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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 first quarter 2013 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment manager
The markets were volatile at times during the first quarter given uncertainties surrounding US fiscal and monetary policy, geopolitical concerns, inconclusive elections in Italy and a banking crisis in Cyprus. Despite speculation that the US Federal Reserve Board (the “Fed”) may moderate quantitative easing sooner than expected, Fed Chairman Ben Bernanke reiterated his commitment to policy accommodation.
The US spread sectors (i.e., non-US Treasury fixed income securities) largely treaded water during the first quarter and generally performed in line with equal duration Treasuries. One notable exception was the high yield bond market, as it posted solid absolute and relative results during the quarter. All told, the Bank of America Merrill Lynch US Cash Pay High Yield Constrained Index1 (the “Index”) returned 2.87% during the quarter. The high yield market was supported by overall strong demand, positive corporate fundamentals and continued low defaults. From a ratings perspective, better-quality rating categories broadly underperformed lower-quality bonds, with the BB- and B-rated segments lagging the CCC and below-rated segment.
For the first quarter of 2013, the Fund posted a net asset value total return of 3.37%, and a market price return of 3.01%. On a net asset value basis, the Fund outperformed the Index, its benchmark, which, as previously stated, returned 2.87% for the quarter.
Spread management contributed to performance during the quarter,2 particularly our overweights to energy, services and gaming sectors. Overweights to cable television, telecommunications and insurance sectors were also beneficial, albeit to lesser extents. Security selection within those sectors was also positive for performance. The portfolio continued to use leverage during the quarter; this was helpful given the market's positive results, as well as our ability to boost the income generated by the Fund. On the downside, an underweight to steel, positioning in the food/drug retail sector and security selection in the bank sector were modest drags on results.
A number of changes were made to the portfolio during the quarter. We increased the Fund's allocations to the telecommunications, technology and chemicals sectors, adding to overweight positions. Our overweight to the energy sector declined, as a number of individual securities were called prior to their maturity. Elsewhere, we somewhat reduced our overweight position in banks, reduced our exposure to super retail toward neutral and moved from an overweight to a small underweight in the food/drug retail sector. We also added exposure to building materials, moving from underweight to overweight.
We began the first quarter with our largest overweights to energy, cable television, gaming and services, and underweights to broadcasting, consumer products, steel and diversified media. We ended the quarter with the most pronounced overweights to energy, services, telecommunications, technology and gaming sectors. Our largest underweights at the end of March were to steel, consumer products, diversified media, restaurants and textiles/apparel.
In our view, the high yield market should continue to provide opportunities for income-oriented investors to take advantage of periodic macro-driven volatility in what remains a low-yield environment. We expect the backdrop of modest economic growth to continue to be generally favorable for credit investors. In addition, we believe that the current low interest rate environment will continue to support demand for high yield bonds.
Corporate fundamentals remain generally sound, although we do recognize modestly declining aggregate fundamentals and deteriorating underwriting trends. Our analysts expect defaults to remain low and below historical averages. However, lower-quality issuers could be susceptible to persistently slow economic growth or a macro shock. Primary market activity was strong throughout the first quarter, although net issuance was only modestly positive, as upgrades to investment grade and calls by issuers offset new issuance.
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.
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 “Spreads” refers to differences between the yield paid on US Treasury bonds and other types of debt, such as corporate or emerging market bonds.