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 fourth quarter of 2013 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment advisor. Market Review Global fixed income markets finished a challenging year by posting generally weak results during the fourth quarter. Both short- and long-term US Treasury yields moved higher as economic data was generally solid. Also driving yields higher was the Federal Reserve Board's (the "Fed") announcement in December that it would begin paring its asset purchase program. In its official statement at the conclusion of its meeting the Fed said, "In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month." Looking at the fourth 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, declined 0.14% during the fourth quarter. The US market fell 2.02% for the year as a whole, as measured by that same index, its first calendar-year decline since 1999. Global bond markets declined 1.09% over the quarter, as measured by the Citigroup World Government Bond Index. Weaker performance was led by Japanese, Australian and Canadian debt, which was negatively impacted by local currency devaluation against the US dollar. On the other hand, the European bond market fared better as yields generally declined early in the period and the euro and British pound proved to be more resilient over the quarter.
Sector OverviewDespite rising interest rates, most spread sectors 1 generated modest gains during the fourth quarter. The quarter began on a positive note, as investor sentiment remained positive following the Fed's surprise decision in September to delay the tapering of its asset purchase program. However, for some spread sectors, a portion of those gains were given back in November and December, as economic data often exceeded expectations and the Fed announced that it would start paring its asset purchases. As was the case for the year as a whole, one of the best performing sectors during the fourth quarter was high yield debt. Supporting the high yield market were continued solid corporate fundamentals, low defaults and overall solid demand. While investment-grade corporate debt posted a negative absolute return, it outperformed equivalent duration US Treasures as spreads 2 contracted over the quarter, driven by demand for yield. Similarly, within securitized debt, agency residential mortgage-backed securities ("MBS") had a negative return for the quarter but outperformed US Treasuries. Commercial MBS had another stronger quarter, outperforming both asset-backed and residential agency MBS. The emerging markets debt asset class experienced periods of volatility and generated mixed results during the fourth quarter of 2013. The quarter began on a positive note, as investor sentiment remained positive following the US Federal Reserve Board's (the "Fed") surprise decision in September to delay the tapering of its asset purchase program. However, a portion of those gains were given back in November as US economic data was largely positive and rates moved higher. In addition, investor sentiment for the asset class was impacted by concerns regarding China's economy and generally falling commodity prices. US dollar-denominated emerging markets debt, as measured by the JP Morgan Emerging Markets Bond Index Global (EMBI Global), posted a 0.91% 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 -1.54% return during the same time period.
Performance ReviewFor the fourth quarter of 2013, the Fund posted a net asset value total return of 1.32% and a market price total return of -1.10%. On a net asset value basis, the Fund outperformed its benchmark, the Strategic Global Benchmark (the “Index”) 3, which declined 0.40% over the quarter. As of December 31, 2013, the Fund's duration was 3.82 years, versus 6.71 years for the Index. The Fund's out-of-benchmark allocation 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. Out-of-benchmark allocations to commercial mortgage-backed securities, agency mortgage-backed securities and collateralized loan obligations also contributed to performance. From a currency positioning perspective, our short position in the Japanese yen enhanced the Fund's results. This more than offset the negative impact from the Fund's short position in the euro, as it appreciated versus the US dollar. The Fund's more limited exposure to non-US dollar interest rate markets detracted from performance. Elsewhere, as further discussed below, our out-of-benchmark overweight to emerging market local currencies was not rewarded, as they generally depreciated versus the US dollar. From an emerging markets debt perspective, while the Fund's overall underweight to emerging markets debt was rewarded, certain country allocation and security selection decisions detracted from performance. In particular, the Fund's allocation to longer-term Brazilian local debt was a drag on results. Brazil's local debt fell further due to negative economic sentiment and concerns regarding higher inflation. Furthermore, rising US interest rates negatively impacted the country's local yields, as these followed US Treasury yields upward. An overweight to Venezuelan US dollar-denominated debt was not rewarded. It performed poorly, especially in November, amid concerns about the country's upcoming local elections and its weakening financial situation. On a positive note, the Fund's underweight to Indonesian and Turkish debt was rewarded, as was its overweight to Belarus US dollar-denominated debt.
OutlookThe US economy was highly resilient last year and we expect it to continue growing at a solid pace in 2014. The Eurozone appears to have finally emerged from its lengthy recession in the middle of 2013. While growth will likely be tepid, we believe that the European Central Bank will take the necessary actions to help the region avoid falling back into a recession. Growth in Japan has been supported by aggressive actions by the government and the Bank of Japan. We will closely monitor incoming data to determine if the country's solid rebound is sustainable. Finally, there are still concerns regarding growth in China and therefore, we maintain our cautious stance regarding its economy. We have a generally positive outlook for the spread sectors. In particular, we could experience an environment where investors maintain their exposures just to earn coupon and perhaps benefit from modest spread tightening during the year. Risks to this outlook include uncertainties regarding the pace of the Fed's transition from policy accommodation to policy normalization and the potential for rates to continue moving higher. We are also monitoring a potential investor rotation from fixed income to equities. Against this backdrop, we expect to maintain our underweight duration position relative to the Index. We continue to have a neutral near-term outlook for the emerging markets asset class. In recent months there has been mounting evidence that the growth in many developing countries has decelerated. In some countries, this has led to growing current account deficits. Looking ahead, this could negatively impact their currencies and put further strains on their economies. Continued rising US Treasury yields could also adversely affect the asset class in 2014, although we believe that the impact will be less severe than it was last year. We maintain our positive long-term outlook for the emerging markets asset class. While it may take some time, we expect growth in emerging market countries to once again surpass their developed country counterparts.
1 A spread sector refers to non-government fixed income sectors, such as high yield bonds, commercial mortgage-back securities (CMBS) and investment grade corporate bonds. The spread measures the difference between the yields paid on non-government securities versus those paid on government securities.2 "Spread" refers to differences between the yield paid on US Treasury bonds and other types of debt, such as corporate or emerging market bonds. 3 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.
|Portfolio statistics as of December 31, 20134|
|Top ten countries (bond holdings only)5||Percentage of net assets|
|Top ten currency exposures (includes all securities and otherinstruments)||Percentage of net assets|
|United States Dollar||71.4%|
|Credit quality6||Percentage of net assets|
|CCC and Below||0.9|
|Cash and other assets, less liabilities||2.4|
|Net asset value per share9||$10.45|
|Market price per share9||$9.03|
|NAV distribution rate (DR)9||6.01%|
|Market distribution rate (DR)9||6.95%|
|Weighted average maturity||8.9 yrs|
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. 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 2014. All rights reserved.
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