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 2013 from UBS
Global Asset Management (Americas) Inc. (“UBS Global AM”), the
Fund’s investment advisor
Market Review
After generating positive results in April, the global fixed
income market sold off in May and June. Triggering this turnaround
were indications from the Federal Reserve Board (the “Fed”) that it
may begin to taper its asset purchase program sooner than
previously anticipated. This caused US Treasury yields to move
sharply higher across the curve. Also impacting the fixed income
market were the ongoing concerns regarding the European sovereign
debt crisis, moderating growth in China and several geopolitical
issues. The US yield curve steepened, as short-tem yields remained
anchored while longer-term yields increased during the quarter. The
overall US bond market, as measured by the Barclays US Aggregate
Index, declined 2.32% during the quarter.
Sector Overview
A number of fixed income asset classes posted negative returns
for the quarter with inflation-linked securities and emerging
markets debt leading the declines. Overall, spread sectors (non-US
Treasury fixed income securities) performed poorly during the
second quarter, as investor risk aversion increased and many fixed
income asset classes experienced outflows. While both investment
grade and high yield corporate debt generated negative absolute
returns, high yield modestly outperformed equal duration Treasuries
during the quarter. Within corporate debt, high-quality rated bonds
generally underperformed lower-quality bonds, as higher quality
debt tends to be longer duration which, with the increase in
Treasury yields, negatively impacted prices.
Emerging markets debt performed poorly during the second
quarter. The main reason for weakness in the asset class was the
expected end of quantitative easing in the US and the ensuing sharp
rise in US interest rates. Weak investor sentiment led to sharp
outflows from the asset class during the quarter. In a reversal
from earlier in the year, US dollar-denominated emerging markets
debt outperformed its local market counterparts during the second
quarter. US dollar-denominated emerging markets debt, as measured
by the JP Morgan Emerging Markets Bond Index Global (EMBI Global),
posted a -6.06% return over the three months, whereas local
currency emerging markets debt, as measured by the JP Morgan
Government Bond Index-Emerging Markets Global Diversified (GBI-EM
Global Diversified), posted a -7.03% return during the same time
period.
Performance Review
During the second quarter of 2013, the Fund posted a net asset
value total return of -4.55% and a market price total return of
-11.46%. On a net asset value basis, the Fund underperformed its
benchmark, the Strategic Global Benchmark (the “Index”)1, which
declined 3.98% for the quarter.
The Fund's spread sector exposure drove its relative performance
during the second quarter. Our overweight position and security
selection of investment grade and high yield corporate bonds
detracted the most from performance. After a positive start during
the first half of the quarter, these gains were more than offset by
the sharp decline in the credit markets that occurred during the
second half of the period. In particular, our overweights to higher
beta (higher risk) BBB-rated securities in the basic industry,
financials and energy sectors were detrimental to performance. On
the upside, the Fund's duration positioning positively contributed
to results. Having a short duration versus that of the benchmark
was rewarded, given the sharp increase in yields during the second
quarter. The Fund’s duration2 at the end of the second quarter was
4.68 years.
With respect to the Fund's emerging markets debt exposure,
having an underweight versus the benchmark was a positive for
relative results. That said, our allocation to the asset class
detracted from the Fund's absolute results. In particular,
overweights in local bonds and local duration in Brazil
detracted the most from performance. Other positions, such as
those in India and Thailand, were also not rewarded. Currency
strategy overall was a negative contributor to results, as many
emerging market currencies depreciated significantly versus the US
dollar. On a positive note, the Fund’s overweight position in US
dollar-denominated Argentina debt added to performance. These
securities performed poorly during the first quarter of 2013, due
to continued concerns regarding a longstanding dispute between
holdouts from Argentina’s 2001 sovereign default. However, investor
sentiment improved and Argentina's debt declined less during the
second quarter amid the sharp downturn in the overall emerging
market asset class. Lastly, the Fund’s underweight duration
exposure to US dollar-denominated emerging markets debt was
rewarded as US Treasury yields rose and helped offset the negative
contribution from exposure to local emerging market rates.
Outlook
We continue to have a positive outlook for the US economy and
believe that growth will continue, albeit at a fairly modest pace.
That said, we are closely monitoring the impact of moderating
growth outside the US, as this could have a negative impact on
exports. We are also keeping a close eye on both consumer and
business spending, in light of higher interest rates in recent
months. In terms of the Fed, we were not surprised by its talk of
tapering future asset purchases. If overall economic data remains
positive and there are continued gains in the labor market, we
would expect to see tapering begin later this year. Given the
uncertainties regarding the timing and magnitude of Fed tapering,
we anticipate periods of heightened volatility as we move through
the remainder of the year. As such, we have a bias to short
duration for the Fund.
Despite the recent setback, we remain positive for the US
corporate bond market. Corporate fundamentals continue to be solid
overall, with balance sheets that are oftentimes flush with cash.
Furthermore, many US companies have taken advantage of relatively
low rates to refinance their debt as well as extended maturities.
Therefore, we expect default rates to remain below their historical
average. Given what we believe to be positive fundamentals and
credit spread3 widening in recent weeks, we would not be surprised
to see spread tightening somewhat as the year progresses.
We also believe that the sharp increases in US Treasury and
local currency emerging markets debt yields during the second
quarter were excessive given the economic environment, as inflation
remains well-contained in most countries. However, inflation could
become more important in emerging market countries, based on the
spill-over effect from declining currencies. From an economic
perspective, it is clear that China's economic growth has
moderated, which could impact commodity prices and other aspects of
developing economies. However, we do not expect China to experience
a hard landing for its economy. Although demand for emerging
markets debt was weak during the quarter, this may reverse as
investors are drawn to the real yields available from the asset
class, especially compared to developed country counterparts.
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.
Further 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.
1 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.
2 Duration measures a portfolio’s sensitivity to interest rate
changes.
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.
UBS Global Asset ManagementClosed-End Funds Desk:
888-793-8637ubs.com
Strategic Global Income Fund, Inc. (NYSE:SGL)
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Strategic Global Income Fund, Inc. (NYSE:SGL)
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