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 first quarter of 2015 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 first quarter, partially due to the impact of the strengthening US dollar. The overall US fixed income market moved higher as Treasury yields declined across the yield curve. All told, the yield on the two-year Treasury fell from 0.67% to 0.56%, whereas the yield on the 10-year Treasury moved from 2.17% to 1.94% during the first quarter. As expected, at its meeting in March, the Federal Reserve Board (the "Fed") removed the word "patient" from its official statement regarding when it may start raising rates. However, Fed Chair Janet Yellen pointed out that, "Just because we removed the word "patient" from the statement doesn't mean we are going to be impatient." Overseas, government yields generally moved lower. On January 22, the European Central Bank ("ECB") announced that, beginning in March 2015, it would begin a €60 billion-per-month bond buying program that is expected to run until September 2016. The overall US bond market, as measured by the Barclays US Aggregate Index, gained 1.61% during the first quarter of 2015. 1 Conversely, the global government bond markets declined 2.51% over the quarter, as measured by the Citigroup World Government Bond Index (unhedged). In contrast, the Citigroup World Government Bond Index (hedged) rose 2.04% for the quarter. 2 Sector overview Most US spread sectors posted positive total returns during the quarter, as they were supported by overall solid demand and declining Treasury yields. 3 Investment grade and high yield corporate debt outperformed Treasuries during the first quarter, as investor demand for yield remained and some of the weakness from the fourth quarter related to falling oil prices had reversed. Commercial mortgage backed securities ("CMBS") continued to deliver strong results relative to other securitized debt sectors. After performing poorly at the end of 2014, emerging markets debt generated a positive return during the first three months of the year. The J.P. Morgan Emerging Markets Bond Index Global ("EMBI Global") Index rose 2.06% during the quarter. 4 However, given the strong US dollar, 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 -3.96% return during the same time period. 5 Performance review During the first quarter of 2015, the Fund posted a net asset value total return of -0.26% and a market price total return of 0.87%. On a net asset value total return basis, the Fund outperformed its benchmark, the Strategic Global Benchmark (the "Index"), which returned -1.02% over the quarter. 6 The Fund's security selection in a number of sectors was beneficial for performance. In particular, our investment grade and high yield corporate bond holdings were positive for returns. We believe industry and issuer selection will be the dominant drivers of relative performance in 2015, as we believe US economic activity is likely to recover in the second half of 2015 and mergers and acquisitions activity is likely to remain robust throughout 2015. Within investment grade corporate debt, we continue to favor financials versus non-financials based on continued positive momentum in fundamentals, positive capital growth and asset quality improvement.
Security selection of mortgage-backed securities ("MBS") was also additive for performance, but as noted below exposure to this sector was not rewarded overall. Elsewhere, the Fund's developed market currency exposure was beneficial. In particular, a long position in the US dollar, along with a short to the euro and several other developed market currencies was positive for results.Among detractors from the Fund's performance were its duration and yield curve positioning. Duration positioning that was shorter than that of the Index was not rewarded given the declining interest rate environment. From a yield curve perspective, our underweight in the long end of the curve and overweight in the intermediate segment detracted from results. An overweight to non-corporate credit, including foreign sovereigns, agencies and supranationals, was negative for performance. An allocation to MBS and the Fund's overweight to US non-Treasury debt obligations also detracted from results. A more limited allocation to the emerging markets debt asset class versus the Index detracted from performance. We are currently underweight the sector, given moderate deterioration in fundamentals and volatility in a handful of headline countries weighing heavily on the asset class more broadly. Outlook Economic data in the US has recently pointed to a slowdown in economic activity, including disappointing retail sales and manufacturing numbers. We believe that moderating growth was partially due to severe winter weather in parts of the country. In our view, the US economy should gain some momentum as the year progresses. That said, we do not expect to see robust growth given continued slack in areas of the economy, generally weak growth overseas and the impact from the stronger US dollar. We believe the Fed will likely start raising rates later in 2015, but that its approach to policy normalization should be very gradual. Turning to the fixed income market, the potential for higher interest rates is a headwind for bond prices. However, we do not expect to see a sharp rise in rates given the global economic environment and the cautious Fed. We believe credit fundamentals are generally sound, with large cash balances on many corporate balance sheets and low default rates. We are keeping a close eye on market technicals, as investor demand could be challenged at times given numerous geopolitical issues and if the Fed takes a more aggressive stance in terms of interest rate hikes.
While we remain cautious on the short-term outlook for the emerging markets debt asset class, our outlook has improved somewhat since the end of 2014. We anticipate modestly strengthening growth in the US, which would be supportive of emerging markets exporters. Growth in Europe continues to be weak, but we are seeing some signs of progress following the commencement of the European Central Bank's quantitative easing program. However, we recognize that some emerging markets countries still show a lower level of economic activity and further downward revisions to growth cannot be ruled out. Finally, inflation is relatively benign overall and, as such, we do not expect to see policy tightening from emerging markets central banks in the near term.
|Portfolio statistics as of March 31, 20157|
|Top ten countries (bond holdings only)8||Percentage of net assets|
|Top ten currency breakdown (includes all securities and|
|other instruments)(9)||Percentage of net assets|
|United States Dollar||77.3%|
|New Zealand Dollar||3.4|
|Credit quality10||Percentage of net assets|
|CCC and Below||1.7|
|Cash and other assets, less liabilities||1.6|
|Net asset value per share13||$9.85|
|Market price per share13||$8.43|
|Weighted average maturity||7.8 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 2015. All rights reserved.The key symbol and UBS are among the registered and unregistered trademarks of UBS.