Fort Dearborn Income Securities, Inc. (FDI) (the “Fund”) announced that the Board of Directors of the Fund approved the following, effective June 1, 2013: 1) changing the Fund’s benchmark from the Investment Grade Bond Index,1 to the Barclays US Aggregate Index (“US Agg”);2 and 2) adjusting the Fund’s portfolio duration range, from its current range of ±2 years, to ±3 years, of the benchmark’s duration.
UBS Global Asset Management (Americas) Inc. (“UBS Global AM”) seeks to reduce the Fund’s interest rate risk profile. The fixed income markets have undergone some significant changes since the Fund first issued its shares, including during the 2007-2008 credit crisis, and the ensuing period of unprecedented accommodative central bank policy and a very low interest rate environment. Consequently, certain properties of the Fund’s current benchmark index have changed, particularly its overall duration/maturity profile, which has become longer.3 As of April 30, 2013, the Fund’s current benchmark duration was 10.5 years, while the Fund maintained a duration of 9.2 years, an underweight relative to its benchmark index.
As bond yields have continued to decline over the past three decades, the Fund’s longer duration bias has been beneficial, allowing the Fund to deliver solid returns. However, with US interest rates now at historically low levels, we believe that the level of compensation offered for taking interest rate risk is far less compelling than it has been in the past. By changing the Fund’s benchmark index, from the Investment Grade Bond Index, to the US Agg, which has a lower duration of 5.1 years as of April 30, 2013, we are adjusting the Fund’s interest rate risk profile and reducing its longer duration bias. This adjustment should leave the Fund less exposed to the potential negative impact of rising interest rates.
In addition to reducing the Fund’s interest rate risk profile by changing its benchmark index, UBS Global AM is also expanding the range within which the Fund will typically maintain its duration from -2 to +2 years, to -3 to +3 years of the benchmark index. For example, as of April 30, 2013, the duration of the US Agg was 5.1 years, which means that the Fund would be able to adjust its duration to between 2.1 and 8.1 years. This additional latitude may provide the portfolio management team with further flexibility to manage the Fund’s interest rate risk, seek to generate returns from active duration and yield curve management strategies and, when necessary, allow the team to take a more defensive positioning, which may help reduce the volatility of the Fund’s returns.
The Fund’s asset composition is not expected to materially change as the result of the benchmark change, which is aimed at adjusting the Fund’s interest rate risk profile. The additional flexibility with respect to the Fund’s duration, however, may result in the Fund having a duration at times that does not closely resemble the duration of the benchmark index. The more the Fund’s duration or its asset composition deviates from that of the benchmark index, the less likely the Fund’s performance will be similar to the benchmark index. The Fund will continue to principally invest in investment grade fixed income securities, such as corporate, government and securitized debt (e.g., mortgage-backed securities), and other fixed income securities that meet its stated investment policies.
As part of its investments in securitized debt, the Fund also may add investments in interest-only (“IO”) and principal only (“PO”) classes of mortgage-backed securities. The Fund may use these investments, particularly IO securities, for purposes of seeking to adjust its overall duration and to generate income. While these securities present certain investment opportunities, they also may introduce additional risks. IO and PO classes of collateralized mortgage obligations and other mortgage-backed securities are structured in a manner that makes them extremely sensitive to prepayment rates. IOs are entitled to receive all or a portion of the interest, but none (or only a nominal amount) of the principal payments, from the underlying mortgage assets. PO classes are purchased at substantial discounts from par, and the yield to an investor, such as the Fund, will be reduced if principal payments are slower than expected.
UBS Global AM believes that as the markets evolve, the Fund should adapt to the changing market environment accordingly. We believe that these investment policy changes may help the Fund remain competitive and well-positioned, as market dynamics shift. As always, we thank you for your continued support and interest in the Fund.
Fort Dearborn Income Securities, Inc. is a closed-end bond fund managed by UBS Global AM. 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.
1 The Investment Grade Bond Index is an unmanaged index compiled by the Advisor, constructed as follows: from 12/31/81 to present—5% Barclays US Agency (7+ years), 75% Barclays US Credit Index (7+ years), 10% Barclays US Mortgage-Backed Securities Index (all maturities) and 10% Barclays US Treasury Index (7+) years.
2 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.
3 Duration is a measure of price sensitivity of a fixed income investment or portfolio (expressed as percent change in price) to a one percentage point (i.e., 100 basis points) change in interest rates. For example, when the level of interest rates increases by 1%, the price of a fixed income security or a portfolio of fixed income securities having a duration of 10 years will generally decrease by approximately 10%. Conversely, when the level of interest rates decreases by 1%, the price of a fixed income security or portfolio of fixed income securities having a duration of 10 years will generally increase by approximately 10%.
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