NEW YORK--(BUSINESS WIRE)--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 market debt issuers.
Fund Commentary for the fourth quarter 2010 from UBS Global Asset Management (Americas) Inc. (“UBS Global AM”), the Fund’s investment advisor
Market Review
During the fourth quarter of 2010, US dollar-denominated emerging markets (EM) bonds posted a negative return; local markets (that is, debt denominated in the currency of the area where the bonds are issued), which fared slightly better, were also down.
Performance during the quarter was mainly driven by the global environment, specifically by renewed concerns surrounding the euro’s financial weakness in peripheral Europe. Increasing instability in Ireland and a potential spillover to Portugal and Spain were the main triggers for risk reduction and profit-taking after a year of strong double-digit returns in emerging markets bonds. Risk premiums in peripheral Europe jumped again, and joined the global trend of increasing yields. Supported by positive US economic data, the 10-year US Treasury bond yield increased from 2.5% to 3.3% during the fourth quarter.
Despite a robust macroeconomic picture, emerging markets currencies depreciated during the fourth quarter as the US dollar (“USD”) appreciated due to investors’ inflows and increasing risk aversion. Eastern European currencies, in particular, suffered the most during November due to renewed concerns about euro stability and further financing needs within the Eurozone.
Performance review
For the fourth quarter ended December 31, 2010, the Fund posted a net asset value total return of 0.16% and a market price total return of -3.85%. On a net asset value return basis, the Fund outperformed its benchmark, the Global High Income Fund Index1 (the “Index”), which returned -1.10% for the quarter.
Over the period, the Fund maintained an underweight to USD-denominated EM debt; however, the overall risk exposure was higher given its overweight allocation to high beta (high risk) countries versus the Index. These high beta countries (e.g., Venezuela, Argentina), as well as quasi-sovereign bonds2 in the Middle East, contributed positively. For local market investments, the Fund’s long duration position in Brazil continued adding to performance.
In November, the overweight in local currencies detracted from performance as increasing risk aversion led to a depreciation of EM currencies versus the USD. As markets calmed down towards December, currency exposure profited from increasing investor interest. Overweight positions in local currencies versus the Index added to the overall performance, specifically in high-carry (or high interest rate) currencies. The Fund’s overall risk exposure was higher than that of the benchmark, while local currencies added most to the total risk exposure. As of December 31, 2010, the Fund was nearly 69% invested in local currency emerging markets.
For US dollar-denominated bonds, as well as for local yields exposure, we still prefer high beta countries (e.g., Venezuela, Argentina) and high carry currencies (e.g., Brazilian real, Russian ruble, Indian rupee).
Outlook
We continue to have a positive long-term outlook for emerging market investments. Volatility may stay elevated in the near term due to market uncertainty and investor risk aversion. However, we also feel that demand for these securities has been supported by investors' search for higher yielding securities. Although USD bonds, in our view, seem relatively fair valued at current levels, an increase in investor demand could lead to another round of spread tightening. (Spread measures the difference between the yields paid on a security versus those paid on US Treasuries of comparable duration.) Despite an expected higher volatility, strong fundamental data, stable reserves, more solid fiscal situations, lower indebtedness and an attractive yield difference between emerging and developed markets should support the appreciation trend for emerging market currencies further.
Disclaimers Regarding Fund Commentary - The Fund Commentary is intended to assist shareholders in understanding how the Fund performed during the period noted. Views and opinions were current as of the date of this press release. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the Fund and UBS Global AM reserve the right to change views about individual securities, sectors and markets at any time. As a result, the views expressed should not be relied upon as a forecast of the Fund’s future investment intent.
Past performance does not predict future performance. The return and value of an investment will fluctuate so that an investor's shares, when sold, may be worth more or less than their original cost. Any Fund net asset value ("NAV") returns cited in a Fund Commentary assume, for illustration only, that dividends and other distributions, if any, were reinvested at the NAV on the payable dates. Any Fund market price returns cited in a Fund Commentary assume that all dividends and other distributions, if any, were reinvested at prices obtained under the Fund's Dividend Reinvestment Plan. Returns for periods of less than one year have not been annualized. Returns do not reflect the deduction of taxes that a shareholder would pay on Fund dividends and other distributions, if any, or on the sale of Fund shares.
1 Global High Income Fund Index is an unmanaged index compiled by the advisor, currently constructed as follows: 50% J.P. Morgan Emerging Markets Bond Index Global (EMBI Global) and 50% J.P. 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 Quasi-sovereign bonds are securities issued by entities supported by the local government.