NEW YORK, Aug 09, 2012 (BUSINESS WIRE) -- Strategic Global Income Fund, Inc. (the "Fund") SGL +0.27% 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 2012 from UBS Global Asset Management (Americas) Inc. ("UBS Global AM"), the Fund's investment advisor
In sharp contrast to the first three months of the year when risk appetite was generally robust, risk aversion largely ruled the markets in late April and May. This reversal in investor sentiment was triggered by signs that the US economy was decelerating, as well as fears of contagion from Europe. Risk appetite returned in late June, given some positive developments in Europe and expectations for another round of quantitative easing by the Federal Reserve Board (Fed).
The US spread sectors (non-US Treasury fixed income securities) experienced periods of volatility during the second quarter, but produced positive absolute returns. While short-term US Treasury yields were relatively stable during the quarter, intermediate and longer-term yields fell sharply, and the yield curve flattened somewhat. At the height of an investor flight-to-quality in early June, the yield on the 10-year US Treasury closed at an all-time low of 1.47%. All told, the overall US bond market, as measured by the Barclays US Aggregate Index, returned 2.06% during the second quarter. Over this period, the spread sectors produced mixed results versus equal duration Treasuries. While US dollar-denominated corporate (both investment grade and high yield) and emerging markets sovereign debt generated the strongest absolute returns during the quarter, asset-backed securities (ABS), mortgage-backed securities (MBS) and commercial mortgage-backed securities (CMBS) posted more moderate gains.
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 return of 2.47%. Although sovereign spreads widened by approximately 33 basis points (bps), declining 10-year US Treasury yields--down from 2.21% to 1.64%--outweighed the detractions and kept the overall market return positive.(1) Local market investments (in other words, emerging markets debt denominated in the currency of the issuer) delivered weak results, ending the quarter with a loss of approximately 1.21%, based on the JP Morgan GBI-EM Global Diversified Index. Depreciating currencies, versus the US dollar, were the main detractors, while local yields added to the overall performance by following US Treasury yields down from 6.4% at the end of March to 6.1% at the end of the second quarter, as measured by the same index.
For the second quarter of 2012, the Fund posted a net asset value total return of 0.16% and a market price total return of 2.06%. On a net asset value basis, the Fund underperformed its benchmark, the Strategic Global Benchmark (the "Index"), which returned 1.45% for the quarter.(2)
Overall, the Fund's local currency emerging markets debt exposures detracted modestly from performance during the quarter. In particular, our allocation to local currency versus US dollar-denominated emerging markets debt was not rewarded. Among individual local currencies, the Indian rupee and Ghana cedi were the largest detractors, while the Fund's allocation to US dollar-denominated emerging markets debt was beneficial for results. Longer-term US Treasury yields reached all-time lows during the quarter which, in turn, supported these holdings. In particular, our long duration position in the Middle East was additive for results. On the other hand, spread widening in higher risk countries such as Argentina and Venezuela detracted from results, which offset the positive contribution mentioned above.
Several of the Fund's spread sector exposures contributed to performance. In particular, allocations to agency MBS, ABS and collateralized debt obligations were additive to results during the second quarter. From a fundamental perspective, we still view the conditions for corporates positively, but we would admit that elements of the fundamental qualifications have begun to slightly weaken. While monetary policy makers continued to act in a manner to stimulate regional and global economies--with the Fed, in particular, expanding their commitment to "Operation Twist" through the end of the year--profit growth among US corporations, while still good, has begun to slow. In turn, an increasing, albeit still small, number of companies have issued profit warnings for the current quarter. We do not view this with much concern, given the still strong balance sheets characteristics of most companies coupled with rather conservative financial strategies by most firms (e.g., little increase in re-leveraging strategies).
While the Fund's allocation to the high yield market was beneficial, our issuer selection slightly detracted. Specifically, the Fund's holdings in energy, health care and services detracted from results, more than offsetting a positive contribution from gaming. In terms of high yield sector allocation, our positioning within industrials, technology, telecommunications and services contributed to results, while our positioning within financials--driven by insurance and diversified financials--detracted from performance.
Lastly, the Fund's shorter-than-the-Index duration positioning was a drag on results as global government yields continued to decline over the period.
Uncertainties remain in the outlook for the global economy and markets, with Europe continuing to be at the core of these uncertainties. Fears around event risk in Europe have reduced somewhat in recent weeks. However, uncertainty will remain, particularly in terms of the impact on global growth. The continuing deterioration of economic data makes further supportive central bank intervention highly likely. Although economic growth in the US decelerated during the quarter, we believe it has enough momentum to continue expanding during the second half of the year. That said, it is likely growth will be far from robust. We also feel the Fed will maintain its accommodative monetary policy and take further action if deemed necessary. We expect to see continued volatility in the financial markets given a host of global macro economic issues, the uncertainties associated with the upcoming elections in November and the "fiscal cliff' in the beginning of 2013.
We continue to have a positive long-term outlook for the emerging markets debt asset class. Many emerging market countries are experiencing growth, well above the levels of major developed markets. We believe the growth gap will at least continue in 2012, and that this gap, as well as relatively low fiscal deficits, will be favorable for debt dynamics in emerging markets relative to developed markets. While volatility may stay elevated in the near term due to market uncertainty and investor risk aversion, we continue to have a positive long-term outlook for emerging markets investments. In our view, demand for emerging markets bonds is likely to be supported by investors' search for higher-yielding securities and strong sovereign and corporate balance sheets in emerging markets. In our opinion, strong fundamental data, stable reserves, a more solid fiscal situation and lower indebtedness are signs of such strengths, especially for sovereigns, quasi-sovereigns and currencies.(3)
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.