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 2014 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment advisor Market Review The global fixed income market again generated positive results during the second quarter. The yield on the US 10-year Treasury fell from 2.73% to 2.53% over the period amid mixed economic data, geopolitical issues and several flights to quality. At its meetings in April and June 2014, the Federal Reserve Board (the "Fed") announced that it would further taper its purchases of longer-term Treasuries and agency mortgage-backed securities. In each case, the Fed said it planned to pare its purchases by a total of $10 billion per month. In its official statement following its June meeting the Fed said, "Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months. Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated. Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow." All told, global government bond markets gained 2.27% over the quarter, as measured by the Citigroup World Government Bond Index. From a currency perspective, the Canadian dollar, British pound and Japanese yen were the best performing currencies, while the Swedish krona, Norwegian krone and euro were the worst-performing currencies. Sector Overview Most US spread sectors 1 generated positive returns during the second quarter. Spread sectors were supported by declining long-term yields and overall solid demand from investors looking to generate incremental yield. Among the strongest performers were investment grade and high yield corporate bonds and mortgage-backed securities ("MBS"). Commercial mortgage-backed securities ("CMBS") and asset-backed securities ("ABS") also posted positive results during the quarter. The emerging markets debt asset class was the best-performing segment of the bond market during the quarter. The segment benefited from strong investor demand, declining US Treasury yields and some signs of stabilization in China's economy. As measured by the J.P. Morgan Emerging Markets Bond Index Global (EMBI Global), US dollar-denominated debt posted a 5.43% return over the three months, whereas local currency emerging markets debt, as measured by the J.P. Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM Global Diversified), posted a 4.02% return during the same time period.
Performance ReviewDuring the second quarter of 2014, the Fund posted a net asset value total return of 3.26% and a market price total return of 3.16%. On a net asset value total return basis, the Fund slightly underperformed its benchmark, the Strategic Global Benchmark (the “Index”), 2 which returned 3.31% over the quarter. The Fund's spread sector exposure was a positive for performance during the second quarter. Security selection and a substantial overweight allocation to investment grade corporate bonds—both financials and industrials—contributed to performance. An overweight to high yield corporate bonds was also beneficial as was an overweight to, and security selection in, CMBS. Elsewhere, overweights to agency MBS and collateralized loan obligations ("CLOs") contributed to performance. On the downside, an underweight to non-U.S. bond markets detracted from results. We tactically adjusted the Fund's duration over the period, but remained shorter than that of the benchmark. This detracted from performance as rates largely declined during the second quarter. The Fund's yield curve positioning was also a negative for performance during the quarter. From a currency perspective, an underweight position to the Japanese yen detracted from performance, as the currency strengthened relative to the US dollar, while an out-of-index allocation to certain emerging markets currencies was rewarded. From an emerging markets debt perspective, an underweight versus the benchmark detracted from performance. In addition, a short duration in the asset class, along with an allocation to Ghana local debt, dragged on results. On the upside, the Fund's allocations to Brazilian local debt, as well as to Venezuelan, Belarusian and Russian U.S. dollar-denominate debt, contributed to performance. Outlook We believe that the US economy remains on a positive trajectory, as the housing market continues to improve and unemployment slowly declines. In addition, consumer spending has been solid. While the European economy is still weak, there have been some signs of stabilization, in part due to ongoing support from the European Central bank. Japan's economy has shown signs of recent strength, although it is too early to tell if the Bank of Japan's high accommodative monetary policy will lead to a sustainable expansion and an end to its lengthy deflationary cycle. Elsewhere, while growth in China has moderated, we feel that the country can avoid a hard landing for its economy.
We feel that the generally positive economic backdrop will be supportive for spread sectors and that we could see some additional spread tightening. However, if growth accelerates, we could see interest rates move higher, which would negatively impact the overall fixed income market. We are also closely monitoring a potential investor rotation from fixed income to equities. Given these potential headwinds, we expect to maintain the Fund's short duration.Many emerging markets countries are experiencing growth well above their major developed country counterparts, although the former are not immune to global developments. We expect to see emerging market growth rates moderate somewhat in 2014, based on lower exports to developed markets. However, advantages in terms of growth and relatively low fiscal deficits are favorable for debt dynamics in emerging markets on a longer-term horizon. That said, in the short-term we are less favorable on the asset class and feel that volatility within the asset class could remain elevated in the near term due to market uncertainty and investor risk aversion. But overall we continue to have a positive long-term outlook for emerging market investments. Solid fundamental data, stable reserves, a stronger fiscal situation and lower indebtedness are signs of such strengths, especially for emerging market sovereigns, quasi-sovereigns and currencies.
|Portfolio statistics as of June 30, 20143|
|Top ten countries (bond holdings only)4||Percentage of net assets|
|Top ten currency breakdown (includes all securities and other instruments) 5||Percentage of net assets|
|United States Dollar||69.0||%|
|New Zealand Dollar||0.9|
|Credit quality6||Percentage of net assets|
|CCC and Below||1.1|
|Cash and other assets, less liabilities||2.3|
|Net asset value per share9||$||10.67|
|Market price per share9||$||9.35|
|NAV distribution rate (DR)9||4.99||%|
|Market distribution rate (DR)9||5.70||%|
|Weighted average maturity||8.3 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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