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 2014 from UBS Global Asset Management (Americas) Inc. ("UBS Global AM"), the Fund's investment advisor Market review The global fixed income market declined during the third quarter. Volatility was elevated at times over the three month period as investor sentiment was impacted by mixed global economic data, questions regarding future central bank monetary policy and an increasing number of geopolitical issues. The yield on the US two-year Treasury rose from 0.47% to 0.58% over the quarter, as expectations for Federal Reserve Board (the "Fed") rate hikes increased. In contrast, the yield on the US 10-year Treasury declined slightly from 2.53% to 2.52%, partially driven by several periods of risk aversion that saw fixed income investors move to the relative safety of US treasuries. As expected, the Fed announced at its meetings in July and September that it would further taper its purchases of longer-term Treasuries and agency mortgage-backed securities (quantitative easing), and the program concluded in October 2014. In its official statement following its September meeting, the Fed stated, "it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2% longer-run goal, and provided that longer-term inflation expectations remain well anchored." All told, global government bond markets declined 3.78% over the quarter, as measured by the Citigroup World Government Bond Index. From a currency perspective, the US dollar appreciated versus most currencies, including the yen and euro.
Sector overviewMany US spread sectors 1 posted negative returns during the third quarter. Spread sectors were impacted by the aforementioned issues driving investor sentiment. Treasury Inflation-Protected Securities ("TIPS"), high yield corporate bonds and emerging market debt generated weak results. After generating strong results over the first eight months of the year, the emerging markets debt asset class fell sharply in September 2014. This reversal was triggered by a number of factors, including increased investor risk aversion, rising US Treasury yields and signs of weak growth in many developed and emerging market countries. US dollar-denominated debt, as measured by the J.P. Morgan Emerging Markets Bond Index Global (EMBI Global), declined 1.65% 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 -5.66% return during the same time period. Performance review During the third quarter of 2014, the Fund posted a net asset value total return of -1.68% and a market price total return of -4.18%. On a net asset value total return basis, the Fund outperformed its benchmark, the Strategic Global Benchmark (the "Index"), 2 which declined 3.08% over the quarter. The largest contributor to the Fund's relative performance was its developed market currency exposure. In particular, a long position in the US dollar, along with shorts to the euro, Japanese yen, New Zealand dollar and Australian dollar, were additive to the Fund's results. On the downside, the Fund's spread sector exposure detracted from performance. In particular, security selection and a substantial overweight allocation to investment grade corporate bonds were negative for returns. This largely occurred in September, as investor risk aversion increased. Within the investment grade space, the Fund's exposures to metals and mining, energy and banks dragged on performance. An overweight to high yield corporate bonds detracted from results, as did an overweight to commercial mortgage-backed securities ("CMBS"). Elsewhere, the Fund's duration and yield curve positioning detracted from returns. An underweight to the long end of the curve was a drag on performance, as rates declined during the quarter as a whole.
From an emerging markets debt perspective, the largest detractor from performance was our local currency exposure. Most local currencies fell sharply versus the US dollar, as the US dollar appreciated versus almost all other currencies due to a stronger economic forecast in the United States. Expectations also increased that the Fed would begin raising rates in 2015. In contrast, growth in many emerging market countries moderated. The Fund's allocation in Brazilian local debt was not rewarded, as it added only marginally compared to other local bonds, although yields were relatively stable. An allocation to US dollar-denominated debt from Venezuela detracted from performance. In particular, Venezuela generated weak results in September, as investors were concerned about the maturation of a large amount of debt in October that will require refinancing. Political and economic uncertainties also led to spread widening. The Fund maintains its position in Venezuela, as we believe spread pressures will dissipate following the refinancing of the country's debt. On the upside, an underweight to Ukraine was rewarded given weak investor sentiment in the country, ongoing tensions with Russia and weak financial fundamentals.Outlook In our view, the US economy has enough momentum to continue expanding, although the pace will be far from robust. We expect the Fed to begin the process of normalizing monetary policy in 2015, and we believe it will do so in a gradual and measured fashion. Economic growth in Europe remains weak, and the European Central Bank is expected to remain accommodative as it looks to stimulate growth and ward off deflation. Elsewhere, we are closely monitoring China's economy given signs of a more modest expansion. Turning to the fixed income market, geopolitical and global growth concerns have driven down US Treasury yields and pushed credit spreads wider. We currently have a neutral to somewhat positive outlook for the credit markets. In particular, we continue to find attractive opportunities given relatively more attractive spreads.
|Portfolio statistics as of September 30, 20143|
|Top ten countries (bond holdings only)4||Percentage of net assets|
|Top ten currency breakdown (includes all securities and otherinstruments) 5||Percentage of net assets|
|United States Dollar||71.8%|
|New Zealand Dollar||3.5|
|Credit quality6||Percentage of net assets|
|CCC and Below||3.0|
|Cash and other assets, less liabilities||2.5|
|Net asset value per share9||$10.36|
|Market price per share9||$8.83|
|Weighted average maturity||7.4 yrs|
|1||A spread sector refers to non-government fixed income sectors, such as investment grade or high yield bonds, commercial mortgage-backed securities (CMBS), etc.|
|2||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.|
|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||Forward foreign currency contracts are reflected at unrealized appreciation/depreciation; this may not align with the risk exposure described in the portfolio commentary section which reflects forward foreign currency contracts based on contract notional amount. As of the most recent period end, September 30, 2014, the Fund maintained a risk exposure to non-US dollar currencies equal to approximately 19% of the Fund.|
|6||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.|
|7||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, 2014 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.|
|8||Includes agency debentures and agency mortgage-backed securities.|
|9||Net asset value (NAV) and market price will fluctuate.|
|10||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.|
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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