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 2013 from UBS Global
Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s
investment manager
Market Review
While the global fixed income market experienced periods of
elevated volatility during the third quarter, it ultimately
generated a positive return. In the US, Treasury yields generally
moved higher in July and August due to expectations that the
Federal Reserve Board (the "Fed") would decide to begin the
tapering of its $85 billion monthly asset purchases at its meeting
on September 18. After peaking in early September, Treasury yields
fell sharply as the Fed chose to not taper, saying that it:
"…decided to await more evidence that progress will be sustained
before adjusting the pace of its purchases." Also driving yields
lower in late September were increasing signs that lawmakers in
Washington DC would not come up with a budget accord in time to
avert a partial government shutdown on October 1. Looking at the
third quarter as a whole, the US yield curve steepened, as
longer-term yields increased more than their shorter-term
counterparts. The overall US bond market, as measured by the
Barclays US Aggregate Index, returned 0.57% during the quarter.
The spread sectors (non-US Treasury fixed income securities)
generated positive returns during the third quarter. High yield
corporate bonds were a relatively strong performer during the
quarter, as the BofA Merrill Lynch US High Yield Cash Pay
Constrained Index1 (the “Index”) returned 2.28%. From a ratings
perspective, higher-quality rated high yield debt broadly
underperformed lower-quality bonds, with the BB- and B-rated
segments lagging the CCC and below-rated segment.
Performance Review
For the third quarter of 2013, the Fund posted a net asset value
total return of 3.47% and a market price return of 2.31%. On a net
asset value basis, the Fund outperformed the Index, its benchmark,
which, as previously stated, returned 2.28% for the quarter.
Within spread management, security selection was the main
contributor to performance during the quarter, particularly our
holdings in the energy and technology sectors. However, this was
modestly offset by our holdings in the building materials sector.
Sector allocation, overall, was a slight detractor from performance
with financial institutions as well as metals and mining detracting
from performance during the quarter. On the other hand, overweights
in the energy, cable television and technology sectors added to
performance.
A number of changes were made to the portfolio during the
quarter. We pared the Fund's overweight to securities rated BBB and
above. From a sector perspective, we increased our overweight in
the energy sector and pared our allocation to the gaming sector.
Elsewhere, we reduced the Fund's overweight in telecommunications
and pared its underweight to healthcare.
Outlook
We remain broadly constructive on high yield as an asset class.
We expect the near-term outlook for the default rate to remain low,
and our analyst team has a credit fundamental outlook for US high
yield issuers that is slightly more favorable than it was three
months ago. The major risk to this view is that technical factors,
potentially driven by possible outflows from the asset class and a
challenging environment for trading liquidity, could overwhelm in
the near-term and lead to volatility and weakness in high yield
markets. We also expect the high yield market to continue to
exhibit increased correlation with the US Treasury market, which
could lead to further periods of volatility as speculation about
the timing of Fed tapering continues over the coming months.
During the third quarter, we sought to maintain a broadly
neutral stance in portfolios from a beta (or market risk)
perspective versus the benchmark, with active risk primarily driven
by the bottom-up views of our credit analyst team.
We anticipate that investment opportunities will arise through
bottom-up issue selection and the avoidance of credit
deterioration. From an industry perspective, the portfolio's
overweights include energy, cable television and technology, driven
by issue selection. The portfolio has an underweight to healthcare,
primarily driven by valuations. Underweights to metals and mining
and the steel sectors are based on valuations and fundamentals,
particularly when we consider the high leverage and excess capacity
in these sectors.
Please note that the Fund’s quarterly portfolio statistics,
which in the past were disclosed as part of the Fund’s dividend
declaration releases, will now be reflected in the quarterly
commentaries, as seen below.
Portfolio statistics as of September 30, 20132
Top ten corporate bonds, including coupon and maturity
Percentage of total portfolio assets SquareTwo
Financial Corp., 11.625%, 04/01/2017 1.4% Ally Financial,
Inc., 8.000%, 03/15/2020 1.2 DISH DBS Corp., 7.875%,
09/01/2019 1.2 NRG Energy, Inc., 8.500%, 06/15/2019
1.1 International Lease Finance Corp., 7.125%, 09/01/2018
1.1 Sabine Pass Liquefaction LLC, 5.625%, 02/01/2021 1.0 MGM
Resorts International, 10.000%, 11/01/2016 1.0 CIT Group,
Inc., 5.500%, 02/15/2019 0.9 Midstates Petroleum Co., Inc.,
10.750%, 10/01/2020 0.8 Intelsat Jackson Holding SA, 7.250%,
10/15/2020 0.8
Top five industries
Percentage of total portfolio assets Energy -
exploration & production 9.6% Telecom -
integrated/services 5.5 Media - cable 5.4 Support -
services 4.9 Consumer/Commercial/Lease Financing 4.5
Credit quality3
Percentage of total portfolio assets BB- or higher
41.3% B 40.7 CCC+ and lower 14.0 Cash equivalents
2.8 Not Rated 1.2 Total 100.0
Other
characteristics Net asset value per share4
$2.20 Market price per share4 $2.00 NAV yield4 8.18%
Market yield4 9.00% Weighted average life
5.01 yrs
Weighted average maturity 6.73 yrs Duration5 4.05 yrs
Duration-leverage adjusted5
5.83 yrs
Leverage6 30.52% 1 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. 2 The
Fund's portfolio is actively managed, and its portfolio composition
will vary over time. 3 Credit quality ratings shown are based on
those assigned by Standard & Poor’s, a division of the
McGraw-Hill Companies, Inc. (“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 references to credit
quality made in the commentary above reflect ratings based on
multiple providers (not just S&P) and thus may not align with
the data represented in this table. Also, the primary source for
reported credit quality in prior quarterly portfolio statistics was
Moody’s; given the switch to S&P, current portfolio statistics
may not be as comparable to statistics in prior releases. 4 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. 5 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. 6 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
listed 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 2013. 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
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