Managed High Yield Plus Fund Inc. (NYSE:HYF) (the “Fund”) is a
closed-end management investment company seeking high income, and
secondarily, capital appreciation, primarily through investments in
lower- rated, income-producing debt and related equity
securities.
Fund Commentary for the second quarter of 2014 from UBS
Global Asset Management (Americas) Inc. (“UBS Global AM”), the
Fund’s investment manager
Market Review
The global fixed income market generated positive results during
the second quarter. The yield on the US 10-year Treasury fell from
2.73% to 2.53% over the period amid mixed economic data,
geopolitical issues and several flights to quality. At its meetings
in April and June 2014, the Federal Reserve Board (the "Fed")
announced that it would further taper its purchases of longer-term
Treasuries and agency mortgage-backed securities. In each case, the
Fed stated it planned to pare its purchases by a total of $10
billion per month. In its official statement following its June
meeting, the Fed stated, "Information received since the Federal
Open Market Committee met in April indicates that growth in
economic activity has rebounded in recent months. Labor market
indicators generally showed further improvement. The unemployment
rate, though lower, remains elevated. Household spending appears to
be rising moderately and business fixed investment resumed its
advance, while the recovery in the housing sector remained slow."
All told, the overall US bond market, as measured by the Barclays
US Aggregate Index,1 gained 2.04% during the second quarter.
Most spread sectors2 generated positive returns during the
second quarter. Spread sectors were supported by declining
long-term yields and overall solid demand from investors looking to
generate incremental yield. As was the case during the first three
months of the year, high yield debt was among the best-performing
sectors in the second quarter. This occurred against a backdrop of
positive corporate fundamentals and low defaults. For the quarter,
the BofA Merrill Lynch US High Yield Cash Pay Constrained Index3
(the “Index”) returned 2.49%. From a ratings perspective, B-rated
high yield debt generated the weakest results, whereas BB-rated
bonds outperformed lower-quality CCC-rated bonds.
Performance Review
For the second quarter of 2014, the Fund posted a net asset
value total return of 2.77% and a market price total return of
2.52%. On a net asset value basis, the Fund outperformed the Index,
which, as previously stated, returned 2.49% for the quarter.
The largest contributor to performance over the quarter was the
Fund's overweight to banks/thrifts, which performed well given
improving fundamentals, low defaults and robust demand. Security
selection within the steel industry was also additive to
performance. Elsewhere, security selection and an overweight to
telecommunications was rewarded during the quarter. The use of
leverage benefited performance during the period, given the solid
performance from the overall high yield market.
On the downside, security selection in super retail was negative
for performance. An overweight to services, along with security
selection within the sector, detracted from results. Elsewhere,
security selection in technology was a drag on performance.
There were no material changes to the portfolio during the
quarter. However, we did add to the Fund's allocation to
banks/thrifts as we found them to have compelling risk/reward
characteristics.
Outlook
We continue to be broadly positive on high yield as an asset
class. While the Fed is expected to complete its tapering of asset
purchases by year-end, the central bank remains committed to
accommodative policy. We view the backdrop of modestly improving
economic growth, coupled with what remains accommodative policy and
relatively sound corporate fundamentals, as favorable for high
yield bonds. We expect that default rates in the near term will
remain low, primarily due to the extent of the refinancing that has
already occurred, and we continue to have a broadly stable outlook
for corporate fundamentals. The major risk to this view is that
technical factors, driven by potential outflows from the asset
class and a reduction in liquidity, could lead to short-term
volatility.
Overall, we remain in a broadly neutral position from a beta
(market risk) perspective versus the benchmark, with active risk
primarily driven by the bottom-up views of our credit analyst team.
We continue to monitor the new issue market and the increase in
merger and acquisition (M&A) activity for any evidence of
deteriorating underwriting standards. However, to date we have not
seen any material evidence of this occurring. We anticipate
investment opportunities to arise through bottom-up issue selection
and the avoidance of credit deterioration. Finally, after the
second quarter reporting period ended, we observed an increase in
outflows from high yield funds. We continue to monitor the
situation and may seek to make adjustments to our positioning to
take advantage of recent risk aversion and add on weakness.
Portfolio statistics as of June 30, 20144
Top ten corporate bonds, including coupon and maturity
Percentage of total portfolio assets SquareTwo
Financial Corp., 11.625%, 04/01/2017
1.3%
International Lease Finance Corp., 7.125%, 09/01/2018 1.1
Sabine Pass Liquefaction LLC, 5.625%, 02/01/2021 1.1
Midstates Petroleum Co., Inc.,10.750%, 10/01/2020 1.0 First
Data Corp., 12.625%, 01/15/2021 1.0 Pacific Drilling SA,
5.375%, 06/01/2020 0.9 DISH DBS Corp., 7.875%, 09/01/2019
0.9 Credit Suisse Group AG, 7.500%, 12/11/2023 0.8
NRG Energy, Inc.,6.250%, 07/15/2022 0.8 Intelsat Jackson
Holdings SA, 7.250%, 10/15/2020 0.8
Top
five industries Percentage of total portfolio
assets Energy - exploration & production 9.9% Media
- cable 6.4 Telecom - integrated/services 5.2 Gas
distribution 4.8 Support - services 4.7
Credit quality5 Percentage of total
portfolio assets BB- or higher 46.2% B 41.0 CCC+
and lower 11.3 Cash equivalents 1.1 Not Rated
0.4
Total
100.0
Characteristics Net asset
value per share6 $2.33 Market price per share6 $2.13
NAV yield6 7.47% Market yield6 8.17% Weighted average
life 4.95 yrs Weighted average life to maturity 7.12
yrs Duration7 4.22 yrs Duration-leverage adjusted7
5.82 yrs Leverage8 27.53%
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 BofA Merrill Lynch US High Yield Cash Pay Constrained
Index is an unmanaged index of publicly placed nonconvertible,
coupon-bearing US dollar-denominated below investment grade
corporate debt with a term to maturity of at least one year. The
index is market-capitalization 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.
4 The Fund's portfolio is actively managed, and its portfolio
composition will vary over time.
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. 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 Net asset value (NAV), market price and yields will fluctuate.
NAV yield is calculated by multiplying the current month’s dividend
by 12 and dividing by the month-end net asset value. Market yield
is calculated by multiplying the current month’s dividend by 12 and
dividing by the month-end market price.
7 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. Duration is unadjusted for leverage.
Duration-leverage adjusted is estimated by dividing duration by an
amount equal to one minus the leverage percentage.
8 As a percentage of adjusted assets. Adjusted net assets equals
total assets minus liabilities, excluding liabilities for borrowed
money.
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 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.
Investing in the Fund entails specific risks, such as
interest rate risk, the greater credit risks inherent
in investing primarily in lower-rated, higher-yielding bonds
as well as the increased risk of using leverage
(that is, borrowing money to invest in additional
portfolio securities). Further detailed information regarding
the Fund, including a discussion of principal objectives, principal
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.
©UBS 2014. All rights reserved.
The key symbol and UBS are among the registered and unregistered
trademarks of UBS
UBS Global Asset ManagementClosed-End Funds Desk: 888-793
8637ubs.com
Managed High Yield Plus Fund, Inc. (NYSE:HYF)
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