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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 2012 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment advisor
Risk aversion was elevated at times during the last three months of 2012. A number of issues triggered periodic flights to quality, including signs of decelerating global growth and the impending US "fiscal cliff." However, these setbacks proved to be only temporary in nature, and robust risk appetite returned given investors' search for yield in the low interest rate environment.
The US Federal Reserve Board (the “Fed”) continued to pursue its highly accommodative monetary policy during the fourth quarter. At its last meeting of the year, the Fed announced that it would continue making open-ended purchases of $40 billion per month of agency mortgage-backed securities, as well as purchasing $45 billion a month of longer-term Treasuries. The Fed also said that it would keep the federal funds rate on hold, "…as long as the unemployment rate remains above 6.5%," provided inflation was well-contained.
All told, the overall US bond market, as measured by the Barclays US Aggregate Index, returned 0.22% during the three months ended December 31, 2012. Most US spread sectors (non-US Treasury fixed income securities) generated positive results during this period, and generally outperformed equal duration Treasuries. As was the case for much of the year, risk taking was rewarded, as lower rated bonds generated superior results. Among the best performers were emerging markets debt and high yield corporate bonds. Investment grade corporate bonds, commercial mortgage-backed securities (CMBS) and Treasury Inflation-Protected Securities (TIPS) also posted strong returns.
As discussed, the emerging markets asset class generated strong results during the fourth quarter. While US dollar-denominated emerging markets debt, as measured by the JP Morgan Emerging Markets Bond Index Global (EMBI Global), posted a 3.33% return over the period, local currency emerging markets debt, as measured by the J.P. Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM Global Diversified), posted an even stronger return of 4.13%.. The high yield bond market, as measured by the Bank of America Merrill Lynch US Cash Pay High Yield Constrained Index, returned 3.15% during the fourth quarter. High yield bond prices were supported by generally robust demand, solid corporate fundamentals and continued low defaults. From a ratings perspective, better-quality rating categories broadly underperformed lower-quality bonds, with the BB and B-rated segments lagging the CCC and below-rated segment.
During the fourth quarter of 2012, the Fund posted a net asset value total return of 2.42% and a market price total return of 0.39%. On a net asset value basis, the Fund outperformed its benchmark, the Strategic Global Benchmark (the “Index”),1 which declined 0.06% for the quarter.
The Fund's spread sector exposures drove its outperformance during the fourth quarter.2 In particular, the Fund's overweight allocation to corporate credit (both investment grade and high yield bonds) was the largest contributor to results. Overweights to CMBS and mortgage-backed securities (MBS) were also additive for results, albeit to lesser extents. Security selection, too, was positive for performance during the quarter. Within investment grade credit, the Fund's holdings in the financial subsector were the most beneficial to performance. We also experienced positive security selection in CMBS, MBS and emerging markets debt.
Overall, duration positioning contributed to results, when the Fund was rewarded for having a shorter duration than its benchmark as US rates moved higher during the quarter. Elsewhere, the Fund’s currency positioning added to results. In particular, having a short to the Japanese yen was beneficial, as newly elected Prime Minister Shinzo Abe vowed to take "truly meaningful measures" to weaken the yen in order to help boost Japan’s faltering economy. In addition, the Fund's overweight to local currency emerging markets debt was a positive contributor.
In terms of the Fund's high yield exposure, overweights to financials, pipelines, construction-related and technology sectors were beneficial for results. Security selection in the gaming, services and telecommunications sectors were also additive to performance.
With respect to the Fund's emerging markets debt exposure, our overweight to local Brazilian debt contributed to performance during the quarter. In particular, our longer-dated local Brazilian debt with inflation protection generated solid results, as it performed well given the decline in local yields and solid demand. Overweights to higher yielding countries such as Belarus and the Ukraine were rewarded during the last three months of the year.
We have a constructive outlook for the global economy, although pockets of weakness remain. Despite fiscal cliff-related headwinds, we believe that reasonable growth is sustainable in the US. We are less positive on growth in Europe given ongoing issues related to the sovereign debt crisis, high unemployment and extensive austerity measures. Japan also faces continued challenges, as it has fallen back into a recession.
We have a generally positive view on the fixed income markets for 2013. In particular, we like the prospects for the credits markets given largely supportive fundamentals and supply/demand technicals. That said, given the amount of spread compression since the financial crisis, credit returns are not expected to be as robust in 2013. As was the case in prior years, we anticipate periods of heightened risk aversion to continue this year, as a number of macro issues remain unresolved. In contrast to developed markets, we maintain a more constructive outlook for emerging markets debt, and anticipate that, within that space, local currencies may lead performance in 2013, but not without potential for periods of heightened volatility.
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.
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% JPMorgan Emerging Markets Bond Index Global (EMBI Global). Investors should note that indices do not reflect the deduction of fees or expenses.
2 “Spreads” refers to differences between the yields paid on US Treasury bonds and other types of debt, such as emerging market bonds.