Global High Income Fund Inc. – Fund Commentary and Portfolio Statistics
Global High Income Fund Inc. (the “Fund”) (NYSE:GHI) is a non-diversified, closed-end management investment company seeking high current income and, secondarily, capital appreciation through investments primarily in securities of emerging markets debt issuers.
Fund Commentary for the third quarter 2014 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment advisor
After generating strong results over the first eight months of the year, the emerging markets debt asset class fell sharply in September 2014. This turnaround was triggered by a number of factors, including increased investor risk aversion, rising US Treasury yields and signs of weak growth in many developed and emerging market countries. As measured by the J.P. Morgan Emerging Markets Bond Index Global (EMBI Global), US dollar-denominated debt declined 1.65% over the three months, whereas local currency emerging markets debt, as measured by the J.P. Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM Global Diversified), posted a -5.66% return during the same time period.
For the third quarter of 2014, the Fund posted a net asset value total return of -3.84%, and a market price total return of -5.21%. On a net asset value basis, the Fund modestly underperformed its benchmark, the Global High Income Fund Index (the “Index”)1, which returned -3.67% for the quarter.
Local currency exposure detracted the most from the Fund’s performance during the quarter. Most local currencies fell sharply versus the US dollar, as the US dollar appreciated versus almost all other currencies due to a stronger economic forecast in the United States. Expectations also increased that the US Federal Reserve Board (the Fed) would begin raising rates in 2015. In contrast, growth in many emerging market countries moderated. The Fund’s higher allocation to Brazilian local debt was not rewarded, as it added only marginally compared with other local bonds, although yields were relatively stable. Elsewhere, an overweight to US dollar-denominated debt from Venezuela detracted from performance. In particular, Venezuela generated weak results in September, as investors were concerned about the maturation of a large amount of debt in October that will require refinancing. Political and economic uncertainties also led to spread2 widening. The Fund maintained its overweight position in Venezuela, as we believed spread pressures should dissipate following the refinancing of the country’s debt.
The impact of having an overall slightly shorter portfolio duration than the Index was largely neutral for the Fund’s performance during the quarter. While this positioning detracted from performance in August, it was beneficial for results in September. Security selection in Brazilian local debt was additive for results during the quarter. Finally, an underweight to Ukraine was rewarded given weak investor sentiment in the country, its ongoing tensions with Russia and weak financial fundamentals.
Several changes were made to the portfolio during the quarter. We reduced the Fund’s local currency duration exposure, moving from a modest overweight to a neutral-to-short duration in most countries. The change in duration was a result of our belief that US Treasury yields were unsustainably low and would increase in the coming months. Elsewhere, we maintained the Fund’s overweight to select local currencies, but we somewhat pared this exposure during the quarter.
We have a neutral to slightly negative near-term outlook for the emerging markets debt asset class. Growth in many developing countries remains higher than in their developed country counterparts. However, economic expansion in many emerging markets countries remains fragile. This is due to a number of factors, including largely weak growth (and demand) from developing countries, weak commodity prices and uncertainties regarding growth in China. That said, inflation is generally well contained, which likely means that most emerging markets central banks will refrain from raising rates in the short-term. We currently see value in higher yielding spread issuers and some currencies, while we generally intend to avoid increased local currency denominated debt exposure and longer duration exposure.
Portfolio statistics as of September 30, 20143
Top ten countries (bond holdings only)4
|Percentage of net assets|
|Top ten currency exposures (includes all securities and other instruments)5||
Percentage of net assets
|United States Dollar||53.3%|
|South African Rand||3.0|
|Credit quality6||Percentage of net assets|
|CCC and Below||4.1|
|Cash and other assets, less liabilities||2.2|
|Net asset value per share7||$11.09|
|Market price per share7||$9.66|
|Weighted average maturity||8.20 yrs|
|1||Global High Income Fund Index is an unmanaged index compiled by the advisor, currently constructed as follows: 50% JP Morgan Emerging Markets Bond Index (EMBI Global) and 50% JP Morgan Government Bond Index-Emerging Markets Global Diversified (GBI-EM Global Diversified). Investors should note that indices do not reflect the deduction of fees and expenses.|
|2||“Spread” refers to differences between the yield paid on US Treasury bonds and other types of debt, such as corporate or emerging market bonds.|
|3||The Fund’s portfolio is actively managed, and its portfolio composition will vary over time.|
|4||Excludes exposures obtained via derivatives (e.g., swaps).|
|5||Forward foreign currency contracts are reflected at unrealized appreciation/depreciation; this may not align with the risk exposure described in the portfolio commentary section which reflects forward foreign currency contracts based on contract notional amount. As of the most recent period end, September 30, 2014, the Fund maintained a risk exposure to non-US dollar currencies equal to approximately 50% of the Fund.|
|6||Credit quality ratings shown in the table are based on those assigned by Standard & Poor’s Financial Services LLC, a part of McGraw-Hill Financial, (“S&P”), to individual portfolio holdings. S&P is an independent ratings agency. Rating reflected represents S&P individual debt issue credit rating. While S&P may provide a credit rating for a bond issuer (e.g., a specific company or country); certain issues, such as some sovereign debt, may not be covered or rated and therefore are reflected as non-rated for the purposes of this table. Credit ratings range from AAA, being the highest, to D, being the lowest, based on S&P’s measures; ratings of BBB or higher are considered to be investment grade quality. Unrated securities do not necessarily indicate low quality. Further information regarding S&P’s rating methodology may be found on its website at www.standardandpoors.com. Please note that references to credit quality made in the commentary preceding the table reflect ratings based on multiple providers (not just S&P) and thus may not align with the data represented in this table.|
|7||Net asset value (NAV) and market price will fluctuate.|
|8||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.|
Any performance information reflects the deduction of the Fund’s fees and expenses, as indicated in its shareholder reports, such as investment advisory and administration fees, custody fees, exchange listing fees, etc. It does not reflect any transaction charges that a shareholder may incur when (s)he buys or sells shares (e.g., a shareholder’s brokerage commissions).
Disclaimers Regarding Fund Commentary - The Fund Commentary is intended to assist shareholders in understanding how the Fund performed during the period noted. The views and opinions were current as of the date of this press release. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the Fund and UBS Global AM reserve the right to change views about individual securities, sectors and markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Fund’s future investment intent.
Past performance does not predict future performance. The return and value of an investment will fluctuate so that an investor’s shares, when sold, may be worth more or less than their original cost. Any Fund net asset value (“NAV”) returns cited in a Fund Commentary assume, for illustration only, that dividends and other distributions, if any, were reinvested at the NAV on the payable dates. Any Fund market price returns cited in a Fund Commentary assume that all dividends and other distributions, if any, were reinvested at prices obtained under the Fund’s Dividend Reinvestment Plan. Returns for periods of less than one year have not been annualized. Returns do not reflect the deduction of taxes that a shareholder would pay on Fund dividends and other distributions, if any, or on the sale of Fund shares.
Investing in the Fund entails specific risks, such as interest rate risk and the risks associated with investing in the securities of issuers 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. Investments in emerging market issuers may decline in value because of unfavorable government actions, greater risks of political instability or the absence of accurate information about emerging market issuers. 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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