FDI Fort Dearborn Income Securities, Inc.

Fort Dearborn Income Securities, Inc. (the "Fund") (NYSE:FDI) is a closed-end bond fund managed by UBS Asset Management (Americas) Inc. (formerly, UBS Global Asset Management (Americas) Inc.). 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.

Fund Commentary for the fourth quarter of 2015 from UBS Asset Management (Americas) Inc. (“UBS AM”), the Fund’s investment advisor

Market review

The overall US fixed income market modestly declined during the fourth quarter as short- and longer-term Treasury yields moved higher. US economic data was mixed over the last three months of the year. While employment gains were generally robust, activity in the manufacturing sector contracted. After remaining on hold in October, the US Federal Reserve (the "Fed") raised interest rates for the first time in almost 10 years at its meeting in December. More specifically, the US central bank raised the federal funds rate from a range between 0% and 0.25% to a range between 0.25% and 0.50%. In its official statement the Fed said, "The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to two percent inflation." For the quarter as a whole, the yield on the two-year Treasury rose from 0.64% to 1.06%, whereas the yield on the 10-year Treasury moved from 2.06% to 2.27%.

The overall US bond market, as measured by the Barclays US Aggregate Index (the "Index"), declined 0.57% during the fourth quarter of 2015. 1 Most US investment grade spread sectors posted negative total returns during the period. 2 Lower-quality securities, such as high yield corporate bonds, generated even weaker results.

Performance review

During the fourth quarter of 2015, the Fund posted a net asset value total return of -0.92% and a market price total return of 4.06%. The Fund, on a net asset value total return basis, underperformed the Barclays US Aggregate Index which, as previously stated, declined 0.57% during the quarter. The Fund’s trading discount narrowed significantly after the October 13, 2015 issuance of a press release announcing preliminary plans to convert the Fund from a closed-end to an open-end fund company. This contributed to the higher market price total return performance for the period.

The Fund’s allocations to collateralized loan obligations ("CLOs") and agency mortgage-backed securities ("MBS") detracted from performance during the quarter. The Fund’s credit exposure contributed to results during the period. In particular, our overweights to investment grade and high yield corporate bonds were beneficial in October as they rallied sharply. These positives, however, were partially offset by spread widening in November and December. The Fund's yield curve flattening bias was rewarded as the curve flattened during the quarter. Finally, allocation to government-related securities was favorable for performance.

Several adjustments were made to the portfolio during the quarter. We reduced the Fund's credit allocation. More specifically, we pared the Fund's exposures to longer-dated credits, as well as to energy and commodity-related credits. Also of note, we tactically used credit derivatives to hedge our credit allocation and to act as partial protection against wider credit spreads.

Outlook

We believe the US economy has enough momentum to continue expanding, but that growth will be far from robust. We also expect inflation to remain relatively muted. Overseas, growth is slowly improving in Europe and we anticipate continued monetary policy accommodation from the European Central Bank. We remain cautious regarding growth in Asia. In particular, we are worried about the slower pace of growth in China and its impact on the global economy. Turning to the fixed income market, we are concerned about the impact of additional Fed rate hikes. In addition, uncertainty regarding the pace and magnitude of future Fed actions could trigger periods of market volatility. Finally, it is beginning to look increasingly likely that the credit cycle may have turned. In light of this, we have trimmed the Fund's credit exposure and will actively manage this allocation going forward.

On October 13, 2015, based on the recommendation of UBS AM, the Fund's investment advisor, the Fund's Board of Directors announced its intention to pursue a conversion of the Fund from a closed-end fund to an open-end fund. It is anticipated that the Fund’s conversion to an open-end fund will be accomplished through a tax-free reorganization of the Fund into an open-end fund created for the purpose of the conversion (“Fund Reorganization”). A Fund Reorganization requires the approval of shareholders, and it is expected that a Fund Reorganization proposal will be submitted to shareholders for approval at a special shareholder meeting of the Fund to be called in the first half of 2016. If the Fund Reorganization is approved, shareholders of the Fund will become shareholders of a new open-end fund.

 

Portfolio statistics as of December 31, 20153

 

Top ten countries4

Percentage of total portfolio assets (%)

United States 76.73 United Kingdom 5.61 Mexico 2.36 Netherlands 1.89 Norway 1.70 Brazil 1.59 Canada 1.23 Germany 1.23 Portugal 1.08 France 0.63 Total 94.05

 

Portfolio composition

Percentage of total portfolio assets (%) Corporate bonds 71.36 Commercial mortgage-backed securities 7.13 Residential mortgage-backed securities 0.43 Collateralized loan obligations 3.55 Mortgage & agency debt securities 1.48 Municipal bonds 2.34 US government obligations 9.03 Preferred stocks 0.08 Short-term investments 1.00 Options purchased 0.01 Cash and other assets, less liabilities 3.59 Total 100.00   Credit quality5 Percentage of total portfolio assets (%) AAA 0.0 US Treasury6 9.0 US Agency6,7 1.5 AA 2.5 A 5.0 BBB 51.4 BB 15.2 B 3.4 CCC and below 0.4 Non-rated 6.8 Cash equivalents 1.0 Other assets, less liabilities 3.8 Total 100.0

Characteristics

    Net asset value per share8   14.72 Market price per share8   14.51 NAV yield8   4.42 Market yield8   4.48 Duration9   5.33 yrs Weighted average maturity   8.46 yrs

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 Fund's portfolio is actively managed, and its portfolio composition will vary over time.

4 The Fund, at this time, does not take active currency risk; as of December 31, 2015, the Fund's holdings in foreign fixed income securities were predominately denominated in US dollars.

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. Rating reflected represents S&P individual debt issue credit rating. While S&P may provide a credit rating for a bond issuer (e.g., a specific company or country); certain issues, such as some sovereign debt, may not be covered or rated and, therefore, are reflected as non-rated for the purposes of this table. 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 S&P downgraded long-term US government debt on August 5, 2011 to AA+. Other rating agencies continue to rate long-term US government debt in their highest ratings categories.

7 Includes agency debentures and agency mortgage-backed securities.

8 Net asset value (NAV), market price and yields will fluctuate. NAV yield is calculated by multiplying the current quarter’s dividend by four and dividing by the quarter-end net asset value. Market yield is calculated by multiplying the current quarter’s dividend by four and dividing by the quarter-end market price.

9 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.

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 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, credit and US government securities risks as well as derivatives risks. Further information regarding the Fund, including a discussion of principal objectives, 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.

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