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 third quarter of 2013 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment advisor 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 a month in 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. Sector Overview The spread sectors (non-US Treasury fixed income securities) generated positive returns during the third quarter. Spread sector returns fluctuated during the quarter due to expectations that the Fed would begin adjusting its monetary policy, possible military action in Syria and concerns regarding the US budget and upcoming debt ceiling debate. Both investment grade and high yield corporate debt generated positive absolute returns. Within corporate debt, high-quality rated bonds generally underperformed lower-quality bonds, as higher quality debt tends to be of longer duration which, with the increase in Treasury yields, negatively impacted prices. Finally, commercial mortgage backed securities and residential agency mortgage backed securities posted solid results over the quarter, with particularly strong gains in September following the announcement of the delay in the Fed taper.
Overall, the emerging markets debt asset class remained volatile during the third quarter, but posted better results in contrast to the prior three month period. After recouping some of its May/June losses in July, the asset class declined in August given expectations for Fed tapering and rising US interest rates. The market’s focus on concerns related to an interest rate rise and weak investor demand dissipated with the announcement by the Fed that it would delay the taper. In September, as US interest rates declined and the demand for emerging markets debt stabilized, asset prices found more support. As was the case during the previous three months, US dollar-denominated emerging markets bonds outperformed their local market counterparts during the third quarter. US dollar-denominated emerging markets debt, as measured by the JP Morgan Emerging Markets Bond Index Global (EMBI Global), posted a 0.87% 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 -0.43% return during the same time period.Performance Review For the third quarter of 2013, the Fund posted a net asset value total return of 1.02% and a market price total return of 0.32%. On a net asset value basis, the Fund underperformed its benchmark, the Strategic Global Benchmark (the “Index”) 1, which returned 2.22% for the quarter. The Fund's strategic currency exposures were the largest detractors from performance during the quarter. In particular, a short to the euro was detrimental as it rallied sharply versus the US dollar. A short to the Japanese yen was also negative for performance, albeit to a lesser extent. Tactical foreign exchange trading was also a drag on results. The Fund's yield curve positioning also detracted from performance, largely in September; the Fund's underweight to the five-to-seven year portion of the curve hurt performance as that part of the curve rallied the most following Fed’s decision to delay the tapering of quantitative easing.
On the upside, the Fund's overweights and security selection of high yield and investment grade corporate bonds were beneficial for performance. Within the investment grade corporate bond sector, an overweight to financials added the most value. Elsewhere, an out-of-benchmark allocation to commercial mortgage-backed securities and security selection within the sector contributed to results. Finally, our agency mortgage-backed security exposure was a modest positive for performance.From an emerging markets debt perspective, the Fund had an underweight exposure versus the Index during the third quarter. The Fund's out-of-Index exposure to local-currency-denominated emerging markets debt detracted from results. While many of the Fund’s local currency positions rallied in September, and offset much of their losses from the prior two months, that was not the case across all markets. One notable exception was the Indian rupee, as the currency sizably depreciated over the three-month period. Our exposure to longer duration Brazilian local debt was also negative for performance as their yields generally increased during the quarter. Conversely, security selection of Argentinean US dollar-denominated debt was rewarded. Toward the end of August and early September, we increased our US dollar exposure in a number of countries that had been hit hard during the sell-off earlier in the summer. This was beneficial as their spreads 2 subsequently narrowed during the rally in September. Outlook We maintain our positive outlook for the US economy and believe that growth will continue, albeit at a relatively modest pace. In recent months, we have seen continued improvements in the housing and labor markets. In addition, despite fears of Fed asset purchase tapering this year, we believe that the government shutdown and next round of budget and debt ceiling talks in early 2014 will push the beginning of the taper back to perhaps March. In addition, we believe that the Fed's taper will be more modest and take longer to complete than previously anticipated. We are less positive for growth outside the US. While Europe's economy appears to have bottomed, we are concerned about the potential drivers of growth going forward. We are also keeping a close eye on China, as its economy has decelerated and this could have a negative impact on Asia.
Turning back to the US fixed income market, we continue to have a positive outlook for corporate bonds. In our view, the fundamental and technical backdrops bode well for these securities. Based on this and what we believe will be low defaults, we see the potential for credit spreads to modestly tighten in the coming months. We believe that risks to the US fixed income market include ongoing fiscal policy uncertainties, questions regarding future Fed monetary policy and a possible rotation out of fixed income due to rates moving higher or the relative risk/reward valuation of fixed income versus equities.We have a neutral near-term outlook for the emerging markets asset class. Current account deficits in some developing countries, such as India, Turkey and Indonesia, have risen in recent months and pressured their currencies, which could lead to slightly higher inflation in those countries, as well as in South Africa and Brazil, given their weaker currencies. From an economic perspective, slower emerging market growth rates are generally not supportive for local currencies in the near team. Finally, uncertainties regarding the timing and magnitude of the Fed's tapering could result in periods of heightened volatility. However, we maintain our positive long-term outlook for the emerging markets asset class. While their economic expansions have decelerated somewhat, growth in developing countries should remain higher than their developed country counterparts. In addition, emerging markets debt-to-GDP ratios and fiscal budgets are relatively more attractive. We also believe that supply/demand technicals should be supportive and lead to spread tightening over time. Please note that the Fund’s quarterly portfolio statistics, which in the past were disclosed as part of the Fund’s distribution declaration releases, will now be reflected in the quarterly commentaries, as seen below.
|Portfolio statistics as of September 30, 20133|
|Top ten countries (bond holdings only)4||Percentage of net assets|
|Top ten currency exposures (includes all securities and otherinstruments)||Percentage of net assets|
|United States Dollar||67.8%|
|Credit quality5||Percentage of net assets|
|CCC and Below||0.9|
|Cash and other assets, less liabilities||2.9|
|Net asset value per share8||$10.47|
|Market price per share8||$9.29|
|NAV distribution rate (DR)8||6.02%|
|Market distribution rate (DR)8||6.78%|
|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||“Spreads” refers to differences between the yields paid on US Treasury bonds and other types of debt, such as emerging markets bonds.|
|3||The Fund’s portfolio is actively managed, and its portfolio composition will vary over time.|
|4||Excludes exposures obtained via derivatives (e.g., swaps).|
|5||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. 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 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.|
|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. The Fund’s aggregate exposure to AA rated debt as of September 30, 2013 would include the percentages indicated above for AA, US Treasury and US Agency debt but has been broken out into three separate categories to facilitate understanding.|
|7||Includes agency debentures and agency mortgage-backed securities.|
|8||Net asset value (NAV), market price and distribution rates will fluctuate. NAV distribution rate (DR) is calculated by multiplying the current month’s regular monthly distribution by 12 and dividing by the month-end net asset value. Market distribution rate (DR) is calculated by multiplying the current month’s regular monthly distribution by 12 and dividing by the month-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.|
Investing in the Fund entails specific risks, such as interest rate, credit and the risks associated with investing in the securities of non-US issuers, including those located in emerging market countries. The value of the Fund's investments in foreign securities may fall due to adverse political, social and economic developments abroad and due to decreases in foreign currency values relative to the US dollar. 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.