Strategic Global Income Fund, Inc. (the "Fund") (NYSE: SGL) is a non-diversified, closed-end management investment company seeking a high level of current income as a primary objective and capital appreciation as a secondary objective through investments in US and foreign debt securities. Fund Commentary for the second quarter of 2013 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment advisor Market Review After generating positive results in April, the global fixed income market sold off in May and June. Triggering this turnaround were indications from the Federal Reserve Board (the “Fed”) that it may begin to taper its asset purchase program sooner than previously anticipated. This caused US Treasury yields to move sharply higher across the curve. Also impacting the fixed income market were the ongoing concerns regarding the European sovereign debt crisis, moderating growth in China and several geopolitical issues. The US yield curve steepened, as short-tem yields remained anchored while longer-term yields increased during the quarter. The overall US bond market, as measured by the Barclays US Aggregate Index, declined 2.32% during the quarter. Sector Overview A number of fixed income asset classes posted negative returns for the quarter with inflation-linked securities and emerging markets debt leading the declines. Overall, spread sectors (non-US Treasury fixed income securities) performed poorly during the second quarter, as investor risk aversion increased and many fixed income asset classes experienced outflows. While both investment grade and high yield corporate debt generated negative absolute returns, high yield modestly outperformed equal duration Treasuries during the quarter. Within corporate debt, high-quality rated bonds generally underperformed lower-quality bonds, as higher quality debt tends to be longer duration which, with the increase in Treasury yields, negatively impacted prices. Emerging markets debt performed poorly during the second quarter. The main reason for weakness in the asset class was the expected end of quantitative easing in the US and the ensuing sharp rise in US interest rates. Weak investor sentiment led to sharp outflows from the asset class during the quarter. In a reversal from earlier in the year, US dollar-denominated emerging markets debt outperformed its local market counterparts during the second quarter. US dollar-denominated emerging markets debt, as measured by the JP Morgan Emerging Markets Bond Index Global (EMBI Global), posted a -6.06% return over the three months, whereas local currency emerging markets debt, as measured by the JP Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM Global Diversified), posted a -7.03% return during the same time period.
Performance ReviewDuring the second quarter of 2013, the Fund posted a net asset value total return of -4.55% and a market price total return of -11.46%. On a net asset value basis, the Fund underperformed its benchmark, the Strategic Global Benchmark (the “Index”) 1, which declined 3.98% for the quarter. The Fund's spread sector exposure drove its relative performance during the second quarter. Our overweight position and security selection of investment grade and high yield corporate bonds detracted the most from performance. After a positive start during the first half of the quarter, these gains were more than offset by the sharp decline in the credit markets that occurred during the second half of the period. In particular, our overweights to higher beta (higher risk) BBB-rated securities in the basic industry, financials and energy sectors were detrimental to performance. On the upside, the Fund's duration positioning positively contributed to results. Having a short duration versus that of the benchmark was rewarded, given the sharp increase in yields during the second quarter. The Fund’s duration 2 at the end of the second quarter was 4.68 years. With respect to the Fund's emerging markets debt exposure, having an underweight versus the benchmark was a positive for relative results. That said, our allocation to the asset class detracted from the Fund's absolute results. In particular, overweights in local bonds and local duration in Brazil detracted the most from performance. Other positions, such as those in India and Thailand, were also not rewarded. Currency strategy overall was a negative contributor to results, as many emerging market currencies depreciated significantly versus the US dollar. On a positive note, the Fund’s overweight position in US dollar-denominated Argentina debt added to performance. These securities performed poorly during the first quarter of 2013, due to continued concerns regarding a longstanding dispute between holdouts from Argentina’s 2001 sovereign default. However, investor sentiment improved and Argentina's debt declined less during the second quarter amid the sharp downturn in the overall emerging market asset class. Lastly, the Fund’s underweight duration exposure to US dollar-denominated emerging markets debt was rewarded as US Treasury yields rose and helped offset the negative contribution from exposure to local emerging market rates.
OutlookWe continue to have a positive outlook for the US economy and believe that growth will continue, albeit at a fairly modest pace. That said, we are closely monitoring the impact of moderating growth outside the US, as this could have a negative impact on exports. We are also keeping a close eye on both consumer and business spending, in light of higher interest rates in recent months. In terms of the Fed, we were not surprised by its talk of tapering future asset purchases. If overall economic data remains positive and there are continued gains in the labor market, we would expect to see tapering begin later this year. Given the uncertainties regarding the timing and magnitude of Fed tapering, we anticipate periods of heightened volatility as we move through the remainder of the year. As such, we have a bias to short duration for the Fund. Despite the recent setback, we remain positive for the US corporate bond market. Corporate fundamentals continue to be solid overall, with balance sheets that are oftentimes flush with cash. Furthermore, many US companies have taken advantage of relatively low rates to refinance their debt as well as extended maturities. Therefore, we expect default rates to remain below their historical average. Given what we believe to be positive fundamentals and credit spread 3 widening in recent weeks, we would not be surprised to see spread tightening somewhat as the year progresses. We also believe that the sharp increases in US Treasury and local currency emerging markets debt yields during the second quarter were excessive given the economic environment, as inflation remains well-contained in most countries. However, inflation could become more important in emerging market countries, based on the spill-over effect from declining currencies. From an economic perspective, it is clear that China's economic growth has moderated, which could impact commodity prices and other aspects of developing economies. However, we do not expect China to experience a hard landing for its economy. Although demand for emerging markets debt was weak during the quarter, this may reverse as investors are drawn to the real yields available from the asset class, especially compared to developed country counterparts.
Disclaimers Regarding Fund Commentary - The Fund Commentary is intended to assist shareholders in understanding how the Fund performed during the period noted. 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. Further 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. 1 The Strategic Global Benchmark is an unmanaged index compiled by the advisor, constructed as follows: 67% Citigroup World Government Bond Index (WGBI) and 33% JP Morgan Emerging Markets Bond Index Global (EMBI Global). Investors should note that indices do not reflect the deduction of fees or expenses. 2 Duration measures a portfolio’s sensitivity to interest rate changes. 3 “Spread” refers to differences between the yield paid on US Treasury bonds and other types of debt, such as corporate or emerging market bonds.