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 2014 from UBS Global Asset Management (Americas) Inc. ("UBS Global AM"), the Fund's investment advisor Market review The global fixed income market generated mixed results during the fourth quarter. Despite improving growth and the end of the Federal Reserve Board's (the "Fed") asset purchase program, US intermediate- and long-term yields declined. In contrast, US short-term rates increased given expectations for Fed rate hikes in 2015. All told, the yield on the two-year US Treasury rose from 0.58% to 0.67%, whereas the yield on the 10-year Treasury fell from 2.52% to 2.17% during the quarter. In its official statement following its last meeting of the year in December, the Fed stated: "Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy." The overall US bond market, as measured by the Barclays US Aggregate Index, returned 1.79% during the fourth quarter, lifting its 2014 gain to 5.97%. 1 Conversely, the global government bond markets declined 1.49% 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 Japanese yen and euro. Sector overview Many US spread sectors posted positive total returns during the fourth quarter, although most lagged equal duration US Treasuries. 2 Among the US spread sectors, long-term investment grade corporate bonds posted the strongest total returns. Although credit spreads generally widened over the period, bond prices were supported by declining Treasury yields. 3 Commercial mortgage-backed securities (CMBS) also posted positive results during the quarter. In contrast, high yield corporate bonds generated weak results. The emerging markets debt asset class generated a negative return during the quarter. This was partially due to collapsing oil prices, global growth concerns and the rising US dollar. 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 -5.71% return during the same time period. Performance review During the fourth quarter of 2014, the Fund posted a net asset value total return of -2.25% and a market price total return of -2.54%.On a net asset value total return basis, the Fund underperformed its benchmark, the Strategic Global Benchmark (the "Index"), which declined 1.53% over the quarter. 4 The Fund's spread sector exposure detracted from performance during the fourth quarter. In particular, security selection and a large overweight allocation to investment grade corporate bonds were negative for returns. Within the investment grade space, the Fund's exposures to energy and metals and mining were the largest detractors from performance. The energy sector was dragged down by sharply falling oil prices. Metals and mining was also negatively impacted by falling prices given concerns about global growth. The Fund's allocation to high yield corporate bonds also detracted from results. Elsewhere, the Fund's yield curve positioning, overall, detracted from returns. An overweight to the intermediate part of the curve and an underweight to the short end of the curve were modestly positive for results. However, this was more than offset by an underweight to the long end of the curve, as rates in this portion of the curve experienced the largest decline during the fourth quarter. Tactical management of the Fund's duration was also negative for performance.
As was the case over the previous three month period, 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. Maintaining a larger allocation to US dollar-denominated debt than the Index was also positive for performance.While the Fund's allocation to the emerging markets debt asset class detracted from results on an absolute basis, an underweight versus the Index was positive for relative performance. Within the asset class, the Fund's overweight to Argentinian US dollar-denominated debt was beneficial for results. In contrast, overweights to Venezuelan and Russian US dollar-denominated debt detracted from results. The Fund's overweight to Russian quasi-sovereigns was also negative for performance. Elsewhere, exposures to emerging markets countries that were negatively affected by the depreciation of the Russian ruble, including Belarus and Kazakhstan, were headwinds for the Fund's performance. Finally, a small allocation to emerging markets currencies detracted from results over the quarter. Outlook We maintain our positive view for the US economy. Unemployment has fallen sharply over the last year and third quarter GDP growth was well above that of other developed countries. Against this backdrop, we expect the Fed to raise interest rates in 2015. That said, moderating inflation should give the Fed the flexibility to delay rate hikes if it deems it appropriate. We also believe that the US central bank will take a slow and measured approach in terms of normalizing monetary policy. We have a less optimistic view on Europe, as growth is very weak and deflationary concerns have increased. As such, we feel the European Central Bank will be true to its word by significantly increasing its balance sheet in 2015. Likewise, we expect the Bank of Japan to remain highly accommodative as it seeks to stimulate growth and ward off deflation. Elsewhere, moderating growth in China may cause its central bank to institute more aggressive actions.
Turning to the fixed income market, we anticipate continued volatility in 2015 for both interest rates and spreads. This could be triggered by a number of factors, including mixed global economic data, uncertainties regarding future central bank monetary policy and geopolitical issues. While this may be unnerving at times, we believe it will breed numerous investment opportunities in 2015.We continue to have a cautious short-term outlook for the emerging markets debt asset class. Sharply falling oil prices have already put severe financial strains on exporters, such as Russia and Venezuela. Declining prices for other commodities have negatively impacted a number of other emerging markets countries as well. While these lower prices should support many developed nations, it is not clear if or when this could ultimately benefit emerging markets countries. In addition, moderating economic data from China is a concern. Against this backdrop, we believe US dollar-denominated debt could continue outperforming local currency debt in the coming months. On the upside for the emerging markets asset class, inflation is relatively benign overall. As such, this should give most emerging markets central banks the ability to delay raising rates in the near-term.
|Portfolio statistics as of December 31, 20145|
|Top ten countries (bond holdings only)6||Percentage of net assets|
|Top ten currency breakdown (includes all securities and other instruments) 7||Percentage of net assets|
|United States Dollar||75.2%|
|New Zealand Dollar||3.3|
|Credit quality8||Percentage of net assets|
|CCC and Below||2.3|
|Cash and other assets, less liabilities||2.4|
|Net asset value per share11||$10.00|
|Market price per share11||$8.48|
|Weighted average maturity||7.6 yrs|
|1||The Barclays US Aggregate Index is an unmanaged broad-based index designed to measure the US dollar-denominated, investment grade, taxable bond market. The index includes bonds from the Treasury, government-related, corporate, mortgage-backed, asset-backed and commercial mortgage-backed sectors.|
|2||A spread sector refers to non-government fixed income sectors, such as investment grade or high yield bonds, commercial mortgage-backed securities (CMBS), etc.|
|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.|
|4||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.|
|5||The Fund's portfolio is actively managed, and its portfolio composition will vary over time.|
|6||Excludes exposures obtained via derivatives (e.g., swaps).|
|7||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, December 31, 2014, the Fund maintained a risk exposure to non-US dollar currencies equal to approximately 29% of the Fund.|
|8||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.|
|9||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 December 31, 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.|
|10||Includes agency debentures and agency mortgage-backed securities.|
|11||Net asset value (NAV) and market price will fluctuate.|
|12||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 2015. All rights reserved.
The key symbol and UBS are among the registered and unregistered trademarks of UBS.