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 third quarter of 2014 from UBS Global
Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s
investment manager
Market review
The fixed income market largely treaded water during the third
quarter. However, there were periods of volatility over the three
month period as investor sentiment was impacted by mixed global
economic data, questions regarding future central bank monetary
policy and an increasing number of geopolitical issues. The yield
on the two-year Treasury rose from 0.47% to 0.58% over the quarter,
as expectations for Federal Reserve Board (the "Fed") rate hikes
increased. In contrast, the yield on the 10-year Treasury declined
slightly from 2.53% to 2.52%, partially driven by several periods
of risk aversion that saw fixed income investors move to the
relative safety of US Treasuries. As expected, the Fed announced at
its meetings in July and September that it would further taper its
purchases of longer-term Treasuries and agency mortgage-backed
securities. In each case, the Fed stated that it planned to pare
its purchases (quantitative easing) by a total of $10 billion per
month. Quantitative easing concluded in October 2014. In its
official statement following its September meeting, the Fed stated,
"it likely will be appropriate to maintain the current target range
for the federal funds rate for a considerable time after the asset
purchase program ends, especially if projected inflation continues
to run below the Committee's 2% longer-run goal, and provided that
longer-term inflation expectations remain well anchored." All told,
the overall US bond market, as measured by the Barclays US
Aggregate Index,1 gained 0.17% during the third quarter.
Many US spread sectors2 posted negative returns during the third
quarter. Spread sectors were impacted by the aforementioned issues
driving investor sentiment. Treasury Inflation-Protected Securities
("TIPS"), high yield corporate bonds and emerging market debt
generated weak results. For the quarter, the BofA Merrill Lynch US
High Yield Cash Pay Constrained Index3 (the “Index”) declined
1.91%. From a ratings perspective, BB-rated high yield debt
generated the best relative results, as they fell 1.34% for the
quarter. Elsewhere B- and CCC-rated securities in the Index
declined 1.85% and 3.41%, respectively.
Performance review
For the third quarter of 2014, the Fund posted a net asset value
total return of -2.97% and a market price total return of -4.67%.
On a net asset value basis, the Fund underperformed the Index,
which, as previously stated, returned -1.91% for the quarter.
An overweight to the energy sector was among the largest
detractors from performance, as the sector was negatively impacted
by declining oil prices and softer global demand. Elsewhere,
security selection within the banks/thrifts, food and
pharmaceutical sectors were negative for performance. Finally, the
use of leverage was a drag on returns during the period given weak
performance from the overall high yield market.
The largest contributor to performance during the quarter was
the Fund's security selection within the service sector. An
underweight and security selection in the gaming sector was also
beneficial, as was security selection within the telecommunication
services sector.
There were no material changes to the portfolio during the
quarter. However, we pared back the Fund's allocation to
banks/thrifts given changes in the composition of the Index.
Outlook
We remain broadly positive on high yield as an asset class. We
view recent volatility as being largely driven by a combination of
heightened geopolitical tensions and market technicals in an
environment of reduced liquidity. The market is also focused on the
recent termination of quantitative easing by the Fed and the
implications of an eventual increase in interest rates. However, we
view the environment of improving—but subdued—economic growth,
coupled with what remains of an accommodative interest rate policy
and relatively sound credit fundamentals, as favorable for high
yield bonds. 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 further short-term volatility.
Throughout the third quarter, we sought to maintain a broadly
neutral stance in the portfolio from a beta, or market risk,
perspective versus the benchmark. We anticipate investment
opportunities to continue to arise through our bottom-up issue
selection and efforts to avoid issuers that are at risk of credit
deterioration. From an industry perspective, our strategies'
overweights continue to include energy and cable TV, while
portfolio sector underweights include metals and mining, and
retail.
Portfolio statistics as of September 30, 20144
Top ten corporate bonds, including coupon and maturity
Percentage of total portfolio assets SquareTwo
Financial Corp., 11.625%, 04/01/2017 1.4% International
Lease Finance Corp., 7.125%, 09/01/2018 1.1 Sabine Pass
Liquefaction LLC, 5.625%, 02/01/2021 1.1 Hecla Mining Co.,
6.875%, 05/01/2021 1.0 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 Intelsat
Jackson Holdings SA, 7.250%, 10/15/2020 0.8 NRG Energy,
Inc., 6.250%, 07/15/2022 0.8
Top five
industries Percentage of total portfolio assets
Energy - exploration & production 9.6% Cable &
satellite TV (formerly, "Media-cable") 6.5 Support -
services 4.8 Gas distribution 4.4
Consumer/commercial/lease financing 4.1
Credit quality5 Percentage of total
portfolio assets BB- or higher 43.7% B 45.1 CCC+
and lower 9.7 Cash equivalents 1.1 Not Rated
0.4
Total 100.0
Characteristics Net asset value per share6
$2.22 Market price per share6 $1.99 Weighted average
life 5.66 yrs Weighted average life to maturity 7.05
yrs Duration7 4.55 yrs Duration-leverage adjusted7
6.36 yrs Leverage8 28.47% 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) and market price will
fluctuate. 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 1 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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