's portfolio is actively managed, and its portfolio composition will vary over time.

4 The Fund, at this time, does not take active currency risk; as of September 30, 2015, the Fund's holdings in foreign fixed income securities were predominately denominated in US dollars.

5 Credit quality ratings shown in the table are based on those assigned by Standard & Poor’s Financial Services LLC, a part of McGraw-Hill Financial, (“S&P”) to individual portfolio holdings. S&P is an independent ratings agency. Rating reflected represents S&P individual debt issue credit rating. While S&P may provide a credit rating for a bond issuer (e.g., a specific company or country); certain issues, such as some sovereign debt, may not be covered or rated and, therefore, are reflected as non-rated for the purposes of this table. Credit ratings range from AAA, being the highest, to D, being the lowest, based on S&P’s measures; ratings of BBB or higher are considered to be investment grade quality. Unrated securities do not necessarily indicate low quality. Further information regarding S&P’s rating methodology may be found on its website at www.standardandpoors.com. Please note that any references to credit quality made in the commentary preceding the table may reflect ratings based on multiple providers (not just S&P) and thus may not align with the data represented in this table.

6 S&P downgraded long-term US government debt on August 5, 2011 to AA+. Other rating agencies continue to rate long-term US government debt in their highest ratings categories.

7 Includes agency debentures and agency mortgage-backed securities.

8 Net asset value (NAV), market price and yields will fluctuate. NAV yield is calculated by multiplying the current quarter’s dividend by four and dividing by the quarter-end net asset value. Market yield is calculated by multiplying the current quarter’s dividend by four and dividing by the quarter-end market price.

9 Duration is a measure of price sensitivity of a fixed income investment or portfolio (expressed as % change in price) to a 1 percentage point (i.e., 100 basis points) change in interest rates, accounting for optionality in bonds such as prepayment risk and call/put features.

Any performance information reflects the deduction of the Fund’s fees and expenses, as indicated in its shareholder reports, such as investment advisory and administration fees, custody fees, exchange listing fees, etc. It does not reflect any transaction charges that a shareholder may incur when (s)he buys or sells shares (e.g., a shareholder’s brokerage commissions).

Disclaimers Regarding Fund Commentary - The Fund Commentary is intended to assist shareholders in understanding how the Fund performed during the period noted. The 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 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.

Investing in the Fund entails specific risks, such as interest rate, credit and US government securities risks as well as derivatives risks. Further information regarding the Fund, including a discussion of principal objectives, investment strategies and principal risks, may be found in the fund overview located at http://www.ubs.com/closedendfundsinfo. You may also request copies of the fund overview by calling the Closed-End Funds Desk at 888-793 8637.

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UBS Asset ManagementClosed-End Funds Desk: 888-793 8637ubs.com