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 third 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 positive results during the third quarter of 2015. While US economic data generally improved, the Federal Reserve Board (the "Fed") kept rates on hold at its September meeting. In the Fed's official statement it said, "The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad." In her press conference following the meeting, Fed Chair Janet Yellen said that policy makers had decided to take “a little bit more time to evaluate the likely impacts” of recent market volatility on the US before raising interest rates. For the quarter as a whole, the yield on the two-year Treasury was unchanged at 0.64%, whereas the yield on the 10-year Treasury fell from 2.35% to 2.06%. Overseas, government yields generally declined. This was partially driven by several flights to quality given investor concerns over slower growth in China and the potential ramifications for the global economy.

The overall US bond market, as measured by the Barclays US Aggregate Index, gained 1.23% during the third quarter, while the global government bond markets returned 1.71%, as measured by the Citigroup World Government Bond Index.1,2 The Citigroup World Government Bond Index (hedged in US dollars) returned 1.91% for the quarter.3

Sector overview

Most US investment grade spread sectors posted positive total returns during the period, whereas lower-quality securities, such as high yield corporate bonds, generated weak results.4 After a modest advance in July, the emerging markets debt asset class produced weak results as the quarter progressed, triggered by weaker growth in China, falling commodity prices and several geopolitical issues. All told, the J.P. Morgan Emerging Markets Bond Index Global (EMBI Global) declined 2.04% 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 10.54% during the quarter.6

Performance review

During the third quarter of 2015, the Fund posted a net asset value total return of -2.13% and a market price total return of -1.53%. On a net asset value total return basis, the Fund underperformed its benchmark, the Strategic Global Benchmark (the “Index”), which gained 0.47% over the quarter.7

The Fund's overweights to investment grade and high yield corporate bonds detracted from performance during the quarter. Their spreads widened given concerns over global growth and periods of investor risk aversion. In particular, our higher beta holdings were negative for results. Out-of-benchmark allocations to agency mortgage-backed securities (MBS) and commercial mortgage-backed securities (CMBS), along with our exposure to sovereign agencies, also dragged on returns. Elsewhere, yield curve positioning was a headwind for performance. In particular, an underweight to the belly of the curve (7–20 year maturities) detracted from results. On the upside, the Fund's currency positioning contributed to performance. In particular, an overweight to the US dollar was beneficial.

Within the emerging markets debt asset class, our underweight to Ukraine was negative for performance. While the country's economic backdrop remains extremely weak and debt restructuring continues, investor sentiment for Ukraine improved and its debt rallied in August. An overweight to Brazilian local debt and the Brazilian real detracted from performance, as did our position in Petrobras. Brazil's economic fundamentals weakened further during the quarter, leading to downgrades by two of the three major rating agencies. Our allocation to Russian quasi-sovereign bank bonds was beneficial, as they outperformed sovereign debt.8

Several adjustments were made to the portfolio during the quarter. We increased the Fund's duration, moving from a two-year short position to being close to neutral versus the benchmark. From a currency perspective, we pared the Fund's overweight to the US dollar. Finally, we tactically traded credit derivatives to help reduce the Fund's exposure to credit risk.

Outlook

We maintain our view that the US economy will continue to expand, albeit at a fairly modest pace. We also expect inflation to remain relatively muted. In terms of the Fed interest rate "liftoff," it appears that it will commence late in 2015, or perhaps in early 2016. Turning our attention overseas, growth is slowly improving in Europe. However, with minimal inflation pressure, we believe the European Central Bank will maintain its accommodative monetary policy. We are cautious regarding growth in Asia. In particular, we are concerned about moderating growth in China and the potential spill over to other emerging markets countries, especially those with commodity-driven economies. Turning to the fixed income market, credit spreads have widened, partially driven by a challenging supply/demand technical environment. In addition, earnings growth has slowed, and we may be getting closer to the end of the credit cycle. That said, valuations appear attractive given current spreads and may lead to compelling entry points for certain securities.

We maintain our cautious outlook for the emerging markets asset class. Growth in many developing countries remains challenged. In addition, the US Federal Reserve's decision to not raise interest rates at its September meeting has led to concerns regarding the health of the US economy. Against this backdrop, the demand for commodities remains relatively lackluster, which is negatively affecting the economic fundamentals in many developing countries. Turning to the emerging markets debt asset class, spreads are wider than their historical average and appear to be pricing in a negative scenario. Should there be a positive economic surprise, it may lead to some spread narrowing. Within the asset class, we currently maintain our preference for US dollar-denominated debt over local debt.

Note regarding material event subsequent to quarterly commentary period: 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 2016 annual meeting of shareholders, which is expected to be held in March 2016. 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 September 30, 20159
 
Top ten countries (bond holdings only)10   Percentage of net assets (%)
United States   42.8
United Kingdom   6.8
New Zealand   3.9
Brazil   3.1
Germany   2.6
France   2.5
Canada   2.2
Russia   2.0
Spain   1.8
Mexico   1.8
Total   69.6
 
 
Top ten currency breakdown (includes all securities and
other instruments)11		   Percentage of net assets (%)
United States Dollar   74.6
Euro   8.0
New Zealand Dollar   3.9
British Pound   3.5
Australian Dollar   2.9
Brazilian Real   0.8
Canadian Dollar   0.8
Mexican Peso   0.6
Russian Ruble   0.4
Swedish Krona   0.1
 
 
Credit quality12   Percentage of net assets (%)
AAA   3.9
US Treasury13   2.5
US Agency13,14   1.8
AA   8.8
A   8.1
BBB   21.8
BB   22.3
B   8.1
CCC and Below   1.4
Non-rated   16.8
Cash and other assets, less liabilities   4.5
Total   100.0
 
 
Characteristics    
Net asset value per share15   $9.29
Market price per share15   $7.93
Duration16   6.9 yrs
Weighted average maturity   6.7 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 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.

 
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 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% JP 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, September 30, 2015, the Fund maintained a risk exposure to non-US dollar currencies equal to approximately 27% 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 www.standardandpoors.com. 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.