Strategic Global Income Fund, Inc. – Fund Commentary

Strategic Global Income Fund, Inc. – Fund Commentary | Bild: © ad-hoc-news

Fund Commentary for the fourth quarter of 2011 from UBS Global Asset Management (Americas) Inc. (?UBS Global AM?), the Fund?s investment advisor

Market Review

Risk appetite, which was in short supply from April through September, returned during the fourth quarter. A number of factors positively impacted investor sentiment, including improving economic data in the US, as well as hopes for progress in the European sovereign debt crisis.

Sector Overview

Following two quarters when the financial markets were generally characterized by heightened risk aversion, risk appetite returned at times during the last three months of 2011. The change in investor sentiment was, in part, due to expectations that the US would not experience a double-dip recession. Additionally, in October there were signs that some progress had been made in the European sovereign debt crisis, although hopes of a resolution faded as the quarter progressed. Turning to the US economy, there were a number of better than expected data points in the fourth quarter, as unemployment trended lower, manufacturing activity improved and there were signs that the housing market may be closer to reaching a bottom. Against this backdrop, the spread sectors (non-US Treasuries), such as commercial mortgage-backed securities (CMBS) and investment grade bonds generated positive results and outperformed comparable duration Treasuries.

During the fourth quarter, US dollar-denominated emerging markets debt, as measured by the JP Morgan Emerging Markets Bond Index Global (EMBI Global), posted a return of 5.12%. After a negative third quarter, October saw a rally in higher risk assets as investors were searching for yields and risk aversion declined. US dollar-denominated emerging markets debt spreads tightened significantly in October.1 However, local currency markets closed the year on a weaker note following increasing concerns about the ability of European institutions to solve the sovereign debt crisis and renewed concerns for the global economy.

The high yield market generated strong results during the fourth quarter of 2011. Most of the market's advance occurred in October, which contributed to the BofA Merrill Lynch US High Yield Cash Pay Constrained Index (the ?Index?) overall return of 6.17% for the quarter. As one would expect given the increase in risk appetite, lower-quality securities broadly outperformed higher-quality securities during the quarter, with CCC rated bonds significantly outperforming BB rated bonds.

Performance Review

For the fourth quarter of 2011, the Fund posted a net asset value total return of 2.82% and a market price total return of 2.93%. On a net asset value basis, the Fund outperformed its benchmark, the Strategic Global Benchmark (the ?Index?),2 which returned 1.60% for the quarter.

The Fund?s shorter-than-the-Index duration positioning modestly detracted from results as government bond yields edged lower during the quarter. The Fund's spread sector exposures generally contributed to performance. In particular, the Fund's allocations to commercial mortgage-backed securities (CMBS) and high yield bonds were additive. Elsewhere, investment grade bond exposure was a modest contributor to performance as spreads reversed much of their prior quarter widening. Lastly, the Fund's allocations to residential mortgage-backed securities, asset-backed securities, collateralized loan obligations (CLOs) and collateralized debt obligations (CDOs) did not meaningfully impact performance over the last three months of the year.

In terms of the Fund's emerging market debt exposures, its allocation to US dollar-denominated debt of high beta (high risk) countries such as Venezuela and Argentina were a positive for performance, as their spreads narrowed during the period. Our allocation to quasi-sovereign bonds3 also benefited results. Elsewhere, long duration positions in Brazil and South Africa, a short duration in Hungary and yield curve positioning in India were rewarded. Emerging market currency exposures, overall, detracted from results. In particular, the Fund's exposures to the Brazilian real, Serbian dinar and Indian rupee detracted from performance.

Outlook

While growth in a number of developed countries moderated during the fourth quarter, we believe there is enough momentum for growth to remain positive, albeit somewhat tepid for 2012. We also expect inflation to remain benign and feel that interest rates will be relatively low in many developed countries given continued economic headwinds, such as high unemployment. We believe spread sectors remain attractive given slow but continued economic growth, low interest rates and modest inflation. In particular, high yield and investment grade corporate bonds may continue to benefit from improving credit fundamentals and strong investor demand.

We continue to have a positive long-term outlook for the emerging markets debt asset class, given the strength and robustness of the underlying economies. However, volatility may continue in the near term due to uncertainties in a number of peripheral Eurozone countries, which could trigger another flight to quality. We are also monitoring a potential decline in commodity demand from China, based on lower economic growth.

Since US interest rates may be near their lowest levels, we see US dollar-denominated emerging market bonds as again attractive at current spread levels. However, we believe local bonds and local currencies should be the main performance drivers for the foreseeable future as yield and economic growth disparities are likely to remain favorable for emerging markets countries.

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 Spreads? refers to differences between the yields paid on US Treasury bonds and other types of debt, such as emerging market bonds.

2 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.

3 Quasi-sovereign bonds are securities issued by entities supported by the local government.