UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-06475
Strategic Global Income Fund, Inc.
(Exact name of registrant as specified in charter)
1285 Avenue of the Americas, New York, New York 10019-6028
(Address of principal executive offices) (Zip code)
Mark F. Kemper, Esq.
UBS Global Asset Management
1285 Avenue of the Americas
New York, NY 10019-6028
(Name and address of agent for service)
Copy to:
Jack W. Murphy, Esq.
Dechert LLP
1900 K Street, NW
Washington, DC 20006
Registrant’s telephone number, including area code: 212-821 3000
Date of fiscal year end: November 30
Date of reporting period: May 31, 2014
Item 1. Reports to Stockholders.
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Closed-end Funds | Semiannual Report | ||
Strategic Global Income Fund, Inc.
Semiannual Report
May 31, 2014
Strategic Global Income Fund, Inc.
Managed distribution policy—key points to note
| Ÿ | The Fund has a managed distribution policy. Since June 2014, the Fund makes regular monthly distributions at an annualized rate equal to 5% of the Fund’s net asset value, as determined as of the last trading day during the first week of a month (usually a Friday, unless the NYSE is closed that day). (Pursuant to the policy with respect to distributions paid from June 2011 through the monthly distribution for May 2014, the annualized rate had been 6%, which, consistent with the policy, in any given month may have been comprised of a combination of net investment income, short- and/or long-term capital gains, and/or a return of capital.) |
| Ÿ | To the extent that the Fund’s taxable income in any fiscal year exceeds the aggregate amount distributed based on a fixed percentage of its net asset value, the Fund would make an additional distribution in the amount of that excess near the end of the fiscal year. To the extent that the aggregate amount distributed by the Fund based on a fixed percentage of its net asset value exceeds its current and accumulated earnings and profits, the amount of that excess would constitute a return of capital or net realized capital gains for tax purposes. A return of capital may occur, for example, when some or all of the money that shareholders invested in the Fund is deemed to be paid back to shareholders. A return of capital distribution does not necessarily reflect the Fund’s investment performance and should not be confused with “yield” or “income.” |
| Ÿ | You should not draw any conclusions about the Fund’s investment performance from the amount of the monthly distribution or from the terms of the Fund’s managed distribution policy. |
| Ÿ | The Fund periodically issues notices and press releases estimating the source characteristics of its monthly distributions. The amounts and sources reported in these materials are only estimates and are not being provided for tax reporting purposes. The actual amounts and sources of the amounts for accounting and tax reporting purposes will depend upon the Fund’s investment experience during its entire fiscal year and may be subject to retroactive changes based on tax regulations. The Fund will send you a Form 1099-DIV (or your financial intermediary should provide you with similar information) for the calendar year that will tell you how to report these distributions for federal income tax purposes. |
| Ÿ | The Fund’s Board may change or terminate the managed distribution policy at any time without prior notice to Fund shareholders; any such change or termination may have an adverse effect on the market price for the Fund’s shares. |
| Ÿ | Further information regarding the Fund’s managed distribution policy is contained in the section captioned “Distribution policy” towards the end of this report. |
Strategic Global Income Fund, Inc.
July 11, 2014
Dear shareholder,
This report provides an overview of the performance of Strategic Global Income Fund, Inc. (the “Fund”) for the six months ended May 31, 2014.
Performance
For the six months ended May 31, 2014, the Fund returned 5.11% on a net asset value basis and 6.98% on a market price basis. In comparison, the Fund’s benchmark, the Strategic Global Benchmark1 (the “Benchmark”), returned 5.13%. The median returns for the Fund’s peer group, the Lipper Global Income Funds category were 6.02% and 10.09% on a net asset value basis and market price basis, respectively, over the same period. (For more on the Fund’s performance, please refer to “Performance at a glance” on page 5.)
The Fund did not use structural leverage during the reporting period. That is, the Fund did not have preferred stock outstanding, nor did it borrow from banks for investment purposes, as some of its peers may have done. Leverage magnifies returns on both the upside and on the downside, and creates a wider range of returns within the Fund’s peer group.
The Fund traded at a discount2 to its net asset value (“NAV”) per share during the reporting period. At the close of the preceding annual reporting period, November 30, 2013, the Fund traded at a discount of 14.5%; at the close of the current reporting period, May 31, 2014, the Fund traded at a discount of 13.4%. As of these same dates, the Lipper peer group reported median discounts of 9.9% and 8.5%, respectively.
On May 21, 2014, the Fund issued a press release announcing a reduction in the annualized rate for distributions pursuant to its managed distribution policy from 6% to 5%, effective beginning with the June 2014 monthly distribution. (Important features of this policy are described on the inside front cover of this report.)
This change was believed appropriate in light of the Fund’s investment opportunities in the current market environment. Notably, global bond yields remain at historically low levels. Furthermore, spreads3 on many credit sectors—such as corporate or securitized debt obligations—have continued to contract, which presents the Fund with more limited opportunities to generate significant future capital gains. Given prevailing market yields, it is believed that the new distribution rate is more appropriate and in line with the Fund’s ongoing earnings potential as of this time.
Market commentary
After three consecutive years of generally modest growth, the overall US economy contracted in the first quarter of 2014. Looking back, gross domestic product (“GDP”) in the US grew at annualized rates of 2.5% and 4.1%
Strategic Global Income Fund, Inc.
Investment goals:
Primarily, high level of current income; secondarily, capital appreciation
Portfolio Management:
Portfolio management team, including Scott Dolan, John Dugenske, Craig Ellinger, Brian Fehrenbach and Uwe Schillhorn
Commencement:
February 3, 1992
NYSE symbol:
SGL
Distribution payments:
Monthly
| 1 | The Strategic Global Benchmark is an unmanaged index compiled by the advisor, constructed as follows: 67% Citigroup World Government Bond Index and 33% J.P. Morgan Emerging Markets Bond Index Global (EMBI Global). Investors should note that indices do not reflect the deduction of fees and expenses. |
| 2 | A fund trades at a premium when the market price at which its shares trade is more than its NAV. Alternatively, a fund trades at a discount when the market price at which its shares trade is less than its NAV. The market price is the price the market is willing to pay for shares of a fund at a given time and may be influenced by a range of factors, including supply and demand and market conditions. NAV per share is determined by dividing the value of the Fund’s securities, cash and other assets, less all liabilities, by the total number of common shares outstanding. |
| 3 | “Spread” is the difference between the yields paid on a government bond (such as US Treasuries) and a security of a different quality, but with the same or similar maturity. When spreads widen, it implies the market is factoring in greater risk of default for the lower rated security; conversely, when spreads tighten, the market is factoring in less risk. Such movements in spreads generally result in changes in market prices for such securities. |
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Strategic Global Income Fund, Inc.
during the second and third quarters of 2013, respectively. Third quarter GDP was the highest reading since the fourth quarter of 2011. The Commerce Department then reported that fourth quarter 2013 GDP grew at a 2.6% annualized rate. In its third and final estimate, the Commerce Department stated that first quarter 2014 GDP contracted at a 2.9% annualized rate.4 This was the first negative reading since the first quarter of 2011 and was partially attributed to severe winter weather in parts of the country.
Growth in other developed countries generally improved during the reporting period. In its April 2014 World Economic Outlook Update, the International Monetary Fund (“IMF”) reported that, “Global activity has broadly strengthened and is expected to improve further in 2014–15, with much of the impetus coming from advanced economies.” From a regional perspective, the IMF anticipates 2014 growth will be 1.2% in the Eurozone, versus -0.5% in 2013. Economic activity in Japan is expected to be relatively stable, with growth of 1.4% in 2014, compared with 1.5% in 2013. After decelerating in 2013, the IMF projects that overall growth in emerging market countries will experience an uptick in 2014, with growth of 4.9% versus 4.7% in 2013. GDP growth in India is projected to move from 4.4% in 2013 to 5.4% in 2014. However, the IMF projects that growth in China will fall from 7.7% in 2013 to 7.5% in 2014.
While there were periods of volatility, US spread sectors5 generated positive results during the reporting period. Investor sentiment fluctuated at times given incoming economic data, geopolitical issues and the US Federal Reserve Board’s (the “Fed’s”) decision to taper its monthly asset purchase program. After posting generally weak results in December 2013 amid rising interest rates, US bond markets rallied for much of the next five months. This turnaround was triggered by a number of factors, including falling longer-term interest rates given the weakening economy during the winter slump and several flights to quality. Among US spread sectors, the strongest results were generated by lower-rated high yield corporate bonds and longer-term investment grade corporate bonds.
After a challenging start, the emerging markets debt asset class rallied and produced solid results during the six month reporting period as a whole. Risk aversion was elevated at times during the first two months of the period as US interest rates moved higher and concerns regarding global growth were partially triggered by weak economic data in China. In addition, there were political concerns in Turkey and Venezuela. While there was no one catalyst, the asset class then began to rally in February 2014. Given significant spread widening in 2013 and January 2014, emerging market debt valuations were more attractive and investors may have felt that negative economic and geopolitical news had been largely priced into the market. Despite a number of headline risks, including Russia’s actions in Ukraine, the asset class continued to move higher from March through May 2014.
Portfolio commentary
What worked
| Ÿ | Spread management contributed to performance, driven by the Fund’s out-of-benchmark exposure to the spread sectors. |
| – | The Fund’s security selection and allocations to high yield and investment grade bonds were beneficial for performance. |
| – | Our securitized product allocations, especially in commercial mortgage-backed securities (“CMBS”), aided the Fund’s results. Security selection within the CMBS sector also added value. |
| Ÿ | The Fund’s currency positioning, overall, was positive for the Fund’s performance. In particular, the Fund’s overweight to the US dollar was rewarded, as was our short position in the Japanese yen. These positions more than offset the downside associated with having a short position in the euro. |
What didn’t work
| Ÿ | The Fund’s US duration positioning was a negative for the Fund’s performance, given the declining interest rate environment. The Fund’s duration was tactically managed during the reporting period. That said, |
| 4 | Based on the Commerce Department’s third estimate announced on June 25, 2014, after the reporting period had ended. |
| 5 | A spread sector refers to non-government fixed income sectors, such as investment grade or high yield bonds, commercial mortgage-backed securities (CMBS), etc. |
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Strategic Global Income Fund, Inc.
| given our belief that US interest rates were unsustainably low, we maintained a duration that was generally two years shorter than that of the Benchmark. (Duration measures a fund’s sensitivity to changes in interest rates and is related to the maturity of the bonds comprising the portfolio.) |
| Ÿ | An underweight to emerging markets debt detracted from the Fund’s relative results. The Fund’s emerging markets debt allocation was positive for its absolute performance. However, an underweight versus the Benchmark hurt its relative results, as the asset class rallied as the reporting period progressed. |
| Ÿ | Our out-of-benchmark allocation to local currency emerging markets debt detracted from benchmark relative results. While the Fund maintained an overall underweight to emerging markets debt, our preference for local currency denominated emerging markets debt was not beneficial. Although local currency emerging markets debt posted a positive return over the reporting period, it generally underperformed US dollar denominated emerging markets debt. |
| Ÿ | Yield curve positioning was slightly negative for performance. |
Portfolio adjustments
| Ÿ | Several adjustments were made to the portfolio during the reporting period. |
| – | We tactically adjusted the Fund’s duration during the six-month period. |
| – | We adjusted the Fund’s investment grade and high yield bond allocations, selling positions that reached our target prices, while purchasing securities that we felt were attractively valued. We also actively participated in the new issue market. |
Use of derivatives
| Ÿ | The Fund utilized various currency derivatives, such as currency forwards, options and swaps, to manage its currency exposures across both developed and emerging markets. Overall, the Fund’s currency strategy contributed to performance during the reporting period. |
| Ÿ | As part of its spread management strategy, the Fund used various credit derivatives, including but not limited to credit default swaps, credit-linked notes and options on credit default swaps, to attempt to efficiently gain or hedge risk exposures across countries, markets, sectors and issuers. Spread management strategy overall contributed to results. |
| Ÿ | The Fund used several different interest rate derivatives, such as interest rate swaps, futures and options, to adjust its duration and yield curve positioning. Overall, duration and yield curve management strategies detracted from performance during the reporting period. |
Outlook
Despite experiencing headwinds from severe winter weather, the US economy has improved, and we believe has enough momentum to continue expanding as the year progresses. Overseas, a modest economic recovery in Europe appears to be occurring, although deflation remains a concern. Elsewhere, growth in China has decelerated, which could negatively impact the global economy. We are also closely monitoring growth trends in Japan and whether the Bank of Japan will take more meaningful actions to support its economy.
Turning to the fixed income market, regardless of some weaker than expected economic data and geopolitical issues, the Fed appears on track to continue paring its monthly asset purchases and potentially ending this phase of quantitative easing during the fourth quarter of 2014. While the market has been rather fixated on when the Fed will move to raise interest rates, we do not see this occurring until sometime in 2015. However, the market may begin to “price in” rising rates prior to the Fed taking action. We maintain our generally positive outlook for the spread sectors. US credit fundamentals continue to be strong and defaults should remain well below their historical average. That being said, spreads in the US are significantly tighter than they were during the financial crisis. As such, their returns will likely be more of a “coupon clipping” nature during the second half of the year.
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Strategic Global Income Fund, Inc.
We have a cautious, but somewhat improving medium-term outlook for the emerging markets asset class. Improving growth in developing countries could have a positive impact on emerging-market exports. Even though valuations in the asset class have become less attractive given spread narrowing in recent months, we continue to see pockets of opportunity. While certain geopolitical issues have been priced into the market, in our view, we expect to see continued periods of elevated volatility. Within the asset class, we feel US dollar-denominated debt should outperform local debt for the year as a whole.
We thank you for your continued support and welcome any comments or questions you may have. For additional information regarding your fund, please contact your financial advisor, or visit us at www.ubs.com/globalam-us.
Sincerely,
|
| |
| Mark E. Carver President Strategic Global Income Fund, Inc. Managing Director UBS Global Asset Management (Americas) Inc. |
Scott Dolan Portfolio Manager Strategic Global Income Fund, Inc. Managing Director UBS Global Asset Management (Americas) Inc. |
|
| |
| John Dugenske, CFA Portfolio Manager Strategic Global Income Fund, Inc. Managing Director UBS Global Asset Management (Americas) Inc. |
Craig Ellinger, CFA Portfolio Manager Strategic Global Income Fund, Inc. Managing Director UBS Global Asset Management (Americas) Inc. |
|
| |
| Brian Fehrenbach, CFA Portfolio Manager Strategic Global Income Fund, Inc. Managing Director UBS Global Asset Management |
Uwe Schillhorn, CFA Portfolio Manager Strategic Global Income Fund, Inc. Managing Director UBS Global Asset Management (Americas) Inc. |
This letter is intended to assist shareholders in understanding how the Fund performed during the six months ended May 31, 2014. The views and opinions in the letter were current as of July 11, 2014. They are not guarantees of future performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and we reserve the right to change our 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. We encourage you to consult your financial advisor regarding your personal investment program.
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Strategic Global Income Fund, Inc.
Performance at a glance (unaudited)
Average annual total returns for periods ended 05/31/2014
| Net asset value returns | 6 months | 1 year | 5 years | 10 years | ||||||||||||
| Strategic Global Income Fund, Inc. |
5.11 | % | 1.42 | % | 10.58 | % | 8.03 | % | ||||||||
| Lipper Global Income Funds median |
6.02 | 4.33 | 10.64 | 8.09 | ||||||||||||
| Market price returns | ||||||||||||||||
| Strategic Global Income Fund, Inc. |
6.98 | % | (2.12 | )% | 10.31 | % | 6.70 | % | ||||||||
| Lipper Global Income Funds median |
10.09 | 4.27 | 10.52 | 10.63 | ||||||||||||
| Index returns | ||||||||||||||||
| Strategic Global Benchmark1 |
5.13 | % | 5.26 | % | 5.81 | % | 6.42 | % | ||||||||
| Citigroup World Government Bond Index2 |
3.20 | 5.39 | 3.45 | 4.76 | ||||||||||||
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. The Fund’s net asset value (“NAV”) returns assume, for illustration only, that dividends and other distributions, if any, were reinvested at the NAV on the payable dates. The Fund’s market price returns assume that all dividends and other distributions, if any, were reinvested at prices obtained under the Fund’s Dividend Reinvestment Plan. Returns for the period 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 and 33% J.P. Morgan Emerging Markets Bond Index Global (EMBI Global). 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. |
Lipper peer group data calculated by Lipper Inc.; used with permission. The Lipper median is the return of the fund that places in the middle of the peer group. Lipper classifies the Fund in its “Global Income Funds” category, which includes both leveraged and non-leveraged closed-end funds that invest primarily in US dollar and non-US dollar debt securities of issuers located in at least three countries, one of which may be the United States.
Any Fund performance information reflects the deduction of the Fund’s fees and expenses, as indicated in 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).
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.
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Strategic Global Income Fund, Inc.
Portfolio statistics (unaudited)
| Characteristics1 | 05/31/14 | 11/30/13 | 05/31/13 | |||||||||||||
| Net asset value |
$ | 10.62 | $ | 10.42 | $ | 11.12 | ||||||||||
| Market price |
$ | 9.20 | $ | 8.90 | $ | 10.07 | ||||||||||
| 12-month dividends/distributions |
$ | 0.6322 | $ | 0.7784 | $ | 0.8035 | ||||||||||
| Monthly dividend/distribution at period-end |
$ | 0.0529 | $ | 0.0528 | $ | 0.0576 | ||||||||||
| Net assets (mm) |
$ | 193.9 | $ | 190.2 | $ | 203.1 | ||||||||||
| Weighted average maturity (yrs.) |
8.3 | 9.1 | 7.2 | |||||||||||||
| Duration (yrs.)2 |
4.6 | 3.9 | 5.1 | |||||||||||||
| Currency breakdown3 | 05/31/14 | 11/30/13 | 05/31/13 | |||||||||||||
| US dollar denominated |
70.8 | % | 73.0 | % | 66.8 | % | ||||||||||
| Foreign denominated |
29.2 | 27.0 | 33.2 | |||||||||||||
| Total |
100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
| Top ten countries4 (bond holdings) |
05/31/14 | 11/30/13 | 05/31/13 | |||||||||||||
| United States |
45.6 | % | United States | 50.1 | % | United States | 42.8 | % | ||||||||
| United Kingdom |
5.6 | United Kingdom | 5.4 | Netherlands | 4.8 | |||||||||||
| Brazil |
4.7 | Brazil | 3.5 | Argentina | 4.1 | |||||||||||
| Russia |
3.2 | Russia | 3.2 | Germany | 3.4 | |||||||||||
| Italy |
2.6 | Germany | 2.5 | Russia | 3.1 | |||||||||||
| France |
2.4 | France | 2.5 | Brazil | 3.1 | |||||||||||
| Mexico |
2.3 | Italy | 2.5 | United Kingdom | 2.4 | |||||||||||
| Belgium |
2.2 | Spain | 2.4 | India | 2.4 | |||||||||||
| Germany |
1.9 | India | 2.0 | Italy | 2.2 | |||||||||||
| Venezuela |
1.8 | Mexico | 1.9 | Cayman Islands | 2.1 | |||||||||||
| Total |
72.3 | % | Total | 76.0 | % | Total | 70.4 | % | ||||||||
| Credit quality5 | 05/31/14 | 11/30/13 | 05/31/13 | |||||||||||||
| AAA |
4.5 | % | 3.2 | % | 3.5 | % | ||||||||||
| US Treasury6 |
3.7 | 6.6 | 4.5 | |||||||||||||
| US Agency6,7 |
7.5 | 8.8 | 8.0 | |||||||||||||
| AA |
8.3 | 7.3 | 5.3 | |||||||||||||
| A |
8.9 | 12.2 | 10.9 | |||||||||||||
| BBB |
21.5 | 20.0 | 17.8 | |||||||||||||
| BB |
13.1 | 10.3 | 13.6 | |||||||||||||
| B |
8.2 | 5.7 | 5.2 | |||||||||||||
| CCC |
0.1 | 0.2 | 0.2 | |||||||||||||
| D |
0.7 | 0.6 | 0.6 | |||||||||||||
| Non-rated |
20.6 | 24.7 | 28.1 | |||||||||||||
| Cash equivalents |
2.6 | 0.6 | 3.9 | |||||||||||||
| Other assets less liabilities |
0.3 | (0.2 | ) | (1.6 | ) | |||||||||||
| Total |
100.0 | % | 100.0 | % | 100.0 | % | ||||||||||
| 1 | Prices and other characteristics will vary over time. |
| 2 | 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. |
| 3 | Breakdown represents a percentage of market value as of the dates indicated. Forward foreign currency contracts are reflected at unrealized appreciation/depreciation; this may not align with the risk exposure described in the portfolio commentary section of the preceding shareholder letter which reflects forward foreign currency contracts based on contract notional amount. As of the most recent period end, May 31, 2014, the Fund maintained a risk exposure to non-US dollar currencies equal to approximately 36% of the Fund. |
| 4 | Weightings represent percentage of net assets as of the dates indicated. The Fund’s portfolio is actively managed and its composition will vary over time. |
| 5 | Weightings represent percentages of net assets as of the dates indicated. The Fund’s portfolio is actively managed and its composition will vary over time. Credit quality ratings shown 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. Ratings reflected represent S&P individual debt issue credit ratings. 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 references to credit quality made in the commentary above reflect ratings based on multiple providers (not just S&P) and thus may not align with the data represented in this table. |
| 6 | 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 May 31, 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. |
| 7 | Includes agency debentures and agency mortgage-backed securities. |
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Strategic Global Income Fund, Inc.
7
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
8
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
9
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
10
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
11
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
12
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
13
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
14
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
Notes to portfolio of investments
Aggregate cost for federal income tax purposes was substantially the same as for book purposes; and net unrealized appreciation consisted of:
| Gross unrealized appreciation |
$ | 8,896,085 | ||
| Gross unrealized depreciation |
(7,776,688 | ) | ||
| Net unrealized appreciation of investments |
$ | 1,119,397 |
For a listing of defined portfolio acronyms, counterparty abbreviations and currency abbreviations that are used throughout the Portfolio of investments as well as the tables that follow, please refer to pages 22-23. Portfolio footnotes begin on page 21.
Forward foreign currency contracts
| Counterparty | Contracts to deliver |
In exchange for |
Maturity date |
Unrealized appreciation/ (depreciation) |
||||||||||||||||||||
| BB |
BRL | 1,215,000 | USD | 539,520 | 06/18/14 | $ | (494 | ) | ||||||||||||||||
| BB |
MXN | 3,750,000 | USD | 289,866 | 06/18/14 | (1,455 | ) | |||||||||||||||||
| BB |
TRY | 35,870 | USD | 15,622 | 06/18/14 | (1,418 | ) | |||||||||||||||||
| BB |
USD | 892,765 | BRL | 2,043,000 | 06/10/14 | 17,298 | ||||||||||||||||||
| BB |
USD | 350,873 | IDR | 4,050,000,000 | 06/18/14 | (4,853 | ) | |||||||||||||||||
| BB |
USD | 537,057 | PEN | 1,500,000 | 06/18/14 | 4,467 | ||||||||||||||||||
| CIBC |
USD | 3,140,949 | EUR | 2,300,000 | 07/22/14 | (5,830 | ) | |||||||||||||||||
| CSI |
BRL | 11,382,275 | USD | 4,788,692 | 06/18/14 | (270,233 | ) | |||||||||||||||||
| CSI |
CLP | 102,950,000 | USD | 186,192 | 06/18/14 | (902 | ) | |||||||||||||||||
| CSI |
INR | 18,750,000 | USD | 316,189 | 06/18/14 | (63 | ) | |||||||||||||||||
| CSI |
MXN | 13,347,000 | USD | 1,001,453 | 06/18/14 | (35,419 | ) | |||||||||||||||||
| CSI |
RUB | 102,430,000 | USD | 2,804,940 | 06/18/14 | (120,846 | ) | |||||||||||||||||
| CSI |
USD | 210,336 | BRL | 488,000 | 06/18/14 | 6,559 | ||||||||||||||||||
| CSI |
USD | 716,846 | BRL | 1,600,000 | 06/18/14 | (5,716 | ) | |||||||||||||||||
| CSI |
USD | 5,377 | IDR | 62,660,000 | 06/18/14 | (24 | ) | |||||||||||||||||
| CSI |
USD | 556,447 | RUB | 19,950,000 | 06/18/14 | 13,401 | ||||||||||||||||||
| DB |
BRL | 600,000 | USD | 265,229 | 06/18/14 | (1,445 | ) | |||||||||||||||||
| DB |
THB | 23,500,000 | USD | 721,525 | 06/18/14 | 6,195 | ||||||||||||||||||
| DB |
TRY | 755,000 | USD | 357,312 | 06/18/14 | (1,362 | ) | |||||||||||||||||
| DB |
USD | 551,679 | HUF | 125,380,000 | 06/18/14 | 12,411 | ||||||||||||||||||
| DB |
USD | 791,620 | INR | 49,120,000 | 06/18/14 | 36,875 | ||||||||||||||||||
| DB |
USD | 733,410 | PHP | 32,050,000 | 06/18/14 | (1,056 | ) | |||||||||||||||||
| GSI |
BRL | 2,043,000 | USD | 847,191 | 06/10/14 | (62,872 | ) | |||||||||||||||||
| GSI |
CAD | 1,530,000 | USD | 1,400,977 | 07/22/14 | (8,329 | ) | |||||||||||||||||
| GSI |
NZD | 2,140,000 | USD | 1,823,558 | 07/22/14 | 14,409 | ||||||||||||||||||
| GSI |
USD | 380,995 | BRL | 850,000 | 06/18/14 | (3,207 | ) | |||||||||||||||||
| GSI |
USD | 182,116 | CLP | 102,950,000 | 06/18/14 | 4,979 | ||||||||||||||||||
| GSI |
USD | 620,187 | INR | 37,050,000 | 06/18/14 | 4,726 | ||||||||||||||||||
| GSI |
USD | 337,564 | KRW | 362,611,600 | 06/18/14 | 17,605 | ||||||||||||||||||
| GSI |
USD | 243,224 | MXN | 3,193,000 | 06/18/14 | 4,826 | ||||||||||||||||||
| GSI |
USD | 17,832 | TWD | 540,000 | 06/18/14 | 181 | ||||||||||||||||||
| JPMCB |
AUD | 5,335,000 | USD | 4,956,354 | 07/22/14 | 8,745 | ||||||||||||||||||
| JPMCB |
EUR | 620,000 | USD | 855,949 | 07/22/14 | 10,830 | ||||||||||||||||||
| JPMCB |
GBP | 415,000 | USD | 699,342 | 07/22/14 | 3,985 | ||||||||||||||||||
| JPMCB |
NOK | 2,320,000 | USD | 388,028 | 07/22/14 | 708 | ||||||||||||||||||
| JPMCB |
SEK | 13,290,000 | USD | 2,017,313 | 07/22/14 | 33,013 | ||||||||||||||||||
| JPMCB |
USD | 3,941,336 | CAD | 4,345,000 | 07/22/14 | 60,908 | ||||||||||||||||||
| JPMCB |
USD | 1,119,628 | DKK | 6,050,000 | 07/22/14 | (14,244 | ) | |||||||||||||||||
15
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
Forward foreign currency contracts (concluded)
| Counterparty | Contracts to deliver |
In exchange for |
Maturity date |
Unrealized appreciation/ (depreciation) |
||||||||||||||||||||
| JPMCB |
USD | 1,053,420 | EUR | 775,000 | 07/22/14 | $ | 2,979 | |||||||||||||||||
| JPMCB |
USD | 2,508,491 | GBP | 1,500,000 | 07/22/14 | 4,848 | ||||||||||||||||||
| JPMCB |
USD | 697,109 | RUB | 24,350,000 | 06/18/14 | (1,581 | ) | |||||||||||||||||
| JPMCB |
USD | 766,577 | TRY | 1,600,000 | 06/18/14 | (6,474 | ) | |||||||||||||||||
| JPMCB |
USD | 804,361 | ZAR | 8,350,000 | 06/18/14 | (17,285 | ) | |||||||||||||||||
| MSCI |
USD | 15,384,861 | JPY | 1,563,700,000 | 07/22/14 | (19,483 | ) | |||||||||||||||||
| Net unrealized depreciation on forward foreign currency contracts |
|
$ | (314,643 | ) | ||||||||||||||||||||
Futures contracts
| Expiration date |
Cost/ (proceeds) |
Value | Unrealized appreciation/ (depreciation) |
|||||||||||||
| US Treasury futures buy contracts: |
||||||||||||||||
| US Long Bond, 48 contracts (USD) |
September 2014 | $ | 6,632,855 | $ | 6,598,500 | $ | (34,355 | ) | ||||||||
| 5 Year US Treasury Notes, 43 contracts (USD) |
September 2014 | 5,140,227 | 5,149,586 | 9,359 | ||||||||||||
| US Treasury futures sell contracts: |
||||||||||||||||
| US Long Bond, 34 contracts (USD) |
September 2014 | (4,670,707 | ) | (4,673,937 | ) | (3,230 | ) | |||||||||
| US Ultra Bond, 20 contracts (USD) |
September 2014 | (3,009,663 | ) | (3,005,625 | ) | 4,038 | ||||||||||
| 10 Year US Treasury Notes, 119 contracts (USD) |
September 2014 | (14,883,157 | ) | (14,936,360 | ) | (53,203 | ) | |||||||||
| Interest rate futures sell contracts: |
||||||||||||||||
| Canadian Government 10 Year Bond, 13 contracts (CAD) |
September 2014 | (1,621,405 | ) | (1,628,627 | ) | (7,222 | ) | |||||||||
| Euro-Bund, 13 contracts (EUR) |
June 2014 | (2,569,354 | ) | (2,601,612 | ) | (32,258 | ) | |||||||||
| Long Gilt, 4 contracts (GBP) |
September 2014 | (743,092 | ) | (742,624 | ) | 468 | ||||||||||
| Net unrealized depreciation on futures contracts |
|
$ | (116,403 | ) | ||||||||||||
Options written
| Expiration date |
Premiums received |
Value | ||||||||||
| Call options |
||||||||||||
| 2 Year Euro-Dollar Midcurve, 387 contracts, strike @ USD 98.2500 | December 2014 | $ | 129,258 | $ | (198,338 | ) | ||||||
| 3 Year Euro-Dollar Midcurve, 155 contracts, strike @ USD 98.7500 | June 2016 | 125,995 | (141,437 | ) | ||||||||
| 4 Year Euro-Dollar Midcurve, 384 contracts, strike @ USD 96.3750 | September 2014 | 267,456 | (542,400 | ) | ||||||||
| Put options |
||||||||||||
| 2 Year Euro-Dollar Midcurve, 387 contracts, strike @ USD 97.2500 | December 2014 | 134,096 | (53,213 | ) | ||||||||
| 3 Year Euro-Dollar Midcurve, 155 contracts, strike @ USD 96.7500 | June 2016 | 124,307 | (24,219 | ) | ||||||||
| 4 Year Euro-Dollar Midcurve, 384 contracts, strike @ USD 96.3750 | September 2014 | 243,056 | (52,800 | ) | ||||||||
| 90 Day Euro-Dollar Time Deposit, 550 contracts, strike @ USD 98.2500 | March 2015 | 142,450 | (3,437 | ) | ||||||||
| Foreign Exchange Option, Sell EUR/BRL, EUR 950,000 face amount covered by contracts, strike @ BRL 2.6000, counterparty: BB |
June 2014 | 8,086 | 0 | |||||||||
| Foreign Exchange Option, Sell USD/TRY, USD 680,000 face amount covered by contracts, strike @ TRY 1.9800, counterparty: BB |
June 2014 | 21,488 | (1 | ) | ||||||||
16
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
Options written (concluded)
| Expiration date |
Premiums received |
Value | ||||||||||
| Options written on interest rate swaps12 |
||||||||||||
| If option exercised the Fund receives quarterly floating 3 month EURIBOR and pays annually 1.825%. Underlying interest rate swap terminating 12/10/15. European style. Counterparty: BB, Notional Amount EUR 48,000,000 | December 2014 | $ | 270,235 | $ | (1,052,853 | ) | ||||||
| If option exercised the Fund receives semi-annually 7.250% and pays quarterly floating 3 month USD LIBOR. Underlying interest rate swap terminating 11/04/25. European style. Counterparty: DB, Notional Amount USD 14,000,000 | November 2015 | 257,600 | (3,530 | ) | ||||||||
| If option exercised the Fund receives semi-annually 8.760% and pays quarterly floating 3 month USD LIBOR. Underlying interest rate swap terminating 11/04/25. European style. Counterparty: DB, Notional Amount USD 14,000,000 | November 2015 | 166,600 | (913 | ) | ||||||||
| Options written on credit default swaps on credit indices12 |
||||||||||||
| If option exercised payment from the counterparty will be received upon the occurrence of a failure to pay, obligation acceleration, repudiation or restructuring of the referenced obligation specified in the CDX.NA.HY Series 21 Index and Fund pays quarterly fixed rate of 5.000%. Underlying credit default swap terminating 12/20/18. European style. Counterparty: MLI, Notional Amount USD 30,000,000 | June 2014 | 375,000 | (16,792 | ) | ||||||||
| If option exercised payment from the counterparty will be received upon the occurrence of a failure to pay, obligation acceleration, repudiation or restructuring of the referenced obligation specified in the CDX.NA.HY Series 21 Index and Fund pays quarterly fixed rate of 5.000%. Underlying credit default swap terminating 12/20/18. European style. Counterparty: MLI, Notional Amount USD 30,000,000 | June 2014 | 132,000 | (47,254 | ) | ||||||||
| Total options written |
$ | 2,397,627 | $ | (2,137,187 | ) | |||||||
Written options activity for the period ended May 31, 2014 was as follows:
| Number of contracts |
Premiums received |
|||||||
| Options outstanding at November 30, 2013 |
2,230 | $ | 776,064 | |||||
| Options written |
6,533 | 1,296,364 | ||||||
| Options terminated in closing purchase transactions |
(6,361 | ) | (905,810 | ) | ||||
| Options expired prior to exercise |
— | — | ||||||
| Options outstanding at May 31, 2014 |
2,402 | $ | 1,166,618 | |||||
Swaptions and foreign exchange written options activity for the period ended May 31, 2014 was as follows:
| Premiums received |
||||
| Swaptions & foreign exchange options outstanding at November 30, 2013 |
$ | 1,694,361 | ||
| Swaptions & foreign exchange options written |
726,164 | |||
| Swaptions & foreign exchange options terminated in closing purchase transactions |
(1,189,516 | ) | ||
| Swaptions & foreign exchange options expired prior to exercise |
— | |||
| Swaptions & foreign exchange options outstanding at May 31, 2014 |
$ | 1,231,009 | ||
17
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
Currency swap agreements12
| Notional Amount | ||||||||||||||||||||||||||||||||||||
| Counterparty | Pay |
Receive |
Termination date |
Pay rate13 |
Receive rate13 |
Upfront (made)/ |
Value | Unrealized appreciation/ (depreciation) |
||||||||||||||||||||||||||||
| BB |
USD | 20,165,754 | AUD | 22,328,244 | 12/24/22 | 3 month USD LIBOR |
3 month BBSW |
$ | — | $ | 814,157 | $ | 814,157 | |||||||||||||||||||||||
| CITI |
AUD | 22,328,244 | USD | 20,165,754 | 12/24/14 | 3 month BBSW |
3 month USD LIBOR |
— | (717,705 | ) | (717,705 | ) | ||||||||||||||||||||||||
| CITI |
JPY | 1,896,000,000 | USD | 18,606,477 | 03/20/19 | 3 month JPY LIBOR |
3 month USD LIBOR |
— | (4,353 | ) | (4,353 | ) | ||||||||||||||||||||||||
| CITI |
USD | 18,606,477 | JPY | 1,896,000,000 | 03/20/15 | 3 month USD LIBOR |
3 month JPY LIBOR |
— | 30,745 | 30,745 | ||||||||||||||||||||||||||
| $ | — | $ | 122,844 | $ | 122,844 | |||||||||||||||||||||||||||||||
Interest rate swap agreements
| Counterparty | Notional amount |
Termination date |
Payments made by the Fund13 |
Payments received by the Fund13 |
Upfront payments (made)/ received |
Value | Unrealized appreciation/ (depreciation) |
|||||||||||||||||||||
| CITI |
KRW | 4,800,000,000 | 08/26/16 | 3.410% | 3 month CD KSDA |
$ | — | $ | (65,238 | ) | $ | (65,238 | ) | |||||||||||||||
| CITI |
USD | 42,400,000 | 11/24/18 | 1 month LIBOR (USD BBA) |
3 month LIBOR (USD BBA) |
— | 148,712 | 148,712 | ||||||||||||||||||||
| CSI |
CAD | 32,620,000 | 02/11/17 | 3 month BA | 3.500% | (293,326 | ) | 1,806,761 | 1,513,435 | |||||||||||||||||||
| CSI |
CAD | 9,200,000 | 02/11/22 | 4.145 | 3 month BA | — | (1,148,704 | ) | (1,148,704 | ) | ||||||||||||||||||
| DB |
EUR | 8,200,000 | 05/04/22 | 2.130 | 6 month EURIBOR | 467,871 | (752,436 | ) | (284,565 | ) | ||||||||||||||||||
| DB |
EUR | 3,650,000 | 05/04/42 | 6 month EURIBOR | 2.460 | — | 218,617 | 218,617 | ||||||||||||||||||||
| DB |
ZAR | 7,400,000 | 05/31/23 | 3 month JIBAR | 7.480 | — | (26,357 | ) | (26,357 | ) | ||||||||||||||||||
| GSI |
TWD | 140,000,000 | 08/26/16 | 1.280 | 3 month TWCPBA | — | (30,429 | ) | (30,429 | ) | ||||||||||||||||||
| JPMCB |
CAD | 32,620,000 | 02/11/17 | 3.500 | 3 month BA | — | (1,806,761 | ) | (1,806,761 | ) | ||||||||||||||||||
| JPMCB |
EUR | 8,200,000 | 05/04/22 | 6 month EURIBOR | 2.130 | — | 752,436 | 752,436 | ||||||||||||||||||||
| JPMCB |
EUR | 3,650,000 | 05/04/42 | 2.460 | 6 month EURIBOR | — | (218,617 | ) | (218,617 | ) | ||||||||||||||||||
| JPMCB |
USD | 105,000,000 | 07/03/42 | 1 month LIBOR (USD BBA) |
3 month LIBOR (USD BBA) |
— | 441,724 | 441,724 | ||||||||||||||||||||
| JPMCB |
USD | 42,300,000 | 11/24/18 | 1 month LIBOR (USD BBA) |
3 month LIBOR (USD BBA) |
— | 138,907 | 138,907 | ||||||||||||||||||||
| MLI |
CAD | 22,140,000 | 04/09/17 | 3 month BA | 1.978 | — | 285,361 | 285,361 | ||||||||||||||||||||
| MLI |
CAD | 7,480,000 | 02/04/21 | 3.725 | 3 month BA | 194,693 | (709,514 | ) | (514,821 | ) | ||||||||||||||||||
| MLI |
CAD | 7,410,000 | 02/04/31 | 3 month BA | 3.475 | — | 352,969 | 352,969 | ||||||||||||||||||||
| MLI |
CAD | 2,620,000 | 02/04/41 | 4.208 | 3 month BA | — | (454,545 | ) | (454,545 | ) | ||||||||||||||||||
| MLI |
ZAR | 12,000,000 | 06/04/18 | 3 month JIBAR | 6.400 | — | (34,555 | ) | (34,555 | ) | ||||||||||||||||||
| MSCI |
CAD | 21,160,000 | 04/08/17 | 3.600 | 3 month BA | — | (1,204,573 | ) | (1,204,573 | ) | ||||||||||||||||||
| $ | 369,238 | $ | (2,306,242 | ) | $ | (1,937,004 | ) | |||||||||||||||||||||
18
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
Credit default swaps on corporate and sovereign issues—buy protection14
| Counterparty | Referenced obligation15 | Notional amount |
Termination date |
Payments made by the Fund13 |
Upfront payments (made)/ received |
Value | Unrealized depreciation |
|||||||||||||||||||||||
| JPMCB |
Government of Japan Bond, 2.000%, due 03/21/22 | USD | 4,000,000 | 12/20/17 | 1.000 | % | $ | 20,131 | $ | (112,436 | ) | $ | (92,305 | ) | ||||||||||||||||
| MLI |
XLIT Ltd. Bond, 6.250%, due 05/15/27 |
USD | 3,000,000 | 09/20/17 | 1.000 | (32,170 | ) | (77,181 | ) | (109,351 | ) | |||||||||||||||||||
| MLI |
American International Group, Inc., Bond, 6.250%, due 05/01/36 |
USD | 2,000,000 | 06/20/19 | 1.000 | 43,209 | (50,073 | ) | (6,864 | ) | ||||||||||||||||||||
| MSCI |
Deutsche Bank AG Bond, 5.125%, due 08/31/17 | EUR | 1,750,000 | 06/20/17 | 1.000 | (94,483 | ) | (48,152 | ) | (142,635 | ) | |||||||||||||||||||
| $ | (63,313 | ) | $ | (287,842 | ) | $ | (351,155 | ) | ||||||||||||||||||||||
Credit default swaps on credit indices—sell protection16
| Counterparty | Referenced Index15 | Notional amount |
Termination date |
Payments received by the Fund13 |
Upfront (made)/ received |
Value | Unrealized appreciation/ (depreciation) |
Credit spread17 |
||||||||||||||||||||||||||
| CSI |
CMBX.NA.BBB. Series 6 Index | USD | 9,550,000 | 05/11/63 | 3.000 | % | $ | 201,015 | $ | (10,238 | ) | $ | 190,777 | 3.010 | % | |||||||||||||||||||
| MLI |
CDX.NA.HY. Series 15 Index | USD | 4,000,000 | 12/20/15 | 5.000 | 295,000 | 328,836 | 623,836 | 0.412 | |||||||||||||||||||||||||
| MSCI |
CMBX.NA.A. Series 6 Index | USD | 9,500,000 | 05/11/63 | 2.000 | (11,462 | ) | 134,540 | 123,078 | 1.810 | ||||||||||||||||||||||||
| $ | 484,553 | $ | 453,138 | $ | 937,691 | |||||||||||||||||||||||||||||
Credit default swaps on corporate and sovereign issues—sell protection16
| Counterparty | Referenced obligation15 | Notional amount |
Termination date |
Payments received by the Fund13 |
Upfront payments (made)/ received |
Value | Unrealized appreciation |
Credit spread17 |
||||||||||||||||||||||||||
| CITI |
State of Illinois Bond, 5.000% due 06/01/29 |
USD | 3,000,000 | 12/20/23 | 1.000 | % | $ | 222,252 | $ | (183,131 | ) | $ | 39,121 | 1.858 | % | |||||||||||||||||||
| JPMCB |
Republic of China Bond, 4.250%, due 10/28/14 | USD | 4,000,000 | 12/20/17 | 1.000 | (16,042 | ) | 84,100 | 68,058 | 0.461 | ||||||||||||||||||||||||
| MLI |
JPMorgan Chase & Co. Bond, 4.750%, due 03/01/15 | USD | 3,000,000 | 09/20/17 | 1.000 | 45,158 | 67,847 | 113,005 | 0.373 | |||||||||||||||||||||||||
| MLI |
General Electric Capital Corp. Bond, 5.625%, due 09/15/17 |
USD | 2,000,000 | 06/20/19 | 1.000 | (48,222 | ) | 53,805 | 5,583 | 0.493 | ||||||||||||||||||||||||
| $ | 203,146 | $ | 22,621 | $ | 225,767 | |||||||||||||||||||||||||||||
19
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
Total return swap agreement12
| Counterparty | Notional amount |
Termination date |
Payments made by the Fund13 |
Payments received by the Fund13 |
Upfront payments |
Value | Unrealized appreciation |
|||||||||||||||||||||||||
| JPMCB |
GBP | 6,710,000 | 06/25/14 | 3 month GBP LIBOR | — | 18 | $ | — | $ | 541,682 | $ | 541,682 | ||||||||||||||||||||
Centrally cleared interest rate swap agreements
| Notional amount |
Termination date |
Payments made by the Fund13 |
Payments received by the Fund13 |
Value | Unrealized appreciation |
|||||||||||||||||||
| CAD |
9,200,000 | 02/11/22 | 3 month BA | 2.626 | % | $ | 201,055 | $ | 201,055 | |||||||||||||||
| EUR |
23,450,000 | 12/27/16 | 6 month EURIBOR | 0.726 | 298,735 | 298,735 | ||||||||||||||||||
| $ | 499,790 | $ | 499,790 | |||||||||||||||||||||
The following is a summary of the fair valuations according to the inputs used as of May 31, 2014 in valuing the Fund’s investments:
| Assets | Unadjusted quoted prices in active markets for identical investments (Level 1) |
Other significant observable inputs (Level 2) |
Unobservable inputs (Level 3) |
Total | ||||||||||||
| Description: |
| |||||||||||||||
| Corporate bonds |
$ | — | $ | 78,700,634 | $ | — | $ | 78,700,634 | ||||||||
| Asset-backed securities |
— | 1,967,046 | 518,228 | 2,485,274 | ||||||||||||
| Collateralized debt obligations |
— | 4,970,935 | 5,683,476 | 10,654,411 | ||||||||||||
| Commercial mortgage-backed securities |
— | 12,805,166 | — | 12,805,166 | ||||||||||||
| Mortgage & agency debt securities |
— | 18,138,574 | 940,668 | 19,079,242 | ||||||||||||
| Municipal bonds |
— | 5,174,856 | — | 5,174,856 | ||||||||||||
| US government obligations |
— | 7,167,180 | — | 7,167,180 | ||||||||||||
| Non-US government obligations |
— | 44,904,096 | — | 44,904,096 | ||||||||||||
| Structured note |
— | 869,600 | — | 869,600 | ||||||||||||
| Supranational bonds |
— | 5,567,546 | — | 5,567,546 | ||||||||||||
| Common stock |
58,215 | — | — | 58,215 | ||||||||||||
| Short-term investment |
— | 5,032,172 | — | 5,032,172 | ||||||||||||
| Options purchased |
800,550 | 12,942 | — | 813,492 | ||||||||||||
| Forward foreign currency contracts |
— | 269,948 | — | 269,948 | ||||||||||||
| Futures contracts |
13,865 | — | — | 13,865 | ||||||||||||
| Swap agreements |
— | 6,700,989 | — | 6,700,989 | ||||||||||||
| Total |
$ | 872,630 | $ | 192,281,684 | $ | 7,142,372 | $ | 200,296,686 | ||||||||
| Liabilities | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Description: |
||||||||||||||||
| Forward foreign currency contracts |
$ | — | $ | (584,591 | ) | $ | — | $ | (584,591 | ) | ||||||
| Futures contracts |
(130,268 | ) | — | — | (130,268 | ) | ||||||||||
| Swap agreements |
— | (7,654,998 | ) | — | (7,654,998 | ) | ||||||||||
| Options written |
(1,015,844 | ) | (1,121,343 | ) | — | (2,137,187 | ) | |||||||||
| Total |
$ | (1,146,112 | ) | $ | (9,360,932 | ) | $ | — | $ | (10,507,044 | ) | |||||
20
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
Level 3 rollforward disclosure
The following is a rollforward of the Fund’s investments that were valued using unobservable inputs for the period:
| Asset- backed securities |
Collateralized debt obligations |
Commercial mortgage- backed securities |
Mortgage & agency debt securities |
Total | ||||||||||||||||
| Assets |
||||||||||||||||||||
| Beginning balance |
$ | 782,960 | $ | 7,582,124 | $ | 1,500,844 | $ | 1,150,837 | $ | 11,016,765 | ||||||||||
| Purchases |
518,228 | 1,696,454 | — | — | 2,214,682 | |||||||||||||||
| Issuances |
— | — | — | — | — | |||||||||||||||
| Sales |
— | — | — | — | — | |||||||||||||||
| Accrued discounts (premiums) |
— | — | — | (136,444 | ) | (136,444 | ) | |||||||||||||
| Total realized gain (loss) |
— | — | — | — | — | |||||||||||||||
| Change in net unrealized appreciation (depreciation) |
(23,040 | ) | (167,727 | ) | 11,728 | (73,725 | ) | (252,764 | ) | |||||||||||
| Transfers into Level 3 |
— | — | — | — | — | |||||||||||||||
| Transfers out of Level 3 |
(759,920 | ) | (3,427,375 | ) | (1,512,572 | ) | — | (5,699,867 | ) | |||||||||||
| Ending balance |
$ | 518,228 | $ | 5,683,476 | $ | — | $ | 940,668 | $ | 7,142,372 | ||||||||||
The change in net unrealized appreciation/depreciation relating to the Level 3 investments held at May 31, 2014 was $(240,115). Transfers out of Level 3 represent the value at the end of the period. At May 31, 2014, securities were transferred from Level 3 to Level 2 as the valuation is based on observable inputs from an established pricing source.
Portfolio footnotes
| * | Non-income producing security. |
| 1 | Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933. These securities are considered liquid, unless noted otherwise, and may be resold in transactions exempt from registration, normally to qualified institutional buyers. At May 31, 2014, the value of these securities amounted to $39,033,882 or 20.13% of net assets. |
| 2 | Security exempt from registration pursuant to Regulation S under the Securities Act of 1933. Regulation S applies to securities offerings that are made outside of the United States and do not involve direct selling efforts in the United States. At May 31, 2014, the value of these securities amounted to $37,163,738 or 19.16% of net assets. |
| 3 | Variable or floating rate security—The interest rate shown is the current rate as of May 31, 2014 and changes periodically. |
| 4 | Perpetual investment. Date shown reflects the next call date. |
| 5 | On September 7, 2008, the Federal Housing Finance Agency placed the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association into conservatorship, and the US Treasury guaranteed the debt issued by those organizations. |
| 6 | All or a portion of these securities have been designated as collateral for open swap agreements. |
| 7 | Security pays, when required, a floating rate that is determined annually based on the Argentina GDP. |
| 8 | Debt security whose principal and/or interest payments are adjusted for inflation, unlike debt securities that make fixed principal and interest payments. The interest rate paid by the securities is fixed, while the principal value rises or falls based on changes in an index. Thus, if inflation occurs, the principal and interest payments on the securities are adjusted accordingly to protect investors from inflationary loss. During a deflationary period, the principal and interest payments decrease, although the securities’ principal amounts will not drop below their face amounts at maturity. In exchange for the inflation protection, the securities generally pay lower interest rates than typical government securities from the issuer’s country. Only if inflation occurs will securities offer a higher real yield than a conventional security of the same maturity. |
| 9 | Step bond—Coupon rate increases in increments to maturity. Rate disclosed is as of May 31, 2014. Maturity date disclosed is the ultimate maturity date. |
| 10 | Rate shown reflects annualized yield at May 31, 2014 on zero coupon bond. |
21
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
| 11 | The table below details the Fund’s investments in a fund advised by the same advisor as the Fund. The advisor does not earn a management fee from the affiliated UBS Relationship Fund. |
| Security description | Value 11/30/13 |
Purchases during the six months ended 05/31/14 |
Sales during the six months ended 05/31/14 |
Value 05/31/14 |
Net income earned from affiliate for the six months ended 05/31/14 |
|||||||||||||||
| UBS Cash Management Prime Relationship Fund |
$ | 1,047,245 | $ | 34,637,456 | $ | 30,652,529 | $ | 5,032,172 | $ | 1,001 | ||||||||||
| 12 | Illiquid investment as of May 31, 2014. |
| 13 | Payments made or received are based on the notional amount. |
| 14 | If the Fund is a buyer of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the referenced obligation or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation. |
| 15 | Payments from/to the counterparty will be received/made upon the occurrence of bankruptcy and/or restructuring event with respect to the referenced index/obligation. |
| 16 | If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index. |
| 17 | Credit spreads, represented in absolute terms, utilized in determining the market value as of period end serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default or other credit event occurring for the credit derivative. The credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement. A credit spread identified as “Defaulted” indicates a credit event has occurred for the referenced entity. |
| 18 | Payment is based on the performance of the underlying iBoxx GBP Corporates Total Return Index. |
Portfolio acronyms
22
Strategic Global Income Fund, Inc.
Portfolio of investments—May 31, 2014
(unaudited)
Counterparty abbreviations
Currency abbreviations
See accompanying notes to financial statements.
23
Strategic Global Income Fund, Inc.
Statement of assets and liabilities — May 31, 2014
(unaudited)
| Assets: |
||||
| Investments in securities of unaffiliated issuers, at value (cost—$187,160,315) |
$ | 188,279,712 | ||
| Investment in affiliated issuer, at value (cost—$5,032,172) |
5,032,172 | |||
| Total investments, at value (cost—$192,192,487) |
$ | 193,311,884 | ||
| Foreign currency, at value (cost—$463,375) |
466,064 | |||
| Cash |
3,556 | |||
| Interest receivable |
2,356,317 | |||
| Receivable for investments sold |
229,722 | |||
| Foreign tax reclaims receivable |
32,165 | |||
| Variation margin on centrally cleared swap agreements |
607,063 | |||
| Due from broker for future contracts |
400,229 | |||
| Cash collateral for futures contracts |
567,455 | |||
| Cash collateral for swap agreements |
292,255 | |||
| Outstanding swap agreements, at value1 |
6,201,199 | |||
| Unrealized appreciation on forward foreign currency contracts |
269,948 | |||
| Other assets |
16,461 | |||
| Total assets |
204,754,318 | |||
| Liabilities: |
||||
| Outstanding swap agreements, at value1 |
7,654,998 | |||
| Options written, at value (premiums received—$2,397,627) |
2,137,187 | |||
| Unrealized depreciation on forward foreign currency contracts |
584,591 | |||
| Payable for investment advisory and administration fees |
156,215 | |||
| Payable for custody and fund accounting fees |
68,531 | |||
| Variation margin on futures contracts |
116,251 | |||
| Directors’ fees payable |
3,838 | |||
| Accrued expenses and other liabilities |
102,919 | |||
| Total liabilities |
10,824,530 | |||
| Net assets:2 |
||||
| Capital stock—$0.001 par value; 100,000,000 shares authorized; 18,258,828 shares issued and outstanding |
$ | 199,836,721 | ||
| Distributions in excess of net investment income |
(2,770,762 | ) | ||
| Accumulated net realized loss |
(4,117,967 | ) | ||
| Net unrealized appreciation |
981,796 | |||
| Net assets |
$ | 193,929,788 | ||
| Net asset value per share |
$10.62 |
| 1 | Net upfront payments received by the Fund on outstanding swap agreements amounted to $993,624. |
| 2 | The actual sources of the Fund’s fiscal year 2014 dividends/distributions may be net investment income, net realized capital gains, return of capital or a combination of the foregoing and may be subject to retroactive recharacterization at the end of the Fund’s fiscal year based on tax regulations. Shareholders will be informed of the tax characteristics of dividends/distributions after the close of the 2014 fiscal year. |
See accompanying notes to financial statements.
24
Strategic Global Income Fund, Inc.
Statement of operations
| For the six months ended May 31, 2014 (unaudited) |
||||
| Investment income: |
||||
| Interest income, net of foreign withholding taxes of $58 |
$4,769,380 | |||
| Affiliated income |
1,001 | |||
| Total income |
4,770,381 | |||
| Expenses: |
||||
| Investment advisory and administration fees |
955,523 | |||
| Custody and accounting fees |
69,404 | |||
| Professional fees |
67,152 | |||
| Reports and notices to shareholders |
42,153 | |||
| Listing fees |
11,843 | |||
| Transfer agency fees |
8,951 | |||
| Directors’ fees |
8,350 | |||
| Insurance expense |
2,337 | |||
| Other expenses |
27,212 | |||
| Total expenses |
1,192,925 | |||
| Less: Fee waivers by investment advisor and administrator |
(47,777 | ) | ||
| Net expenses |
1,145,148 | |||
| Net investment income |
3,625,233 | |||
| Realized and unrealized gains (losses) from investment activities: |
||||
| Net realized gain (loss) on: |
||||
| Investments |
(2,808,936 | ) | ||
| Futures contracts |
21,592 | |||
| Options written |
1,471,574 | |||
| Swap agreements |
(1,142,386 | ) | ||
| Forward foreign currency contracts |
(1,720,069 | ) | ||
| Foreign currency transactions |
(76,706 | ) | ||
| Change in net unrealized appreciation/depreciation on: |
||||
| Investments |
6,828,936 | |||
| Futures contracts |
(342,141 | ) | ||
| Options written |
255,765 | |||
| Swap agreements |
1,986,695 | |||
| Forward foreign currency contracts |
1,320,641 | |||
| Translation of other assets and liabilities denominated in foreign currency |
72,544 | |||
| Net realized and unrealized gain from investment activities |
5,867,509 | |||
| Net increase in net assets resulting from operations |
$9,492,742 | |||
See accompanying notes to financial statements.
25
Strategic Global Income Fund, Inc.
Statement of changes in net assets
| For the six months |
For the year ended |
|||||||
| From operations: |
||||||||
| Net investment income |
$ | 3,625,233 | $ | 7,936,496 | ||||
| Net realized loss |
(4,254,931 | ) | (4,120,260 | ) | ||||
| Change in net unrealized appreciation/depreciation |
10,122,440 | (13,027,983 | ) | |||||
| Net increase (decrease) in net assets resulting from operations |
9,492,742 | (9,211,747 | ) | |||||
| Dividends and distributions to shareholders from: |
||||||||
| Net investment income |
(5,747,879 | )1 | (5,866,970 | ) | ||||
| Net realized gains |
— | (2,083,332 | ) | |||||
| Return of capital |
— | (6,262,369 | ) | |||||
| Total dividends and distributions to shareholders |
(5,747,879 | ) | (14,212,671 | ) | ||||
| Net increase (decrease) in net assets |
3,744,863 | (23,424,418 | ) | |||||
| Net assets: |
||||||||
| Beginning of period |
190,184,925 | 213,609,343 | ||||||
| End of period |
$ | 193,929,788 | $ | 190,184,925 | ||||
| Distributions in excess of net investment income |
$ | (2,770,762 | )1 | $ | (648,116 | ) | ||
| 1 | The actual sources of the Fund’s fiscal year 2014 dividends/distributions may be net investment income, net realized capital gains, return of capital or a combination of the foregoing and may be subject to retroactive recharacterization at the end of the Fund’s fiscal year based on tax regulations. Shareholders will be informed of the tax characteristics of dividends/distributions after the close of the 2014 fiscal year. |
See accompanying notes to financial statements.
26
Strategic Global Income Fund, Inc.
Financial highlights
Selected data for a share of common stock outstanding throughout each period is presented below:
| For the six months |
For the years ended November 30, | |||||||||||||||||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||||||||||||||||||
| Net asset value, beginning of period |
$ | 10.42 | $ | 11.70 | $ | 11.37 | $ | 12.12 | $ | 11.94 | $ | 9.34 | ||||||||||||
| Net investment income1 |
0.20 | 0.43 | 0.44 | 0.46 | 0.51 | 0.55 | ||||||||||||||||||
| Net realized and unrealized gains (losses) |
0.31 | (0.93 | ) | 0.86 | 0.56 | 0.55 | 2.83 | |||||||||||||||||
| Net increase (decrease) from operations |
0.51 | (0.50 | ) | 1.30 | 1.02 | 1.06 | 3.38 | |||||||||||||||||
| Dividends from net investment income |
(0.31 | )2 | (0.33 | ) | (0.46 | ) | (1.26 | ) | (0.84 | ) | (0.78 | ) | ||||||||||||
| Distributions from net realized gains |
— | (0.11 | ) | (0.51 | ) | (0.51 | ) | (0.04 | ) | — | ||||||||||||||
| Return of capital |
— | (0.34 | ) | — | — | — | — | |||||||||||||||||
| Total dividends, distributions and return of capital |
(0.31 | ) | (0.78 | ) | (0.97 | ) | (1.77 | ) | (0.88 | ) | (0.78 | ) | ||||||||||||
| Net asset value, end of period |
$ | 10.62 | $ | 10.42 | $ | 11.70 | $ | 11.37 | $ | 12.12 | $ | 11.94 | ||||||||||||
| Market price, end of period |
$ | 9.20 | $ | 8.90 | $ | 10.71 | $ | 10.52 | $ | 11.74 | $ | 10.63 | ||||||||||||
| Total net asset value return3 |
5.11 | % | (4.56 | )% | 12.13 | % | 8.93 | % | 9.23 | % | 37.82 | % | ||||||||||||
| Total market price return4 |
6.98 | % | (10.23 | )% | 11.42 | % | 4.54 | % | 19.42 | % | 53.96 | % | ||||||||||||
| Ratios to average net assets: |
||||||||||||||||||||||||
| Expenses before fee waivers |
1.25 | %5 | 1.24 | % | 1.22 | % | 1.22 | % | 1.23 | % | 1.25 | % | ||||||||||||
| Expenses after fee waivers |
1.20 | %5 | 1.19 | % | 1.17 | % | 1.17 | % | 1.18 | % | 1.23 | % | ||||||||||||
| Net investment income |
3.79 | %5 | 3.94 | % | 3.90 | % | 3.95 | % | 4.22 | % | 5.30 | % | ||||||||||||
| Supplemental data: |
||||||||||||||||||||||||
| Net assets, end of period (000’s) |
$ | 193,930 | $ | 190,185 | $ | 213,609 | $ | 207,562 | $ | 221,217 | $ | 218,009 | ||||||||||||
| Portfolio turnover rate |
22 | % | 78 | % | 182 | % | 121 | % | 59 | % | 128 | % | ||||||||||||
| 1 | Calculated using the average shares method. |
| 2 | The actual sources of the Fund’s fiscal year 2014 dividends/distributions may be net investment income, net realized capital gains, return of capital or a combination of the foregoing and may be subject to retroactive recharacterization at the end of the Fund’s fiscal year based on tax regulations. Shareholders will be informed of the tax characteristics of dividends/distributions after the close of the 2014 fiscal year. |
| 3 | Total net asset value return is calculated assuming a $10,000 purchase of common stock at the current net asset value on the first day of each period reported and a sale at the current net asset value on the last day of each period reported, and assuming reinvestment of dividends and other distributions at the net asset value on the payable dates. Total net asset value return does not reflect the deduction of taxes that a shareholder would pay on Fund dividends/distributions or a sale of Fund shares. Total return based on net asset value is hypothetical as investors cannot purchase or sell Fund shares at the net asset value but only at market prices. Total net asset value return for the period of less than one year has not been annualized. |
| 4 | Total market price return is calculated assuming a $10,000 purchase of common stock at the current market price on the first day of each period reported and a sale at the current market price on the last day of each period reported, and assuming reinvestment of dividends and other distributions at prices obtained under the Fund’s Dividend Reinvestment Plan. Total market price return does not reflect brokerage commissions or the deduction of taxes that a shareholder would pay on Fund dividends/distributions or a sale of Fund shares. Total market price return for the period of less than one year has not been annualized. |
| 5 | Annualized. |
See accompanying notes to financial statements.
27
Strategic Global Income Fund, Inc.
Notes to financial statements
(unaudited)
Organization and significant accounting policies
Strategic Global Income Fund, Inc. (the “Fund”) was incorporated in Maryland on November 15, 1991 and is registered with the US Securities and Exchange Commission (“SEC”) as a closed-end, non-diversified management investment company. The Fund’s primary investment objective is to achieve a high level of current income. As a secondary objective the Fund seeks capital appreciation, to the extent consistent with its primary objective.
In the normal course of business, the Fund enters into contracts that contain a variety of representations or that provide general indemnification for certain liabilities. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) is the exclusive reference of authoritative US generally accepted accounting principles (“US GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the SEC under authority of federal laws are also sources of authoritative US GAAP for SEC registrants. The Fund’s financial statements are prepared in accordance with US GAAP, which may require the use of management estimates and assumptions. Actual results could differ from those estimates. The following is a summary of significant accounting policies:
Valuation of investments
The Fund calculates its net asset value based on the current market value, where available, for its portfolio securities. The Fund normally obtains market values for its investments from independent pricing sources and broker-dealers. Independent pricing sources may use last reported sale prices, official market closing prices, current market quotations or valuations from computerized evaluation systems that derive values based on comparable investments. An evaluation system incorporates parameters such as security quality, maturity and coupon, and/or research and evaluations by its staff, including review of broker-dealer market price quotations, if available, in determining the valuation of the portfolio investments. Investments also may be valued based on appraisals derived from information concerning the investment or similar investments received from recognized dealers in those holdings. Investments traded in the over-the counter (“OTC”) market and listed on The NASDAQ Stock Market, Inc. (“NASDAQ”) normally are valued at the NASDAQ Official Closing Price. Other OTC securities are valued at the last bid price on the valuation date prior to valuation. Investments which are listed on US and foreign stock exchanges normally are valued at the market close, the last sale price on the day the securities are valued or, lacking any sales on such day, at the last available bid price. In cases where investments are traded on more than one exchange, the investments are valued on the exchange designated as the primary market by UBS Global Asset Management (Americas) Inc. (“UBS Global AM” or the “Advisor”), the investment advisor of the Fund. UBS Global AM is an indirect wholly owned asset management subsidiary of UBS AG, an internationally diversified organization with headquarters in Zurich and Basel, Switzerland and operations in many areas of the financial services industry. If a market value is not available from an independent pricing source for a particular investment, that investment is valued at fair value as determined in good faith by or under the direction of the Fund’s Board of Directors (the “Board”). Various factors may be reviewed in order to make a good faith determination of an investment’s fair value. These factors include, but are not limited to, fundamental analytical data relating to the investment; the nature and duration of restrictions on disposition of the investment; and the evaluation of forces which influence the market in which the investment is purchased and sold. Foreign currency exchange rates are generally determined as of the close of the New York Stock Exchange (“NYSE”).
Certain investments in which the Fund invests are traded in markets that close before 4:00 p.m., Eastern time. Normally, developments that occur between the close of the foreign markets and 4:00 p.m., Eastern time, will not be reflected in the Fund’s net asset value. However, if the Fund determines that such developments are so significant that they will materially affect the value of the Fund’s investments, the Fund may adjust the previous closing prices to reflect what the Board believes to be the fair value of these investments as of 4:00 p.m., Eastern time.
28
Strategic Global Income Fund, Inc.
Notes to financial statements
(unaudited)
The amortized cost method of valuation, which approximates market value, generally is used to value short-term debt instruments with sixty days or less remaining to maturity, unless the Board determines that this does not represent fair value. Investments in open-end investment companies are valued at the daily closing net asset value of the respective investment company. Pursuant to the Fund’s use of the practical expedient within ASC Topic 820, investments in non-registered investment companies are also valued at the daily net asset value. All investments quoted in foreign currencies are valued daily in US dollars on the basis of the foreign currency exchange rates prevailing at the time such valuation is determined by the Fund’s custodian and accounting agent.
Futures contracts are generally valued at the settlement price established each day on the exchange on which they are traded. Forward foreign currency contracts are valued daily using forward exchange rates quoted by independent pricing services.
Swaps are marked-to-market daily based upon values from third party vendors or quotations from market makers to the extent available, and the change in value, if any, is recorded as an unrealized gain or loss on the Statement of assets and liabilities. In the event that market quotations are not readily available or deemed unreliable, the swap is valued at fair value as determined in good faith by or under the direction of the Board (or a committee designated by it).
The Board has delegated to the UBS Global AM Global Valuation Committee (“GVC”) the responsibility for making fair value determinations with respect to the Fund’s portfolio holdings. The GVC is comprised of representatives of management, including members of the investment team.
The GVC provides reports to the Board at each quarterly meeting regarding any investments that have been fair valued, valued pursuant to standing instructions approved by the GVC, or where non-vendor pricing sources had been used to make fair value determinations when sufficient information exists during the prior quarter. Fair valuation determinations are subject to review at least monthly by the GVC during scheduled meetings. Pricing decisions, processes, and controls over fair value determinations are subject to internal and external reviews, including annual internal compliance reviews and periodic internal audit reviews of securities valuations.
The types of investments for which such fair value pricing may be necessary include, but are not limited to: foreign investments under some circumstances, as discussed below, securities of an issuer that has entered into a restructuring; investments whose trading has been halted or suspended; fixed income securities that are in default and for which there is no current market value quotation; and investments that are restricted as to transfer or resale. The need to fair value a Fund’s portfolio investments may also result from low trading volume in foreign markets or thinly traded domestic investments, and when a security that is subject to a trading limit or collar on the exchange or market on which it is primarily traded reaches the “limit up” or “limit down” price and no trading has taken place at that price. Various factors may be reviewed in order to make a good faith determination of an investment’s fair value. These factors include, but are not limited to, fundamental analytical data relating to the investment; the nature and duration of restrictions on disposition of the investments; and the evaluation of forces which influence the market in which the investments are purchased and sold. Valuing investments at fair value involves greater reliance on judgment than valuing investments that have readily available market quotations. Fair value determinations can also involve reliance on quantitative models employed by a fair value pricing service.
US GAAP requires disclosure regarding the various inputs that are used in determining the value of the Fund’s investments. These inputs are summarized into the three broad levels listed below:
Level 1—Unadjusted quoted prices in active markets for identical investments.
Level 2—Other significant observable inputs, including but not limited to, quoted prices for similar investments, interest rates, prepayment speeds and credit risk.
29
Strategic Global Income Fund, Inc.
Notes to financial statements
(unaudited)
Level 3—Unobservable inputs inclusive of the Fund’s own assumptions in determining the fair value of investments.
A fair value hierarchy has been included near the end of the Fund’s Portfolio of investments.
In January 2013, Accounting Standards Update 2013-01 (“ASU 2013-01”), “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities”, replaced Accounting Standards Update 2011-11 (“ASU 2011-11”), “Disclosures about Offsetting Assets and Liabilities”. ASU 2013-01 is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. ASU 2011-11 was intended to enhance disclosure requirements on the offsetting of financial assets and liabilities. ASU 2013-01 limits the scope of the new balance sheet offsetting disclosures to derivatives, repurchase and reverse repurchase agreements, and securities lending and borrowing transactions to the extent that they are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement.
| Derivative Financial Instruments: | Assets ($) | Liabilities ($) | ||||||
| Forward foreign currency contracts |
269,948 | (584,591 | ) | |||||
| Futures contracts |
13,865 | (130,268 | ) | |||||
| Options and swaptions purchased |
813,492 | — | ||||||
| Options and swaptions written |
— | (2,137,187 | ) | |||||
| Swap agreements |
6,700,989 | (7,654,998 | ) | |||||
| Total gross amount of derivative assets and liabilities in the Statement of Assets and Liabilities |
7,798,294 | (10,507,044 | ) | |||||
| Derivatives not subject to a master netting agreement or similar agreement (“MNA”) |
(1,314,205 | ) | 1,146,112 | |||||
| Total gross amount of assets and liabilities subject to MNA or similar agreements |
6,484,089 | (9,360,932 | ) | |||||
The following tables present the Fund’s derivative assets and liabilities by counterparty net of amounts available for offset under a MNA and net of the related collateral received/pledged by the Fund as of May 31, 2014.
| Counterparty | Gross Amount of Assets ($) |
Financial Instruments and Derivatives Available for Offset ($) |
Collateral Received ($)* |
Net Amount of Assets ($) |
||||||||||||
| BB |
835,922 | (835,922 | ) | — | — | |||||||||||
| CITI |
179,457 | (179,457 | ) | — | — | |||||||||||
| CSI |
1,826,721 | (1,592,145 | ) | (234,576 | ) | — | ||||||||||
| DB |
287,040 | (287,040 | ) | — | — | |||||||||||
| GSI |
46,726 | (46,726 | ) | — | — | |||||||||||
| JPMCB |
2,084,865 | (2,084,865 | ) | — | — | |||||||||||
| MLI |
1,088,818 | (1,088,818 | ) | — | — | |||||||||||
| MSCI |
134,540 | (134,540 | ) | — | — | |||||||||||
| Total |
6,484,089 | (6,249,513 | ) | (234,576 | ) | — | ||||||||||
30
Strategic Global Income Fund, Inc.
Notes to financial statements
(unaudited)
| Counterparty | Gross Amount of Liabilities ($) |
Financial Instruments and Derivatives Available for Offset ($) |
Collateral Pledged ($)* |
Net Amount of Liabilities ($) |
||||||||||||
| BB |
(1,061,074 | ) | 835,922 | 225,152 | — | |||||||||||
| CIBC |
(5,830 | ) | — | — | (5,830 | ) | ||||||||||
| CITI |
(970,427 | ) | 179,457 | 595,001 | (195,969 | ) | ||||||||||
| CSI |
(1,592,145 | ) | 1,592,145 | — | — | |||||||||||
| DB |
(787,099 | ) | 287,040 | 366,800 | (133,259 | ) | ||||||||||
| GSI |
(104,837 | ) | 46,726 | — | (58,111 | ) | ||||||||||
| JPMCB |
(2,177,398 | ) | 2,084,865 | 92,533 | — | |||||||||||
| MLI |
(1,389,914 | ) | 1,088,818 | 301,096 | — | |||||||||||
| MSCI |
(1,272,208 | ) | 134,540 | 1,137,668 | — | |||||||||||
| Total |
(9,360,932 | ) | 6,249,513 | 2,718,250 | (393,169 | ) | ||||||||||
| * | In some instances, the actual collateral received and/or pledged may be more than the amount shown. |
The provisions of ASC Topic 815 “Derivatives and Hedging” (“ASC Topic 815”) require qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk related contingent features in derivative agreements. Since investment companies value their derivatives at fair value and recognize changes in fair value through the Statement of operations, they do not qualify for hedge accounting under ASC Topic 815. Accordingly, even though the Fund’s investments in derivatives may represent economic hedges, they are considered to be non-hedge transactions for purposes of disclosure under ASC Topic 815. ASC Topic 815 requires that (1) objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation, (2) the fair values of derivative instruments and their gains and losses be disclosed in a tabular format, and (3) information be disclosed about credit-risk contingent features of derivatives contracts. Details of this disclosure can be found below as well as in the Portfolio of investments. Swap agreements, forward foreign currency contracts, swaptions and options written entered into by the Fund may contain credit-risk related contingent features that could be triggered subject to certain circumstances. Such circumstances include agreed upon net asset value thresholds. If triggered, the derivative counterparty could request additional cash margin and/or terminate the derivative contract. The aggregate fair value of the derivative contracts that are in a net liability position that contain these triggers can be found in the Portfolio of investments. The aggregate fair value of assets that are already posted as collateral as of May 31, 2014 is reflected in the Statement of assets and liabilities. If the applicable credit-risk related contingent features were triggered as of May 31, 2014, the Fund would be required to post additional collateral or may be required to terminate the contracts and settle any amounts outstanding. The volume of derivatives that is presented in the Portfolio of investments of the Fund is consistent with the derivative activity during the period ended May 31, 2014. The Fund may be a seller of protection through credit default swap agreements which are by nature credit-risk contingent (the terms of these agreements can be found within the Portfolio of investments, with further discussion in the Notes to financial statements).
31
Strategic Global Income Fund, Inc.
Notes to financial statements
(unaudited)
Disclosure of derivatives by underlying risk as of and for the period ended May 31, 2014 is as follows:
| Asset derivatives | ||||||||||||||||
| Interest rate risk |
Credit risk | Foreign exchange risk |
Total | |||||||||||||
| Forward foreign currency contracts1 |
$ | — | $ | — | $ | 269,948 | $ | 269,948 | ||||||||
| Futures contracts2 |
13,865 | — | — | 13,865 | ||||||||||||
| Options purchased1 |
813,492 | — | 0 | 813,492 | ||||||||||||
| Swap agreements1,2 |
5,186,959 | 669,128 | 844,902 | 6,700,989 | ||||||||||||
| Total value |
$ | 6,014,316 | $ | 669,128 | $ | 1,114,850 | $ | 7,798,294 | ||||||||
| 1 | Statement of assets and liabilities location: Options purchased are shown within investments in securities of unaffiliated issuers, at value, outstanding swap agreements, at value (except centrally cleared swaps) and unrealized appreciation on forward foreign currency contracts. |
| 2 | Includes cumulative appreciation of futures contracts and centrally cleared swaps as reported in the futures contracts and centrally cleared swaps tables in the Portfolio of investments, but only the unpaid variation margin, if any is reported within the Statement of assets and liabilities within Variation margin on futures contracts and centrally cleared swap agreements, respectively. |
| Liability derivatives | ||||||||||||||||
| Interest rate risk |
Credit risk | Foreign exchange risk |
Total | |||||||||||||
| Forward foreign currency contracts1 |
$ | — | $ | — | $ | (584,591 | ) | $ | (584,591 | ) | ||||||
| Futures contracts2 |
(130,268 | ) | — | — | (130,268 | ) | ||||||||||
| Options written1 |
(2,073,140 | ) | (64,046 | ) | (1 | ) | (2,137,187 | ) | ||||||||
| Swap agreements1 |
(6,451,729 | ) | (481,211 | ) | (722,058 | ) | (7,654,998 | ) | ||||||||
| Total value |
$ | (8,655,137 | ) | $ | (545,257 | ) | $ | (1,306,650 | ) | $ | (10,507,044 | ) | ||||
| 1 | Statement of assets and liabilities location: Options written, at value, outstanding swap agreements, at value and unrealized depreciation on forward foreign currency contracts. |
| 2 | Includes cumulative depreciation of futures contracts as reported in the futures contracts table in the Portfolio of investments, but only the unpaid variation margin is reported within the Statement of assets and liabilities within Variation margin on futures contracts. |
Activities in derivative instruments during the period ended May 31, 2014, were as follows:
| Interest rate risk |
Credit risk | Foreign exchange risk |
Total | |||||||||||||
| Net realized gain (loss)1 |
||||||||||||||||
| Forward foreign currency contracts |
$ | — | $ | — | $ | (1,720,069 | ) | $ | (1,720,069 | ) | ||||||
| Futures contracts |
21,592 | — | — | 21,592 | ||||||||||||
| Options purchased2 |
(1,434,437 | ) | — | (72,425 | ) | (1,506,862 | ) | |||||||||
| Options written |
390,344 | 1,049,500 | 31,730 | 1,471,574 | ||||||||||||
| Swap agreements |
(296,755 | ) | (494,073 | ) | (351,558 | ) | (1,142,386 | ) | ||||||||
| Total net realized gain (loss) |
$ | (1,319,256 | ) | $ | 555,427 | $ | (2,112,322 | ) | $ | (2,876,151 | ) | |||||
| Change in net unrealized appreciation/depreciation3 |
||||||||||||||||
| Forward foreign currency contracts |
$ | — | $ | — | $ | 1,320,641 | $ | 1,320,641 | ||||||||
| Futures contracts |
(342,141 | ) | — | — | (342,141 | ) | ||||||||||
| Options purchased2 |
(272,200 | ) | — | 26,317 | (245,883 | ) | ||||||||||
| Options written |
(105,922 | ) | 375,625 | (13,938 | ) | 255,765 | ||||||||||
| Swap agreements |
1,596,469 | 266,220 | 124,006 | 1,986,695 | ||||||||||||
| Total change in net unrealized appreciation/depreciation |
$ | 876,206 | $ | 641,845 | $ | 1,457,026 | $ | 2,975,077 | ||||||||
| 1 | Statement of operations location: Net realized gain (loss) on futures contracts, options written, swap agreements and forward foreign currency contracts. |
32
Strategic Global Income Fund, Inc.
Notes to financial statements
(unaudited)
| 2 | Realized and unrealized gain (loss) is included in net realized gain (loss) on investments and change in net unrealized appreciation/depreciation on investments. |
| 3 | Statement of operations location: Change in net unrealized appreciation/depreciation on futures contracts, options written, swap agreements and forward foreign currency contracts. |
Restricted securities
The Fund may invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expenses, and prompt sale at an acceptable price may be difficult. Restricted securities are identified, if any, in the Portfolio of investments and information regarding them is included in the Fund’s Portfolio of investments footnotes.
Investment transactions and investment income
Investment transactions are recorded on the trade date. Realized gains and losses from investment and foreign exchange transactions are calculated using the identified cost method. Interest income is recorded on an accrual basis. Discounts are accreted and premiums are amortized as adjustments to interest income and the identified cost of investments.
Foreign currency translation
The Fund uses the foreign currency exchange rates determined as of the close of regular trading on the NYSE. For purposes of calculating the US dollar equivalent value of a non-US dollar denominated obligation, foreign currency amounts are translated into US dollars on the following basis: (1) market value of investment securities and other assets and liabilities—at the exchange rates prevailing at the end of the Fund’s fiscal period; and (2) purchases and sales of investment securities and income and expenses—at the rates of exchange prevailing on the respective dates of such transactions.
Although the net assets and the market value of the Fund’s portfolio are presented at the foreign exchange rates at the end of the Fund’s fiscal period, the Fund does not generally isolate the effect of fluctuations in foreign exchange rates from the effect of the changes in market prices of securities. However, the Fund does isolate the effect of fluctuations in foreign exchange rates when determining the realized gain or loss upon the sale or maturity of foreign currency-denominated securities pursuant to US federal income tax regulations. Certain foreign exchange gains and losses included in realized and unrealized gains and losses are included in, or are a reduction of, ordinary income in accordance with US federal income tax regulations.
Forward foreign currency contracts
The Fund may enter into forward foreign currency contracts (“forward contracts”) in connection with planned purchases or sales of securities or to hedge the US dollar value of portfolio securities denominated in a particular currency. The Fund may also use forward contracts in an attempt to enhance income or gains.
The Fund has no specific limitation on the percentage of assets which may be committed to such contracts. The Fund may enter into forward contracts or maintain a net exposure to forward contracts only if (1) the consummation of the contracts would not obligate the Fund to deliver an amount of foreign currency in excess of the value of the position being hedged by such contracts or (2) the Fund identifies cash or liquid securities in an amount not less than the value of its assets committed to the consummation of the forward contracts and not covered as provided in (1) above, as marked-to-market daily.
Risks may arise upon entering into forward contracts from the potential inability of counterparties to meet the terms of their forward contracts and from unanticipated movements in the value of foreign currencies relative to the US dollar.
33
Strategic Global Income Fund, Inc.
Notes to financial statements
(unaudited)
Fluctuations in the value of forward contracts are recorded for book purposes as unrealized gains or losses by the Fund. Realized gains and losses include net gains and losses recognized by the Fund on contracts which have been sold or matured.
Futures contracts
The Fund may use financial futures contracts for hedging purposes and to adjust exposure to US and foreign fixed income markets in connection with a reallocation of the Fund’s assets or to manage the average duration of the Fund. The Fund may also use futures contracts in an attempt to enhance income or gains. However, imperfect correlations between futures contracts and the related securities or markets, or market disruptions, do not normally permit full control of these risks at all times. Using financial futures contracts involves various market risks, including interest rate risk. Risks of entering into futures contracts include the possibility that there may be an illiquid market or that a change in the value of the contract may not correlate with changes in the value of the underlying securities. To the extent that market prices move in an unexpected direction, there is a risk that the Fund will not achieve the anticipated benefits of the futures contract or may realize a loss.
Upon entering into a financial futures contract, the Fund is required to deliver to a broker an amount of cash and/or liquid securities equal to a certain percentage of the contract amount. This amount is known as the “initial margin.” Subsequent payments, known as “variation margin,” are made or received by the Fund each day, depending on the daily fluctuations in the value of the underlying futures contracts. Such variation margin is recorded for financial statement purposes on a daily basis as an unrealized gain or loss on futures until the futures contract is closed or expires, at which time the net gain or loss is reclassified to realized gain or loss on futures.
Swap agreements
The Fund may engage in swap agreements, including but not limited to interest rate, currency, total return, and credit default swap agreements. The Fund expects to enter into these transactions to preserve a return or spread on a particular investment or to hedge a portion of the portfolio’s duration, to protect against any increase in the price of securities the Fund anticipates purchasing at a later date, to gain exposure to certain markets in the most economical way possible or in an attempt to enhance income or gains.
The Fund may enter into interest rate swap agreements with another party to receive or pay interest (e.g., an exchange of fixed rate payments for floating rate payments) to protect itself from interest rate fluctuations. This type of swap is an agreement that obligates two parties to exchange a series of cash flows at specified intervals based upon or calculated by reference to a specified interest rate(s) for a specified amount. The payment flows are usually netted against each other, with the difference being paid by one party to the other. In addition, the Fund may enter into interest rate cap and floor transactions which involve an agreement between two parties in which one party agrees to make payments to the other when a designated market interest rate goes above (in the case of a cap) or below (in the case of a floor) a designated level on pre-determined dates or during a specified period. Interest rate swap agreements are subject to general market risk, liquidity risk, counterparty risk and interest rate risk.
The Fund may enter into currency swap agreements with another party to receive or pay amounts based on changes in currency exchange rates in order to protect itself from or take advantage of exchange rate fluctuations. The Fund utilizes currency swaps to earn income and enhance returns as well as to manage the risk profile of the Fund. This type of swap is an agreement that obligates two parties to exchange a series of cash flows at specified intervals based upon or calculated by reference to a specified currency exchange rate(s) for a specified amount. Currency swap agreements are subject to general market risk, liquidity risk, counterparty risk, foreign exchange risk and interest rate risk.
34
Strategic Global Income Fund, Inc.
Notes to financial statements
(unaudited)
Credit default swap agreements involve commitments to make or receive payments in the event of a default or other credit event of a referenced security. As a buyer, the Fund would make periodic payments to the counterparty, and the Fund would receive payments only upon the occurrence of a credit event. If no credit event occurs, the Fund will lose its periodic stream of payments over the term of the contract. However, if a credit event does occur, the Fund typically would receive full notional value for a reference obligation that may have little or no value. As a seller, the Fund would receive periodic payments from the counterparty, and the Fund would make payments only upon the occurrence of a credit event. If no credit event occurs, the Fund will retain the periodic stream of payments it received over the term of the contract. However, if a credit event occurs, the Fund will pay full notional value for a reference obligation that may have little or no value. Credit default swaps may involve greater risks than if the Fund had invested in the reference obligation directly and are subject to general market risk, liquidity risk, counterparty risk and credit risk.
Credit default swap agreements on corporate issues or sovereign issues of an emerging market country involve one party making a stream of payments to another party in exchange for the right to receive a specified return in the event of a default or other credit event. If a credit event occurs and cash settlement is not elected, a variety of other obligations may be delivered in lieu of the specific referenced obligation. The ability to deliver other obligations may result in delivery of a security with a value other than had been anticipated (such as a party’s right to choose the deliverable obligation with the lowest value following a credit event). The Fund may use credit default swaps on corporate issues or sovereign issues of an emerging market country to provide a measure of protection against defaults of the issuers (i.e., to reduce risk where the Fund owns or has exposure to the referenced obligation) or to take an active long or short position with respect to the likelihood of a particular issuer’s default.
The maximum potential amount of future payments (undiscounted) that the Fund as a seller of protection could be required to make under a credit default swap agreement would be an amount equal to the notional amount of the agreement. Notional amounts of all credit default swap agreements outstanding as of May 31, 2014 for which the Fund is the seller of protection are disclosed under the sections “Credit default swaps on corporate and sovereign issues—sell protection” and “Credit default swaps on credit indices—sell protection” in the Portfolio of investments. These potential amounts would be partially offset by any recovery values of the respective referenced obligations, upfront payments received upon entering into the agreement, or net amounts received from the settlement of buy protection credit default swap agreements entered into, if any, by the Fund for the same referenced entity or entities.
Total return swap agreements involve commitments to pay or receive interest in exchange for a market-linked return based on a notional amount. To the extent the total return of the security or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Fund will receive a payment from or make a payment to the counterparty, respectively. Total return swaps are marked-to-market daily, and the change, if any, is recorded as unrealized appreciation or depreciation. Total return swap agreements are subject to general market risk, liquidity risk, counterparty risk and the risk that there may be unfavorable changes in the underlying investments or instruments.
Certain clearinghouses currently offer clearing for limited types of derivatives transactions, such as interest and credit derivatives. In a cleared derivative transaction, a Fund typically enters into the transaction with a financial institution counterparty, and performance of the transaction is effectively guaranteed by a central clearinghouse, thereby reducing or eliminating the Fund’s exposure to the credit risk of its original counterparty. The Fund will be required to post specified levels of margin with the clearinghouse or at the instruction of the clearinghouse; the margin required by a clearinghouse may be greater than the margin the Fund would be required to post in an uncleared transaction. Only a limited number of transactions are currently eligible for clearing. Centrally cleared swaps, if any, are reported on the Statement of assets and liabilities based on variation margin received or paid, if any.
35
Strategic Global Income Fund, Inc.
Notes to financial statements
(unaudited)
The use of swap agreements involves investment techniques and risks different from those associated with ordinary portfolio security transactions. If UBS Global AM is incorrect in its forecast of market values, interest rates and other applicable factors, the investment performance of the Fund will be less favorable than it would have been if this investment technique was never used. Swap agreements do not involve the delivery of securities and are subject to counterparty risk. If the other party to a swap agreement defaults and fails to consummate the transaction, the Fund’s risk of loss will consist of the net amount of interest or other payments that the Fund is contractually entitled to receive. Therefore, the Fund would consider the creditworthiness of the counterparty to a swap agreement in evaluating potential credit risk.
The Fund accrues for interim payments on swap agreements on a daily basis, with the net amount recorded within outstanding swap agreements on the Statement of assets and liabilities. Once interim payments are settled in cash, the net amount is recorded as realized gain/loss on swap agreements, in addition to realized gain/loss recorded upon the termination of swap agreements on the Statement of operations. Fluctuations in the value of swap agreements are recorded for financial statement purposes as unrealized appreciation or depreciation on swap agreements.
Structured notes
The Fund may invest in structured notes whose values are based on the price movements of a referenced security or index. The value of these structured notes will rise and fall in response to changes in the referenced security or index. On the maturity date of each structured note, the Fund will receive a payment from a counterparty based on the value of the referenced security or index (notional amount multiplied by the price of the referenced security or index) and record a realized gain or loss.
Structured notes may present a greater degree of market risk than many types of securities and may be more volatile and less liquid than less complex securities. Structured notes are also subject to the risk that the issuer of the structured notes may fail to perform its contractual obligations.
Option writing
The Fund may write (sell) put and call options on foreign or US securities, indices, foreign currencies and interest rate swaps (commonly referred to as swaptions), in order to gain exposure to or protect against changes in the markets. When the Fund writes a call or a put option, an amount equal to the premium received by the Fund is included in the Fund’s Statement of assets and liabilities as an asset and as an equivalent liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written. If an option which the Fund has written either expires on its stipulated expiration date or the Fund enters into a closing purchase transaction, the Fund realizes a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security or derivative instrument, and the liability related to such option is extinguished. If a call option which the Fund has written is exercised, the Fund recognizes a realized gain or loss (long-term or short-term, depending on the holding period of the underlying security) from the sale of the underlying security or derivative instrument and the proceeds from the sale are increased by the premium originally received. If a put option which the Fund has written is exercised, the amount of the premium originally received reduces the cost of the security or derivative instrument which the Fund purchases upon exercise of the option.
In writing an option, the Fund bears the market risk of an unfavorable change in the price of the derivative instrument, security, index or currency underlying the written option. Exercise of an option written by the Fund could result in the Fund selling or buying a derivative instrument, security or currency at a price different from current market value.
36
Strategic Global Income Fund, Inc.
Notes to financial statements
(unaudited)
Purchased options
The Fund may purchase put and call options on foreign or US securities, indices, foreign currencies and interest rate swaps (commonly referred to as swaptions), as well as exchange listed call options on particular market segment indices to achieve temporary exposure to a specific security, currency, industry or geographic region. Purchasing call options tends to increase exposure to the underlying instrument. Purchasing put options tends to decrease exposure to the underlying instrument. The Fund pays a premium which is included in the Statement of assets and liabilities as an investment and subsequently marked-to-market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying futures, security or currency transaction to determine the realized gain or loss.
Dividends and distributions
Dividends and distributions to shareholders are recorded on the ex-distribution date. The amount of dividends from net investment income and distributions from net realized capital gains and/or return of capital are determined in accordance with income tax regulations, which may differ from US GAAP. These “book/tax” differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification.
Concentration of risk
Investing in securities of foreign issuers and currency transactions may involve certain considerations and risks not typically associated with investments in US securities. These risks include revaluation of currencies, adverse fluctuations in foreign currency values and possible adverse political, social and economic developments, including those particular to a specific industry, country or region, which could cause the securities and their markets to be less liquid and prices more volatile than those of comparable US companies and US government securities. These risks are greater with respect to securities of issuers located in emerging market countries in which the Fund invests. The ability of the issuers of debt securities held by the Fund to meet their obligations may be affected by economic and political developments particular to a specific industry, country, state or region.
Investment advisor and administrator and other transactions with related entities
The Fund’s Board has approved an investment advisory and administration contract (“Advisory Contract”) with UBS Global AM. In accordance with the Advisory Contract, the Fund pays UBS Global AM investment advisory and administration fees, which are accrued weekly and paid monthly, at the annual rate of 1.00% of the Fund’s average weekly net assets. UBS Global AM has agreed voluntarily to waive 0.05% of its fees through July 31, 2014, thereby reducing the fees to 0.95% for such period. At May 31, 2014, the Fund owed UBS Global AM $156,215 which is composed of $164,428 of investment advisory and administration fees less fees waived of $8,213. For the six months ended May 31, 2014, UBS Global AM waived $47,777 of investment advisory and administration fees from the Fund.
Effective August 1, 2014, the contractual fee rate under the Advisory Contract is being changed from 1.00% to 0.85% of the Fund’s average weekly net assets. Given the new, lower contractual fee rate, the voluntary year-to-year arrangements are now replaced by the ongoing contractual fee at the 0.85% rate.
Additional information regarding compensation to affiliate of a board member
Professor Meyer Feldberg serves as a senior advisor to Morgan Stanley, a financial services firm with which the Fund may conduct transactions, resulting in him being an interested director of the Fund. The Fund has been informed that Professor Feldberg’s role at Morgan Stanley does not involve matters directly affecting any UBS funds. Fund transactions are executed through Morgan Stanley based on that firm’s ability to provide best
37
Strategic Global Income Fund, Inc.
Notes to financial statements
(unaudited)
execution of the transactions. For the six months ended May 31, 2014, the Fund purchased and sold certain securities (e.g., fixed income securities) in principal trades with Morgan Stanley having an aggregate value of $11,111,783. Morgan Stanley received compensation in connection with these trades, which may have been in the form of a “mark-up” or “mark-down” of the price of the securities, a fee from the issuer for maintaining a commercial paper program, or some other form of compensation. Although the precise amount of this compensation is not generally known by UBS Global AM, UBS Global AM believes that under normal circumstances it represents a small portion of the total value of the transactions.
Securities lending
The Fund may lend securities up to 33 1⁄3% of its total assets to qualified broker-dealers or institutional investors. The loans are secured at all times by cash, cash equivalents or US government securities in an amount at least equal to 102% of the market value of the securities loaned with respect to domestic securities and 105% of the market value of the securities loaned with respect to foreign securities, plus accrued interest and dividends, determined on a daily basis and adjusted accordingly.
The Fund will regain ownership of loaned securities to exercise certain beneficial rights; however, the Fund may bear the risk of delay in recovery of, or even loss of rights in, the securities loaned should the borrower fail financially. The Fund receives compensation for lending its securities from interest or dividends earned on the cash, cash equivalents or US government securities held as collateral, net of fee rebates paid to the borrower plus reasonable administrative and custody fees. The Fund did not lend any securities during the six months ended May 31, 2014.
Capital stock
There are 100,000,000 shares of $0.001 par value common stock authorized and 18,258,828 shares outstanding at May 31, 2014. For the six months ended May 31, 2014 and for the year ended November 30, 2013, there were no transactions involving common stock.
Purchases and sales of securities
For the six months ended May 31, 2014, aggregate purchases and sales of portfolio securities, excluding short-term securities and US government and agency securities, were as follows: $40,898,011, and $40,980,751, respectively. For the same period, aggregate purchases and sales of US government and agency securities, excluding short-term securities, were as follows: $1,060,212, and $6,561,497, respectively.
Federal tax status
It is the Fund’s policy to comply with all requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. In addition, by distributing during each calendar year substantially all of its net investment income, net realized capital gains and certain other amounts, if any, the Fund intends not to be subject to a federal excise tax. Accordingly, no federal income tax provision was required.
The tax character of distributions paid during the year ended November 30, 2013 was as follows:
| Distributions paid from: | 2013 | |||
| Ordinary income |
$ | 4,832,639 | ||
| Return of capital |
6,262,369 | * | ||
| Net long-term capital gains |
3,117,663 | |||
| Total distributions paid |
$ | 14,212,671 | ||
| * | The return of capital is primarily due to tax treatment of foreign currency losses. |
38
Strategic Global Income Fund, Inc.
Notes to financial statements
(unaudited)
The tax character of distributions paid and components of accumulated earnings (deficit) on a tax basis for the current fiscal year will be determined after the Fund’s fiscal year ending November 30, 2014.
Under the Regulated Investment Company Modernization Act of 2010 (the “Act”), net capital losses recognized by the Fund after December 22, 2010 may be carried forward indefinitely, and retain their character as short-term and/or long-term losses. The Act requires that post-enactment net capital losses be used before pre-enactment net capital losses.
At November 30, 2013, the Fund had no pre-enactment capital loss carryforwards for federal income tax purposes available to offset future capital gains.
ASC 740-10 “Income Taxes—Overall” sets forth a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken. The Fund has conducted an analysis and concluded, as of May 31, 2014, that there are no significant uncertain tax positions taken or expected to be taken that would require recognition in the financial statements. It is the Fund’s policy to record any significant foreign tax exposures on the financial statements. The Fund recognizes interest and penalties, if any, related to uncertain tax positions as income tax expense in the Statement of operations. During the six months ended May 31, 2014, the Fund did not incur any interest or penalties. Capital gains realized by the Fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
Each of the tax years in the four year period ended November 30, 2013 remains subject to examination by the Internal Revenue Service and state taxing authorities.
39
Strategic Global Income Fund, Inc.
General information
(unaudited)
The Fund
Strategic Global Income Fund, Inc. (the “Fund”) is a non-diversified, closed-end management investment company whose shares trade on the New York Stock Exchange (“NYSE”). The Fund’s primary investment objective is to achieve a high level of current income. As a secondary objective, the Fund seeks capital appreciation, to the extent consistent with its primary objective. There can be no assurance that the Fund’s investment objective will be achieved. The Fund’s investment advisor and administrator is UBS Global Asset Management (Americas) Inc. (“UBS Global AM”).
Shareholder information
The Fund’s NYSE trading symbol is “SGL.” Net asset value and market price information as well as other information about the Fund is updated each business day on UBS’s web site at the following internet address: http://globalam-us.ubs.com/corpweb/closedendedfunds.do.
Shareholder meeting information
An annual meeting of shareholders of the Fund was held on March 13, 2014. At the meeting, the two nominees as Class I directors, namely Meyer Feldberg and Richard R. Burt, were elected to serve as board members for three year terms and until their successors are duly elected and qualified or until they retire, resign or are earlier removed. The shares were voted as indicated below:
| To vote for or withhold authority in the election of: | Shares voted for |
Shares withhold authority |
||||||
| Meyer Feldberg |
14,544,655.999 | 909,307.566 | ||||||
| Richard R. Burt |
14,604,521.732 | 849,441.833 | ||||||
The following persons’ terms of office as directors also continued after the annual meeting given that they are in other director classes: Bernard H. Garil, Heather R. Higgins, Richard Q. Armstrong and Alan Bernikow. In addition, David Malpass became a Class III director of the Fund on May 20, 2014. The Fund is not aware of any broker non-votes. (Broker non-votes are shares held in streetname for which the broker indicates that instructions have not been received from the beneficial owners or other persons entitled to vote and for which the broker does not have discretionary voting authority.)
Quarterly Form N-Q portfolio schedule
The Fund will file its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s Web site at http://www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the SEC’s Public Reference Room may be obtained by calling 1-800-SEC-3330. Additionally, you may obtain copies of Form N-Q from the Fund upon request by calling 1-888-793 8637.
Proxy voting policies, procedures and record
You may obtain a description of the Fund’s (1) proxy voting policies (2) proxy voting procedures, and (3) information regarding how the Fund voted any proxies related to portfolio securities during the most recent 12-month period ended June 30 for which an SEC filing has been made, without charge, upon request by contacting the Fund directly at 1-888-793 8637, online on UBS’s Web site: http://www.ubs.com/us/en/ asset_management/individual_investors/closed_end_funds.html or on the EDGAR Database on the SEC’s Web site (http://www.sec.gov).
40
Strategic Global Income Fund, Inc.
General information
(unaudited)
Dividend reinvestment plan
The Fund’s Board has established a Dividend Reinvestment Plan (the “Plan”) under which all shareholders whose shares are registered in their own names, or in the name of UBS Financial Services Inc. or its nominee, will have all dividends and other distributions on their shares of common stock automatically reinvested in additional shares, unless such shareholders elect to receive cash. Shareholders who elect to hold their shares in the name of another broker or nominee should contact such broker or nominee to determine whether, or how, they may participate in the Plan.
The ability of such shareholders to participate in the Plan may change if their shares are transferred into the name of another broker or nominee.
A shareholder may elect not to participate in the Plan or may terminate participation in the Plan at any time without penalty, and shareholders who have previously terminated participation in the Plan may rejoin it at any time. Changes in elections must be made in writing to the Fund’s transfer agent and should include the shareholder’s name and address as they appear on that share certificate or in the transfer agent’s records.
An election to terminate participation in the Plan, until such election is changed, will be deemed an election by a shareholder to take all subsequent distributions in cash. An election will be effective only for distributions declared and having a record date at least ten days after the date on which the election is received.
Additional shares of common stock acquired under the Plan will be purchased in the open market, on the NYSE or otherwise, at prices that may be higher or lower than the net asset value per share at the time of the purchase. Investors should consider whether continued participation in the dividend reinvestment plan is appropriate for them when the Fund’s market price exceeds its net asset value; a portion of a dividend/distribution may represent a return of capital, which would be reinvested in the Fund at a premium to net asset value. The number of shares of common stock purchased with each dividend/distribution will be equal to the result obtained by dividing the amount of the dividend/distribution payable to a particular shareholder by the average price per share (including applicable brokerage commissions) that the transfer agent was able to obtain in the open market. The Fund will not issue any new shares in connection with the Plan. There currently is no charge to participants for reinvesting dividends or other distributions. The transfer agent’s fees for handling the reinvestment of distributions are paid by the Fund. However, each participant pays a pro rata share of brokerage commissions incurred with respect to the transfer agent’s open market purchases of common stock in connection with the reinvestment of distributions. The automatic reinvestment of dividends and other distributions in shares of common stock does not relieve participants of any income tax that may be payable on such distributions.
Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund reserves the right to amend or terminate the Plan with respect to any dividend or other distribution if notice of the change is sent to Plan participants at least 30 days before the record date for such distribution. The Plan also may be amended or terminated by the transfer agent by at least 30 days’ written notice to all Plan participants. Additional information regarding the Plan may be obtained from, and all correspondence concerning the Plan should be directed to, the transfer agent at BNY Mellon Shareowner Services, P.O. Box 358035, Pittsburgh, PA 15252-8035. For further information regarding the Plan, you may also contact the transfer agent directly at 1-866-352 5528.
Distribution policy
The Fund’s Board adopted a managed distribution policy in May 1998, which was revised (1) effective January 2000, (2) in May 2005, (3) effective August 2009, (4) effective June 2011 and (5) effective June 2014. Pursuant to the policy as in effect from January 2000 through early May 2005, the Fund made regular monthly distributions at an annualized rate equal to 10% of the Fund’s net asset value, as determined as of the last trading day during the first week of that month (usually a Friday unless the NYSE is closed that Friday). The Board approved reducing the
41
Strategic Global Income Fund, Inc.
General information
(unaudited)
annualized rate for distribution pursuant to the policy from 10% to 8% effective beginning with the June 2005 monthly distribution. The Board approved a further reduction in the annualized rate for distributions pursuant to the policy from 8% to 7% in July 2009, effective beginning with the August 2009 monthly distribution. The Board again approved a further reduction in the annualized rate of distribution pursuant to the policy from 7% to 6% in May 2011, effective beginning with the June 2011 monthly distribution. Most recently, the Board approved a reduction in the annualized rate for distributions pursuant to the policy from 6% to 5% in May 2014, effective beginning with the June 2014 monthly distribution. From May 31, 1998 through January 2000, the Fund’s managed distribution was 8% of the Fund’s net asset value as determined as of the last trading day during the first week of the month. Prior to May 31, 1998, the Fund’s distributions varied based on the Fund’s net investment income and realized capital gains or losses.
Monthly distributions based on a fixed percentage of the Fund’s net asset value may require the Fund to make multiple distributions of long-term capital gains during a single fiscal year. The Fund has received exemptive relief from the Securities and Exchange Commission that enables it to do so. The Fund’s Board receives recommendations from UBS Global AM, the Fund’s investment advisor, periodically and no less frequently than annually will reassess the annualized percentage of net assets at which the Fund’s monthly distributions will be made.
The above information supplements that contained on the inside front cover of this report.
42
Directors
Principal Officers
Investment Advisor and Administrator
UBS Global Asset Management (Americas) Inc.
1285 Avenue of the Americas
New York, New York 10019-6028
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940 that from time to time the Fund may purchase shares of its common stock in the open market at market prices.
This report is sent to shareholders of the Fund for their information. It is not a prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or of any securities mentioned in this report.
The financial information included herein is taken from the records of the Fund without examination by independent registered public accountants who do not express an opinion thereon.
©UBS 2014. All rights reserved.
UBS Global Asset Management (Americas) Inc.
1285 Avenue of the Americas
New York, NY 10019-6028
Item 2. Code of Ethics.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual report.
Item 3. Audit Committee Financial Expert.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual report.
Item 4. Principal Accountant Fees and Services.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual report.
Item 5. Audit Committee of Listed Registrants.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual report.
Item 6. Investments.
| (a) | Included as part of the report to shareholders filed under Item 1 of this form. |
| (b) | Not applicable. |
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual report.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Form N-CSR disclosure requirement not applicable to this filing of a semi-annual report.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
There were no purchases made by or on behalf of the Registrant or any “affiliated purchaser,” as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended, of shares of the Registrant’s equity securities that are registered by the Registrant pursuant to Section 12 of the Exchange Act made in the period covered by this report.
Item 10. Submission of Matters to a Vote of Security Holders.
The registrant’s Board has established a Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee will consider nominees recommended by shareholders
if a vacancy occurs among those board members who are not “interested persons” as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended. In order to recommend a nominee, a shareholder should send a letter to the chairperson of the Nominating and Corporate Governance Committee, Richard R. Burt, care of the Secretary of the registrant at UBS Global Asset Management, UBS Building, One North Wacker Drive, Chicago, IL 60606, and indicate on the envelope “Nominating and Corporate Governance Committee.” The shareholder’s letter should state the nominee’s name and should include the nominee’s resume or curriculum vitae, and must be accompanied by a written consent of the individual to stand for election if nominated for the Board and to serve if elected by shareholders.
Item 11. Controls and Procedures.
| (a) | The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended) are effective based on their evaluation of these controls and procedures as of a date within 90 days of the filing date of this document. |
| (b) | The registrant’s principal executive officer and principal financial officer are aware of no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940, as amended) that occurred during the registrant’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
Item 12. Exhibits.
| (a) | (1) Code of Ethics - Form N-CSR disclosure requirement not applicable to this filing of a semi-annual report. |
| (a) | (2) Certifications of principal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto as Exhibit EX-99.CERT. |
| (a) | (3) Written solicitation to purchase securities under Rule 23c-1 under the Investment Company Act of 1940 sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons – The registrant has not engaged in such a solicitation during the period covered by this report. |
| (b) | Certifications of principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto as Exhibit EX-99.906CERT. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Strategic Global Income Fund, Inc.
| By: |
/s/ Mark E. Carver | |
| Mark E. Carver President | ||
| Date: |
August 8, 2014 | |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: |
/s/ Mark E. Carver | |
| Mark E. Carver President | ||
| Date: |
August 8, 2014 | |
| By: |
/s/ Thomas Disbrow | |
| Thomas Disbrow Vice President and Treasurer | ||
| Date: |
August 8, 2014 | |