Strategic Global Income Fund, Inc. - Fund Commentary And Portfolio Statistics

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 2015 from UBS Asset Management (Americas) Inc. ("UBS AM"), the Fund's investment advisor

Market review

The global fixed income market largely produced weak results during the fourth quarter of 2015. US economic data was mixed over the last three months of the year. After remaining on hold in October, the Fed raised interest rates for the first time in nine years at its meeting in December. In its official statement the Fed said, "The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to two percent inflation." For the quarter as a whole, the yield on the two-year Treasury rose from 0.64% to 1.06%, whereas the yield on the 10-year Treasury moved from 2.06% to 2.27%. To a great extent, government yields outside the US also moved higher during the three-month period.

The overall US bond market, as measured by the Barclays US Aggregate Index, declined 0.57% during the fourth quarter, as did global government bond markets, as measured by the Citigroup World Government Bond Index, which fell by 1.23%. 1,2 Conversely, the Citigroup World Government Bond Index (hedged in US dollars) had a slightly positive return of 0.08% for the quarter. 3

Sector overview

Most US investment grade spread sectors posted negative total returns during the period. 4 Lower-quality securities, such as high yield corporate bonds, generated even weaker results. After a sharp rally in October, the emerging markets debt asset class was flat in November and declined in December. Investor sentiment for the asset class fluctuated given signs of moderating growth in China, sharply falling commodity prices and uncertainties regarding the direction of future global monetary policy. All told, the J.P. Morgan Emerging Markets Bond Index Global (EMBI Global) gained 1.55% during the quarter. 5 Local currency emerging markets debt, as measured by the J.P. Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM Global Diversified), declined 0.01% during the quarter. 6

Performance review

During the fourth quarter of 2015, the Fund posted a net asset value total return of 0.30% and a market price total return of 13.08%. On a net asset value total return basis, the Fund outperformed its benchmark, the Strategic Global Benchmark (the "Index"), which declined 0.30% over the quarter. 7 The Fund's trading discount narrowed significantly after the October 13, 2015, issuance of a press release announcing a proposal to liquidate the Fund in 2016. This contributed to the higher market price total return performance for the period.

The Fund's credit exposure contributed to results during the quarter. In particular, our overweights to investment grade and high yield corporate bonds were beneficial for the period as a whole. More specifically, our credit allocations were additive to results in October. These positives, however, were partially offset by spread widening in November and December. Out-of-benchmark allocations to agency mortgage-backed securities (MBS) and commercial mortgage-backed securities (CMBS), along with our exposure to sovereign agencies, also benefited returns for the period. Elsewhere, the Fund's currency exposure modestly contributed to performance. On the downside, yield curve positioning detracted from results. The Fund's allocation to collateralized loan obligations ("CLOs") also detracted from performance.

Within the emerging markets debt asset class, the Fund's underweight to Argentina was not rewarded. Its spread tightened as investor sentiment improved following elections in the country and hopes for meaningful political reforms. Our preference for Columbian quasi-sovereign debt relative to the country's US dollar-denominated sovereign debt also negatively impacted performance. 8 On the upside, an underweight to Brazilian quasi-sovereigns contributed to results. The Fund's allocation to Venezuelan US dollar-denominated debt was positive for performance. Finally, an underweight to Mexico was rewarded.

Several changes were made to the portfolio during the quarter. For example, we adjusted the Fund's currency exposures and trimmed our credit allocation over the last three months of the year. Also of note, we tactically used credit derivatives to hedge our credit allocation and to act as partial protection against wider credit spreads.


We believe the US economy has enough momentum to continue expanding, but growth will be far from robust. We also expect inflation to remain relatively muted. Overseas, growth is slowly improving in Europe, and we anticipate continued monetary policy accommodation from the European Central Bank. We remain cautious regarding growth in Asia. In particular, we are worried about the slower pace of growth in China and its impact on the global economy. Turning to the fixed income market, we are concerned about the impact of additional Fed rate hikes. In addition, uncertainty regarding the pace and magnitude of future Fed actions could trigger periods of market volatility. Finally, it is beginning to look increasingly likely that the credit cycle may have turned. In light of this, we have trimmed the Fund's lower-quality credit exposure and expect to actively manage this allocation going forward.

We believe 2016 is likely to be a year of transition for emerging markets (EM), as many countries will likely still be in the midst of adjusting their economies to the new reality of lower commodity prices, trade volumes and capital inflows. Against this backdrop, growth in developing countries is likely to remain subdued in 2016, although we expect a mild recovery from 2015 levels. We believe this will be mainly due to base effects, as some of the larger countries, including Russia, may strengthen in 2016. One of the main reasons for persistently low growth rates in EM countries is the ongoing economic adjustment in China. With China's growth rates slowing to mid-single digits from mid-double digits a decade ago, global trade volumes and commodity prices have declined significantly, reflecting China's increasing role in international trade. These adverse dynamics have had a detrimental impact on EM countries' export values, with no evidence of any improvement in the foreseeable future.

Important Note: As previously announced in a press release issued on October 13, 2015, based upon the recommendation of UBS Asset Management (Americas) Inc., the Fund's investment advisor, the Fund's Board of Directors determined that liquidation and dissolution of the Fund is in the best interests of the Fund's shareholders. A proposed plan of liquidation will be submitted for the approval of the Fund's shareholders at the Fund's March 2016 annual meeting of shareholders. If the shareholders approve the proposed plan, the liquidation and dissolution of the Fund will take place as soon as reasonably practicable, but in no event later than December 31, 2016 (absent unforeseen circumstances).
Portfolio statistics as of December 31, 2015 9  
Top ten countries (bond holdings only) 10   Percentage of net assets (%)
United States   46.4
United Kingdom   7.0
New Zealand   4.1
Germany   2.7
France   2.5
Mexico   2.2
Brazil   2.1
Canada   1.9
Spain   1.8
Ireland   1.5
Total   72.2
Top ten currency breakdown (includes all securities and other instruments) 11   Percentage of net assets (%)
United States Dollar   75.4
Euro   8.6
New Zealand Dollar   4.0
British Pound   3.5
Australian Dollar   2.9
Canadian Dollar   0.9
Brazilian Real   0.9
Mexican Peso   0.6
Russian Ruble   0.4
Japanese Yen   0.2

Credit quality 12
  Percentage of net assets (%)
AAA   3.1
US Treasury 13   6.7
US Agency 13,14   1.8
AA   10.4
A   6.6
BBB   23.2
BB   20.1
B   8.6
CCC and Below   1.6
Non-rated   15.4
Cash and other assets, less liabilities   2.5
Total   100.0
Net asset value per share 15   9.11
Market price per share 15   8.76
Duration 16   5.3 yrs
Weighted average maturity   7.0 yrs

Any performance information reflects the deduction of the Fund's fees and expenses, as indicated in its shareholder reports, such as investment advisory and administration fees, custody fees, exchange listing fees, etc. It does not reflect any transaction charges that a shareholder may incur when (s)he buys or sells shares (e.g., a shareholder's brokerage commissions).

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 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 . You may also request copies of the fund overview by calling the Closed-End Funds Desk at 888-793 8637.

©UBS 2016. All rights reserved. The key symbol and UBS are among the registered and unregistered trademarks of UBS.

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. Investors should note that indices do not reflect the deduction of fees and expenses.
2 The Citigroup World Government Bond Index is an unmanaged market-capitalization-weighted index designed to measure the performance of fixed-rate, local currency, investment grade sovereign bonds with a one-year minimum maturity. Investors should note that indices do not reflect the deduction of fees and expenses.
3 The Citigroup World Government Bond Index (hedged in USD) is an unmanaged market-capitalization-weighted index designed to measure the performance of fixed-rate, local currency, investment grade sovereign bonds with a one-year minimum maturity and is hedged back to the US dollar. Investors should note that indices do not reflect the deduction of fees and expenses.
4 A spread sector refers to non-government fixed income sectors, such as corporate investment grade or high yield bonds, commercial mortgage-backed securities (CMBS), etc.
5 The J.P. Morgan Emerging Markets Bond Index Global (EMBI Global) is an unmanaged index which is designed to track total returns for US dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans and Eurobonds. Investors should note that indices do not reflect the deduction of fees and expenses.
6 The J.P. Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM) is an unmanaged index which is designed to track the total returns for local currency debt instruments issued by emerging market governments.
7 The Strategic Global Benchmark is an unmanaged index compiled by the advisor, constructed as follows: 67% Citigroup World Government Bond Index (WGBI) and 33% J.P. Morgan Emerging Markets Bond Index Global (EMBI Global). Investors should note that indices do not reflect the deduction of fees or expenses.
8 Quasi-sovereign bonds are securities issued by entities supported by the local government.
9 The Fund's portfolio is actively managed, and its portfolio composition will vary over time.
10 Excludes exposures obtained via derivatives (e.g., swaps).
11 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, 2015, the Fund maintained a risk exposure to non-US dollar currencies equal to approximately 35% of the Fund.
12 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 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.
13 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 June 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.
14 Includes agency debentures and agency mortgage-backed securities.
15 Net asset value (NAV) and market price will fluctuate.
16 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.

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