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Strategic Global Income Fund, Inc. (the “Fund”) (NYSE: SGL), 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, today announced changes to certain non-fundamental investment policies, effective March 1, 2013.
The following letter is being mailed to shareholders:
Strategic Global Income Fund, Inc.
1285 Avenue of the Americas, 12th Floor
New York, NY 10019
January 29, 2013
Dear Strategic Global Income Fund, Inc. Shareholder:
In the Fund’s last semiannual report (dated May 31, 2012), we provided you with details on the expansion of the Fund’s portfolio management team from a team-based format with a single lead portfolio manager, to one led by multiple portfolio managers. This change was implemented with the goal of better aligning the Fund’s team structure with its multi-sector investment strategy.
In line with our efforts to look for ways to enhance the Fund and its performance, we have, in the time since we last reported to you, made changes to the Fund’s investment policies, including (1) increasing the ability of the Fund to make investments in below investment grade-rated securities and (2) expanding the Fund’s ability to invest in mortgage-backed securities (such as increasing a percentage cap to allow more investment flexibility in light of market changes). In addition, the Fund may introduce an element of portfolio leverage by engaging in certain types of portfolio transactions (such as a portfolio trading technique known as “dollar rolls,” which is explained in the enclosed annual report) (Note 1).
The portfolio management team will be able to utilize these new policies/techniques effective March 1, 2013. We believe that these changes are consistent with seeking the Fund’s investment goals, and are appropriate in light of ongoing changes in the marketplace. You should keep in mind that while the portfolio management team will now have additional flexibility in seeking the Fund’s objectives, it may decide to use this additional flexibility to varying degrees over time and may even decide not to engage in certain investments/techniques in light of market expectations, relative valuations/attractiveness and overall anticipated risk/return tradeoffs. Also, as with all investments/strategies, there is always the risk that they may not have the desired results.
A brief overview of these changes appears on pages 1 and 2 of the enclosed annual report (Note 2), while a more detailed discussion, including a discussion of certain related risks, can be found on pages 43 and 44 (Note 3). The enclosed annual report also contains an expanded and updated discussion regarding the Fund’s use of derivatives for risk management and other investment purposes (such as attempting to achieve additional income/returns) on pages 44 through 46 (Note 4).
As always, we thank you for your continued support, and welcome any questions or comments you may have.
/s/ Mark E. Carver
Mark E. Carver
Strategic Global Income Fund, Inc.
(1) As this press release is not accompanied by the Fund’s annual report, excerpts from the annual report providing additional details appear below.
(2) The following summary description of the changes appears at the beginning of the Fund’s annual report:
Investment Policy Changes
Based upon a recommendation made by UBS Global Asset Management (Americas) Inc. (“UBS Global AM,” the Fund’s investment advisor), the Board of the Fund approved a change to the Fund’s investment policies regarding below investment grade securities. Effective March 1, 2013, the Fund will have more flexibility to invest in fixed income securities of US and non-US issuers that are below investment grade (basically, reducing the minimum percentage that the Fund normally invests in investment grade securities from 65% to 50%). In addition, also upon UBS Global AM’s recommendation, the Board expanded the ability of the Fund to invest in mortgage-backed securities, changing a prior policy which imposed a 20% cap and by allowing for up to 40% of the Fund’s assets to be invested in a wider array of mortgage-backed securities, also effective March 1, 2013.
Also as of that date, the Fund may begin employing the use of a certain type of portfolio transaction—referred to as “dollar rolls”—in order to add a degree of economic leverage in an attempt to enhance returns. Such transactions may be initiated or closed out at any time as believed appropriate.
(3) The following description of the changes appears on pages 43 and 44 of the shareholder report:
Changes to the Fund’s non-fundamental investment policies
Based upon a recommendation made by UBS Global AM, the Board of Directors of the Fund approved certain changes to the Fund’s non-fundamental investment policies which will become effective on March 1, 2013. These changes are described below.
Change to non-fundamental investment policies regarding below investment grade securities. The Fund invests in a wide range of US and non-US debt securities. Currently, the Fund has the following three non-fundamental investment policies relating to below investment grade securities:
- the Fund normally invests at least 65% of its total assets in securities that, at the time of purchase, are rated at least BBB/Baa by Standard & Poor’s, a division of The McGraw Hill Companies, Inc. (“S&P”), Moody’s Investors Service, Inc. (“Moody’s”), or Fitch Ratings (“Fitch”) or, if not rated, are deemed by UBS Global AM to be of the equivalent credit quality;
- the Fund may invest up to 35% of its total assets in fixed income securities of US and foreign issuers that are rated below BBB/Baa by S&P or Moody’s, or Fitch or, if not rated, are deemed by UBS Global AM to be of the equivalent credit quality; and
- the Fund will invest less than 50% of its total assets in securities that are rated BBB/Baa and lower by S&P or Moody’s, or Fitch or, if not rated, are deemed by UBS Global AM to be of the equivalent credit quality.
To simplify its investment policies, to provide more investment flexibility and to allow increased investment in higher yielding assets, effective March 1, 2013, the above three policies have been replaced with a single non-fundamental investment policy requiring the Fund to normally invest at least 50% of its total assets in securities rated, at the time of purchase, at least BBB-/Baa3 by S&P, Moody’s or Fitch or, if not rated, deemed by UBS Global AM to be of the equivalent credit quality.
Expansion of non-fundamental policy regarding mortgage-backed securities. The Fund currently may invest up to 20% of its total assets in mortgage-backed securities, such as those issued by the Government National Mortgage Association, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation or certain foreign issuers.
Upon UBS Global AM’s recommendation, the Board has approved a change to this policy, effective March 1, 2013, that expands the Fund’s investments in mortgage-backed securities from 20% to 40% of its total assets, including residential and commercial mortgage-backed securities (both government agency issued and privately issued). UBS Global AM believes that these changes reflect developments that have occurred in the fixed income markets generally, and in the mortgage-backed securities market over the past decade.
Although the aforementioned changes to the Fund’s non-fundamental investment policies are anticipated to increase the Fund’s net investment income through increased investment in higher yielding assets, the changes have certain associated risks, including possibly elevated volatility, higher drawdown and potentially weaker total returns when risk assets underperform.
Use of leverage through investment in dollar roll transactions
Based upon UBS Global AM’s recommendation, the Board also approved, effective March 1, 2013, the Fund’s use of dollar roll transactions as a means of employing leverage. In a dollar roll, a fund sells mortgage-backed or other securities for delivery on the next regular settlement date for those securities and, simultaneously, contracts to purchase substantially similar securities for delivery on a later settlement date. The securities that are purchased will bear the same interest rate and a similar maturity as those sold, but the assets collateralizing those securities may have different prepayment histories than those sold. Because the Fund receives the proceeds from the sale before it has to pay for the purchased securities (a later settlement) the use of dollar roll transactions provides economic leverage to the Fund.
The use of dollar roll transactions to leverage the Fund’s investments involves certain risks. During the period between the sale and repurchase, the Fund will not be entitled to receive interest and principal payments on the securities sold. Proceeds of the sale will be used to purchase additional investments, and the income from these investments will generate income for the Fund. If such income does not exceed the income, capital appreciation and gain or loss that would have been realized on the securities sold as part of the dollar roll, the use of this technique will diminish the investment performance of the Fund compared with what the performance would have been without the use of dollar rolls. Dollar rolls involve the risk that the market value of the securities subject to the Fund’s forward purchase commitment may decline below, or the market value of the securities subject to the Fund’s forward sale commitment may increase above, the exercise price of the forward commitment. In the event the buyer of the securities files for bankruptcy or becomes insolvent, the Fund’s use of the proceeds of the current sale portion of the transaction may be restricted.
Dollar rolls are considered to be borrowings, and will therefore require the Fund to maintain on its records or with an approved custodian in a segregated account (or designate on the books of its custodian) cash or other liquid assets, marked to market daily, in an amount at least equal to its obligations under such commitment.
UBS Global AM believes that investments in dollar rolls will, together with the aforementioned changes to the Fund’s non-fundamental investment policies, increase the Fund’s net investment income, although there are no assurances that this will be the case.
In the longer term, the Fund may consider the use of other types of leverage when it is deemed to be appropriate in light of prevailing market conditions and future outlook.
(4) The following appears on pages 44 through 46 of the shareholder report:
Update regarding the use of derivatives by the Fund
The Fund has expanded its use of certain derivatives consistent with the authorization set forth in the Fund’s registration statement. The Fund may, but is not required to, use derivative instruments for risk management purposes or as part of the Fund’s investment strategies. Generally, derivatives are financial contracts whose value depends upon, or is derived from, the value of an underlying asset, reference rate, or index, and may relate to stocks, bonds, interest rates, currencies or currency exchange rates, and related indexes. Examples of derivatives include options (including, but not limited to, options on futures contracts, on foreign currencies and on swap agreements (explained further below)), futures contracts, forward interest rate and currency contracts, nondeliverable forwards, swap agreements (including, but not limited to, interest rate swaps; caps, floors and collars related to interest rates; total return, currency and credit default swaps), and credit-linked securities. The Fund may use derivatives to earn income and enhance returns, to manage or adjust the risk profile of the Fund (e.g., managing portfolio duration, hedging), to replace more traditional direct investments, or to obtain exposure to certain markets.
Derivative instruments involve special considerations and risks, including the following:
Derivatives risk: Derivatives involve risks different from, and possibly greater than, the risks associated with investing directly in securities and other instruments. If UBS Global AM incorrectly forecasts the value of securities, currencies, interest rates, or other economic factors in using derivatives, the Fund might have been in a better position if the Fund had not entered into the derivatives. While some strategies involving derivatives can protect against the risk of loss, the use of derivatives can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments. Derivatives also involve the risk of mispricing or other improper valuation, the risk that changes in the value of a derivative may not correlate perfectly with the underlying asset, rate, index or overall securities markets, and counterparty and credit risk (the risk that the other party to a swap agreement or other derivative will not fulfill its contractual obligations, whether because of bankruptcy or other default). Gains or losses involving some options, futures, swaps and other derivatives may be substantial (for example, for some derivatives, it is possible for the Fund to lose more than the amount the Fund invested in the derivatives). Some derivatives tend to be more volatile than other investments, resulting in larger gains or losses in response to market changes. Derivatives are subject to a number of other risks, including liquidity risk (the possible lack of a secondary market for derivatives and the resulting inability of the Fund to sell or otherwise close out the derivatives) and interest rate risk (some derivatives are more sensitive to interest rate changes and market price fluctuations). Finally, the Fund’s use of derivatives may cause the Fund to realize higher amounts of short-term capital gains (generally taxed at ordinary income tax rates) than if the Fund had not used such instruments.
Leverage risk: Leverage involves increasing the total assets in which the Fund can invest beyond the level of its net assets, through investment in certain financial instruments. Because leverage increases the amount of the Fund’s assets, it can magnify the effect on the Fund of changes in market values. As a result, while leverage can increase the Fund’s income and potential for gain, it also can increase expenses and the risk of loss. To the extent the Fund is required to maintain assets as “cover,” maintain segregated accounts or make margin payments when it takes positions in derivatives involving obligations to third parties, if the Fund were unable to close out its positions in such derivatives, it might be required to continue to maintain such assets or accounts to make such payments until the position expired or matured, which might impair the Fund’s ability to sell a portfolio security or make an investment at a time when it would otherwise be favorable to do so, or require that the Fund sell a portfolio security at a disadvantageous time.
Swap agreement risk: The Fund may enter into various types of swap agreements, including, but not limited to, credit default swaps, total return swaps, interest rate swaps, index swaps, currency swaps and variance swap agreements. Swaps are agreements entered into primarily by institutional investors for periods ranging from a few weeks to a year or longer (e.g., several years). In a standard swap agreement, two parties agree to exchange the returns earned on specific assets, such as the returns on, or increase in value of, a particular dollar amount invested at a particular interest rate, in a particular foreign currency, or in a “basket” of securities representing a particular index. Swap agreements can be less liquid and more difficult to value than other investments. Because its cash flows are based in part on changes in the value of the reference asset, a total return swap’s market value will vary with changes in that reference asset. In addition, the Fund may experience delays in payment or losses if the counterparty fails to perform under the contract.
Structured security risk: The Fund may purchase securities representing interests in underlying assets, but structured to provide certain advantages not inherent in those assets. Structured notes may entail a greater degree of market risk than other types of debt securities because the investor bears the risk of the reference instrument (e.g., the risk related to the issuer of the referenced obligation in addition to the risk related to the issuer of the structured note). Structured notes may also be more volatile, less liquid and more difficult to accurately price than less complex securities or more traditional debt securities. If those securities behaved in a way that UBS Global AM did not anticipate, or if the security structures encountered unexpected difficulties, the Fund could suffer a loss.
Illiquidity risk: The Fund’s ability to close out a position in a derivative instrument depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of a counterparty to enter into a transaction closing out the position. As a result, certain derivative instruments may be less liquid than other types of securities. The Fund could lose money if it cannot sell such derivative instruments at the time and price that would be most beneficial to the Fund.
Aggressive investment risk: The Fund may employ investment strategies that involve greater risks than the strategies used by other funds that do not use derivative instruments. UBS Global AM may employ hedging strategies. There is no assurance that hedging strategies will protect against losses or perform better than non-hedging, that hedging strategies will be successful, or that consistent returns will be received through the use of hedging strategies.