Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
First Trust Preferred
Securities and Income Fund
Semi-Annual Report
For the Six Months Ended
April 30, 2013
STONEBRIDGE
Advisors LLC
TABLE OF CONTENTS
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
SEMI-ANNUAL REPORT
APRIL 30, 2013
Shareholder Letter .......................................................... 1
At A Glance ................................................................. 2
Portfolio Commentary ........................................................ 4
Understanding Your Fund Expenses ............................................ 6
Portfolio of Investments .................................................... 7
Statement of Assets and Liabilities ......................................... 13
Statement of Operations ..................................................... 14
Statements of Changes in Net Assets ......................................... 15
Financial Highlights ........................................................ 16
Notes to Financial Statements ............................................... 21
Additional Information ...................................................... 28
|
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Stonebridge Advisors LLC ("Stonebridge" or the
"Sub-Advisor") and their respective representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Preferred Securities and Income Fund (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and/or
Sub-Advisor and their respective representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of Fund shares
may therefore be less than what you paid for them. Accordingly, you can lose
money by investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of certain other risks of investing in the
Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns and net asset value will fluctuate and Fund shares, when sold, may be
worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Stonebridge are just that: informed opinions. They should not be considered to
be promises or advice. The opinions, like the statistics, cover the period
through the date on the cover of this report. The risks of investing in the Fund
are spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2013
Dear Shareholders:
I am pleased to present you with the semi-annual report for your investment in
First Trust Preferred Securities and Income Fund (the "Fund").
The report you hold contains detailed information about your investment, a
portfolio commentary from the Fund's management team that provides a recap of
the period, a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the period this report covers.
I encourage you to read this document and discuss it with your financial
advisor. A successful investor is also typically a knowledgeable one, as we have
found to be the case at First Trust Advisors L.P. ("First Trust").
The six months covered by this report have been more positive for the U.S.
markets. In fact, the S&P 500 Index, as measured on a total return basis, rose
14% during the period, and many economists and investors have felt positive
about the current market environment. Of course, past performance can never be
an indicator of future performance. As I have written many times, First Trust
believes that staying invested in quality products through up and down markets
and having a long-term horizon can help investors reach their financial goals.
As you know, First Trust offers a variety of products that we believe could fit
many financial plans to help investors seeking long-term investment success. We
encourage you to talk to your advisor about the other investments First Trust
offers that might also fit your financial goals and to discuss those goals with
your advisor regularly so that he or she can help keep you on track.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals. I look forward to
the remainder of 2013 and to the next edition of your Fund's report.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees and
Chief Executive Officer of First Trust Advisors L.P.
|
Page 1
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
"AT A GLANCE"
AS OF APRIL 30, 2013 (UNAUDITED)
-----------------------------------------------------------
FUND STATISTICS
-----------------------------------------------------------
FIRST TRUST PREFERRED SECURITIES NET ASSET
AND INCOME FUND VALUE (NAV)
-----------------------------------------------------------
Class A (FPEAX) $22.67
Class C (FPECX) $22.71
Class F (FPEFX) $22.85
Class I (FPEIX) $22.73
Class R3 (FPERX) $22.66
-----------------------------------------------------------
-----------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
-----------------------------------------------------------
Wachovia Capital Trust III 2.7%
SCE Trust I 2.1
Duke Energy Corp. 1.8
DTE Energy Co. 1.7
PNC Financial Services Group, Inc., Series P 1.6
JPMorgan Chase & Co., Series 1 1.6
Endurance Specialty Holdings Ltd., Series B 1.6
ING Groep N.V. 1.5
Kimco Realty Corp., Series K 1.5
NextEra Energy Capital Holdings, Inc., Series H 1.4
------
Total 17.5%
======
-----------------------------------------------------------
% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
-----------------------------------------------------------
Financials 78.3%
Utilities 14.4
Telecommunication Services 3.4
Industrials 2.3
Energy 1.1
Consumer Discretionary 0.5
------
Total 100.0%
======
-----------------------------------------------------------
% OF TOTAL
CREDIT QUALITY(1) INVESTMENTS
-----------------------------------------------------------
AA- 2.1%
A+ 0.5
A 4.3
A- 6.6
BBB+ 20.5
BBB 34.2
BBB- 19.4
BB+ 8.4
BB 3.3
NR 0.7
------
Total 100.0%
======
|
--------------------------------------------------------------------------------------------------------------------------
CLASS CLASS CLASS CLASS CLASS
DIVIDEND DISTRIBUTIONS A SHARES C SHARES F SHARES I SHARES R3 SHARES
--------------------------------------------------------------------------------------------------------------------------
Current Monthly Distribution per Share (2) $0.0929 $0.0789 $0.0947 $0.0975 $0.0882
Current Distribution Rate on NAV (3) 4.92% 4.17% 4.97% 5.15% 4.67%
|
(1) The credit quality and ratings information presented above reflects the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of the McGraw Hill Companies, Inc., Moody's Investors Service,
Inc. or a comparably rated NRSRO. For situations in which a security is
rated by more than one NRSRO and the ratings are not equivalent, the
highest ratings are used. See the prospectus or summary prospectus for
more complete descriptions of ratings and rating organizations.
Sub-investment grade ratings are those rated BB+/Ba1 or lower. Investment
grade ratings are those rated BBB-/Baa3 or higher. The credit ratings
shown relate to the credit worthiness of the issuer of the underlying
securities in the Fund and not the Fund or its shares. Credit ratings are
subject to change.
(2) Most recent distribution paid or declared through 4/30/2013. Subject to
change in the future.
(3) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
NAV as of 4/30/2013. Subject to change in the future.
NR Not Rated
Page 2
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
"AT A GLANCE" - (CONTINUED)
AS OF APRIL 30, 2013 (UNAUDITED)
PERFORMANCE OF A $10,000 INVESTMENT
This chart compares your Fund's Class I performance to that
of the Merrill Lynch Fixed Rate Preferred Stock Index from
1/11/2011 through 4/30/2013.
First Trust Preferred Merrill Lynch Fixed
Securities Income Fund - Rate Preferred
Class I Shares Stock Index ("P0P1")
1/11/2011 10,000 10,000
4/30/2011 10,393 10,454
10/31/11 10,521 10,521
4/30/12 11,475 11,155
10/31/12 12,398 11,861
4/30/13 12,931 12,287
|
-------------------------------------------------------------------------------------------------------------------------------
PERFORMANCE AS OF APRIL 30, 2013
-------------------------------------------------------------------------------------------------------------------------------
A SHARES C SHARES F SHARES I SHARES R3 SHARES P0P1*
Inception Inception Inception Inception Inception
2/25/2011 2/25/2011 3/2/2011 1/11/2011 3/2/2011
-------------------------------------------------------------------------------------------------------------------------------
W/MAX
1.00%
W/MAX CONTINGENT
W/O 4.50% W/O DEFERRED W/O W/O W/O W/O
SALES SALES SALES SALES SALES SALES SALES SALES
AVERAGE ANNUAL TOTAL RETURNS CHARGES CHARGE CHARGES CHARGE CHARGES CHARGES CHARGES CHARGES
6 Months 4.18% -0.50% 3.79% 2.79% 4.20% 4.30% 4.05% 3.72%
1 Year 12.55% 7.49% 11.65% 10.65% 12.56% 12.69% 12.07% 10.28%
Since Inception 11.49% 9.16% 10.73% 10.73% 11.82% 11.82% 10.98% 9.35%
30-Day SEC Yields(1) 3.92% 3.36% 4.20% 4.35% 3.87% N/A
-------------------------------------------------------------------------------------------------------------------------------
|
* Since inception return is based on the Class I shares inception date.
Performance figures assume reinvestment of all dividend distributions and do not
reflect the deduction of taxes that the shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would have
been lower if certain fees had not been waived and expenses reimbursed by the
Advisor. An index is a statistical composite that tracks a specific financial
market or sector. Unlike the Fund, the index does not actually hold a portfolio
of securities and therefore does not incur the expenses incurred by the Fund.
These expenses negatively impact the performance of the Fund. The Fund's past
performance does not predict future performance.
Performance of share classes will vary due to differences in sales charges and
expenses. Total return with sales charges includes payment of the maximum sales
charge of 4.50% for Class A Shares, a contingent deferred sales charge ("CDSC")
of 1.00% for Class C Shares in year one and 12b-1 service fees of 0.25% per year
of average daily net assets for Class A Shares and combined Rule 12b-1
distribution and service fees of 1.00% per year of average daily net assets for
Class C Shares. Class F, Class I and Class R3 Shares do not have a front-end
sales charge or a CDSC; therefore, performance is at net asset value. The Rule
12b-1 service fees are 0.15% of average daily net assets for Class F Shares and
combined Rule 12b-1 distribution and service fees are 0.50% of average daily net
assets for Class R3 Shares, while Class I Shares do not have these fees. Prior
to December 15, 2011, Class R3 Shares combined Rule 12b-1 distribution and
service fees were 0.75% of average daily net assets.
(1) 30-day SEC yield is calculated by dividing the net investment income per
share earned during the most recent 30-day period by the maximum offering
price per share on the last day of the period. The reported SEC yields are
subsidized. The subsidized yields reflect the fee waiver and/or
reimbursement of Fund expenses, which has the effect of lowering the
Fund's expense ratio and generating a higher yield.
Page 3
PORTFOLIO COMMENTARY
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
SEMI-ANNUAL REPORT
APRIL 30, 2013
STONEBRIDGE ADVISORS LLC
Stonebridge Advisors LLC ("Stonebridge" or the "Sub-Advisor") is the Sub-Advisor
to First Trust Preferred Securities and Income Fund (the "Fund") and is a
registered investment advisor based in Wilton, Connecticut. Stonebridge
specializes in the management of preferred securities and North American equity
income securities.
PORTFOLIO MANAGEMENT TEAM
SCOTT T. FLEMING, PRESIDENT AND CIO OF STONEBRIDGE ADVISORS LLC
Prior to founding Stonebridge in 2004, Mr. Fleming co-founded Spectrum Asset
Management, Inc. in 1999, an investment advisor that specializes in preferred
securities asset management for institutional clients and mutual funds. During
his 13-year tenure there, he served as Chairman of the Board of Directors, Chief
Financial Officer and Chief Investment Officer. Under his leadership, Spectrum
grew to be one of the largest preferred securities managers in the country. As
Chief Investment Officer at Spectrum, Mr. Fleming established and implemented
custom investment strategies for the firm's clients. In this capacity, he was
instrumental in growing assets under management to over $2 billion by
consistently outperforming stated benchmarks by solid margins. Mr. Fleming
previously served as Vice President and Portfolio Manager for DBL Preferred
Management, Inc. in New York City. There he managed over $300 million of
institutional assets with a strategy specializing in preferred securities. Mr.
Fleming received a BS in accounting from Bentley College in Waltham, MA and his
MBA in finance from Babson College in Wellesley, MA.
ALLEN SHEPARD, PHD, VICE PRESIDENT, SENIOR RISK ANALYST AND PORTFOLIO ANALYTICS
Dr. Shepard joined Stonebridge in 2004 and developed proprietary hedging models
for use in managing preferred and fixed-income securities. Prior to joining
Stonebridge, Dr. Shepard held positions as a Gibbs Instructor in the Mathematics
Department at Yale University and as an Assistant Professor of Mathematics at
Allegheny College. Dr. Shepard brings a strong academic background to
Stonebridge's analytical team. He received a BA in mathematics from Hampshire
College in 1980 and a PhD in mathematics from Brown University in 1985,
specializing in the field of algebraic topology. His subsequent research has
been in mathematical economics. Dr. Shepard collaborated extensively with
leading economists to create a new mathematical framework for modeling the
substitution effect in the Consumer Price Index. In addition, Dr. Shepard
partnered with economic colleagues to develop models of modern manufacturing
paradigms. In order to expand his background in applied mathematical
disciplines, Dr. Shepard returned to graduate school during 1995-1997, first in
the economics department at MIT and then in the PhD program in economics at
Boston University.
ROBERT WOLF, VICE PRESIDENT, PORTFOLIO MANAGER AND SENIOR CREDIT ANALYST
Mr. Wolf brings 14 years of fixed-income experience to Stonebridge. His primary
focus is in analyzing both investment-grade and non investment-grade securities,
where he has developed a rigorous approach to credit and industry analysis.
Prior to joining Stonebridge, Mr. Wolf was a high yield fixed-income research
analyst at Lehman Brothers. In this role, his responsibilities included detailed
credit analysis across multiple sectors, relative value analysis, and developing
trade recommendations for Lehman's High-Yield proprietary trading effort. Mr.
Wolf previously worked for Lehman Brothers Commercial Mortgage-Backed Securities
(CMBS) trading desk as a credit analyst where he provided in-depth analysis of
CMBS transactions and the underlying Commercial Real Estate. Mr. Wolf received
his BS degree in chemistry from Villanova University in 1999 and his MBA in
finance from the New York University Stern School of Business in 2004.
DANIELLE SALTERS, CFA, CREDIT ANALYST
Ms. Salters has five years of investment management experience of which four
years have been focused on fixed income. Previous functions have included
fundamental credit research, relative value analysis and trading. Prior to
beginning at Stonebridge, Ms. Salters was Portfolio Analyst at a boutique asset
manager where she focused on high-yield credit analysis and portfolio analytics
for a hedge fund and institutional client. Previously, Ms. Salters was employed
by UBS Financial Services, Inc., where she worked in Taxable Fixed Income Sales
and, later, served as the Fixed Income Specialist to a Portfolio Manager. Ms.
Salters received a BA in economics from Duke University in 2007 and is a CFA
charterholder.
COMMENTARY
MARKET RECAP
The preferred market had a good start to the year as many investors' appetites
for yield continued to be strong in the first quarter of 2013. Although
macroeconomic conditions remain tepid, quantitative easing by central banks
around the globe and relatively low yields in most other fixed-income products
have left preferred securities as an attractive investment in the fixed-income
category. With very little negative news in the U.S. market in the first
quarter, products further out in the risk spectrum performed the best.
Preferreds outperformed nearly all other fixed-income asset classes in first
quarter 2013 except
Page 4
PORTFOLIO COMMENTARY - (CONTINUED)
for high yield. The broader U.S. equity market was the best performer during the
quarter driven by the Federal Reserve's affirmation of its commitment to "QE3"
and signs of an improving housing market. Convertible bonds also performed very
well as they benefited from the gains in the equity markets. The long bond was
the clear loser during the quarter; however, recent events--including the
bailout of the banks in Cyprus and recent signs of global economic
slowdown--lead us to believe that this may be a temporary phenomenon.
PERFORMANCE ANALYSIS
The total return for the six-month period ending April 30, 2013, on the Fund's
Class I shares was 4.30% while the benchmark (Merrill Lynch Fixed Rate Preferred
Stock Index or "P0P1") return for the same period was 3.72%. We have repeatedly
stated the importance of security selection to our investment process and over
the last six months, this selection provided a reasonable advantage over the
benchmark.
MARKET AND FUND OUTLOOK
Given the strong demand by investors for higher yielding products like preferred
securities in the low interest rate environment, we think preferreds will
continue to offer good value relative to other fixed-income products. The yield
spread of the Fund's benchmark index (P0P1) over the 10-year Treasury is 450
basis points as of April 30, 2013, which is 140 basis points wider than the
historical average of 310 basis points(1). Prior to the credit crisis of August
2007, when many things such as correlations between preferreds and Treasuries
changed, the average spread since inception was even tighter at 240 basis
points. In addition, the spread of P0P1 to other credit products continues to be
attractive. Historically wide spreads, coupled with improved credit fundamentals
in the major sectors represented in the preferred universe, provides the
potential for further tightening in preferreds (or at least offers a cushion
against rising rates).
The biggest risks to our outlook for the preferred market continue to be
politically driven actions in Europe and the U.S., and an unexpected rise in
interest rates in the U.S. The Cyprus bank bailout was a perfect example of why
we remain cautious on European issuers. For the time being, European leaders
appear to be more supportive of a bailout of the weaker Eurozone members;
however, creditors and investors may now contribute to "paying" for the bailout
as they were forced to do in Cyprus.
Additionally, we are of the opinion that interest rates may move incrementally
higher in 2013, although not enough to have a material impact on the preferred
market. We expect any move higher to come at the long-end of the Treasury yield
curve as the Fed is expected to keep the short-end near zero, potentially into
2015. There are a number of factors that we expect will keep rates from moving
significantly higher. First, we believe that the "plow horse" economy we are
experiencing in the U.S. and challenging global economic conditions cannot
support rates materially higher than current rates. Second, there are risks to
the U.S. economy that could develop out of the sequestration and debt ceiling
negotiations. We are quickly approaching the end of the debt limit suspension in
May. If further gridlock occurs in Washington or spending cuts negatively impact
GDP, we could see a flight to quality that may drive investors back into
Treasuries, similar to what occurred in 2011. Finally, we believe that
significant increases in the 10-year Treasury would dampen the housing recovery
in the U.S. Mortgage rates need to stay low to continue supporting a recovery in
housing and the Fed is likely to intervene to keep the long-end in the current
range. In our view, if we do see a further increase in the long-end of the
Treasury curve, it is likely to result in spread compression before preferreds
begin to widen out.
As long as we continue in this low interest-rate environment, we anticipate new
issuance will remain strong for the remainder of 2013, especially in the $25 par
securities. Despite the announcement of significant redemptions (which at the
time of this writing have actually surpassed new issuance), we still think net
issuance could be positive for the year. We anticipate that once the rules for
acceptable forms of Tier 1 capital are finalized in Europe under Basel III and
CRD IV, European banks may increase their issuance of preferreds and replace
some of the higher-coupon securities outstanding in the market. U.S. banks will
also likely need to issue more preferreds to meet capital rules in the U.S.
1 Historical average is calculated from inception of P0P1 index on 1/1/1994
to 3/31/2013.
Page 5
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2013 (UNAUDITED)
As a shareholder of the First Trust Preferred Securities and Income Fund, you
incur two types of costs: (1) transaction costs, including sales charges (loads)
on purchases of Class A Shares and contingent deferred sales charges on the
lesser of purchase price or redemption proceeds of Class C Shares; and (2)
ongoing costs, including management fees; distribution and/or service (12b-1)
fees; and other Fund expenses. This Example is intended to help you understand
your ongoing costs (in U.S. dollars) of investing in the Fund and to compare
these costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended April 30, 2013.
ACTUAL EXPENSES
The first three columns of the table below provide information about actual
account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the third column under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during the
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The next three columns of the table below provide information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing cost of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or contingent deferred sales charges. Therefore, the
hypothetical section of the table is useful in comparing ongoing costs only, and
will not help you determine the relative total costs of owning different funds.
In addition, if these transactional costs were included, your costs would have
been higher.
--------------------------------------------------------------------------------------------------------
HYPOTHETICAL
ACTUAL EXPENSES (5% RETURN BEFORE EXPENSES)
--------------------------------------------- ------------------------------------------
BEGINNING ENDING EXPENSES PAID BEGINNING ENDING EXPENSES PAID
ACCOUNT ACCOUNT DURING PERIOD ACCOUNT ACCOUNT DURING PERIOD ANNUALIZED
VALUE VALUE 11/1/2012 - VALUE VALUE 11/1/2012 - EXPENSE
11/1/2012 4/30/2013 4/30/2013 (a) 11/1/2012 4/30/2013 4/30/2013 (a) RATIOS (b)
--------------------------------------------------------------------------------------------------------
Class A $ 1,000.00 $ 1,041.80 $ 7.09 $ 1,000.00 $ 1,017.85 $ 7.00 1.40%
Class C 1,000.00 1,037.90 10.86 1,000.00 1,014.13 10.74 2.15
Class F 1,000.00 1,042.00 6.58 1,000.00 1,018.35 6.51 1.30
Class I 1,000.00 1,043.00 5.83 1,000.00 1,019.09 5.76 1.15
Class R3 1,000.00 1,040.50 8.35 1,000.00 1,016.61 8.25 1.65
|
(a) Expenses are equal to the annualized expense ratios, multiplied by the
average account value over the period (November 1, 2012 through April 30,
2013, multiplied by 181/365 (to reflect the six-month period).
(b) These expense ratios reflect expense caps.
Page 6
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 2013 (UNAUDITED)
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
$25 PAR PREFERRED SECURITIES - 69.4%
CAPITAL MARKETS - 9.1%
40,000 Affiliated Managers Group, Inc................. 6.38% 08/15/42 $ 1,082,800
95,431 Apollo Investment Corp......................... 6.63% 10/15/42 2,429,673
21,795 Ares Capital Corp.............................. 7.75% 10/15/40 588,465
100,000 Bank of New York Mellon Corp................... 5.20% (a) 2,562,000
43,147 Charles Schwab Corp., Series B ................ 6.00% (a) 1,163,675
93,800 Deutsche Bank Capital Funding Trust VIII ...... 6.38% (a) 2,376,892
21,160 Goldman Sachs Group, Inc....................... 6.13% 11/01/60 566,876
18,529 Goldman Sachs Group, Inc....................... 6.50% 11/01/61 514,921
50,000 Goldman Sachs Group, Inc., Series J (b) ....... 5.50% (a) 1,289,575
128,000 Morgan Stanley Capital Trust III .............. 6.25% 03/01/33 3,251,200
110,100 Morgan Stanley, Series A (c) .................. 4.00% (a) 2,536,704
60,887 Raymond James Financial, Inc................... 6.90% 03/15/42 1,695,094
94,863 State Street Corp., Series C .................. 5.25% (a) 2,417,109
10,000 Stifel Financial Corp.......................... 6.70% 01/15/22 271,100
23,100 Stifel Financial Corp.......................... 5.38% 12/31/22 619,080
--------------
23,365,164
--------------
COMMERCIAL BANKS - 9.2%
55,000 Banco Santander S.A., Series 6 (c) ............ 4.00% (a) 1,207,250
100,299 Barclays Bank PLC, Series 2 ................... 6.63% (a) 2,553,613
59,982 BB&T Corp., Series E .......................... 5.63% (a) 1,544,536
75,700 BB&T Corp., Series F .......................... 5.20% (a) 1,901,584
23,424 First Republic Bank, Series A ................. 6.70% (a) 635,259
84,850 First Republic Bank, Series B ................. 6.20% (a) 2,270,586
78,900 HSBC USA, Inc., Series F (c) .................. 3.50% (a) 1,777,617
20,000 Lloyds Banking Group PLC ...................... 7.75% 07/15/50 557,600
132,500 PNC Financial Services Group, Inc.,
Series P (b) ............................... 6.13% (a) 3,802,750
79,200 Regions Financial Corp., Series A ............. 6.38% (a) 2,032,272
44,097 SunTrust Banks, Inc., Series E ................ 5.88% (a) 1,125,796
40,000 US Bancorp, Series F (b) ...................... 6.50% (a) 1,198,400
50,000 US Bancorp, Series G (b) ...................... 6.00% (a) 1,403,000
30,000 US Bancorp, Series H .......................... 5.15% (a) 749,400
27,500 Wells Fargo & Co., Series J ................... 8.00% (a) 845,625
--------------
23,605,288
--------------
CONSUMER FINANCE - 1.9%
89,000 Capital One Financial Corp., Series B ......... 6.00% (a) 2,324,680
68,500 Discover Financial Services, Series B ......... 6.50% (a) 1,817,990
25,000 HSBC Finance Corp., Series B .................. 6.36% (a) 635,750
--------------
4,778,420
--------------
DIVERSIFIED FINANCIAL SERVICES - 4.4%
55,432 Allied Capital Corp............................ 6.88% 04/15/47 1,412,407
51,747 Bank of America Corp., Series 5 (c) ........... 4.00% (a) 1,226,922
147,000 ING Groep N.V.................................. 6.38% (a) 3,719,100
58,000 ING Groep N.V.................................. 7.20% (a) 1,485,380
58,154 KKR Financial Holdings LLC .................... 8.38% 11/15/41 1,698,097
|
See Notes to Financial Statements Page 7
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
$25 PAR PREFERRED SECURITIES - (CONTINUED)
DIVERSIFIED FINANCIAL SERVICES - (CONTINUED)
17,000 KKR Financial Holdings LLC .................... 7.50% 03/20/42 $ 468,520
45,000 KKR Financial Holdings LLC, Series A .......... 7.38% (a) 1,192,500
--------------
11,202,926
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES - 1.6%
69,000 Qwest Corp..................................... 7.50% 09/15/51 1,889,220
85,634 Qwest Corp..................................... 7.00% 07/01/52 2,327,532
--------------
4,216,752
--------------
ELECTRIC UTILITIES - 9.7%
175,000 Duke Energy Corp............................... 5.13% 01/15/73 4,464,250
96,693 Entergy Louisiana LLC ......................... 5.25% 07/01/52 2,522,720
57,400 Entergy Mississippi, Inc....................... 6.00% 05/01/51 1,521,674
73,300 Interstate Power & Light Co., Series D ........ 5.10% (a) 1,871,349
74,400 NextEra Energy Capital Holdings, Inc........... 5.00% 01/15/73 1,844,376
125,445 NextEra Energy Capital Holdings, Inc.,
Series H ................................... 5.63% 06/15/72 3,284,150
65,000 NextEra Energy Capital Holdings, Inc.,
Series I ................................... 5.13% 11/15/72 1,644,500
96,000 PPL Capital Funding, Inc., Series B ........... 5.90% 04/30/73 2,519,040
190,404 SCE Trust I ................................... 5.63% (a) 5,093,307
--------------
24,765,366
--------------
INSURANCE - 14.4%
99,600 AEGON N.V...................................... 6.50% (a) 2,523,864
49,000 AEGON N.V., Series 1 (c) ...................... 4.00% (a) 1,216,670
49,195 Allianz SE .................................... 8.38% (a) 1,246,788
58,157 American Financial Group, Inc.................. 6.38% 06/12/42 1,568,494
12,929 American Financial Group, Inc.................. 7.00% 09/30/50 354,901
87,029 American International Group, Inc.,
Series A4 (b) .............................. 6.45% 06/15/77 2,220,110
110,500 Arch Capital Group Ltd., Series C ............. 6.75% (a) 3,049,800
25,000 Aspen Insurance Holdings Ltd. (b) ............. 5.95% (a) 637,500
61,147 Aspen Insurance Holdings Ltd................... 7.25% (a) 1,668,090
39,804 Aspen Insurance Holdings Ltd. (b) ............. 7.40% (a) 1,096,998
104,388 Aviva PLC ..................................... 8.25% 12/01/41 3,004,287
87,746 Axis Capital Holdings Ltd., Series C .......... 6.88% (a) 2,434,074
137,000 Endurance Specialty Holdings Ltd., Series B ... 7.50% (a) 3,775,720
80,400 MetLife, Inc., Series A (c) ................... 4.00% (a) 2,041,356
21,292 PartnerRe Ltd., Series E ...................... 7.25% (a) 607,887
24,325 PartnerRe Ltd., Series F ...................... 5.88% (a) 625,639
45,324 Protective Life Corp........................... 6.25% 05/15/42 1,191,115
45,546 Protective Life Corp........................... 6.00% 09/01/42 1,191,939
32,000 Prudential Financial, Inc...................... 5.75% 12/15/52 825,280
20,000 Prudential Financial, Inc...................... 5.70% 03/15/53 509,200
24,500 RenaissanceRe Holdings Ltd., Series C ......... 6.08% (a) 626,710
66,368 Selective Insurance Group ..................... 5.88% 02/09/43 1,696,532
|
Page 8 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
$25 PAR PREFERRED SECURITIES - (CONTINUED)
INSURANCE - (CONTINUED)
100,000 Torchmark Corp................................. 5.88% 12/15/52 $ 2,680,000
--------------
36,792,954
--------------
MACHINERY - 0.9%
87,050 Stanley Black & Decker, Inc.................... 5.75% 07/25/52 2,312,919
--------------
MEDIA - 0.5%
45,000 Comcast Corp................................... 5.00% 12/15/61 1,157,400
--------------
MULTI-UTILITIES - 2.8%
55,000 DTE Energy Co.................................. 6.50% 12/01/61 1,529,550
160,000 DTE Energy Co.................................. 5.25% 12/01/62 4,128,000
51,500 SCANA Corp..................................... 7.70% 01/30/65 1,403,890
--------------
7,061,440
--------------
REAL ESTATE INVESTMENT TRUSTS - 13.3%
111,556 CommonWealth REIT ............................. 5.75% 08/01/42 2,781,091
49,944 CommonWealth REIT, Series E ................... 7.25% (a) 1,268,078
37,000 Digital Realty Trust, Inc., Series E .......... 7.00% (a) 1,004,180
59,729 Digital Realty Trust, Inc., Series F .......... 6.63% (a) 1,572,664
24,558 Health Care REIT, Inc., Series J .............. 6.50% (a) 672,889
54,099 Hospitality Properties Trust, Series D ........ 7.13% (a) 1,455,263
140,000 Kimco Realty Corp., Series K .................. 5.63% (a) 3,609,200
81,700 National Retail Properties, Inc., Series D .... 6.63% (a) 2,218,972
80,000 PS Business Parks, Inc., Series T ............. 6.00% (a) 2,092,000
108,628 PS Business Parks, Inc., Series U ............. 5.75% (a) 2,762,410
25,000 Public Storage, Series T ...................... 5.75% (a) 648,750
68,642 Public Storage, Series V ...................... 5.38% (a) 1,756,549
100,081 Public Storage, Series W ...................... 5.20% (a) 2,535,052
40,100 Regency Centers Corp., Series 6 ............... 6.63% (a) 1,077,086
100,000 Senior Housing Properties Trust ............... 5.63% 08/01/42 2,550,000
61,000 Taubman Centers, Inc., Series J ............... 6.50% (a) 1,591,490
5,697 Taubman Centers, Inc., Series K ............... 6.25% (a) 146,698
100,000 Vornado Realty Trust, Series J ................ 6.88% (a) 2,783,000
28,103 Vornado Realty Trust, Series K ................ 5.70% (a) 727,025
30,000 Vornado Realty Trust, Series L ................ 5.40% (a) 747,300
--------------
33,999,697
--------------
WIRELESS TELECOMMUNICATION SERVICES - 1.6%
81,152 Telephone & Data Systems, Inc.................. 6.88% 11/15/59 2,162,701
34,180 Telephone & Data Systems, Inc.................. 5.88% 12/01/61 876,717
39,384 US Cellular Corp............................... 6.95% 05/15/60 1,048,796
--------------
4,088,214
--------------
TOTAL $25 PAR PREFERRED SECURITIES ......................................... 177,346,540
(Cost $170,243,172) --------------
$50 PAR PREFERRED SECURITIES - 0.5%
COMMERCIAL BANKS - 0.5%
20,000 CoBank ACB, Series D .......................... 11.00% (a) 1,112,500
|
See Notes to Financial Statements Page 9
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
STATED STATED
SHARES DESCRIPTION RATE MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
$50 PAR PREFERRED SECURITIES - (CONTINUED)
TOTAL $50 PAR PREFERRED SECURITIES ......................................... $ 1,112,500
(Cost $1,149,000) --------------
$100 PAR PREFERRED SECURITIES - 2.1%
COMMERCIAL BANKS - 1.1%
25,000 CoBank ACB (b) (d) ............................ 6.25% (a) 2,687,500
--------------
ELECTRIC UTILITIES - 0.4%
11,000 Southern California Edison Co. (c) ............ 4.32% (a) 1,111,000
--------------
INSURANCE - 0.6%
16,449 Principal Financial Group, Inc., Series A (b).. 5.56% (a) 1,657,237
--------------
TOTAL $100 PAR PREFERRED SECURITIES ........................................ 5,455,737
(Cost $5,399,944) --------------
PAR STATED STATED
AMOUNT DESCRIPTION RATE MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
CAPITAL PREFERRED SECURITIES - 23.2%
CAPITAL MARKETS - 2.7%
$ 1,500,000 Charles Schwab Corp. (b) ...................... 7.00% (a) 1,727,598
1,250,000 Goldman Sachs Capital I ....................... 6.35% 02/15/34 1,319,534
3,000,000 Goldman Sachs Capital II (c) .................. 4.00% 06/01/43 2,559,000
1,500,000 Goldman Sachs Capital III (c) ................. 4.00% (a) 1,268,250
--------------
6,874,382
--------------
COMMERCIAL BANKS - 6.0%
1,000,000 Banco Santander S.A., Series 11 (b) ........... 10.50% (a) 1,064,902
1,000,000 Fifth Third Capital Trust IV (b) .............. 6.50% 04/15/37 1,003,120
1,000,000 M&T Bank Corp. (d) ............................ 6.88% (a) 1,040,081
350,000 National Capital Trust II (b) (d) ............. 5.49% (a) 357,875
2,380,000 Northgroup Preferred Capital Corp. (b) (d) .... 6.38% (a) 2,439,500
3,000 US Bancorp, Series A (c) ...................... 3.50% (a) 2,749,875
6,561,000 Wachovia Capital Trust III (c) ................ 5.57% (a) 6,593,805
--------------
15,249,158
--------------
DIVERSIFIED FINANCIAL SERVICES - 5.2%
1,750,000 Citigroup, Inc. (b) ........................... 5.95% (a) 1,833,125
2,200,000 General Electric Capital Corp., Series A (b) .. 7.13% (a) 2,579,839
2,250,000 General Electric Capital Corp., Series B (b) .. 6.25% (a) 2,487,447
3,250,000 JPMorgan Chase & Co., Series 1 (b) ............ 7.90% (a) 3,789,113
1,500,000 ZFS Finance USA Trust II (b) (d) .............. 6.45% 12/15/65 1,627,500
1,000,000 ZFS Finance USA Trust V (b) (d) ............... 6.50% 05/09/37 1,075,000
--------------
13,392,024
--------------
ELECTRIC UTILITIES - 0.8%
1,000,000 Electricite de France SA (b) (d) .............. 5.25% (a) 1,007,773
1,000,000 PECO Energy Capital Trust IV .................. 5.75% 06/15/33 1,026,944
--------------
2,034,717
--------------
|
Page 10 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PAR STATED STATED
AMOUNT DESCRIPTION RATE MATURITY VALUE
------------- ----------------------------------------------- ---------- ------------- --------------
CAPITAL PREFERRED SECURITIES - (CONTINUED)
INDUSTRIAL CONGLOMERATES - 1.3%
$ 3,000,000 Hutchison Whampoa International 12
Ltd. (b) (d) ............................... 6.00% (a) $ 3,225,000
--------------
INSURANCE - 5.9%
1,000,000 Allstate Corp. (b) ............................ 6.50% 05/15/57 1,117,000
2,215,000 Assured Guaranty Municipal Holdings,
Inc. (b) (d) ............................... 6.40% 12/15/66 2,048,875
1,500,000 Assured Guaranty US Holdings, Series A (b) .... 6.40% 12/15/66 1,436,250
1,000,000 MetLife, Inc................................... 6.40% 12/15/36 1,116,505
2,000,000 Prudential Financial, Inc. (b) ................ 5.63% 06/15/43 2,105,000
2,000,000 QBE Capital Funding III Ltd. (b) (d) .......... 7.25% 05/24/41 2,122,500
2,153,000 Reinsurance Group of America, Inc. (b) ........ 6.75% 12/15/65 2,190,677
1,500,000 Swiss Re Capital I LP (b) (d) ................. 6.85% (a) 1,612,500
1,400,000 Wilton Re Finance LLC (b) (d) ................. 5.88% 03/30/33 1,439,606
--------------
15,188,913
--------------
OIL, GAS & CONSUMABLE FUELS - 1.1%
2,500,000 BG Energy Capital PLC (b) ..................... 6.50% 11/30/72 2,772,125
--------------
THRIFTS & MORTGAGE FINANCE - 0.2%
500,000 Abbey National Capital Trust I (b) ............ 8.96% (a) 595,000
--------------
TOTAL CAPITAL PREFERRED SECURITIES ......................................... 59,331,319
(Cost $57,021,877) --------------
TOTAL INVESTMENTS - 95.2% .................................................. 243,246,096
(Cost $233,813,993) (e)
NET OTHER ASSETS AND LIABILITIES - 4.8% .................................... 12,277,852
--------------
NET ASSETS - 100.0% ........................................................ $ 255,523,948
==============
|
(a) Perpetual maturity.
(b) Fixed-to-floating rate security. The interest rate shown reflects the
fixed rate in effect at April 30, 2013. At a predetermined date, the fixed
rate will change to a floating rate.
(c) Floating rate security. The interest rate shown reflects the rate in
effect at April 30, 2013.
(d) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Trust's Board of Trustees, this security has
been determined to be liquid by Stonebridge Advisors LLC, the Fund's
sub-advisor. Although market instability can result in periods of
increased overall market illiquidity, liquidity for each security is
determined based on security specific factors and assumptions, which
require subjective judgment. At April 30, 2013, securities noted as such
amounted to $20,683,710 or 8.09% of net assets.
(e) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2013, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $9,531,076 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $98,973.
See Notes to Financial Statements Page 11
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2013 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 4/30/2013 PRICES INPUTS INPUTS
--------------------------------------------------- ------------- ------------- ------------- -------------
$25 Par Preferred Securities*...................... $ 177,346,540 $ 177,346,540 $ -- $ --
$50 Par Preferred Securities*...................... 1,112,500 1,112,500 -- --
$100 Par Preferred Securities*..................... 5,455,737 5,455,737 -- --
Capital Preferred Securities
Commercial Banks................................ 15,249,158 2,749,875 12,499,283 --
Other Industry Categories*...................... 44,082,161 -- 44,082,161 --
------------- ------------- ------------- -------------
Total Investments.................................. $ 243,246,096 $ 186,664,652 $ 56,581,444 $ --
============= ============= ============= =============
|
* See the Portfolio of Investments for industry breakout.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. As of April
30, 2013, the Fund transferred a capital preferred security valued at $268,750
from Level 2 to Level 1 of the fair value hierarchy.
Page 12 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2013 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $233,813,993)......................................................................... $243,246,096
Cash........................................................................................... 16,461,844
Receivables:
Fund shares sold............................................................................ 1,765,533
Investment securities sold.................................................................. 1,267,364
Interest.................................................................................... 982,756
Dividends................................................................................... 291,295
Prepaid expenses............................................................................... 1,832
Other assets................................................................................... 45,206
------------
Total Assets................................................................................ 264,061,926
------------
LIABILITIES:
Payables:
Investment securities purchased............................................................. 7,790,852
Distributions payable....................................................................... 311,164
Investment advisory fees.................................................................... 140,253
Transfer agent fees......................................................................... 91,861
12b-1 distribution and service fees......................................................... 72,067
Shares repurchased.......................................................................... 50,680
Registration fees........................................................................... 31,373
Audit and tax fees.......................................................................... 19,899
Administrative fees......................................................................... 12,749
Custodian fees.............................................................................. 10,721
Trustees' fees and expenses................................................................. 2,373
Printing fees............................................................................... 1,960
Commitment fees............................................................................. 1,040
Financial reporting fees.................................................................... 732
Other liabilities.............................................................................. 254
------------
Total Liabilities........................................................................... 8,537,978
------------
NET ASSETS..................................................................................... $255,523,948
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $245,985,392
Par value ($0.01 per share with an unlimited number of shares authorized)...................... 112,560
Accumulated net investment income (loss)....................................................... (1,095,029)
Accumulated net realized gain (loss) on investments............................................ 1,088,922
Net unrealized appreciation (depreciation) on investments...................................... 9,432,103
------------
NET ASSETS..................................................................................... $255,523,948
============
MAXIMUM OFFERING PRICE PER SHARE:
CLASS A SHARES:
Net asset value and redemption price per share (Based on net assets of $120,443,416 and
5,311,902 shares of beneficial interest issued and outstanding)............................. $ 22.67
Maximum sales charge (4.50% of offering price).............................................. 1.07
------------
Maximum offering price to public............................................................ $ 23.74
============
CLASS C SHARES:
Net asset value and redemption price per share (Based on net assets of $59,446,594 and
2,617,979 shares of beneficial interest issued and outstanding)............................. $ 22.71
============
CLASS F SHARES:
Net asset value and redemption price per share (Based on net assets of $6,731,395 and
294,553 shares of beneficial interest issued and outstanding)............................... $ 22.85
============
CLASS I SHARES:
Net asset value and redemption price per share (Based on net assets of $68,301,853 and
3,005,060 shares of beneficial interest issued and outstanding)............................. $ 22.73
============
CLASS R3 SHARES:
Net asset value and redemption price per share (Based on net assets of $600,690 and
26,504 shares of beneficial interest issued and outstanding)................................ $ 22.66
============
|
See Notes to Financial Statements Page 13
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2013 (UNAUDITED)
INVESTMENT INCOME:
Dividends...................................................................................... $ 4,860,958
Interest....................................................................................... 1,098,873
------------
Total investment income..................................................................... 5,959,831
------------
EXPENSES:
Investment advisory fees....................................................................... 851,481
12b-1 distribution and/or service fees:
Class A..................................................................................... 127,363
Class C..................................................................................... 233,700
Class F..................................................................................... 3,958
Class R3.................................................................................... 1,499
Transfer agent fees............................................................................ 165,130
Registration fees.............................................................................. 137,780
Administrative fees............................................................................ 46,221
Printing fees.................................................................................. 25,161
Audit and tax fees............................................................................. 16,487
Custodian fees................................................................................. 16,030
Legal fees..................................................................................... 15,054
Trustees' fees and expenses.................................................................... 11,511
Financial reporting fees....................................................................... 4,587
Listing expense................................................................................ 1,177
Commitment fees................................................................................ 1,040
Other.......................................................................................... 3,669
------------
Total expenses.............................................................................. 1,661,848
------------
Fees waived or expenses reimbursed by the investment advisor................................ (71,297)
------------
Net expenses................................................................................... 1,590,551
------------
NET INVESTMENT INCOME (LOSS)................................................................... 4,369,280
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... 1,122,399
Net change in unrealized appreciation (depreciation) on investments......................... 3,829,056
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 4,951,455
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 9,320,735
============
|
Page 14 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2013 ENDED
(UNAUDITED) 10/31/2012
------------- -------------
OPERATIONS:
Net investment income (loss)............................................ $ 4,369,280 $ 2,496,381
Net realized gain (loss)................................................ 1,122,399 1,352,953
Net change in unrealized appreciation (depreciation).................... 3,829,056 5,556,277
------------- -------------
Net increase (decrease) in net assets resulting from operations......... 9,320,735 9,405,611
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares....................................................... (2,562,291) (1,855,501)
Class C Shares....................................................... (996,626) (627,182)
Class F Shares....................................................... (134,223) (62,233)
Class I Shares....................................................... (1,536,054) (576,586)
Class R3 Shares...................................................... (14,317) (12,915)
------------- -------------
(5,243,511) (3,134,417)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN:
Class A Shares....................................................... (428,841) (1,206)
Class C Shares....................................................... (190,619) (531)
Class F Shares....................................................... (20,850) (19)
Class I Shares....................................................... (259,747) (66)
Class R3 Shares...................................................... (2,749) (0) (a)
------------- -------------
(902,806) (1,822)
------------- -------------
Total distributions to shareholders..................................... (6,146,317) (3,136,239)
------------- -------------
CAPITAL TRANSACTIONS:
Proceeds from shares sold .............................................. 116,546,741 162,840,845
Proceeds from shares reinvested......................................... 4,233,117 2,192,407
Cost of shares redeemed................................................. (38,887,177) (10,938,691)
------------- -------------
Net increase (decrease) in net assets resulting from capital
transactions ........................................................ 81,892,681 154,094,561
------------- -------------
Total increase (decrease) in net assets................................. 85,067,099 160,363,933
NET ASSETS:
Beginning of period..................................................... 170,456,849 10,092,916
------------- -------------
End of period........................................................... $ 255,523,948 $ 170,456,849
============= =============
Accumulated net investment income (loss) at end of period............... $ (1,095,029) $ (220,798)
============= =============
|
(a) Amount is less than $1.
See Notes to Financial Statements Page 15
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR PERIOD
4/30/2013 ENDED ENDED
CLASS A SHARES (UNAUDITED) 10/31/2012 10/31/2011 (a)
------------ ------------ --------------
Net asset value, beginning of period............ $ 22.42 $ 20.10 $ 20.26
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................... 0.46 (b) 0.89 (b) 0.79
Net realized and unrealized gain (loss)......... 0.45 2.55 (0.11)
---------- ---------- ----------
Total from investment operations................ 0.91 3.44 0.68
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.56) (1.12) (0.84)
Net realized gain............................... (0.10) (0.00) (c) --
---------- ---------- ----------
Total distributions............................. (0.66) (1.12) (0.84)
---------- ---------- ----------
Net asset value, end of period.................. $ 22.67 $ 22.42 $ 20.10
========== ========== ==========
TOTAL RETURN (d)................................ 4.18% 17.60% 3.45%
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) ........... $ 120,443 $ 83,717 $ 6,932
Ratio of total expenses to average net assets... 1.43% (e) 1.83% 6.68% (e)
Ratio of net expenses to average net assets..... 1.40% (e) 1.40% 1.40% (e)
Ratio of net investment income (loss) to
average net assets........................... 4.20% (e) 4.13% 4.68% (e)
Portfolio turnover rate ........................ 21% 60% 88%
|
(a) Class A Shares commenced operations on February 25, 2011.
(b) Based on average shares outstanding.
(c) Amount is less than $0.01.
(d) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 4.50% or contingent
deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC
of 1% may be imposed on certain redemptions made within twelve months of
purchase. If the sales charges were included, total returns would be
lower. These returns include Rule 12b-1 service fees of 0.25% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(e) Annualized.
Page 16 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR PERIOD
4/30/2013 ENDED ENDED
CLASS C SHARES (UNAUDITED) 10/31/2012 10/31/2011 (a)
------------ ------------ --------------
Net asset value, beginning of period............ $ 22.45 $ 20.13 $ 20.26
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................... 0.38 (b) 0.73 (b) 0.69
Net realized and unrealized gain (loss)......... 0.45 2.55 (0.08)
---------- ---------- ----------
Total from investment operations................ 0.83 3.28 0.61
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.47) (0.96) (0.74)
Net realized gain............................... (0.10) (0.00) (c) --
---------- ---------- ----------
Total distributions............................. (0.57) (0.96) (0.74)
---------- ---------- ----------
Net asset value, end of period.................. $ 22.71 $ 22.45 $ 20.13
========== ========== ==========
TOTAL RETURN (d)................................ 3.79% 16.70% 3.08%
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 59,447 $ 36,681 $ 2,720
Ratio of total expenses to average net assets... 2.16% (e) 2.66% 8.03% (e)
Ratio of net expenses to average net assets..... 2.15% (e) 2.15% 2.15% (e)
Ratio of net investment income (loss) to
average net assets........................... 3.45% (e) 3.36% 4.10% (e)
Portfolio turnover rate......................... 21% 60% 88%
|
(a) Class C Shares commenced operations on February 25, 2011.
(b) Based on average shares outstanding.
(c) Amount is less than $0.01.
(d) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
return would be lower. These returns include combined Rule 12b-1
distribution and service fees of 1% and do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption
of Fund shares. The total returns would have been lower if certain fees
had not been waived and expenses reimbursed by the investment advisor.
Total return is calculated for the time period presented and is not
annualized for periods less than one year.
(e) Annualized.
See Notes to Financial Statements Page 17
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR PERIOD
4/30/2013 ENDED ENDED
CLASS F SHARES (UNAUDITED) 10/31/2012 10/31/2011 (a)
------------ ------------ --------------
Net asset value, beginning of period............ $ 22.59 $ 20.12 $ 20.25
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................... 0.48 (b) 0.89 (b) 0.70
Net realized and unrealized gain (loss)......... 0.45 2.72 (0.07)
---------- ---------- ----------
Total from investment operations................ 0.93 3.61 0.63
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.57) (1.14) (0.76)
Net realized gain............................... (0.10) (0.00) (c) --
---------- ---------- ----------
Total distributions............................. (0.67) (1.14) (0.76)
---------- ---------- ----------
Net asset value, end of period.................. $ 22.85 $ 22.59 $ 20.12
========== ========== ==========
TOTAL RETURN (d)................................ 4.20% 18.47% 3.17%
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 6,731 $ 4,012 $ 1
Ratio of total expenses to average net assets... 1.66% (e) 3.71% 233.60% (e)
Ratio of net expenses to average net assets..... 1.30% (e) 1.30% 1.30% (e)
Ratio of net investment income (loss) to
average net assets........................... 4.30% (e) 4.09% 5.21% (e)
Portfolio turnover rate......................... 21% 60% 88%
|
(a) Class F Shares were initially seeded and commenced operations on March 2,
2011.
(b) Based on average shares outstanding.
(c) Amount is less than $0.01.
(d) Assumes reinvestment of all distributions for the period. These returns
include Rule 12b-1 service fees of 0.15% and do not reflect the deduction
of taxes that a shareholder would pay on Fund distributions or the
redemption of Fund shares. The total returns would have been lower if
certain fees had not been waived and expenses reimbursed by the investment
advisor. Total return is calculated for the time period presented and is
not annualized for periods less than one year.
(e) Annualized.
Page 18 See Notes to Financial Statements
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR PERIOD
4/30/2013 ENDED ENDED
CLASS I SHARES (UNAUDITED) 10/31/2012 10/31/2011 (a)
------------ ------------ --------------
Net asset value, beginning of period............ $ 22.47 $ 20.15 $ 20.00
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................... 0.49 (b) 0.92 (b) 0.82
Net realized and unrealized gain (loss)......... 0.46 2.57 0.21
---------- ---------- ----------
Total from investment operations................ 0.95 3.49 1.03
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.59) (1.17) (0.88)
Net realized gain............................... (0.10) (0.00) (c) --
---------- ---------- ----------
Total distributions............................. (0.69) (1.17) (0.88)
---------- ---------- ----------
Net asset value, end of period.................. $ 22.73 $ 22.47 $ 20.15
========== ========== ==========
TOTAL RETURN (d)................................ 4.30% 17.84% 5.21%
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 68,302 $ 45,432 $ 439
Ratio of total expenses to average net assets... 1.26% (e) 1.46% 22.09% (e)
Ratio of net expenses to average net assets..... 1.15% (e) 1.15% 1.15% (e)
Ratio of net investment income (loss) to
average net assets........................... 4.44% (e) 4.20% 5.12% (e)
Portfolio turnover rate......................... 21% 60% 88%
|
(a) Class I Shares were initially seeded on December 16, 2010 and commenced
operations on January 11, 2011.
(b) Based on average shares outstanding.
(c) Amount is less than $0.01.
(d) Assumes reinvestment of all distributions for the period. These returns do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(e) Annualized.
See Notes to Financial Statements Page 19
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR PERIOD
4/30/2013 ENDED ENDED
CLASS R3 SHARES (UNAUDITED) 10/31/2012 10/31/2011 (a)
------------ ------------ --------------
Net asset value, beginning of period............ $ 22.41 $ 20.11 $ 20.25
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................... 0.44 (b) 0.80 (b) 0.61
Net realized and unrealized gain (loss)......... 0.44 2.56 (0.07)
---------- ---------- ----------
Total from investment operations................ 0.88 3.36 0.54
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.53) (1.06) (0.68)
Net realized gain............................... (0.10) (0.00) (c) --
---------- ---------- ----------
Total distributions............................. (0.63) (1.06) (0.68)
---------- ---------- ----------
Net asset value, end of period.................. $ 22.66 $ 22.41 $ 20.11
========== ========== ==========
TOTAL RETURN (d)................................ 4.05% 17.19% 2.74%
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 601 $ 615 $ 1
Ratio of total expenses to average net assets... 5.11% (e) 11.51% 301.79% (e)
Ratio of net expenses to average net assets..... 1.65% (e) 1.65% 1.90% (e)
Ratio of net investment income (loss) to
average net assets........................... 3.97% (e) 3.66% 4.62% (e)
Portfolio turnover rate......................... 21% 60% 88%
|
(a) Class R3 Shares were initially seeded and commenced operations on March 2,
2011.
(b) Based on average shares outstanding.
(c) Amount is less than $0.01.
(d) Assumes reinvestment of all distributions for the period. These returns
include combined Rule 12b-1 distribution and service fees of 0.50%
effective December 15, 2011, and 0.75% prior to December 15, 2011, and do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(e) Annualized.
Page 20 See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
APRIL 30, 2013 (UNAUDITED)
1. ORGANIZATION
First Trust Preferred Securities and Income Fund (the "Fund") is a series of
First Trust Series Fund (the "Trust"), a Massachusetts business trust organized
on July 9, 2010, and is registered as a non-diversified, open-end management
investment company with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund offers
five classes of shares: Class A, Class C, Class F, Class I and Class R3. Each
class represents an interest in the same portfolio of investments but with a
different combination of sales charges, distribution and service (12b-1) fees,
eligibility requirements and other features.
The Fund's investment objective is to seek to provide current income and total
return. The Fund seeks to achieve its objective by investing, under normal
market conditions, at least 80% of its net assets (including investment
borrowings, if any) in preferred securities and other securities with similar
economic characteristics. There can be no assurance that the Fund will achieve
its investment objective. The Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") for each class of shares of the Fund is determined
daily as of the close of trading on the New York Stock Exchange ("NYSE"),
normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If
the NYSE closes early on a valuation day, the NAV is determined as of that time.
Domestic debt securities and foreign securities are priced using data reflecting
the earlier closing at the principal markets for those securities. The NAV for
each class is calculated by dividing the value of the Fund's total assets
attributable to such class (including accrued interest and dividends), less all
liabilities attributable to such class (including accrued expenses, dividends
declared but unpaid and any borrowings of the Fund), by the total number of
shares of the class outstanding. Differences in NAV of each class of the Fund's
shares are generally expected to be due to the daily expense accruals of the
specified distribution and service (12b-1) fees and transfer agency costs
applicable to such class of shares and the resulting differential in the
dividends that may be paid on each class of shares.
The Fund's investments are valued daily in accordance with valuation procedures
adopted by the Trust's Board of Trustees, and in accordance with provisions of
the 1940 Act. The Fund's securities will be valued as follows:
Preferred stocks and other equity securities listed on any national or
foreign exchange (excluding the NASDAQ(R) National Market LLC ("NASDAQ")
and the London Stock Exchange Alternative Investment Market ("AIM")), are
valued at the last sale price on the exchange on which they are
principally traded or, for NASDAQ and AIM securities, the official closing
price. Securities traded on more than one securities exchange are valued
at the last sales price or official closing price, as applicable, at the
close of the securities exchange representing the principal market for
such securities.
Bonds, notes and other debt securities are valued on the basis of
valuations provided by dealers who make markets in such securities or by
an independent pricing service approved by the Trust's Board of Trustees,
which may use the following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Securities traded in an over-the-counter market are valued at their
closing bid prices.
Short-term investments that mature in less than 60 days when purchased are
valued at amortized cost.
All market quotations used in valuing the Fund's securities will be obtained
from a third party pricing service. If no quotation is received from a pricing
service, attempts will be made to obtain one or more broker quotes for the
security. In the event the pricing service does not provide a valuation, broker
quotations are not readily available, or the valuations received are deemed
unreliable, the Trust's Board of Trustees has designated First Trust Advisors
L.P. ("First Trust") to use a fair value method to value the Fund's securities.
Additionally, if events occur after the close of the principal markets for
certain securities (e.g., domestic debt and foreign securities) that could
materially
Page 21
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
APRIL 30, 2013 (UNAUDITED)
affect the Fund's NAV, First Trust will use a fair value method to value the
Fund's securities. The use of fair value pricing is governed by valuation
procedures adopted by the Trust's Board of Trustees, and in accordance with the
provisions of the 1940 Act. As a general principle, the fair value of a security
is the amount which the Fund might reasonably expect to receive for the security
upon its current sale. In light of the judgment involved in fair valuations,
there can be no assurance that a fair value assigned to a particular security
will be the amount which the Fund might be able to receive upon its current
sale. Fair valuation of a security will be based on the consideration of all
available information, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
If the securities in question are foreign securities, the following additional
information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2013, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded daily on the accrual basis, including the amortization of premiums and
accretion of discounts. Income is allocated on a pro rata basis to each class of
shares.
The Fund may hold the securities of real estate investment trusts ("REITs").
Distributions from such investments may include income, capital gains and return
of capital. The actual character of amounts received during the year is not
known until after the REITs' fiscal year end. The Fund records the character of
distributions received from the REITs during the year based on estimates
available. The characterization of distributions received by the Fund may be
subsequently revised based on information received from the REITs after their
tax reporting periods conclude.
Page 22
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
APRIL 30, 2013 (UNAUDITED)
C. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will declare daily and pay monthly distributions of all or a portion of
its net income to holders of each class of shares. Distributions of any net
capital gains earned by the Fund will be distributed at least annually.
Distributions will automatically be reinvested into additional Fund shares
unless cash distributions are elected by the shareholder.
Distributions from net investment income and realized capital gains are
determined in accordance with income tax regulations, which may differ from U.S.
GAAP. Certain capital accounts in the financial statements are periodically
adjusted for permanent differences in order to reflect their tax character.
These permanent differences are primarily due to the varying treatment of income
and gain/loss on portfolio securities held by the Fund and have no impact on net
assets or NAV per share. Temporary differences, which arise from recognizing
certain items of income, expense and gain/loss in different periods for
financial statement and tax purposes, will reverse at some time in the future.
The tax character of distributions paid during the fiscal year ended October 31,
2012 was as follows:
Distributions paid from:
Ordinary income.............................. $ 3,136,239
Capital gain................................. --
Return of capital............................ --
|
As of October 31, 2012, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income................ $ 790,754
Undistributed capital gains.................. 103,254
Total undistributed earnings................. 894,008
Accumulated capital and other losses......... --
Net unrealized appreciation (depreciation)... 5,562,809
------------
Total accumulated earnings (losses).......... 6,456,817
Other........................................ (205,239)
Paid-in capital.............................. 164,205,271
------------
Net assets................................... $170,456,849
============
|
D. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2012, the
Fund had no non-expiring capital loss carryforwards for federal income tax
purposes.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2012 and 2011
remain open to federal and state audit. As of April 30, 2013, management has
evaluated the application of these standards to the Fund, and has determined
that no provision for income tax is required in the Fund's financial statements
for uncertain tax positions.
E. EXPENSES:
The Fund pays all expenses directly related to its operations. Expenses of the
Fund are allocated on a pro rata basis to each class of shares, except for
distribution and service fees and incremental transfer agency costs which are
unique to each class of shares.
Page 23
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
APRIL 30, 2013 (UNAUDITED)
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
services, First Trust is entitled to a monthly fee calculated at an annual rate
of 0.80% of the Fund's average daily net assets. First Trust also provides fund
reporting services to the Fund for a flat annual fee in the amount of $9,250.
Stonebridge Advisors LLC ("Stonebridge" or the "Sub-Advisor"), an affiliate of
First Trust, serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a monthly
portfolio management fee calculated at an annual rate of 0.40% of average daily
net assets that is paid by First Trust out of its investment advisory fee.
First Trust and Stonebridge have agreed to waive fees and/or pay Fund expenses
to the extent necessary to prevent the annual operating expenses of the Fund
(excluding 12b-1 distribution and service fees, interest expenses, taxes, fees
incurred in acquiring and disposing of portfolio securities and extraordinary
expenses) from exceeding 1.15% of average daily net assets of any class of
Shares of the Fund (the "Expense Cap") until February 28, 2014, and then will
not exceed 1.50% from March 1, 2014, to February 28, 2023 (the "Expense Cap
Termination Date"). Expenses borne and fees waived by First Trust and
Stonebridge are subject to recovery by First Trust and Stonebridge up to three
years from the date the fee or expense was incurred, but no reimbursement
payment will be made by the Fund at any time if it would result in the Fund's
expenses exceeding its Expense Cap in place at the time the expense was borne or
the fee was waived by First Trust and Stonebridge. These amounts would be
included in "Expenses previously waived or reimbursed" on the Statement of
Operations. The advisory fee waivers and expense reimbursement for the six
months ended April 30, 2013, and the expenses borne by First Trust and
Stonebridge subject to recovery for the periods indicated were as follows:
EXPENSES SUBJECT TO RECOVERY
-----------------------------------------------------------------
PERIOD ENDED YEAR ENDED SIX MONTHS
ADVISORY FEE EXPENSE OCTOBER 31, OCTOBER 31, ENDED
WAIVER REIMBURSEMENT 2011 2012 APRIL 30, 2013 TOTAL
------------ -------------- -------------- -------------- -------------- --------------
$ 71,297 $ -- $ 219,802 $ 320,165 $ 71,297 $ 611,264
|
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's administrator, fund
accountant and custodian in accordance with certain fee arrangements. As
administrator and fund accountant, BBH is responsible for providing certain
administrative and accounting services to the Fund, including maintaining the
Fund's books of account, records of the Fund's securities transactions, and
certain other books and records. As custodian, BBH is responsible for custody of
the Fund's assets.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
transfer agent in accordance with certain fee arrangements. As transfer agent,
BNYM IS is responsible for maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer of $125,000 per year and an annual per fund fee of $4,000 for each
closed-end fund or other actively managed fund and $1,000 for each index fund in
the First Trust Fund Complex. The fixed annual retainer is allocated pro rata
among each fund in the First Trust Fund Complex based on net assets.
Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all mettings. The Lead Independent Trustee and each Committee
Chairman will serve two-year terms until December 31, 2013, before rotating to
serve as Chairman of another Committee or as Lead Independent Trustee. After
December 31, 2013, the Lead Independent Trustee and Committee Chairmen will
rotate every three years. The officers and "Interested" Trustee receive no
compensation from the funds for acting in such capacities.
Page 24
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
APRIL 30, 2013 (UNAUDITED)
4. CAPITAL SHARE TRANSACTIONS
Capital transactions were as follows:
SIX MONTHS YEAR
ENDED APRIL 30, 2013 ENDED OCTOBER 31, 2012
SHARES VALUE SHARES VALUE
---------- ------------ ---------- ------------
Sales:
Class A 2,128,409 $ 47,556,308 3,662,445 $ 78,869,660
Class C 1,006,424 22,544,208 1,508,203 32,727,231
Class F 126,658 2,852,275 187,052 4,091,877
Class I 1,945,666 43,593,950 2,114,019 46,568,361
Class R3 -- -- 27,416 583,716
---------- ------------ ---------- ------------
Total Sales: 5,207,157 $116,546,741 7,499,135 $162,840,845
========== ============ ========== ============
Dividend Reinvestment:
Class A 87,481 $ 1,953,178 57,516 $ 1,249,277
Class C 35,110 784,825 20,318 441,847
Class F 3,408 76,606 1,325 29,423
Class I 63,397 1,418,508 21,260 471,860
Class R3 -- -- -- --
---------- ------------ ---------- ------------
Total Dividend Reinvestment: 189,396 $ 4,233,117 100,419 $ 2,192,407
========== ============ ========== ============
Redemptions
Class A (638,657) $(14,277,630) (330,167) $ (7,059,899)
Class C (57,407) (1,289,284) (29,817) (649,623)
Class F (13,117) (295,290) (10,822) (236,497)
Class I (1,025,822) (23,003,440) (135,225) (2,992,672)
Class R3 (961) (21,533) -- --
---------- ------------ ---------- ------------
Total Redemptions: (1,735,964) $(38,887,177) (506,031) $(10,938,691)
========== ============ ========== ============
|
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities, other than short-term
investments, for the six months ended April 30, 2013, were $117,799,078 and
$42,530,265, respectively.
6. BORROWINGS
Effective March 28, 2013, the Trust and the First Trust Variable Insurance Trust
entered into a $20 million Committed Line of Credit ("Line of Credit") with the
Bank of Nova Scotia ("Scotia") to be a liquidity backstop during periods of high
redemption volume. A commitment fee of 0.125% of the daily amount of the excess
of the commitment amount over the outstanding principal balance of the loans
will be charged by Scotia, which First Trust will allocate amongst the funds
that have access to the Line of Credit. To the extent that the Fund accesses the
Line of Credit, there would also be an interest fee charged.
7. DISTRIBUTION AND SERVICE PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the share
classes of the Fund are authorized to pay an amount up to 0.25%, 1.00%, 0.15%
and 0.50% of their average daily net assets each year for Class A, Class C,
Class F and Class R3, respectively, to reimburse and compensate First Trust
Portfolios L.P. ("FTP"), the distributor of the Fund, for amounts expended to
finance activities primarily intended to result in the sale of Fund shares or
the provision of investor services. FTP may also use this amount to compensate
securities dealers or other persons for providing distribution assistance,
including broker-dealer and shareholder support and educational and promotional
services.
Page 25
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
APRIL 30, 2013 (UNAUDITED)
8. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
9. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
MARKET RISK: Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in stock
prices. Overall stock values could decline generally or could underperform other
investments. Companies with smaller market capitalizations are generally subject
to additional market risk.
INTEREST RATE RISK: If interest rates rise, the prices of fixed-rate preferred
securities and other fixed-rate debt securities held by the Fund will fall.
PREFERRED SECURITIES RISK: Preferred securities combine some of the
characteristics of both common stocks and bonds. Preferred securities are
typically subordinated to bonds and other debt instruments in a company's
capital structure, in terms of priority to corporate income, and therefore will
be subject to greater credit risk than those debt instruments. Preferred
securities are also subject to credit risk, interest rate risk and income risk.
CONCENTRATION RISK: A fund concentrated in a single industry or sector is likely
to present more risks than a fund that is broadly diversified over several
industries or sectors. Compared to the broad market, an individual industry or
sector may be more strongly affected by changes in the economic climate, broad
market shifts, moves in a particular dominant stock, or regulatory changes.
CREDIT RISK: Credit risk is the risk that an issuer of a security may be unable
or unwilling to make dividend, interest and principal payments when due and the
related risk that the value of a security may decline because of concerns about
the issuer's ability or willingness to make such payments. In addition, parties
to other financial contracts with the Fund could default on their obligations.
CURRENCY RISK: Although the Fund's net asset value is determined on the basis of
U.S. dollars, because the Fund invests in foreign securities, you may lose money
if the local currency of a foreign market depreciates against the U.S. dollar,
even if the local currency value of the Fund's holdings goes up.
DEPOSITARY RECEIPTS RISK: Depositary receipts may be less liquid than the
underlying shares in their primary trading market. Any distributions paid to the
holders of depositary receipts are usually subject to a fee charged by the
depositary. Holders of depositary receipts may have limited voting rights, and
investment restrictions in certain countries may adversely impact the value of
depositary receipts because such restrictions may limit the ability to convert
equity shares into depositary receipts and vice versa. Such restrictions may
cause equity shares of the underlying issuer to trade at a discount or premium
to the market price of the depositary receipts.
FINANCIAL COMPANY RISK: The Fund invests in the securities of financial
companies, which may include banks, thrifts, brokerage firms, broker-dealers,
investment banks, finance companies, REITs and companies involved in the
insurance industry. Banks, thrifts and their holding companies are especially
subject to the adverse effects of economic recession; government regulation;
decreases in the availability of capital; volatile interest rates; portfolio
concentrations in geographic markets and in commercial and residential real
estate loans; and competition from new entrants in their fields of business.
ILLIQUID SECURITIES RISK: Illiquid securities involve the risk that the
securities will not be able to be sold at the time desired by the Fund or at
prices approximately the value at which the Fund is carrying the securities on
its books.
INCOME RISK: If interest rates fall, the income from the Fund's portfolio will
decline as the Fund invests the proceeds from new share sales, or from matured
or called debt securities, at interest rates that are below the portfolio's
current earnings rate.
NON-DIVERSIFICATION RISK: The Fund is classified as "non-diversified" under the
1940 Act. As a result, the Fund is only limited as to the percentage of its
assets which may be invested in the securities of any one issuer by the
diversification requirements imposed by the Code. The Fund may invest a
relatively high percentage of its assets in a limited number of issuers. As a
result, the Fund may be more susceptible to a single adverse economic or
regulatory occurrence affecting one or more of these issuers, experience
increased volatility and be highly concentrated in certain issuers.
Page 26
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
APRIL 30, 2013 (UNAUDITED)
REIT RISK: Investing in REITs involves risks related to their structure and
focus, which include, but are not limited to, dependency upon management skills,
limited diversification, the risks of locating and managing financing for
projects, heavy cash flow dependency, possible default by borrowers, the costs
and potential losses of self-liquidation of one or more holdings, the risk of a
possible lack of mortgage funds and associated interest rate risks,
overbuilding, property vacancies, increases in property taxes and operating
expenses, changes in zoning laws, losses due to environmental damages, changes
in neighborhood values and appeal to purchases, the possibility of failing to
maintain exemptions from registration under the 1940 Act and, in many cases,
relatively small market capitalization, which may result in less market
liquidity and greater price volatility. Fund shareholders indirectly pay REIT
fees and expenses.
NON U.S. SECURITIES RISK: The Fund may invest in securities of non U.S. issuers.
Such securities are subject to higher volatility than securities of domestic
issuers due to possible adverse political, social or economic developments;
restrictions on foreign investment or exchange of securities; lack of liquidity;
currency exchange rates; excessive taxation; government seizure of assets;
different legal or accounting standards; and less government supervision and
regulation of exchanges in foreign countries.
10. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued and has determined that there were
no subsequent events to report.
Page 27
ADDITIONAL INFORMATION
FIRST TRUST PREFERRED SECURITIES AND INCOME FUND
APRIL 30, 2013 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
Page 28
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Stonebridge Advisors, LLC
187 Danbury Road
Wilton, CT 06897
ADMINISTRATOR,
FUND ACCOUNTANT &
CUSTODIAN
Brown Brothers Harriman & Co.
50 Milk Street
Boston, MA 02109
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
First Trust/Confluence
Small Cap Value Fund
Semi-Annual Report
For the Six Months Ended
April 30, 2013
CONFLUENCE
INVESTMENT MANAGEMENT
TABLE OF CONTENTS
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
SEMI-ANNUAL REPORT
APRIL 30, 2013
Shareholder Letter .......................................................... 1
At A Glance ................................................................. 2
Portfolio Commentary ........................................................ 4
Understanding Your Fund Expenses ............................................ 7
Portfolio of Investments .................................................... 8
Statement of Assets and Liabilities ......................................... 10
Statement of Operations ..................................................... 11
Statements of Changes in Net Assets ......................................... 12
Financial Highlights ........................................................ 13
Notes to Financial Statements ............................................... 17
Additional Information ...................................................... 23
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
|
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Confluence Investment Management LLC
("Confluence" or the "Sub-Advisor") and their respective representatives, taking
into account the information currently available to them. Forward-looking
statements include all statements that do not relate solely to current or
historical fact. For example, forward-looking statements include the use of
words such as "anticipate," "estimate," "intend," "expect," "believe," "plan,"
"may," "should," "would" or other words that convey uncertainty of future events
or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust/Confluence Small Cap Value Fund (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and/or
Sub-Advisor and their respective representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objective. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of Fund shares
may therefore be less than what you paid for them. Accordingly, you can lose
money by investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of certain other risks of investing in the
Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns and net asset value will fluctuate and Fund shares, when sold, may be
worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Confluence are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2013
Dear Shareholders:
I am pleased to present you with the semi-annual report for your investment in
First Trust/Confluence Small Cap Value Fund (the "Fund").
The report you hold contains detailed information about your investment, a
portfolio commentary from the Fund's management team that provides a recap of
the period, a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the period this report covers.
I encourage you to read this document and discuss it with your financial
advisor. A successful investor is also typically a knowledgeable one, as we have
found to be the case at First Trust Advisors L.P. ("First Trust").
The six months covered by this report have been more positive for the U.S.
markets. In fact, the S&P 500 Index, as measured on a total return basis, rose
14% during the period, and many economists and investors have felt positive
about the current market environment. Of course, past performance can never be
an indicator of future performance. As I have written many times, First Trust
believes that staying invested in quality products through up and down markets
and having a long-term horizon can help investors reach their financial goals.
As you know, First Trust offers a variety of products that we believe could fit
many financial plans to help investors seeking long-term investment success. We
encourage you to talk to your advisor about the other investments First Trust
offers that might also fit your financial goals and to discuss those goals with
your advisor regularly so that he or she can help keep you on track.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals. I look forward to
the remainder of 2013 and to the next edition of your Fund's report.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees and
Chief Executive Officer of First Trust Advisors L.P.
|
Page 1
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
"AT A GLANCE"
AS OF APRIL 30, 2013 (UNAUDITED)
----------------------------------------------------------
FUND STATISTICS
----------------------------------------------------------
NET ASSET
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND VALUE (NAV)
----------------------------------------------------------
Class A (FOVAX) $23.72
Class C (FOVCX) $22.69
Class I (FOVIX) $23.96
Class R3 (FOVRX) $23.11
----------------------------------------------------------
----------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
----------------------------------------------------------
Deckers Outdoor Corp. 3.8%
VCA Antech, Inc. 3.6
PennantPark Investment Corp. 3.6
EnPro Industries, Inc. 3.4
Zebra Technologies Corp., Class A 3.4
C&J Energy Services, Inc. 3.4
Rayonier, Inc. 3.4
GrafTech International Ltd. 3.3
Forward Air Corp. 3.3
Mueller Industries, Inc. 3.3
----------------------------------------------------------
Total 34.5%
======
----------------------------------------------------------
% OF TOTAL
SECTOR ALLOCATION INVESTMENTS
----------------------------------------------------------
Industrials 36.1%
Financials 23.7
Health Care 16.2
Consumer Discretionary 8.4
Information Technology 6.7
Energy 3.4
Consumer Staples 2.9
Materials 2.6
----------------------------------------------------------
Total 100.0%
======
|
Page 2
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
"AT A GLANCE" - (CONTINUED)
AS OF APRIL 30, 2013 (UNAUDITED)
PERFORMANCE OF A $10,000 INVESTMENT
This chart compares your Fund's Class I performance to
that of the Russell 2000(R) Value Index and the Russell
2000(R) Index from 1/11/2011 through 4/30/2013.
First Trust/Confluence Small Cap Russell 2000(R) Value Russell 2000(R)
Value Fund - Class I Shares Index (R2000V) Index (R2000)
1/11/2011 10,000 10,000 10,000
4/30/2011 10,730 10,716 10,923
10/31/2011 9,790 9,261 9,457
4/30/12 10,554 10,323 10,499
10/31/12 10,951 10,601 10,599
4/30/2013 12,260 12,309 12,307
|
--------------------------------------------------------------------------------------------------------------------------
PERFORMANCE AS OF APRIL 30, 2013
--------------------------------------------------------------------------------------------------------------------------
A SHARES C SHARES I SHARES R3 SHARES
Inception 2/24/2011 Inception 3/2/2011 Inception 1/11/2011 Inception 3/2/2011 R2000V* R2000*
--------------------------------------------------------------------------------------------------------------------------
W/MAX
1.00%
W/MAX CONTINGENT
W/O 5.50% W/O DEFERRED W/O W/O W/O W/O
SALES SALES SALES SALES SALES SALES SALES SALES
CHARGES CHARGE CHARGES CHARGE CHARGES CHARGES CHARGES CHARGES
AVERAGE ANNUAL
TOTAL RETURNS
6 Months 11.79% 5.64% 11.28% 10.28% 11.95% 11.43% 16.58% 16.58%
1 Year 15.65% 9.29% 15.02% 14.02% 16.16% 15.32% 19.71% 17.69%
Since Inception 8.80% 6.02% 6.24% 6.24% 9.25% 7.37% 9.45% 9.46%
--------------------------------------------------------------------------------------------------------------------------
|
*Since inception return is based on the Class I shares inception date.
Performance figures assume reinvestment of all dividend distributions and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would have
been lower if certain fees had not been waived and expenses reimbursed by the
Advisor. An index is a statistical composite that tracks a specified financial
market or sector. Unlike the Fund, the indices do not actually hold a portfolio
of securities and therefore do not incur the expenses incurred by the Fund.
These expenses negatively impact the performance of the Fund. The Fund's past
performance does not predict future performance.
Performance of share classes will vary due to differences in sales charges and
expenses. Average annual total return with sales charges includes payment of the
maximum sales charge of 5.50% for Class A Shares, a contingent deferred sales
charge ("CDSC") of 1.00% for Class C Shares in year one and 12b-1 service fees
of 0.25% per year of average daily net assets for Class A Shares and combined
Rule 12b-1 distribution and service fees of 1.00% per year of average daily net
assets for Class C Shares. Class I and Class R3 Shares do not have a front-end
sales charge or a CDSC; therefore, performance is at net asset value. The
combined Rule 12b-1 distribution and service fees are 0.50% of average daily net
assets for Class R3 Shares, while Class I Shares do not have these fees. Prior
to December 15, 2011, Class R3 Shares' combined Rule 12b-1 distribution and
service fees were 0.75% per year of average daily net assets.
Page 3
PORTFOLIO COMMENTARY
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
SEMI-ANNUAL REPORT
APRIL 30, 2013
SUB-ADVISOR
Confluence Investment Management LLC, a registered investment advisor
("Confluence" or the "Sub-Advisor"), located in St. Louis, Missouri, serves as
the Sub-Advisor to First Trust/Confluence Small Cap Value Fund (the "Fund"). The
investment professionals at Confluence have over 80 years of aggregate portfolio
management experience. Confluence professionals have invested in a wide range of
specialty finance and other financial company securities during various market
cycles, working to provide attractive risk-adjusted returns to clients.
PORTFOLIO MANAGEMENT TEAM
MARK KELLER, CFA
CHIEF EXECUTIVE OFFICER AND CHIEF INVESTMENT OFFICER
As Chief Investment Officer, Mr. Keller oversees all of Confluence's investment
strategies and investment operations and has more than 30 years of investment
experience, with a focus on value-oriented equity analysis and management. Prior
to joining Confluence, Mr. Keller was a Senior Vice President of A.G. Edwards &
Sons, Inc. and of Gallatin Asset Management, Inc., and was a member of the Board
of Directors of both companies. From 1994 to May 2008, he was the Chief
Investment Officer of Gallatin Asset Management, and its predecessor
organization, A.G. Edwards Asset Management, the investment management arm of
A.G. Edwards, Inc. Mr. Keller and his team were responsible for the management
of over $10 billion of assets across various equity, asset allocation and
fixed-income strategies. Mr. Keller received a B.A. from Wheaton College
(Illinois) and holds the Chartered Financial Analyst designation.
DAVID MIYAZAKI, CFA
SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
Mr. Miyazaki performs market research and is actively involved in portfolio
management activities. Prior to joining Confluence in May 2008, Mr. Miyazaki
served as a Portfolio Manager and Analyst with Gallatin Asset Management, the
investment management arm of A.G. Edwards, Inc. He joined A.G. Edwards in 1999.
Mr. Miyazaki was responsible for separately managed accounts invested in
individual stocks with a value discipline and co-managed the A.G. Edwards'
ETF-based asset allocation program. In addition to portfolio management, Mr.
Miyazaki served as a member of the A.G. Edwards Investment Strategy Committee.
As a strategist, he was responsible for the firm's quantitative asset allocation
models, including its Cyclical Asset Allocation program. He also co-manages the
First Trust Specialty Finance and Financial Opportunities Fund (NYSE: FGB), a
closed-end fund.
Mr. Miyazaki has nearly 20 years of financial experience, starting in the
industry in 1992. He received a Bachelor of Business Administration from Texas
Christian University and holds the Chartered Financial Analyst designation.
DANIEL WINTER, CFA
SENIOR VICE PRESIDENT AND PORTFOLIO MANAGER
Mr. Winter performs market research and chairs the firm's equity portfolio
management committee. Prior to joining Confluence in May 2008, Mr. Winter served
as a Portfolio Manager and Analyst with Gallatin Asset Management, the
investment management arm of A.G. Edwards, Inc. While at Gallatin, he chaired
the portfolio management team responsible for the firm's six value-oriented
equity strategies. His responsibilities also included directing the strategy
implementation and trading execution for the equity portfolios.
Mr. Winter also served as a portfolio manager for the Cyclical Growth ETF
Portfolio and the Cyclical Growth and Income ETF Portfolio which were offered
through variable annuities. He was also a member of the firm's Allocation
Advisor Committee which oversaw the A.G. Edwards exchange-traded fund focused
strategies. Prior to joining the firm's Asset Management division in 1996, Mr.
Winter served as a portfolio manager for A.G. Edwards Trust Company.
Additionally, Mr. Winter co-manages the First Trust Specialty Finance and
Financial Opportunities Fund (NYSE: FGB), a closed-end fund whose primary focus
is on Business Development Companies. Mr. Winter earned a B.A. in business
management from Eckerd College and an M.B.A. from Saint Louis University and
holds the Chartered Financial Analyst designation.
CHRIS STEIN
VICE PRESIDENT AND PORTFOLIO MANAGER
Mr. Stein performs market research, executes trades and is actively involved in
portfolio management activities. Mr. Stein joined Confluence in August 2008.
Previously, he served as a Portfolio Manager and Analyst with Gallatin Asset
Management, the investment management arm of A.G. Edwards, Inc. Mr. Stein was
part of the portfolio management team responsible for Gallatin's Large Cap
Value, Small Cap Value, Equity Income, Value Opportunities and All Cap Global
separately managed accounts. Additionally, Mr. Stein assisted the A.G. Edwards
Trust Company in constructing and managing individual stock portfolios.
Prior to joining the Asset Management division in 2001, Mr. Stein was an
associate analyst covering the media and entertainment sector for A.G. Edwards'
securities research. Mr. Stein earned a B.S. in accounting and a B.S. in finance
from the University of Dayton, and he also received an M.B.A. from Saint Louis
University.
Page 4
PORTFOLIO COMMENTARY - (CONTINUED)
COMMENTARY
MARKET RECAP
The equity markets continued to advance in the Fund's six-month period ended
April 30, 2013, with the Russell 2000(R) Index and Russell 2000(R) Value Index
each posting solid returns of 16.58%. This follows a very strong year in 2012
when the markets posted mid-teens returns despite the uncertainty centered on
the European debt crisis, a slowdown in China, the domestic fiscal policy debate
and the impending "fiscal cliff." While these events negatively impacted
sentiment and hindered economic growth, the massive monetary stimulus alleviated
some of the concerns and provided the necessary push to keep the economy moving
in a positive direction, albeit below trend. More specifically, rising
employment and an improving housing market are aiding economic growth and helped
offset the reduction in federal spending. Lastly, the last minute deals on the
"fiscal cliff" and continued slow economic growth, albeit below trend, have
given investors the confidence to be more positive on the equity markets.
The Federal Reserve's actions should provide the impetus for continued economic
growth as consumers begin to spend and slow their deleveraging, helping to
offset the declines in federal spending, although it will take time to play out.
In the meantime, companies continue to report solid margins and good returns on
capital, albeit at lower levels of revenue growth than equity returns would
imply. This has resulted in recent returns being driven by sentiment and
expanding multiples/valuations as expectations for a continued recovery
increase. This type of environment presents challenges for value-oriented
fundamental investors, such as us, as the relative numbers for the six-month
period ended April 30 reflect.
The Fund's Class I Shares generated gains of 11.95% in the six-month period
ended April 30, 2013, which lagged the benchmark. From inception (1/11/2011)
through the end of April 2013, the Fund's Class I Shares are up 9.25%, which is
in line with the Russell 2000(R) Index and Russell 2000(R) Value Index, which
posted gains of 9.46% and 9.45%, respectively, for the same period. Returns are
annualized for periods greater than one year.
The Fund lagged its peer group during the six-month period ended April 30, 2013,
as the peer group posted an average return of 16.93% versus 11.95% for the Fund.
Since inception, the Fund lagged the peer group, returning 9.25% versus the peer
group average annual return of 10.03%.
PEER GROUP
----------------------------------------------------------------------------------------------------
COMPARABLE FUNDS SYMBOL 1H FY'13 INCEPTION TO DATE
-------- ---------- -----------------
FT/Confluence Small Cap Value Fund - I FOVIX 11.95% 9.25%
GOLDMAN SACHS S/C VALUE-INST GSSIX 18.92% 13.21%
T ROWE PRICE SM CAP VAL PRSVX 14.97% 11.30%
PUTNAM SMALL CAP VALUE FD-Y PVSVX 16.52% 9.38%
ASTON RIVER RD SML CAP VAL-I ARSIX 19.07% 8.08%
WILLIAM BLAIR SM CAP VALUE-I BVDIX 17.29% 10.71%
LORD ABBETT S/C VALUE SER-I LRSYX 16.88% 7.57%
VICTORY SMALL CO OPPORTUN-I VSOIX 14.82% 9.97%
----------------------------------------------------------------------------------------------------
Average 16.93% 10.03%
|
PERFORMANCE ANALYSIS
During the six-month period ended April 30, 2013, the Producer Durables and
Health Care sectors were the biggest detractors from Fund relative performance.
The larger-than-average cash holding also held back overall performance. The
sectors with the largest positive relative contributions for the Fund were
Consumer Staples and Consumer Discretionary (see attribution table).
PORTFOLIO ATTRIBUTION
10/31/12-4/30/13
--------------------------------------------------------------------------------------------------------------------------------
RUSSELL 2000(R) VALUE RUSSELL 2000(R) FUND CONTRIBUTION
----------------------- ----------------------- ----------------------- -----------------------
SECTOR WGT RTN WGT RTN WGT RTN RSL 2V RSL 2 FUND
Consumer Discretionary 12.0 23.1 13.8 20.0 8.5 27.2 2.8 2.8 2.3
Consumer Staples 2.6 17.7 3.6 16.2 2.8 35.6 0.5 0.6 1.0
Energy 6.4 12.1 6.0 11.0 3.1 2.3 0.8 0.7 0.1
Financial Services 38.1 16.3 24.1 17.2 23.0 18.6 6.2 4.1 4.3
Health Care 4.4 13.8 12.1 17.9 14.8 9.1 0.6 2.2 1.3
Materials & Processing 5.5 8.6 5.2 10.0 3.1 1.0 0.5 0.5 0.2
Producer Durables 12.2 18.1 14.8 18.4 31.4 8.1 2.2 2.7 2.4
Technology 11.9 19.1 16.3 15.4 5.9 14.0 2.3 2.5 0.8
Utilities 6.8 12.1 4.0 11.9 0.0 0.0 0.8 0.5 0.0
Cash 0.0 0.0 0.0 0.0 7.3 0.0 0.0 0.0 0.0
--------------------------------------------------------------------------------------------------------------------------------
|
Sources: Bloomberg and Confluence Investment Management
Our investment approach of managing risk--risk defined as the probability of a
permanent loss of capital--focuses the portfolio managers' efforts on finding
quality businesses trading at bargain prices. This philosophy has helped
minimize losses during market downturns as it did in the previous periods, but
also tends to lag when there is a sharp upward move in the market, as leveraged
Page 5
PORTFOLIO COMMENTARY - (CONTINUED)
and cyclical businesses tend to garner investors' affection. With the small
capitalization indexes, Russell 2000 and Russell 2000 Value, up sharply over the
past two quarters, it does not surprise us that the Fund would lag as our focus
on high-quality businesses garners less attention in the near term.
Also impacting the Fund's relative performance was the drag of its cash position
during the first half of the period. This was primarily a function of selling
names and not immediately repositioning the proceeds. As we have mentioned in
the past, we are bottom-up, research-focused investors, and when fundamentals
deteriorate and/or valuations are extended, leaving an unfavorable risk/reward
ratio, we will not hesitate to sell. On occasion we may not have an immediate
replacement which may cause cash to build temporarily; rest assured we are
diligently working to invest the cash but will only do so prudently.
There were a few changes in the Fund during the first half as Generac Holdings
(GNRC), HNI Corp. (HNI) and Simpson Manufacturing (SSD) were sold. Thermon Group
Holdings (THR), GrafTech International (GTI) and Forward Air (FWRD) were added.
Regarding the sells, Generac manufactures a range of generators for residential
and commercial markets. They have been very successful in growing their business
and, more importantly, rewarding shareholders with wise capital allocation
including a large one-time dividend. Their success has not gone unnoticed as the
shares have appreciated considerably and the valuation became a little rich
which is why the shares were sold. HNI Corp. is a manufacturer of office
furniture and hearth products. It is run by a strong management team that
generates above-average margins and returns on capital. While they continue to
execute well, the shares have moved up near our intrinsic value estimate, which
allowed the Fund to take a nice profit. Lastly, Simpson Manufacturing
manufactures construction products such as connectors and fastening systems.
Although it has been benefiting from the strengthening in the housing market,
they have also been facing increasing competition which will likely restrict the
company's growth and impact margins in the future; therefore, the company's
shares were sold.
As noted, during the first half, we initiated positions in Thermon Group
Holdings (THR), GrafTech International (GTI), and Forward Air (FWRD). Thermon is
a small manufacturer that produces heat tracers to keep pipes from freezing in
harsh climates as well as regulating the pipe contents to keep them within a
specified temperature range. The company's products have been used since the
1950s and it largely operates in a duopoly. The company primarily serves the oil
and gas sector and should benefit from the revival of the North American energy
market. At current levels, we believe the shares represent a good value.
Regarding GrafTech, it has attributes we especially like in companies, such as a
product its customers must absolutely have to operate, yet one that represents a
relatively insignificant portion of the customer's total operating costs. More
specifically, GrafTech makes graphite electrodes used in steel mills employing
electric arc furnaces. GrafTech is the world's largest supplier of graphite
electrodes and it has positioned itself as the qualitative top tier of the
industry. The shares are down sharply, reflecting the slump in the global steel
industry which we believe provides the Fund a nice entry point to purchase
shares at a good valuation.
Finally, Forward Air is a niche player in the transportation logistics market.
The majority of the company's earnings are generated through its network of
airport-to-airport trucking terminals whereby the company moves products between
airports in order to reduce shipping costs while maintaining time definite
deliveries. Service requirements within this niche are high and Forward Air's
consolidated position provides them with the necessary density to achieve both
high levels of service and attractive profit margins. Having largely
consolidated the airport-to-airport business, management has been searching for
attractive areas to redeploy cash flow. It took several years for this
disciplined management team to find, but we believe the recent acquisition of
Total Quality provides the company with a new and attractive avenue for growth.
Total Quality serves the temperature controlled delivery needs of the
pharmaceutical and life sciences industry. Like Forward Air's legacy business,
customers within this cold transportation niche require high levels of service
and are willing to pay for it.
MARKET AND FUND OUTLOOK
Looking forward, the economy continues to move forward with housing and
employment gradually improving and providing a tailwind instead of a headwind.
As always, we remain focused on company-specific fundamentals and growth
prospects and believe the current market will continue to provide us with
opportunities to buy quality companies at reasonable prices.
Page 6
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2013 (UNAUDITED)
As a shareholder of the First Trust/Confluence Small Cap Value Fund, you incur
two types of costs: (1) transaction costs, including sales charges (loads) on
purchases of Class A Shares and contingent deferred sales charges on the lesser
of purchase price or redemption proceeds of Class C Shares; and (2) ongoing
costs, including management fees; distribution and/or service (12b-1) fees; and
other Fund expenses. This Example is intended to help you understand your
ongoing costs (in U.S. dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended April 30, 2013.
ACTUAL EXPENSES
The first three columns of the table below provide information about actual
account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the third column under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during the
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The next three columns of the table below provide information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing cost of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or contingent deferred sales charges. Therefore, the
hypothetical section of the table is useful in comparing ongoing costs only, and
will not help you determine the relative total costs of owning different funds.
In addition, if these transactional costs were included, your costs would have
been higher.
-----------------------------------------------------------------------------------------------------------
HYPOTHETICAL
ACTUAL EXPENSES (5% RETURN BEFORE EXPENSES)
------------------------------------------------- --------------------------------------------------------
ENDING EXPENSES PAID BEGINNING ENDING EXPENSES PAID
BEGINNING ACCOUNT DURING PERIOD ACCOUNT ACCOUNT DURING PERIOD ANNUALIZED
ACCOUNT VALUE VALUE 11/1/2012- VALUE VALUE 11/1/2012- EXPENSE
11/1/2012 04/30/2013 04/30/2013 (a) 11/1/2012 04/30/2013 04/30/2013 (a) RATIOS (b)
-----------------------------------------------------------------------------------------------------------
Class A $1,000.00 $1,117.90 $ 8.40 $1,000.00 $1,016.86 $ 8.00 1.60%
Class C 1,000.00 1,112.80 12.31 1,000.00 1,013.14 11.73 2.35
Class I 1,000.00 1,119.50 7.09 1,000.00 1,018.10 6.73 1.35
Class R3 1,000.00 1,114.30 9.70 1,000.00 1,015.62 9.25 1.85
|
(a) Expenses are equal to the annualized expense ratios, multiplied by the
average account value over the period (November 1, 2012 through April 30,
2013), multiplied by 181/365 (to reflect the six-month period).
(b) These expense ratios reflect expense caps.
Page 7
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 2013 (UNAUDITED)
SHARES DESCRIPTION VALUE
---------------- -------------------------------------------------------- --------------
COMMON STOCKS - 92.2%
AEROSPACE & DEFENSE - 2.9%
1,555 Cubic Corp.............................................. $ 66,818
--------------
AIR FREIGHT & LOGISTICS - 3.1%
1,910 Forward Air Corp........................................ 70,460
--------------
CAPITAL MARKETS - 8.2%
385 Affiliated Managers Group, Inc. (a) .................... 59,937
4,070 MVC Capital, Inc. (b) .................................. 52,869
6,460 PennantPark Investment Corp. (b) ....................... 75,582
--------------
188,388
--------------
CHEMICALS - 2.4%
1,210 Scotts Miracle-Gro (The) Co., Class A .................. 54,874
--------------
COMMERCIAL SERVICES & SUPPLIES - 2.9%
3,295 Ritchie Bros. Auctioneers, Inc.......................... 66,460
--------------
ELECTRICAL EQUIPMENT - 8.3%
1,610 Franklin Electric Co., Inc.............................. 52,116
9,846 GrafTech International Ltd. (a) ........................ 70,694
3,462 Thermon Group Holdings, Inc. (a) ....................... 67,855
--------------
190,665
--------------
ENERGY EQUIPMENT & SERVICES - 3.1%
3,660 C&J Energy Services, Inc. (a) .......................... 72,431
--------------
FOOD PRODUCTS - 2.7%
1,000 Sanderson Farms, Inc.................................... 61,260
--------------
HEALTH CARE EQUIPMENT & SUPPLIES - 5.6%
1,665 Haemonetics Corp. (a) .................................. 64,103
1,020 West Pharmaceutical Services, Inc....................... 65,137
--------------
129,240
--------------
HEALTH CARE PROVIDERS & SERVICES - 6.3%
1,790 Patterson Cos., Inc..................................... 67,931
3,195 VCA Antech, Inc. (a) ................................... 76,999
--------------
144,930
--------------
INSURANCE - 5.2%
2,070 Brown & Brown, Inc...................................... 64,149
763 RLI Corp................................................ 54,822
--------------
118,971
--------------
LIFE SCIENCES TOOLS & SERVICES - 3.0%
1,085 Techne Corp............................................. 69,592
--------------
MACHINERY - 12.2%
4,935 Douglas Dynamics, Inc................................... 69,041
1,480 EnPro Industries, Inc. (a) ............................. 72,934
1,115 Graco, Inc.............................................. 67,491
1,357 Mueller Industries, Inc................................. 70,265
--------------
279,731
--------------
|
Page 8 See Notes to Financial Statements
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
SHARES DESCRIPTION VALUE
---------------- -------------------------------------------------------- --------------
COMMON STOCKS - (CONTINUED)
MEDIA - 4.2%
1,165 John Wiley & Sons, Inc., Class A ....................... $ 44,468
805 Morningstar, Inc........................................ 53,138
--------------
97,606
--------------
OFFICE ELECTRONICS - 3.2%
1,558 Zebra Technologies Corp., Class A (a) .................. 72,681
--------------
REAL ESTATE INVESTMENT TRUSTS - 8.5%
4,135 Franklin Street Properties Corp......................... 63,141
3,170 Gladstone Commercial Corp............................... 60,674
1,200 Rayonier, Inc........................................... 71,304
--------------
195,119
--------------
ROAD & RAIL - 3.9%
1,520 Heartland Express, Inc.................................. 20,626
1,275 Landstar System, Inc.................................... 69,692
--------------
90,318
--------------
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT - 3.0%
1,250 Hittite Microwave Corp. (a) ............................ 70,138
--------------
TEXTILES, APPAREL & LUXURY GOODS - 3.5%
1,450 Deckers Outdoor Corp. (a) .............................. 79,924
--------------
TOTAL INVESTMENTS - 92.2% .............................. 2,119,606
(Cost $1,905,151) (c)
NET OTHER ASSETS AND LIABILITIES - 7.8% ................ 178,203
--------------
NET ASSETS - 100.0% .................................... $ 2,297,809
==============
|
(a) Non-income producing security.
(b) Business Development Company
(c) Aggregate cost for financial reporting purposes, which approximates
the aggregate cost for federal income tax purposes. As of April 30,
2013, the aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $239,432 and
the aggregate gross unrealized depreciation for all securities in
which there was an excess of tax cost over value was $24,977.
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2013 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
04/30/2013 PRICES INPUTS INPUTS
-------------- -------------- -------------- --------------
Common Stocks*..................................... $ 2,119,606 $ 2,119,606 $ -- $ --
============== ============== ============== ==============
|
* See the Portfolio of Investments for industry breakout.
All transfers in and out of the Levels during the period are assumed to be on
the last day of the period at their current value. There were no transfers
between Levels at April 30, 2013.
See Notes to Financial Statements Page 9
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2013 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $1,905,151)........................................................................... $ 2,119,606
Cash........................................................................................... 261,570
Receivables:
Investment securities sold.................................................................. 46,779
From investment advisor..................................................................... 22,128
Dividends................................................................................... 1,420
Prepaid expenses............................................................................... 14
------------
Total Assets.............................................................................. 2,451,517
------------
LIABILITIES:
Payables:
Investment securities purchased............................................................. 67,976
Transfer agent fees......................................................................... 30,069
Audit and tax fees.......................................................................... 19,280
Legal fees.................................................................................. 13,487
Administrative fees......................................................................... 8,305
Trustees' fees and expenses................................................................. 3,917
Registration fees........................................................................... 3,673
Investment advisory fees.................................................................... 1,753
12b-1 distribution and service fees......................................................... 1,157
Printing fees............................................................................... 1,008
Financial reporting fees.................................................................... 732
Commitment fees............................................................................. 267
Custodian fees.............................................................................. 214
Other liabilities.............................................................................. 1,870
------------
Total Liabilities......................................................................... 153,708
------------
NET ASSETS..................................................................................... $ 2,297,809
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 2,049,691
Par value...................................................................................... 992
Accumulated net investment income (loss)....................................................... (1,574)
Accumulated net realized gain (loss) on investments............................................ 34,245
Net unrealized appreciation (depreciation) on investments...................................... 214,455
------------
NET ASSETS..................................................................................... $ 2,297,809
============
MAXIMUM OFFERING PRICE PER SHARE:
(Net assets are rounded to the nearest whole dollar and shares are rounded to the nearest
full share)
CLASS A SHARES:
Net asset value and redemption price per share (Based on net assets of
$773,359 and 32,604 shares of
beneficial interest issued and outstanding)............................................. $ 23.72
Maximum sales charge (5.50% of offering price).............................................. 1.38
------------
Maximum offering price to public............................................................ $ 25.10
============
CLASS C SHARES:
Net asset value and redemption price per share (Based on net assets of
$1,276,410 and 56,246 shares of
beneficial interest issued and outstanding)............................................. $ 22.69
============
CLASS I SHARES:
Net asset value and redemption price per share (Based on net assets of $246,890 and
10,303 shares of beneficial interest issued and outstanding).............................. $ 23.96
============
CLASS R3 SHARES:
Net asset value and redemption price per share (Based on net assets of $1,150 and 50 shares
of beneficial interest issued and outstanding)............................................ $ 23.11
============
|
Page 10 See Notes to Financial Statements
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2013 (UNAUDITED)
INVESTMENT INCOME:
Dividends (net of foreign withholding tax of $85).............................................. $ 22,668
Interest....................................................................................... 27
------------
Total investment income..................................................................... 22,695
------------
EXPENSES:
Registration fees.............................................................................. 51,342
Transfer agent fees............................................................................ 50,088
Administrative fees............................................................................ 25,805
Audit and tax fees............................................................................. 16,265
Legal fees..................................................................................... 11,573
Trustees' fees and expenses.................................................................... 10,547
Investment advisory fees....................................................................... 8,885
Printing fees.................................................................................. 7,130
12b-1 distribution and/or service fees:
Class A..................................................................................... 837
Class C..................................................................................... 4,834
Class R3.................................................................................... 3
Financial reporting fees....................................................................... 4,587
Custodian fees................................................................................. 741
Commitment fees................................................................................ 267
Other.......................................................................................... 2,415
------------
Total expenses.............................................................................. 195,319
Less fees waived and expenses reimbursed by the investment advisor.......................... (177,646)
------------
Net expenses................................................................................ 17,673
------------
NET INVESTMENT INCOME (LOSS)................................................................... 5,022
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... 34,243
Net change in unrealized appreciation (depreciation) on investments......................... 150,328
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 184,571
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ 189,593
============
|
See Notes to Financial Statements Page 11
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2013 ENDED
(UNAUDITED) 10/31/2012
------------ ------------
OPERATIONS:
Net investment income (loss)................................................ $ 5,022 $ 8,039
Net realized gain (loss).................................................... 34,243 19,673
Net change in unrealized appreciation (depreciation)........................ 150,328 68,817
------------ ------------
Net increase (decrease) in net assets resulting from operations............. 189,593 96,529
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A Shares........................................................... (7,530) (605)
Class C Shares........................................................... (4,429) --
Class F Shares........................................................... -- (3)
Class I Shares........................................................... (2,086) (655)
Class R3 Shares.......................................................... (11) --
------------ ------------
(14,056) (1,263)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAIN:
Class A Shares........................................................... (2,739) --
Class C Shares........................................................... (3,897) --
Class I Shares........................................................... (530) --
Class R3 Shares.......................................................... (5) --
------------ ------------
(7,171) --
------------ ------------
Total distributions to shareholders......................................... (21,227) (1,263)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from shares sold................................................... 830,586 1,086,129
Proceeds from shares reinvested............................................. 14,134 587
Cost of shares redeemed..................................................... (123,351) (165,408)
------------ ------------
Net increase (decrease) in net assets resulting from capital transactions 721,369 921,308
------------ ------------
Total increase (decrease) in net assets..................................... 889,735 1,016,574
------------ ------------
NET ASSETS:
Beginning of period......................................................... 1,408,074 391,500
------------ ------------
End of period............................................................... $ 2,297,809 $ 1,408,074
============ ============
Accumulated net investment income (loss) at end of period................... $ (1,574) $ 7,460
============ ============
|
Page 12 See Notes to Financial Statements
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR PERIOD
4/30/2013 ENDED ENDED
CLASS A SHARES (UNAUDITED) 10/31/2012 10/31/2011 (a)
------------ ------------ --------------
Net asset value, beginning of period........... $ 21.58 $ 19.54 $ 20.10
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)............... 0.11 0.23 0.03
Net realized and unrealized gain (loss)........ 2.40 1.85 (0.59)
---------- ---------- ----------
Total from investment operations............... 2.51 2.08 (0.56)
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income.......................... (0.27) (0.04) --
Net realized gain.............................. (0.10) -- --
---------- ---------- ----------
Total from distributions....................... (0.37) (0.04) --
---------- ---------- ----------
Net asset value, end of period................. $ 23.72 $ 21.58 $ 19.54
========== ========== ==========
TOTAL RETURN (c)............................... 11.79% 10.61% (2.79)%
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........... $ 773 $ 651 $ 218
Ratio of total expenses to average net assets.. 19.69% 23.94% (d) 60.42% (d)
Ratio of net expenses to average net assets.... 1.60% (d) 1.60% (d) 1.60% (d)
Ratio of net investment income (loss) to
average net assets.......................... 1.01% (d) 1.10% (d) 0.26% (d)
Portfolio turnover rate........................ 12% 11% 21%
|
(a) Class A Shares commenced operations on February 24, 2011.
(b) Per share amounts have been calculated using the average share method.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 5.50% or contingent
deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC
of 1% may be imposed on certain redemptions made within twelve months of
purchase. If the sales charges were included, total returns would be
lower. These returns include Rule 12b-1 service fees of 0.25% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total return would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(d) Annualized.
See Notes to Financial Statements Page 13
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR PERIOD
4/30/2013 ENDED ENDED
CLASS C SHARES (UNAUDITED) 10/31/2012 10/31/2011 (a)
------------ ------------ --------------
Net asset value, beginning of period........... $ 20.59 $ 18.81 $ 20.10
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)............... 0.02 0.05 (0.07)
Net realized and unrealized gain (loss)........ 2.29 1.73 (1.22)
---------- ---------- ----------
Total from investment operations............... 2.31 1.78 (1.29)
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income.......................... (0.11) -- --
Net realized gain.............................. (0.10) -- --
---------- ---------- ----------
Total distributions............................ (0.21) -- --
---------- ---------- ----------
Net asset value, end of period................. $ 22.69 $ 20.59 $ 18.81
========== ========== ==========
TOTAL RETURN (c)............................... 11.28% 9.46% (6.42)%
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........... $ 1,277 $ 615 $ 8
Ratio of total expenses to average net assets.. 19.37% (d) 26.69% 98.09% (d)
Ratio of net expenses to average net assets.... 2.35% (d) 2.35% 2.35% (d)
Ratio of net investment income (loss) to
average net assets.......................... 0.14% (d) 0.25% (0.54)% (d)
Portfolio turnover rate........................ 12% 11% 21%
|
(a) Class C Shares commenced operations on March 2, 2011.
(b) Per share amounts have been calculated using the average share method.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
return would be lower. These returns include combined Rule 12b-1
distribution and service fees of 1% and do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption
of Fund shares. The total return would have been lower if certain fees had
not been waived and expenses reimbursed by the investment advisor. Total
return is calculated for the time period presented and is not annualized
for periods less than one year.
(d) Annualized.
Page 14 See Notes to Financial Statements
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR PERIOD
4/30/2013 ENDED ENDED
CLASS I SHARES (UNAUDITED) 10/31/2012 10/31/2011 (a)
------------ ------------ --------------
Net asset value, beginning of period........... $ 21.81 $ 19.58 $ 20.00
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)............... 0.16 0.26 0.07
Net realized and unrealized gain (loss)........ 2.41 2.05 (0.49)
---------- ---------- ----------
Total from investment operations............... 2.57 2.31 (0.42)
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income.......................... (0.32) (0.08) --
Net realized gain.............................. (0.10) -- --
---------- ---------- ----------
Total distributions............................ (0.42) (0.08) --
---------- ---------- ----------
Net asset value, end of period................. $ 23.96 $ 21.81 $ 19.58
========== ========== ==========
TOTAL RETURN (c)............................... 11.95% 11.85% (2.10)%
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........... $ 247 $ 141 $ 164
Ratio of total expenses to average net assets.. 33.18% (d) 41.80% 103.62% (d)
Ratio of net expenses to average net assets.... 1.35% (d) 1.35% 1.35% (d)
Ratio of net investment income (loss) to
average net assets.......................... 1.41% (d) 1.28% 0.43% (d)
Portfolio turnover rate........................ 12% 11% 21%
|
(a) Class I Shares were initially seeded on December 16, 2010 and commenced
operations on January 11, 2011.
(b) Per share amounts have been calculated using the average share method.
(c) Assumes reinvestment of all distributions for the period. These returns do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total return would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(d) Annualized.
See Notes to Financial Statements Page 15
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR PERIOD
4/30/2013 ENDED ENDED
CLASS R3 SHARES (UNAUDITED) 10/31/2012 10/31/2011 (a)
------------ ------------ --------------
Net asset value, beginning of period.......... $ 21.04 $ 19.03 $ 20.10
---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)............... 0.08 0.15 (0.04)
Net realized and unrealized gain (loss)........ 2.30 1.86 (1.03)
---------- ---------- ----------
Total from investment operations............... 2.38 2.01 (1.07)
---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income.......................... (0.21) -- --
Net realized gain.............................. (0.10) -- --
---------- ---------- ----------
Total distributions............................ (0.31) -- --
---------- ---------- ----------
Net asset value, end of period................. $ 23.11 $ 21.04 $ 19.03
========== ========== ==========
TOTAL RETURN (c)............................... 11.43% 10.56% (5.32)%
========== ========== ==========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........... $ 1 $ 1 $ 1
Ratio of total expenses to average net assets.. 2,291.09% (d) 2,717.44% 297.34% (d)
Ratio of net expenses to average net assets.... 1.85% (d) 1.88% 2.10% (d)
Ratio of net investment income (loss) to
average net assets.......................... 0.80% (d) 0.75% (0.32)% (d)
Portfolio turnover rate........................ 12% 11% 21%
|
(a) Class R3 Shares were initially seeded and commenced operations on March 2,
2011.
(b) Per share amounts have been calculated using the average share method.
(c) Assumes reinvestment of all distributions for the period. These returns
include combined Rule 12b-1 distribution and service fees of 0.50%
effective December 15, 2011 and 0.75% prior to Decmber 15, 2011 and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total return would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(d) Annualized.
Page 16 See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
APRIL 30, 2013 (UNAUDITED)
1. ORGANIZATION
First Trust/Confluence Small Cap Value Fund (the "Fund") is a series of the
First Trust Series Fund (the "Trust"), a Massachusetts business trust organized
on July 9, 2010, and is registered as a diversified open-end management
investment company with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund offers
four classes of shares: Class A, Class C, Class I and Class R3. Each class
represents an interest in the same portfolio of investments but with a different
combination of sales charges, distribution and service (12b-1) fees, eligibility
requirements and other features.
The Fund's investment objective is to seek to provide long-term capital
appreciation. The Fund seeks to achieve its investment objective by investing,
under normal market conditions, at least 80% of its net assets (including
investment borrowings, if any) in equity securities of U.S. listed companies
with small market capitalizations at the time of investment that Confluence
Investment Management LLC ("Confluence" or the "Sub-Advisor") believes have
produced solid returns over extended periods of time. There can be no assurance
that the Fund will achieve its investment objective. The Fund may not be
appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of each class of shares of the Fund is determined
daily as of the close of regular trading on the New York Stock Exchange
("NYSE"), normally 4:00 p.m. Eastern time, on each day the NYSE is open for
trading. If the NYSE closes early on a valuation day, the NAV is determined as
of that time. The NAV for each class is calculated by dividing the value of the
Fund's total assets attributable to such class (including accrued interest and
dividends), less all liabilities attributable to such class (including accrued
expenses, dividends declared but unpaid and any borrowings of the Fund), by the
total number of shares of the class outstanding. Differences in NAV of each
class of the Fund's shares are generally expected to be due to the daily expense
accruals of the specified distribution and service (12b-1) fees and transfer
agency costs applicable to such class of shares and the resulting differential
in the dividends that may be paid on each class of shares.
The Fund's investments are valued daily in accordance with valuation procedures
adopted by the Trust's Board of Trustees, and in accordance with provisions of
the 1940 Act. The Fund's securities will be valued as follows:
Common stocks and other securities listed on any national or foreign
exchange (excluding the NASDAQ Stock Market LLC ("NASDAQ") and the London
Stock Exchange Alternative Investment Market ("AIM")) are valued at the
last sale price on the exchange on which they are principally traded or,
for NASDAQ and AIM securities, the official closing price. Securities
traded on more than one securities exchange are valued at the last sale
price or official closing price, as applicable, at the close of the
securities exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are valued at their
closing bid prices.
Short-term investments that mature in less than 60 days when purchased are
valued at amortized cost.
All market quotations used in valuing the Fund's securities will be obtained
from a third party pricing service. If no quotation is received from a pricing
service, attempts will be made to obtain one or more broker quotes for the
security. In the event the pricing service does not provide a valuation, broker
quotations are not readily available, or the valuations received are deemed
unreliable, the Trust's Board of Trustees has designated First Trust Advisors
L.P. ("First Trust") to use a fair value method to value the Fund's securities.
Additionally, if events occur after the close of the principal markets for
certain securities that could materially affect the Fund's NAV, First Trust will
use a fair value method to value the Fund's securities. The use of fair value
pricing is governed by valuation procedures adopted by the Trust's Board of
Trustees, and in accordance with the provisions of the 1940 Act. As a general
principle, the fair value of a security is the amount which the Fund might
reasonably expect to receive for the security upon its current sale. In light of
the judgment involved in fair valuations, there can be no assurance that a fair
value assigned to a particular security will be the amount which the Fund might
be able to receive upon its current sale. Fair valuation of common stocks and
other equity securities will be based on the consideration of all available
information, including, but not limited to, the following:
Page 17
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
APRIL 30, 2013 (UNAUDITED)
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2013, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income, if any, is
recorded daily on the accrual basis, including the amortization of premiums and
the accretion of discounts. Income is allocated on a pro rata basis to each
class of shares.
The Fund may hold the securities of real estate investment trusts ("REITs").
Distributions from such investments may be comprised of return of capital,
capital gains and income. The actual character of amounts received during the
year is not known until after the REIT's fiscal year end. The Fund records the
character of distributions received from REITs during the year based on
estimates available. The characterization of distributions received by the Fund
may be subsequently revised based on information received from the REITs after
their tax reporting periods conclude.
C. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will distribute to holders of its shares semi-annual dividends of all
or a portion of its net income. Distributions of any net capital gains earned by
the Fund will be distributed at least annually. Distributions will automatically
be reinvested into additional Fund shares unless cash distributions are elected
by the shareholder.
Distributions from net investment income and realized capital gains are
determined in accordance with income tax regulations, which may differ from U.S.
GAAP. Certain capital accounts in the financial statements are periodically
adjusted for permanent differences in order to reflect their tax character.
These permanent differences are primarily due to the varying treatment of income
and gain/loss on portfolio securities held by the Fund and have no impact on net
assets or NAV per share. Temporary differences, which arise from recognizing
certain items of income, expense and gain/loss in different periods for
financial statement and tax purposes, will reverse at some point in the future.
Page 18
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
APRIL 30, 2013 (UNAUDITED)
The tax character of distributions paid during the fiscal year ended October 31,
2012 was as follows:
Distributions paid from:
Ordinary income.............................. $ 1,263
Capital gain................................. --
Return of capital............................ --
|
As of October 31, 2012, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income................ $ 9,068
Undistributed capital gains.................. 5,565
-----------------
Total undistributed earnings................. 14,633
Accumulated capital and other losses......... --
Net unrealized appreciation (depreciation)... 62,127
-----------------
Total accumulated earnings (losses).......... 78,760
Other........................................ --
Paid-in capital.............................. 1,329,314
-----------------
Net assets................................... $ 1,408,074
=================
|
D. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allows it to carry realized capital loss forward indefinitely following the year
of the loss and offset such loss against any future realized capital gains. The
Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At October 31, 2012, the
Fund had no non-expiring capital loss carryforwards for federal income tax
purposes. During the taxable year ended October 31, 2012, the Fund utilized
non-expiring capital loss carryforwards in the amount of $12,352.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ended 2011 and 2012
remain open to federal and state audit. As of April 30, 2013, management has
evaluated the application of these standards to the Fund and has determined that
no provision for income tax is required in the Fund's financial statements for
uncertain tax positions.
E. EXPENSES:
The Fund will pay all expenses directly related to its operations. Expenses of
the Fund are allocated on a pro rata basis to each class of shares, except for
distribution and service (12b-1) fees and incremental transfer agency costs
which are unique to each class of shares.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 1.00% of the Fund's average daily net assets.
First Trust also provides fund reporting services to the Fund for a flat annual
fee in the amount of $9,250.
Confluence serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a portfolio
management fee at an annual rate of 0.50% of the Fund's average daily net assets
that is paid by First Trust from its investment advisory fee.
First Trust and Confluence have agreed to waive fees and/or pay Fund expenses to
the extent necessary to prevent the annual operating expenses of the Fund
(excluding 12b-1 distribution and service fees, interest expenses, taxes,
acquired fund fees and expenses, fees incurred in acquiring and disposing of
portfolio securities and extraordinary expenses) from exceeding 1.35% of average
daily net assets of any class of shares of the Fund (the "Expense Cap") until
February 28, 2014 and then will not exceed 1.70% from March 1, 2014 to February
28, 2023 (the "Expense Cap Termination Date"). Expenses borne and fees waived by
First Trust and Confluence are subject to recovery by First Trust and Confluence
up to three years from the date the fee or expense was incurred, but no
reimbursement payment will
Page 19
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
APRIL 30, 2013 (UNAUDITED)
be made by the Fund at any time if it would result in the Fund's expenses
exceeding the Expense Cap in place at the time the expense was borne or the fee
was waived by First Trust and Confluence. These amounts would be included in
"Expenses previously waived or reimbursed" on the Statement of Operations. The
advisory fee waivers and expense reimbursement for the six months ended April
30, 2013 and the expenses borne by First Trust and Confluence subject to
recovery for the periods indicated were as follows:
EXPENSES SUBJECT TO RECOVERY
---------------------------------------------------------------------------
ADVISORY FEE EXPENSE PERIOD ENDED YEAR ENDED SIX MONTHS ENDED
WAIVER REIMBURSEMENT OCTOBER 31, 2011 OCTOBER 31, 2012 APRIL 30, 2013 TOTAL
------------ ------------- ---------------- ---------------- ----------------- --------------
$ 8,885 $ 168,761 $ 169,849 $ 237,946 $ 177,646 $ 621,441
|
Brown Brothers Harriman & Co. ("BBH") serves as the Fund's administrator, fund
accountant and custodian in accordance with certain fee arrangements. As
administrator and fund accountant, BBH is responsible for providing certain
administrative and accounting services to the Fund, including maintaining the
Fund's books of account, records of the Fund's securities transactions, and
certain other books and records. As custodian, BBH is responsible for custody of
the Fund's assets.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
transfer agent in accordance with certain fee arrangements. As transfer agent,
BNYM IS is responsible for maintaining shareholder records for the Fund.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer of $125,000 per year and an annual per fund fee of $4,000 for each
closed-end fund or other actively managed fund and $1,000 for each index fund in
the First Trust Fund Complex. The fixed annual retainer is allocated pro rata
among each fund in the First Trust Fund Complex based on net assets.
Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are also reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and each Committee
chairman will serve two-year terms until December 31, 2013 before rotating to
serve as chairman of another committee or as Lead Independent Trustee. After
December 31, 2013, the Lead Independent Trustee and Committee chairmen will
rotate every three years. The officers and "Interested" Trustee receive no
compensation from the funds for acting in such capacities.
4. CAPITAL SHARE TRANSACTIONS
Capital transactions were as follows:
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2013 OCTOBER 31, 2012
SHARES VALUE SHARES VALUE
---------- ------------ ---------- ------------
Sales:
Class A 6,201 $ 141,740 22,827 $ 462,559
Class C 26,036 563,342 29,845 577,127
Class F * -- -- -- --
Class I 5,296 125,504 2,182 46,369
Class R3 -- -- 4 74
---------- ------------ ---------- ------------
Total Sales: 37,533 $ 830,586 54,858 $ 1,086,129
========== ============ ========== ============
Dividend Reinvestment:
Class A 258 $ 5,561 22 $ 417
Class C 358 7,523 -- --
Class F * -- -- -- --
Class I 44 960 9 170
Class R3 -- -- -- --
---------- ------------ ---------- ------------
Total Dividend Reinvestment: 660 $ 14,134 31 $ 587
========== ============ ========== ============
|
Page 20
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
APRIL 30, 2013 (UNAUDITED)
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2013 OCTOBER 31, 2012
Redemptions:
Class A (4,033) $ (88,770) (3,817) $ (78,652)
Class C (14) (300) (378) (7,559)
Class F * -- -- (50) (755)
Class I (1,498) (34,281) (4,132) (78,369)
Class R3 -- -- (4) (73)
---------- ------------ ---------- ------------
Total Redemptions: (5,545) $ (123,351) (8,381) $ (165,408)
========== ============ ========== ============
|
* Effective December 15, 2011, all Class F Shares were liquidated and the Class
was terminated.
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the six months ended April 30, 2013,
were $817,364 and $198,379, respectively.
6. BORROWINGS
Effective March 28, 2013, the Trust and First Trust Variable Insurance Trust
entered into a $20 million Committed Line of Credit ("Line of Credit") with the
Bank of Nova Scotia ("Scotia") to be a liquidity backstop during periods of high
redemption volume. A commitment fee of 0.125% of the daily amount of the excess
of the commitment amount over the outstanding principal balance of the loans
will be charged by Scotia, which First Trust will allocate amongst the funds
that have access to the Line of Credit. To the extent that the Fund accesses the
Line of Credit, there would also be an interest fee charged.
7. DISTRIBUTION AND SERVICE PLANS
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the share
classes of the Fund are authorized to pay an amount up to 0.25%, 1.00% and 0.50%
of their average daily net assets each year for Class A, Class C and Class R3,
respectively, to reimburse First Trust Portfolios L.P. ("FTP"), the distributor
of the Fund, for amounts expended to finance activities primarily intended to
result in the sale of Fund shares or the provision of investor services. FTP may
also use this amount to compensate securities dealers or other persons for
providing distribution assistance, including broker-dealer and shareholder
support and educational and promotional services.
8. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
9. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
MARKET RISK: Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in stock
prices. Overall stock values could decline generally or could underperform other
investments. Companies with smaller market capitalizations are generally subject
to additional market risk.
MARKET CAPITALIZATION RISK: The Fund normally invests at least 80% of its assets
in Small-Cap Companies. Because the market capitalization is measured at the
time of its initial purchase, the Fund will not be forced to sell a stock
because the stock has exceeded or fallen below the market capitalization range.
Because of market movement, there can be no assurance that the securities held
by the Fund will stay within the given market capitalization range. As a result,
the Fund may be exposed to additional risk or investors may not be given the
opportunity to invest fully n a certain market capitalization range.
SMALL CAP RISK: The Fund invests in Small-Cap Companies. Such companies may be
more vulnerable to adverse general market or economic developments, and their
securities may be less liquid and may experience greater price volatility than
larger, more established companies as a result of several factors, including
limited trading volumes, products or financial resources, management
inexperience and
Page 21
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
APRIL 30, 2013 (UNAUDITED)
dependence on a few key people, and less publicly available information.
Accordingly, such companies are generally subject to greater market risk than
larger, more established companies. The market movements of equity securities
issued by issuers with smaller capitalizations may be more abrupt or erratic
than the market movements of equity securities of larger, more established
companies or the stock market in general. Historically, smaller capitalization
companies have sometimes gone through extended periods when they did not perform
as well as larger companies. In addition, equity securities of smaller
capitalization companies may be less liquid than those of larger companies.
VALUE INVESTING RISK: The Fund focuses its investments on securities that the
portfolio manager believes are undervalued or inexpensive relative to other
investments. These types of securities may present risks in addition to the
general risks associated with investing in them. These securities generally are
selected on the basis of an issuer's business and economic fundamentals or the
securities' current and projected credit profiles, relative to current market
price. Such securities are subject to the risk of misestimating certain
fundamental factors. Disciplined adherence to a "value" investment mandate
during periods in which that style is "out of favor" can result in significant
underperformance relative to overall market indices and other managed investment
vehicles that pursue growth style investments and/or flexible style mandates.
REAL ESTATE INVESTMENT RISK: The Fund invests in companies in the real estate
industry, including REITs. Therefore, the Fund is subject to the risks
associated with investing in real estate, which may include, but are not limited
to, fluctuations in the value of underlying properties; defaults by borrowers or
tenants; market saturation; changes in general and local economic conditions;
decreases in market rates for rents; increases in competition, property taxes,
capital expenditures or operating expenses; and other economic, political or
regulatory occurrences affecting companies in the real estate industry.
REIT RISK: REITs are subject to risks related to their structure and focus,
which include, but are not limited to, dependency upon management skills,
limited diversification, the risks of locating and managing financing for
projects, heavy cash flow dependency, possible default by borrowers, the costs
and potential losses of self-liquidation of one or more holdings, the risk of a
possible lack of mortgage funds and associated interest rate risks,
overbuilding, property vacancies, increases in property taxes and operating
expenses, changes in zoning laws, losses due to environmental damages, changes
in neighborhood values and appeal to purchases, the possibility of failing to
maintain exemptions from registration under the 1940 Act, and, in many cases,
relatively small market capitalization, which may result in less market
liquidity and greater price volatility. Fund shareholders indirectly pay REIT
fees and expenses.
BDC RISK: The Fund may invest in BDCs which may carry risks similar to those of
a private equity or venture capital fund. BDCs are not redeemable at the option
of the shareholder and they may trade in the market at a discount to their net
asset value. The BDCs included in the Fund may employ the use of leverage in its
portfolio through borrowings or the issuance of preferred stock. While leverage
often serves to increase the yield of a BDC, this leverage also subjects a BDC
to increased risks, including the likelihood of increased volatility and the
possibility that a BDC's common share income will fall if the dividend rate of
the preferred shares or the interest rate on any borrowings rises.
INDUSTRIALS AND PRODUCER DURABLES SECTOR RISK. The Fund invests in the
securities of companies in the industrials and producer durables sectors. Many
companies in these sectors convert unfinished goods into finished durables used
to manufacture other goods or provide services. Some industries included in
these sectors are electrical equipment and components, industrial products,
manufactured housing and telecommunications equipment. General risks of these
companies include the general state of the economy, intense competition,
consolidation, domestic and international politics, excess capacity and consumer
demand and spending trends. In addition, they may also be significantly affected
by overall capital spending levels, economic cycles, technical obsolescence,
delays in modernization, labor relations, government regulations and e-commerce
initiatives.
10. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were no subsequent events requiring recognition or disclosure in the financial
statements that have not already been disclosed.
Page 22
ADDITIONAL INFORMATION
FIRST TRUST/CONFLUENCE SMALL CAP VALUE FUND
APRIL 30, 2013 (UNAUDITED)
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com;
(3) on the SEC's website at http://www.sec.gov; and (4) for review and copying
at the SEC's Public Reference Room ("PRR") in Washington, DC. Information
regarding the operation of the PRR may be obtained by calling (800) SEC-0330.
Page 23
This Page Left Blank Intentionally.
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Confluence Investment Management LLC
349 Marshall Avenue, Suite 302
Saint Louis, MO 63119
ADMINISTRATOR,
FUND ACCOUNTANT &
CUSTODIAN
Brown Brothers Harriman & Co.
50 Milk Street
Boston, MA 02109
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
FIRST TRUST
First Trust Short Duration
High Income Fund
Semi-Annual Report
For the Period November 1, 2012
(Commencement of Operations)
through April 30, 2013
TABLE OF CONTENTS
FIRST TRUST SHORT DURATION HIGH INCOME FUND
SEMI-ANNUAL REPORT
APRIL 30, 2013
Shareholder Letter .......................................................... 1
At A Glance ................................................................. 2
Portfolio Commentary ........................................................ 4
Understanding Your Fund Expenses ............................................ 6
Portfolio of Investments .................................................... 7
Statement of Assets and Liabilities ......................................... 17
Statement of Operations ..................................................... 18
Statement of Changes in Net Assets .......................................... 19
Financial Highlights ........................................................ 20
Notes to Financial Statements ............................................... 23
Additional Information ...................................................... 28
|
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and its representatives, taking into account the
information currently available to them. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
forward-looking statements include the use of words such as "anticipate,"
"estimate," "intend," "expect," "believe," "plan," "may," "should," "would" or
other words that convey uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Short Duration High Income Fund (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and its
representatives only as of the date hereof. We undertake no obligation to
publicly revise or update these forward-looking statements to reflect events and
circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of Fund shares
may therefore be less than what you paid for them. Accordingly, you can lose
money by investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of certain other risks of investing in the
Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns and net asset value will fluctuate and Fund shares, when sold, may be
worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
First Trust are just that: informed opinions. They should not be considered to
be promises or advice. The opinions, like the statistics, cover the period
through the date on the cover of this report. The risks of investing in the Fund
are spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
SHAREHOLDER LETTER
FIRST TRUST SHORT DURATION HIGH INCOME FUND
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2013
Dear Shareholders:
I am pleased to present you with the semi-annual report for your investment in
First Trust Short Duration High Income Fund (the "Fund").
The report you hold contains detailed information about your investment, a
portfolio commentary from the Fund's management team that provides a recap of
the period, a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the period this report covers.
I encourage you to read this document and discuss it with your financial
advisor. A successful investor is also typically a knowledgeable one, as we have
found to be the case at First Trust Advisors L.P. ("First Trust").
The six months covered by this report have been more positive for the U.S.
markets. In fact, the S&P 500 Index, as measured on a total return basis, rose
14% during the period, and many economists and investors have felt positive
about the current market environment. Of course, past performance can never be
an indicator of future performance. As I have written many times, First Trust
believes that staying invested in quality products through up and down markets
and having a long-term horizon can help investors reach their financial goals.
As you know, First Trust offers a variety of products that we believe could fit
many financial plans to help investors seeking long-term investment success. We
encourage you to talk to your advisor about the other investments First Trust
offers that might also fit your financial goals and to discuss those goals with
your advisor regularly so that he or she can help keep you on track.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals. I look forward to
the remainder of 2013 and to the next edition of your Fund's report.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees and
Chief Executive Officer of First Trust Advisors L.P.
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Page 1
FIRST TRUST SHORT DURATION HIGH INCOME FUND
"AT A GLANCE"
AS OF APRIL 30, 2013 (UNAUDITED)
---------------------------------------------------------
FUND STATISTICS
---------------------------------------------------------
NET ASSET
FIRST TRUST SHORT DURATION HIGH INCOME FUND VALUE (NAV)
---------------------------------------------------------
Class A (FDHAX) $20.80
Class C (FDHCX) $20.79
Class I (FDHIX) $20.80
---------------------------------------------------------
---------------------------------------------------------
% OF TOTAL
CREDIT QUALITY(1) INVESTMENTS
---------------------------------------------------------
A/A2 0.4%
BBB-/Baa3 8.9
BB+/Ba1 4.0
BB/Ba2 6.6
BB-/Ba3 24.0
B+/B1 30.9
B/B2 13.5
B-/B3 4.8
CCC+/Caa1 5.7
CCC/Caa2 0.3
NR 0.9
------
Total 100.0%
======
---------------------------------------------------------
% OF TOTAL
TOP TEN HOLDINGS INVESTMENTS
---------------------------------------------------------
Caesar's Entertainment Inc., Term Loan 2.4%
Focus Brands, Inc., Term Loan 2.2
Beechcraft Holdings, Term Loan 2.1
Cooper Gay Swett & Crawford, Term Loan 2.1
Charter Communications, Term Loan 1.9
Seminole Tribe of Florida, Term Loan 1.7
CSC Holdings, LLC, Term Loan 1.7
Catalant Pharma Solutions, Inc., Term Loan 1.5
AMC Entertainment, Inc., Term Loan 1.3
EVERTEC, Term Loan 1.3
------
Total 18.2%
======
---------------------------------------------------------
% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
---------------------------------------------------------
Media 10.6%
Hotels, Restaurants & Leisure 8.3
Diversified Financial Services 6.7
Food Products 5.6
Wireless Telecommunication Services 5.2
Auto Components 5.0
Chemicals 4.6
Health Care Providers & Services 4.3
Aerospace & Defense 3.7
Real Estate Management & Development 3.0
Specialty Retail 2.8
Diversified Telecommunication Services 2.7
Consumer Finance 2.4
Professional Services 2.2
Insurance 2.2
Building Products 2.0
Diversified Consumer Services 2.0
Containers & Packaging 2.0
Road & Rail 2.0
Communications Equipment 2.0
Pharmaceuticals 2.0
Software 1.9
Health Care Equipment & Supplies 1.6
Semiconductors & Semiconductor Equipment 1.5
Commercial Services & Supplies 1.3
Independent Power Producers & Energy Traders 1.2
Capital Markets 1.2
Tires & Rubber 1.1
Oil, Gas & Consumable Fuels 1.1
Industrial Conglomerates 1.1
Health Care Technology 0.9
IT Services 0.9
Food & Staples Retailing 0.9
Machinery 0.7
Life Sciences Tools & Services 0.6
Automobiles 0.5
Real Estate Investment Trusts 0.4
Diversified Business Services 0.4
Household Durables 0.4
Distributors 0.3
Electric Utilities 0.3
Metals & Mining 0.2
Biotechnology 0.2
------
Total 100.0%
======
--------------------------------------------------------------------------------
CLASS CLASS CLASS
DIVIDEND DISTRIBUTIONS A SHARES C SHARES I SHARES
--------------------------------------------------------------------------------
Current Monthly Distribution per Share (2) $0.0792 $0.0662 $0.0834
Current Distribution Rate on NAV (3) 4.57% 3.82% 4.81%
|
(1) The credit quality and ratings information presented above reflects the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of the McGraw Hill Companies, Inc., Moody's Investors Service,
Inc. or a comparably rated NRSRO. For situations in which a security is
rated by more than one NRSRO and the ratings are not equivalent, the
highest rating is used. See the prospectus or summary prospectus for more
complete descriptions of ratings and rating organizations. Sub-investment
grade ratings are those rated BB+/Ba1 or lower. Investment grade ratings
are those rated BBB-/Baa3 or higher. The credit ratings shown relate to
the credit worthiness of the issuers of the underlying securities in the
Fund, and not the Fund or its shares. Credit ratings are subject to
change.
(2) Most recent distribution paid or declared through 4/30/2013. Subject to
change in the future.
(3) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
NAV as of 4/30/2013. Subject to change in the future.
NR Not Rated
Page 2
FIRST TRUST SHORT DURATION HIGH INCOME FUND
"AT A GLANCE" - (CONTINUED)
AS OF APRIL 30, 2013 (UNAUDITED)
PERFORMANCE OF A $10,000 INVESTMENT
This chart compares your Fund's Class I performance to
that of the Bank of America Merrill Lynch U.S. High Yield
Master II Constrained Index, the S&P/LSTA Leveraged Loan
Index and the Blended Benchmark from 11/1/2012 through
4/30/2013.
First Trust Short Bank of America Merrill
Duration High Lynch U.S. High S&P/LSTA
Income Fund - Class I Blended Yield Master II Leveraged Loan
Shares Benchmark (a) Constrained Index ("HUC0") Index ("SPBDAL")
1/11/12 10000 10000 10000 10000
4/30/13 10613 10548 10713 10384
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(a) The Blended Benchmark return is a 50/50 split between the Bank of America
Merrill Lynch U.S. High Yield Master II Constrained Index and the S&P/LSTA
Leveraged Loan Index returns.
-----------------------------------------------------------------------------------------------------------------------------
PERFORMANCE AS OF APRIL 30, 2013
-----------------------------------------------------------------------------------------------------------------------------
A SHARES C SHARES I SHARES
Inception (11/1/2012) Inception (11/1/2012) Inception (11/1/2012) BLENDED HUC0* SPBDAL*
through 4/30/2013 through 4/30/2013 through 4/30/2013 BENCHMARK*
W/MAX
1.00%
W/MAX CONTINGENT
W/O 3.50% W/O DEFERRED W/O W/O W/O W/O
SALES SALES SALES SALES SALES SALES SALES SALES
CUMULATIVE TOTAL RETURNS CHARGES CHARGE CHARGES CHARGE CHARGES CHARGES CHARGES CHARGES
Since Inception 6.03% 2.29% 5.65% 4.65% 6.13% 5.48% 7.13% 3.84%
30-Day SEC Yields(1) 3.66% 3.03% 3.90% N/A N/A N/A
-----------------------------------------------------------------------------------------------------------------------------
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* Since inception return is based on inception date of the Fund.
Performance figures assume reinvestment of all dividend distributions and do not
reflect the deduction of taxes that the shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would have
been lower if certain fees had not been waived and expenses reimbursed by the
Advisor. An index is a statistical composite that tracks a specific financial
market or sector. Unlike the Fund, the index does not actually hold a portfolio
of securities and therefore does not incur the expenses incurred by the Fund.
These expenses negatively impact the performance of the Fund. The Fund's past
performance does not predict future performance.
Performance of share classes will vary due to differences in sales charges and
expenses. Total returns with sales charges include payment of the maximum sales
charge of 3.50% for Class A Shares, a contingent deferred sales charge ("CDSC")
of 1.00% for Class C Shares in year one and 12b-1 service fees of 0.25% per year
of average daily net assets for Class A and combined Rule 12b-1 distribution and
service fees of up to 1.00% per year of average daily net assets for Class C
Shares. Class I Shares do not have a front-end sales charge or a CDSC;
therefore, performance is at net asset value.
(1) 30-day SEC yield is calculated by dividing the net investment income per
share earned during the most recent 30-day period by the maximum offering
price per share on the last day of the period. The reported SEC yields are
subsidized. The subsidized yields reflect the waiver and/or a
reimbursement of Fund expenses, which has the effect of lowering the
Fund's expense ratio and generating a higher yield.
Page 3
PORTFOLIO COMMENTARY
FIRST TRUST SHORT DURATION HIGH INCOME FUND
SEMI-ANNUAL REPORT
APRIL 30, 2013
INVESTMENT MANAGER
The First Trust Advisors L.P. Leveraged Finance Team ("First Trust") is a team
of eleven experienced credit professionals, specializing in below
investment-grade securities. The team is comprised of portfolio management,
research, trading and operations. As of March 31, 2013, the First Trust
Leveraged Finance Team managed or supervised approximately $923 million in
senior secured bank loans and high-yield bonds. These assets are spread across a
closed-end fund, an open-end fund, an exchange-traded fund, a series of unit
investment trusts and institutional separate accounts.
PORTFOLIO MANAGEMENT TEAM
WILLIAM HOUSEY, CFA - SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER
SCOTT D. FRIES, CFA - SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
PETER FASONE, CFA - VICE PRESIDENT, PORTFOLIO MANAGER
FIRST TRUST SHORT DURATION HIGH INCOME FUND
The primary investment objective of First Trust Short Duration High Income Fund
(the "Fund") is a high level of current income with a secondary objective of
capital appreciation.
MARKET RECAP
Capital markets were generally strong over the period, supported by generally
positive economic reports in the U.S. and relatively benign news regarding the
European debt situation. This positive backdrop supported asset prices in many
markets including both the high-yield bond and senior loan market.
Senior Loan Market
The S&P/LSTA Leveraged Loan Index returned a fairly impressive 3.84% for the
6-month period ended April 30, 2013. Additionally, performance throughout the
period was consistently positive with no individual month posting negative
performance.
From a credit quality perspective, lower credit-rated issues provided the
strongest performance for the period. Lower quality CCC rated issues returned
12.22% for the period, significantly outperforming the returns of higher-quality
B rated issues at 3.46% and BB rated issues at 2.70%. In terms of prices of
loans, we witnessed a continued ascent in average loan prices. The average price
of loans in the market began the period at $96.4 and rose 2 points over the
6-month period to end at $98.4.
High-Yield Bond Market
The Bank of America Merrill Lynch U.S. High Yield Master II Constrained Index
returned 7.13% for the 6-month period.
Similar to the returns in senior loans, lower-quality high-yield bonds
outperformed higher-quality high-yield bonds during the period. Lower-quality
CCC rated and below issues returned 10.93% during the period, which exceeded
returns of higher-quality B rated issues at 7.32% and BB rated issues at 5.64%.
As the returns suggest, average bond prices rose during the period, from $103.4
to $106.5 to end the period.
Credit Quality/Default Rates
One important factor helping support the positive returns for the 6-month period
was the continuation of a strong credit environment. The trailing twelve-month
default rate at the end of April 2013 was 1.91% for senior loans and 0.99% for
high-yield bonds. The default rate remains well inside the long-term historical
average for both senior loans and high-yield bonds. The long-term average
default rate for senior loans is 3.33% (for the period March 1999 - April 2013),
while the long-term average default rate for high-yield bonds is 3.62% (for the
period March 1999 - April 2013) (Source: S&P/Capital IQ).
Two trends in the market that have helped keep default volumes in check are
solid corporate fundamentals and robust capital markets activity. Regarding
corporate fundamentals, senior loan issuers that file their financial results
publicly (also a good proxy for high-yield bond issuers) grew cash flows by
approximately 7% year-over-year in the fourth quarter of 2012 (latest data
available), which represents 14 straight quarters of cash flow growth. This
extended period of cash flow growth has given companies the opportunity to
strengthen their balance sheets. The second positive trend is the active capital
markets, which
Page 4
PORTFOLIO COMMENTARY - (CONTINUED)
have provided companies the ability to refinance near-term debt maturities with
longer-dated paper and a lower coupon. This process of refinancing extends debt
maturities of corporate borrowers and helps alleviate a potential catalyst for
future defaults. In addition, the lower coupon eases a company's interest
burden. Loan maturities in either 2013 or 2014 stand at just $29.8 billion, down
from $47.6 billion at December 2012 and $140.3 billion at the end of 2011.
High-yield maturities in either 2013 or 2014 stand at just $76 billion, down
from $219 billion at December 2008. Overall, the combination of good corporate
performance and a reduction in near-term maturities supports our view that the
default environment will remain modest.
FUND PERFORMANCE
The Fund's inception date was November 1, 2012. The Fund's Class I Share
performance, excluding sales load, from inception through April 30, 2013 was
6.13%, exceeding the blended benchmark return of 5.48% (comprised of 50%
S&P/LSTA Leveraged Loan Index and 50% Bank of America Merrill Lynch US High
Yield Master II Constrained Index).
The Fund paid its first monthly distribution payment in December 2012 of $0.0834
per share on the Class I Shares. Since that time, the Fund has maintained this
level of monthly distributions. At the end of the period, the effective yield
based on this distribution rate was 4.81% for the Class I Shares.
From a portfolio construction standpoint, the Fund is favoring senior loan
holdings relative to high-yield bonds. This positioning is driven by the
relative value opportunities we're seeing in the market. The senior loan market,
in aggregate, is offering a yield that is relatively close to that of the
high-yield bond market. In the current environment, given senior loans provide a
superior position in a company's capital structure (senior secured) relative to
high-yield bonds and given the floating-rate feature of loans (benefitting
investors by limiting interest rate risk), we believe that the relative value is
tilting in the direction of the senior loan market relative to high-yield bonds.
The Fund performed well over the period, outperforming its blended benchmark.
This outperformance was driven principally by superior asset selection relative
to the benchmark. While the Fund's under-weight position in the lowest
credit-quality issues (CCC rated and below) and the tilt towards senior loans
relative to high-yield bonds were headwinds to performance for the period, good
individual asset selection more than made up for these headwinds.
MARKET AND FUND OUTLOOK
Our outlook for the leveraged finance market (high-yield bonds and senior loans)
remains constructive. We expect the new issue market to remain robust with
plenty of investment opportunities coming to market. As we evaluate new
investment opportunities for the portfolio, decisions will continue to be rooted
in our rigorous bottom up credit analysis with a specific focus on the
opportunities that offer the best risk and reward balance. Through this process,
we expect the portfolio will continue to favor higher credit quality in relation
to the benchmark.
We believe the combination of a modest default environment, slow but positive
economic growth, and strong investor demand provides a firm backdrop for returns
in the periods ahead. Given the tactical nature of the Fund, we're using our
rigorous fundamental investment process to capitalize on strong corporate
fundamentals and relative value opportunities within the senior loan and
high-yield markets. Our analysis suggests that, in light of the historically low
yield and historically high prices within the high-yield market, there's
considerably more interest rate risk embedded in pockets of high-yield than
history would indicate. Moreover, given the narrow yield differential between
senior loans and high-yield bonds, investors benefit far more from the
structural enhancements available for senior loans (senior secured position
within the capital structure, floating interest rate) than the slight yield
pick-up in high-yield bonds, furthering support for our thesis that senior loans
appear more attractive today than high-yield bonds.
Page 5
FIRST TRUST SHORT DURATION HIGH INCOME FUND
UNDERSTANDING YOUR FUND EXPENSES
APRIL 30, 2013 (UNAUDITED)
As a shareholder of the First Trust Short Duration High Income Fund, you incur
two types of costs: (1) transaction costs, including sales charges (loads) on
purchases of Class A Shares and contingent deferred sales charges on the lesser
of purchase price or redemption proceeds of Class C Shares; and (2) ongoing
costs, including management fees; distribution and/or service (12b-1) fees; and
other Fund expenses. This Example is intended to help you understand your
ongoing costs (in U.S. dollars) of investing in the Fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The Example is based on an investment of $1,000 invested at the beginning of the
period and held through the six-month period ended April 30, 2013.
ACTUAL EXPENSES
The first three columns of the table below provide information about actual
account values and actual expenses. You may use the information in these
columns, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the third column under the heading entitled "Expenses
Paid During Period" to estimate the expenses you paid on your account during the
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The next three columns of the table below provide information about hypothetical
account values and hypothetical expenses based on the Fund's actual expense
ratio and an assumed rate of return of 5% per year before expenses, which is not
the Fund's actual return. The hypothetical account values and expenses may not
be used to estimate the actual ending account balance or expenses you paid for
the period. You may use this information to compare the ongoing cost of
investing in the Fund and other funds. To do so, compare this 5% hypothetical
example with the 5% hypothetical examples that appear in the shareholder reports
of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or contingent deferred sales charges. Therefore, the
hypothetical section of the table is useful in comparing ongoing costs only, and
will not help you determine the relative total costs of owning different funds.
In addition, if these transactional costs were included, your costs would have
been higher.
HYPOTHETICAL
ACTUAL EXPENSES (5% RETURN BEFORE EXPENSES)
--------------------------------------------- ---------------------------------------------------------
BEGINNING ENDING EXPENSES PAID BEGINNING ENDING EXPENSES PAID
ACCOUNT ACCOUNT DURING PERIOD ACCOUNT ACCOUNT DURING PERIOD ANNUALIZED
VALUE VALUE 11/1/2012 - VALUE VALUE 11/1/2012 - EXPENSE
11/1/2012 4/30/2013 4/30/2013 (a) 11/1/2012 4/30/2013 4/30/2013 (a) RATIOS (b)
----------------------------------------------------------------------------------------------------------
Class A $ 1,000.00 $ 1,060.30 $ 6.24 $ 1,000.00 $ 1,018.60 $ 6.26 1.25%
Class C 1,000.00 1,056.50 9.97 1,000.00 1,014.88 9.99 2.00
Class I 1,000.00 1,061.30 5.00 1,000.00 1,019.84 5.01 1.00
|
(a) Expenses are equal to the annualized expense ratios, multiplied by the
average account value over the period (November 1, 2012 through April 30,
2013), multiplied by 181/365 (to reflect the six-month period).
(b) These expense ratios reflect expense caps.
Page 6
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL RATINGS (a) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (b) MATURITY (c) VALUE
------------- ----------------------------------------------- -------------- ------------- -------------- -------------
SENIOR FLOATING-RATE LOAN INTERESTS - 73.5%
AEROSPACE & DEFENSE - 2.9%
$ 150,000 AM General, LLC, Term Loan B .................. B2 BB- 10.25% 03/20/18 $ 150,625
500,000 Beechcraft Holdings, Term Loan B .............. B1 BB- 5.75% 12/05/20 499,065
45,802 DynCorp International, Inc., Term Loan ........ Ba2 BB- 6.25% 07/07/16 46,111
49,875 Sequa Corp., Term Loan B ...................... B1 B 5.25% 05/29/17 50,615
-------------
746,416
-------------
AGRICULTURAL PRODUCTS - 1.3%
200,000 Dole Food Company, Inc., Term Loan B .......... Ba3 B+ 3.75% 04/22/20 201,250
149,499 Jimmy Sanders, Term Loan B .................... B2 B 6.75% 11/15/18 151,368
-------------
352,618
-------------
ALTERNATIVE CARRIERS - 1.0%
100,000 DigitalGlobe, Inc., Term Loan B ............... Ba2 BBB- 3.75% 01/25/20 101,050
158,061 Telesat Canada, Term Loan B ................... Ba3 BB- 3.50% 03/25/19 159,304
-------------
260,354
-------------
APPAREL RETAIL - 1.3%
249,750 Collective Brands, Inc., Term Loan ............ B1 B 7.25% 09/19/19 253,107
100,000 Phillips-Van Heusen Corp., Term Loan B ........ Ba1 BBB- 3.25% 12/31/19 100,808
-------------
353,915
-------------
APPLICATION SOFTWARE - 1.0%
49,749 Eagle Parent, Inc., Term Loan B ............... Ba3 B+ 4.50% 05/16/18 50,495
100,000 Flexera Software, LLC, Term Loan B ............ B2 B+ 5.00% 02/14/19 101,750
100,000 Verint Systems, Inc., Term Loan B ............. B1 BB- 4.00% 09/06/19 100,625
-------------
252,870
-------------
ASSET MANAGEMENT & CUSTODY BANKS - 1.2%
100,000 Nuveen Investments, Inc., Term Loan, First
Lien ....................................... B2 B 5.20% 05/13/17 101,125
166,668 Nuveen Investments, Inc., Term Loan, Second
Lien ....................................... Caa1 CCC 6.50% 02/28/19 167,709
49,875 TCW Group, Inc., Term Loan B .................. Ba1 BB+ 4.00% 12/20/19 50,333
-------------
319,167
-------------
AUTO PARTS & EQUIPMENT - 3.4%
100,000 Affinia Group, Inc., Term Loan B2 ............. B2 B 4.75% 04/09/20 101,125
200,000 BBB Industries, LLC, Term Loan B .............. NR NR 5.50% 03/25/19 201,000
49,875 Metaldyne, LLC, Term Loan B ................... B1 B+ 5.00% 12/04/18 50,748
249,375 Remy International, Inc., Term Loan B ......... B1 B+ 4.25% 02/28/20 251,714
142,857 Tower International, Inc., Term Loan B ........ B1 B+ 5.75% 04/10/20 144,464
-------------
900,911
-------------
AUTOMOBILE MANUFACTURERS - 0.2%
49,873 Chrysler Group, LLC, Term Loan B .............. Ba1 BB 6.00% 05/24/17 50,509
-------------
BIOTECHNOLOGY - 0.2%
49,673 Grifols, SA, Term Loan B ...................... Ba2 BB+ 4.25% 06/01/17 50,225
-------------
BROADCASTING - 3.7%
200,000 Clear Channel Communications, Inc., Term
Loan B...................................... Caa1 CCC+ 3.85% 01/29/16 183,278
49,750 Cumulus Media Holdings, Inc., Term Loan,
First Lien ................................. Ba2 BB- 4.50% 09/16/18 50,605
|
See Notes to Financial Statements Page 7
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL RATINGS (a) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (b) MATURITY (c) VALUE
------------- ----------------------------------------------- -------------- ------------- -------------- -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (CONTINUED)
BROADCASTING - (CONTINUED)
$ 73,333 FoxCo Acquisition, LLC, Term Loan ............. B2 B 5.50% 07/14/17 $ 74,502
150,000 Hubbard Radio, LLC, Tranche 1 Term Loan ....... Ba3 B+ 4.50% 04/28/17 152,437
14,857 Mission Broadcasting, Term Loan B ............. Ba2 BB 4.50% 11/19/19 15,043
173,366 NEP/NCP Holdco, Inc., Term Loan B ............. B1 B 4.75% 01/22/20 176,400
28,571 NEP/NCP Holdco, Inc., Term Loan, Second
Lien ....................................... Caa1 CCC+ 9.50% 07/18/20 29,691
35,143 Nexstar Broadcasting, Term Loan B ............. Ba2 BB 4.50% 11/19/19 35,582
50,000 Univision Corp., Term Loan C1 ................. B2 B+ 4.50% 02/28/20 50,438
200,000 Univision Corp., Term Loan C2 ................. B2 B+ 4.50% 02/28/20 201,900
-------------
969,876
-------------
BUILDING PRODUCTS - 0.9%
133,333 American Builders & Contractors Supply Co.,
Inc., Term Loan B .......................... B1 BB+ 3.50% 04/05/20 134,388
99,750 Unifrax, LLC, Term Loan B ..................... B1 B+ 4.25% 11/30/18 100,840
-------------
235,228
-------------
CABLE & SATELLITE - 3.0%
400,000 Charter Communications Operating, LLC,
Term Loan E ................................ Baa3 BB+ 3.00% 04/10/20 398,916
400,000 CSC Holdings, LLC, Term Loan B ................ Baa3 BBB- 2.70% 04/11/20 398,864
-------------
797,780
-------------
CASINOS & GAMING - 4.2%
619,355 Caesar's Entertainment, Inc., Term Loan B6 .... B3 B 5.45% 01/28/18 561,582
4,706 ROC Finance, LLC, Delayed Draw Term
Loan (e) ................................... B1 BB- 2.25%(d) 08/19/17 4,835
49,383 ROC Finance, LLC, Term Loan B ................. B1 BB- 8.50% 03/25/19 49,815
400,000 Seminole Tribe of Florida, Term Loan B ........ Baa3 BBB- 3.00% 04/04/20 402,328
81,481 Twin River Management Group, Inc., Term
Loan B ..................................... B1 BB- 6.50% 09/30/18 82,398
-------------
1,100,958
-------------
COAL & CONSUMABLE FUELS - 0.4%
99,499 Arch Coal, Inc., Term Loan .................... Ba3 BB 5.75% 05/16/18 100,784
-------------
COMMODITY CHEMICALS - 0.8%
198,810 Tronox, Inc., Term Loan B ..................... Ba2 BBB- 4.50% 03/13/20 201,605
-------------
COMMUNICATIONS EQUIPMENT - 1.7%
50,000 Alcatel-Lucent USA, Inc., Term Loan B ......... B1 BB- 6.25% 07/29/16 50,722
149,625 Alcatel-Lucent USA, Inc., Term Loan C ......... B1 BB- 7.25% 01/29/19 153,280
200,000 ARRIS Group, Inc., Term Loan B ................ Ba3 BB- 3.50% 02/07/20 200,126
49,746 CommScope, Inc., Term Loan B .................. Ba3 BB 3.75% 01/14/18 50,400
-------------
454,528
-------------
CONSTRUCTION & FARM MACHINERY & HEAVY
TRUCKS - 0.4%
115,518 Navistar International Corp., Term Loan B ..... Ba3 B+ 5.75% 08/16/17 117,612
-------------
CONSUMER FINANCE - 1.3%
49,875 Altisource Solutions S.a.r.l., Term Loan B .... B1 BB- 5.75% 11/20/19 50,374
150,000 Ocwen Financial Corp., Term Loan B ............ B1 B 5.00% 01/28/18 152,362
|
Page 8 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL RATINGS (a) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (b) MATURITY (c) VALUE
------------- ----------------------------------------------- -------------- ------------- -------------- -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (CONTINUED)
CONSUMER FINANCE - (CONTINUED)
$ 147,484 Walter Investment Management Corp., Term
Loan B ..................................... B2 B+ 5.75% 11/28/17 $ 149,912
-------------
352,648
-------------
DISTRIBUTORS - 0.3%
74,813 WESCO Distribution, Inc., Term Loan B ......... Ba3 B+ 4.50% 12/04/19 75,561
-------------
DIVERSIFIED REAL ESTATE ACTIVITIES - 1.5%
193,817 iStar Financial, Inc., Term Loan .............. B1 BB- 4.50% 10/15/17 195,877
200,000 Starwood Property Trust, Term Loan B .......... Ba3 BB+ 3.50% 04/04/20 200,500
-------------
396,377
-------------
EDUCATION SERVICES - 0.4%
99,750 Bright Horizons Family Solutions, LLC,
Term Loan B ................................ B1 B+ 4.00%-5.25% 01/20/20 100,623
-------------
ELECTRIC UTILITIES - 0.3%
100,000 Texas Competitive Electric Holdings
Company, LLC, Term Loan .................... Caa3 CCC 3.70%-3.78% 10/10/14 75,083
-------------
ENVIRONMENTAL & FACILITIES SERVICES - 1.0%
199,500 Advanced Disposal Services, Inc., Term
Loan B ..................................... B1 B+ 4.25% 10/09/19 201,892
48,426 EnergySolutions, LLC, Term Loan ............... B2 BB- 6.25% 08/15/16 48,837
-------------
250,729
-------------
HEALTH CARE EQUIPMENT - 0.6%
49,750 Biomet, Inc., Term Loan B1 .................... B1 BB- 3.95%-4.03% 07/25/17 50,372
99,498 Kinetic Concepts, Inc., Term Loan C1 .......... Ba2 BB- 5.50% 05/04/18 101,133
-------------
151,505
-------------
HEALTH CARE FACILITIES - 0.2%
49,750 United Surgical Partners International, Inc.,
Term Loan B................................. B1 B 4.75% 04/30/19 49,999
-------------
HEALTH CARE SERVICES - 3.7%
99,750 Air Medical Group Holdings, Inc., Term
Loan B ..................................... B2 B 6.50% 05/31/18 101,932
100,000 Apria Healthcare Group, Inc., Term Loan B ..... B1 BB 6.75% 03/20/20 99,969
49,349 CHG Healthcare Services, Term Loan B .......... B1 B 5.00% 11/13/19 50,074
199,492 Emergency Medical Services Corp., Term
Loan B ..................................... B1 B+ 4.00% 05/25/18 201,878
150,000 Healogics, Inc., Term Loan B .................. B1 B 5.25% 02/05/19 151,612
49,875 Heartland Dental Care, Inc., Term Loan B ...... Ba3 B+ 6.25% 12/20/18 50,561
49,747 Rural Metro Corp., Term Loan, First Lien ...... B1 B+ 5.75% 06/30/18 49,965
249,375 Sheridan Holdings, Inc., Term Loan B .......... B1 B+ 4.50% 06/29/18 252,338
-------------
958,329
-------------
HEALTH CARE SUPPLIES - 0.2%
50,000 Sage Products, Inc., Term Loan B .............. B1 B 4.25% 12/13/19 50,375
-------------
|
See Notes to Financial Statements Page 9
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL RATINGS (a) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (b) MATURITY (c) VALUE
------------- ----------------------------------------------- -------------- ------------- -------------- -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (CONTINUED)
HEALTH CARE TECHNOLOGY - 0.8%
$ 49,749 Emdeon Business Services, LLC, Term
Loan B ..................................... Ba3 BB- 5.00% 11/02/18 $ 50,175
49,747 Trizetto Group, Inc., Term Loan B ............. B1 BB- 4.75% 05/02/18 50,047
50,000 Trizetto Group, Inc., Term Loan, Second
Lien ....................................... Caa1 CCC+ 8.50% 03/26/19 51,125
49,749 Wolverine Healthcare Analytics, Inc., Term
Loan B ..................................... Ba3 B+ 4.50% 05/31/19 50,341
-------------
201,688
-------------
HOMEFURNISHING RETAIL - 0.4%
49,875 Serta Simmons Holdings, LLC, Term
Loan B ..................................... B1 B+ 5.00% 10/01/19 50,522
49,875 Tempur-Pedic International, Inc., Term
Loan B ..................................... Ba3 BB 5.00% 11/20/19 50,667
-------------
101,189
-------------
HOUSEHOLD APPLIANCES - 0.4%
99,494 Alliance Laundry Systems, LLC, Term
Loan B ..................................... B2 B 4.50% 12/07/19 100,364
-------------
HUMAN RESOURCE & EMPLOYMENT SERVICES -
0.2%
49,750 Genpact International, Inc., Term Loan B ...... Ba2 BB+ 4.25% 08/17/19 50,621
-------------
HYPERMARKETS & SUPER CENTERS - 0.8%
199,251 BJ's Wholesale Club, Inc., Term Loan,
First Lien ................................. B3 B 4.25% 09/20/19 200,841
-------------
INDEPENDENT POWER PRODUCERS & ENERGY
TRADERS - 0.6%
49,750 Calpine Corp., Term Loan B3 ................... B1 BB- 4.00% 09/28/19 50,367
38,462 Dynegy, Inc., Term Loan B1 .................... B2 BB- 4.00% 04/16/20 38,441
61,538 Dynegy, Inc., Term Loan B2 .................... B2 BB- 4.00% 04/11/20 61,505
-------------
150,313
-------------
INDUSTRIAL CONGLOMERATES - 1.0%
199,500 Silver II Borrower S.C.A., Term Loan B ........ B1 B+ 4.00% 12/13/19 200,847
49,875 Tomkins Air Distribution, Term Loan B ......... B1 B 5.00% 11/09/18 50,644
-------------
251,491
-------------
INDUSTRIAL MACHINERY - 0.2%
49,875 Dematic Holdings S.a.r.l., Term Loan B ........ B1 B 5.25% 12/18/19 50,374
-------------
INSURANCE BROKERS - 3.6%
249,375 AmWINS Group, LLC, Term Loan B ................ B1 B+ 5.00% 06/06/19 251,931
49,875 Compass Investors, Inc., Term Loan B .......... B1 B- 5.25% 12/14/19 50,449
149,625 Confie Seguros Holding Co., Term Loan B ....... B2 B- 6.50% 11/08/18 150,467
300,000 Cooper Gay Swett & Crawford, Ltd., Term
Loan B ..................................... Ba3 B 8.25% 04/05/20 302,625
180,000 Cooper Gay Swett & Crawford, Ltd., Term
Loan, Second Lien .......................... Caa1 CCC+ 8.25% 09/19/20 183,600
-------------
939,072
-------------
|
Page 10 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL RATINGS (a) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (b) MATURITY (c) VALUE
------------- ----------------------------------------------- -------------- ------------- -------------- -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (CONTINUED)
INTEGRATED TELECOMMUNICATION SERVICES - 0.8%
$ 100,000 Securus Technologies, Inc, Term Loan .......... B2 B 4.75% 04/15/20 $ 100,188
99,750 Windstream Corp., Term Loan B4 ................ Baa3 BB+ 3.50% 01/08/20 100,062
-------------
200,250
-------------
IT CONSULTING & OTHER SERVICES - 0.6%
45,192 Sirius Computer Solutions, Inc., Term Loan .... Ba3 BB- 7.00% 11/30/18 45,983
99,107 West Corp., Term Loan B8 ...................... Ba3 B+ 3.75% 06/30/18 100,649
-------------
146,632
-------------
LIFE & HEALTH INSURANCE - 0.2%
47,788 CNO Financial Group, Inc., Term Loan B2 ....... Ba3 B+ 5.00% 09/20/18 48,425
-------------
LIFE SCIENCES TOOLS & SERVICES - 0.1%
31,288 Quintiles Transnational Corp., Term Loan B2 ... B1 BB- 4.50% 06/08/18 31,686
-------------
METAL & GLASS CONTAINERS - 1.0%
150,000 Berlin Packaging, Term Loan B ................. B1 B+ 4.75% 03/18/19 151,594
100,000 Berry Plastics Corp., Term Loan D ............. B1 B+ 3.50% 02/04/20 99,833
-------------
251,427
-------------
MOVIES & ENTERTAINMENT - 1.5%
300,000 AMC Entertainment, Inc., Term Loan B .......... Ba2 BB- 3.50% 04/18/20 301,947
100,000 Village Roadshow Films Ltd., Term Loan B ...... A2 NR 4.75% 11/21/17 102,000
-------------
403,947
-------------
OTHER DIVERSIFIED FINANCIAL SERVICES - 3.3%
300,000 EVERTEC, Term Loan B .......................... B1 BB- 3.50% 04/05/20 299,250
150,000 First Data Corp., Term Loan B ................. B1 B+ 5.20% 03/24/17 149,766
257,902 Moneygram International, Term Loan B .......... B1 BB- 4.25% 03/25/20 259,930
149,625 Transfirst Holdings, Inc., Term Loan B ........ B1 B 4.75% 12/27/17 149,999
-------------
858,945
-------------
PACKAGED FOODS & MEATS - 3.0%
239,107 Blue Buffalo Company, Ltd., Term Loan B ....... B1 B+ 4.75% 08/07/19 242,394
49,749 Ferrara Candy Company, Term Loan B ............ B2 B 7.50%-8.50% 06/08/18 50,371
150,000 H.J. Heinz Co., Term Loan B2 .................. Ba2 BB 3.50% 03/18/20 151,313
200,000 New HB Acquisition, LLC, Term Loan B .......... NR B- 6.75% 02/12/20 204,500
150,000 Weight Watchers International, Inc., Term
Loan B2 .................................... Ba1 BB- 3.75% 04/01/20 149,495
-------------
798,073
-------------
PAPER PACKAGING - 0.2%
49,750 Reynolds Consumer Products Holdings, Inc.,
Term Loan .................................. B1 B+ 4.75% 09/21/18 50,520
-------------
PHARMACEUTICALS - 1.7%
250,000 Catalent Pharma Solutions, Inc., Term Loan .... Caa1 B 6.50% 12/31/17 252,500
99,750 Catalent Pharma Solutions, Inc., Term
Loan B2 .................................... Ba3 BB- 4.25% 09/15/17 100,822
99,501 Par Pharmaceutical, Inc., Term Loan B ......... B1 B+ 4.25% 09/30/19 100,413
-------------
453,735
-------------
|
See Notes to Financial Statements Page 11
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL RATINGS (a) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (b) MATURITY (c) VALUE
------------- ----------------------------------------------- -------------- ------------- -------------- -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (CONTINUED)
PUBLISHING - 0.8%
$ 100,000 McGraw-Hill Global Education Holdings, LLC,
Term Loan B ................................ B2 NR 9.00% 03/18/19 $ 100,000
99,750 Tribune Co., Term Loan B ...................... Ba3 BB+ 4.00% 12/17/19 100,893
-------------
200,893
-------------
REAL ESTATE SERVICES - 1.0%
250,000 Realogy Corp., Term Loan B .................... B1 BB- 4.50% 02/12/20 252,890
-------------
RESEARCH & CONSULTING SERVICES - 1.7%
100,000 Advantage Sales & Marketing, Inc., Term
Loan, First Lien ........................... Ba3 B+ 4.25% 12/18/17 101,125
152,105 Advantage Sales & Marketing, Inc., Term
Loan, Second Lien .......................... Caa1 B- 8.25% 06/18/18 152,485
100,000 SurveyMonkey.Com, LLC, Term Loan B ............ B2 B 5.50% 02/07/19 101,250
99,746 Symphony IRI Group, Inc., Term Loan B ......... B1 B+ 4.50% 12/01/17 100,744
-------------
455,604
-------------
RESTAURANTS - 1.9%
448,164 Focus Brands, Inc., Term Loan B ............... B1 B 6.25% 02/21/18 450,965
50,000 Focus Brands, Inc., Term Loan, Second Lien .... Caa1 CCC+ 10.25% 08/21/18 51,125
-------------
502,090
-------------
RETAIL REITS - 0.4%
100,000 Capital Automotive L.P., Term Loan, Second ....
Lien B1 B- 6.00% 04/16/20 103,000
-------------
SEMICONDUCTORS - 1.4%
250,000 Freescale Semiconductor, Inc., Term Loan B .... B1 B 5.00% 01/30/20 253,438
99,750 NXP B.V., Term Loan C ......................... B1 B+ 4.75% 12/06/19 101,994
-------------
355,432
-------------
SPECIALIZED CONSUMER SERVICES - 0.4%
99,750 Asurion Corp., Term Loan B1 ................... Ba2(f) B+ 4.50% 05/24/19 100,860
-------------
SPECIALIZED FINANCE - 1.0%
99,500 AlixPartners, LLP, Term Loan B2 ............... Ba3 B+ 4.50% 06/01/19 100,682
100,000 Duff & Phelps Corp., Term Loan B .............. B1 B 4.50% 03/12/20 101,000
49,367 Fly Leasing, Ltd., Term Loan B ................ B1 BBB- 5.75% 08/06/18 50,005
-------------
251,687
-------------
SPECIALTY CHEMICALS - 2.5%
65,839 AI Chem & Cy S.C.A., Term Loan B1 ............. Ba3 B+ 4.50% 09/12/19 66,621
34,160 AI Chem & Cy S.C.A., Term Loan B2 ............. Ba3 B+ 4.50% 09/12/19 34,566
49,749 Ascend Performance Materials, LLC, Term
Loan B ..................................... B1(f) BB-(f) 6.75% 04/10/18 50,495
49,719 AZ Chemicals, Inc., Term Loan B ............... Ba3 BB- 5.25% 12/22/17 50,526
200,000 Cyanco Intermediate Corp., Term Loan B ........ B2 B+ 5.50% 05/15/20 199,500
150,000 DuPont Performance Coatings, Term Loan B ...... B1 B+ 4.75% 01/17/20 151,860
49,875 Houghton International, Inc., Term Loan B ..... B1 B 5.25% 12/13/19 50,623
149,591 Nusil Technology, LLC, Term Loan .............. B1 BB- 5.00% 04/07/17 150,386
49,746 Omnova Solutions, Inc., Term Loan B ........... Ba2 B+ 4.25% 05/31/18 50,243
-------------
652,960
-------------
|
Page 12 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL RATINGS (a) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (b) MATURITY (c) VALUE
------------- ----------------------------------------------- -------------- ------------- -------------- -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (CONTINUED)
SPECIALTY STORES - 0.8%
$ 200,000 Rite Aid Corp., Term Loan B ................... B1 B+ 4.00% 02/07/20 $ 202,376
-------------
STEEL - 0.2%
49,750 Fortescue (FMG), Term Loan B .................. Ba1 BB+ 5.25% 10/02/17 50,621
-------------
SYSTEMS SOFTWARE - 0.7%
45,651 Riverbed Technology, Inc., Term Loan B ........ Ba3 BBB- 4.00% 12/13/19 46,450
41,537 SS&C Technologies Holdings, Inc., Term
Loan B1 .................................... Ba3 BB- 5.00% 05/24/19 41,693
4,297 SS&C Technologies Holdings, Inc., Term
Loan B2 .................................... Ba3 BB- 5.00% 05/24/19 4,313
99,750 SunGard Data Systems, Inc., Term Loan D ....... Ba3 BB 4.50% 12/14/19 100,935
-------------
193,391
-------------
TRUCKING - 0.8%
49,875 Hertz Corp., Term Loan B2 ..................... Ba1 BB 3.75% 03/11/18 50,399
150,000 SIRVA Worldwide, Inc., Term Loan B ............ NR(f) B(f) 7.50% 03/22/19 148,125
-------------
198,524
-------------
WIRELESS TELECOMMUNICATION SERVICES - 2.4%
250,000 Cricket Communications, Inc., Term Loan C ..... Ba3 B+ 4.75% 03/15/20 251,027
100,000 Lightower Fiber Networks, Term Loan B ......... B1 B 4.50% 04/01/20 101,000
125,000 Lightower Fiber Networks, Term Loan,
Second Lien ................................ Caa1 CCC+ 8.00% 04/01/21 127,344
150,000 Syniverse Holdings, Inc., Delayed Draw Term
Loan (e) ................................... B1 BB- 1.50%(d) 04/23/19 150,470
-------------
629,841
-------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS ................................................. 19,166,347
(Cost $18,952,682) -------------
PRINCIPAL RATINGS (a) STATED STATED
VALUE DESCRIPTION MOODY'S S&P COUPON MATURITY VALUE
------------- ----------------------------------------------- -------------- ------------- -------------- -------------
CORPORATE BONDS AND NOTES - 12.7%
AEROSPACE & DEFENSE - 0.4%
100,000 GenCorp, Inc. (g) ............................. Ba3 B- 7.13% 03/15/21 108,250
-------------
AUTO PARTS & EQUIPMENT - 1.0%
250,000 American Axle & Manufacturing, Inc............. B2 B 6.25% 03/15/21 264,687
-------------
AUTOMOBILE MANUFACTURERS - 0.2%
50,000 Chrysler Group LLC/Chrysler Group
Co-Issuer, Inc.............................. B1 B 8.25% 06/15/21 57,625
-------------
BUILDING PRODUCTS - 0.9%
125,000 American Builders & Contractors Supply Co.,
Inc. (g) ................................... B3 B 5.63% 04/15/21 130,156
100,000 Apex Tool Group, LLC (g) ...................... B3 B- 7.00% 02/01/21 107,750
-------------
237,906
-------------
CABLE & SATELLITE - 0.2%
50,000 CCO Holdings LLC/CCO Holdings Capital
Corp. (g) .................................. B1 BB- 5.25% 03/15/21 51,500
-------------
|
See Notes to Financial Statements Page 13
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL RATINGS (a) STATED STATED
VALUE DESCRIPTION MOODY'S S&P COUPON MATURITY VALUE
------------- ----------------------------------------------- -------------- ------------- -------------- -------------
CORPORATE BONDS AND NOTES - (CONTINUED)
CASINOS & GAMING - 1.3%
$ 50,000 MGM Resorts International ..................... B3 B+ 8.63% 02/01/19 $ 59,500
250,000 Station Casinos LLC (g) ....................... Caa1 CCC+ 7.50% 03/01/21 265,000
-------------
324,500
-------------
COAL & CONSUMABLE FUELS - 0.4%
100,000 Arch Coal, Inc................................. B3 B- 8.75% 08/01/16 104,500
-------------
COMMERCIAL PRINTING - 0.2%
50,000 RR Donnelley & Sons Co......................... Ba3 BB 7.88% 03/15/21 54,750
-------------
CONSUMER FINANCE - 0.8%
200,000 Nationstar Mortgage LLC/Nationstar Capital
Corp. (g) .................................. B2 B+ 6.50% 07/01/21 210,750
-------------
DISTILLERS & VINTNERS - 0.2%
50,000 Constellation Brands, Inc...................... Ba1 BB+ 3.75% 05/01/21 50,938
-------------
HEALTH CARE EQUIPMENT - 0.7%
150,000 Kinetic Concepts, Inc./KCI USA, Inc............ B3 B 10.50% 11/01/18 169,125
-------------
INDEPENDENT POWER PRODUCERS & ENERGY
TRADERS - 0.5%
125,000 AES Corp....................................... Ba3 BB- 4.88% 05/15/23 127,813
-------------
IT CONSULTING & OTHER SERVICES - 0.2%
50,000 West Corp...................................... Caa1 B 7.88% 01/15/19 54,750
-------------
LIFE SCIENCES TOOLS & SERVICES - 0.4%
100,000 Inventiv Health, Inc. (g) ..................... B2 B 9.00% 01/15/18 106,000
-------------
OIL & GAS REFINING & MARKETING - 0.2%
50,000 Rain CII Carbon LLC/CII Carbon Corp. (g) ...... B1 BB- 8.25% 01/15/21 54,625
-------------
PACKAGED FOODS & MEATS - 0.4%
100,000 Wells Enterprises, Inc. (g) ................... B2 B+ 6.75% 02/01/20 108,750
-------------
RAILROADS - 0.5%
125,000 Watco Cos., LLC/Watco Finance Corp. (g) ....... B3 CCC+ 6.38% 04/01/23 130,937
-------------
REAL ESTATE OPERATING COMPANIES - 0.2%
50,000 ClubCorp Club Operations, Inc.................. B3 B+ 10.00% 12/01/18 56,438
-------------
SPECIALIZED CONSUMER SERVICES - 1.0%
250,000 ARAMARK Corp. (g) ............................. B3 B- 5.75% 03/15/20 263,125
-------------
SPECIALTY CHEMICALS - 0.6%
150,000 Hexion US Finance Corp. (g) ................... B1 B- 6.63% 04/15/20 157,125
-------------
TIRES & RUBBER - 1.0%
250,000 Goodyear Tire & Rubber (The) Co................ B1 B+ 6.50% 03/01/21 262,812
-------------
TRUCKING - 0.5%
125,000 Avis Budget Car Rental LLC/Avis Budget
Finance, Inc. (g) .......................... B2 B 5.50% 04/01/23 129,531
-------------
WIRELESS TELECOMMUNICATION SERVICES - 0.9%
200,000 MetroPCS Wireless, Inc. (g) ................... B1 BB 6.63% 04/01/23 215,750
-------------
TOTAL CORPORATE BONDS AND NOTES ........................................................... 3,302,187
(Cost $3,130,806) -------------
|
Page 14 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
PRINCIPAL RATINGS (a) STATED STATED
VALUE DESCRIPTION MOODY'S S&P COUPON MATURITY VALUE
------------- ----------------------------------------------- -------------- ------------- -------------- -------------
FOREIGN CORPORATE BONDS AND NOTES - 3.0%
ALTERNATIVE CARRIERS - 1.0%
$ 125,000 Intelsat Luxembourg S.A. (g) .................. Caa3 CCC+ 6.75% 06/01/18 $ 132,187
125,000 Intelsat Luxembourg S.A. (g) .................. Caa3 CCC+ 7.75% 06/01/21 132,188
-------------
264,375
-------------
CABLE & SATELLITE - 0.2%
50,000 Cogeco Cable, Inc. (g) ........................ NR BB- 4.88% 05/01/20 51,063
-------------
DIVERSIFIED CHEMICALS - 0.2%
50,000 INEOS Finance PLC (g) ......................... B1 B+ 8.38% 02/15/19 56,563
-------------
METAL & GLASS CONTAINERS - 0.6%
150,000 Ardagh Packaging Finance PLC/Ardagh
Holdings USA, Inc. (g) ..................... B3 CCC+ 7.00% 11/15/20 159,000
-------------
WIRELESS TELECOMMUNICATION SERVICES - 1.0%
250,000 SoftBank Corp. (g) ............................ Baa3 BBB- 4.50% 04/15/20 259,371
-------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES ................................................... 790,372
(Cost $752,875) -------------
TOTAL INVESTMENTS - 89.2% ................................................................. 23,258,906
(Cost $22,836,363) (h)
NET OTHER ASSETS AND LIABILITIES - 10.8% .................................................. 2,816,028
-------------
NET ASSETS - 100.0% ....................................................................... $ 26,074,934
=============
|
(a) Ratings below Baa3 by Moody's Investors Service, Inc. or BBB- by Standard
& Poor's Ratings Group are considered to be below investment grade.
(b) Senior Floating-Rate Loan Interests ("Senior Loans") in which the Fund
invests pay interest at rates which are periodically predetermined by
reference to a base lending rate plus a premium. These base lending rates
are generally (i) the lending rate offered by one or more major European
banks, such as the London Inter-Bank Offered Rate ("LIBOR"), (ii) the
prime rate offered by one or more United States banks or (iii) the
certificate of deposit rate. Certain Senior Loans are subject to a LIBOR
floor that establishes a minimum LIBOR rate. The interest rate shown
reflects the rate in effect at April 30, 2013.
(c) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior Loans may
be substantially less than the stated maturities shown.
(d) Represents commitment fee rate on unfunded loan commitment.
(e) Delayed Draw Loan (see Note 2C in the Notes to Financial Statements).
(f) This Senior Loan was privately rated upon issuance. The rating agency does
not provide ongoing surveillance on the rating.
(g) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended, and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Trust's Board of Trustees, this security has
been determined to be liquid by First Trust Advisors L.P., the Fund's
advisor. Although market instability can result in periods of increased
overall market illiquidity, liquidity for each security is determined
based on security specific factors and assumptions, which require
subjective judgment. At April 30, 2013, securities noted as such amounted
to $2,829,621 or 10.85% of net assets.
(h) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2013, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $432,165 and the aggregate gross
unrealized depreciation for all securities in which there was an excess of
tax cost over value was $9,622.
NR Not Rated
See Notes to Financial Statements Page 15
FIRST TRUST SHORT DURATION HIGH INCOME FUND
PORTFOLIO OF INVESTMENTS - (CONTINUED)
APRIL 30, 2013 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2013 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2013 PRICES INPUTS INPUTS
------------- ------------ ------------- --------------
Senior Floating-Rate Loan Interests*............... $ 19,166,347 $ -- $ 19,166,347 $ --
Corporate Bonds and Notes*......................... 3,302,187 -- 3,302,187 --
Foreign Corporate Bonds and Notes*................. 790,372 -- 790,372 --
------------- ------------ ------------- --------------
Total Investments.................................. $ 23,258,906 $ -- $ 23,258,906 $ --
============= ============ ============= ==============
|
*See Portfolio of Investments for industry breakout.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. There were no
transfers between Levels at April 30, 2013.
Page 16 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2013 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $22,836,363).......................................................................... $ 23,258,906
Cash........................................................................................... 5,725,759
Receivables:
Investment securities sold.................................................................. 2,410,959
Fund shares sold............................................................................ 1,109,613
Interest.................................................................................... 126,616
Prepaid expenses............................................................................... 310
------------
Total Assets............................................................................. 32,632,163
------------
LIABILITIES:
Payables:
Investment securities purchased............................................................. 6,388,925
Shares repurchased.......................................................................... 55,714
Investment advisory fees.................................................................... 33,305
Audit and tax fees.......................................................................... 26,807
Distributions payable....................................................................... 22,073
Registration fees........................................................................... 8,493
Printing fees............................................................................... 6,368
12b-1 distribution and service fees......................................................... 5,645
Administrative fees......................................................................... 3,711
Transfer agent fees......................................................................... 2,829
Custodian fees.............................................................................. 2,061
Financial reporting fees.................................................................... 771
Commitment fees............................................................................. 322
Trustees' fees and expenses................................................................. 205
------------
Total Liabilities........................................................................ 6,557,229
------------
NET ASSETS..................................................................................... $ 26,074,934
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 25,578,312
Par value ($0.01 per share with an unlimited number of shares authorized)...................... 12,535
Accumulated net investment income (loss)....................................................... (45,425)
Accumulated net realized gain (loss) on investments............................................ 106,969
Net unrealized appreciation (depreciation) on investments...................................... 422,543
------------
NET ASSETS..................................................................................... $ 26,074,934
============
MAXIMUM OFFERING PRICE PER SHARE:
(Net assets are rounded to the nearest whole dollar and shares are rounded to the nearest
full share)
CLASS A SHARES:
Net asset value and redemption price per share (Based on net assets of $11,990,330 and
576,339 shares of beneficial interest issued and outstanding)............................. $ 20.80
Maximum sales charge (3.50% of offering price).............................................. 0.75
------------
Maximum offering price to public............................................................ $ 21.55
============
CLASS C SHARES:
Net asset value and redemption price per share (Based on net assets of $4,780,299 and
229,932 shares of beneficial interest issued and outstanding)............................. $ 20.79
============
CLASS I SHARES:
Net asset value and redemption price per share (Based on net assets of $9,304,305 and
447,258 shares of beneficial interest issued and outstanding)............................. $ 20.80
============
|
See Notes to Financial Statements Page 17
FIRST TRUST SHORT DURATION HIGH INCOME FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2013 (UNAUDITED)
INVESTMENT INCOME:
Interest....................................................................................... $ 237,861
Other.......................................................................................... 17,284
------------
Total investment income..................................................................... 255,145
------------
EXPENSES:
Investment advisory fees....................................................................... 34,667
Audit and tax fees............................................................................. 26,807
12b-1 distribution and service fees:
Class A..................................................................................... 5,025
Class C..................................................................................... 14,151
Registration fees.............................................................................. 15,599
Administrative fees............................................................................ 10,223
Trustees' fees and expenses.................................................................... 8,384
Printing fees.................................................................................. 6,929
Financial reporting fees....................................................................... 4,625
Legal fees..................................................................................... 3,605
Transfer agent fees............................................................................ 3,230
Custodian fees................................................................................. 2,061
Commitment fees................................................................................ 322
Other.......................................................................................... 2,136
------------
Total expenses.............................................................................. 137,764
Less fees waived and expenses reimbursed by the investment advisor.......................... (65,253)
------------
Net expenses................................................................................... 72,511
------------
NET INVESTMENT INCOME (LOSS)................................................................... 182,634
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... 105,890
Net increase from payment by the advisor (a)................................................ 1,079
Net change in unrealized appreciation (depreciation) on investments......................... 422,543
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 529,512
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................... $ 712,146
============
|
(a) See Note 3 in the Notes to Financial Statements.
Page 18 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED
4/30/2013 (a)
(UNAUDITED)
-------------
OPERATIONS:
Net investment income (loss)................................................ $ 182,634
Net realized gain (loss).................................................... 105,890
Net change in unrealized appreciation (depreciation)........................ 422,543
Net increase from payment by the advisor (b)................................ 1,079
-------------
Net increase (decrease) in net assets resulting from operations............. 712,146
-------------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
Class A shares.............................................................. (88,995)
Class C shares.............................................................. (51,786)
Class I shares.............................................................. (87,278)
-------------
Total distributions to shareholders......................................... (228,059)
-------------
CAPITAL TRANSACTIONS:
Proceeds from shares sold................................................... 33,467,226
Proceeds from shares reinvested............................................. 103,042
Cost of shares redeemed..................................................... (7,979,421)
-------------
Net increase (decrease) in net assets resulting from capital transactions... 25,590,847
-------------
Total increase (decrease) in net assets..................................... 26,074,934
NET ASSETS:
Beginning of period......................................................... --
-------------
End of period............................................................... $ 26,074,934
=============
Accumulated net investment income (loss) at end of period................... $ (45,425)
=============
|
(a) The Fund was initially seeded and commenced operations on November 1,
2012.
(b) See Note 3 in the Notes to Financial Statements.
See Notes to Financial Statements Page 19
FIRST TRUST SHORT DURATION HIGH INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
SIX MONTHS
ENDED
4/30/2013 (a)
CLASS A SHARES (UNAUDITED)
-------------
Net asset value, beginning of period............ $ 20.00
-----------
INCOME FROM INVESTMENT OPERATIONS: .............
Net investment income (loss) (b)................ 0.35
Net realized and unrealized gain (loss)......... 0.85
-----------
Total from investment operations................ 1.20
-----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.40)
-----------
Total distributions............................. (0.40)
-----------
Net asset value, end of period.................. $ 20.80
===========
TOTAL RETURN (c)................................ 6.03% (d)
===========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 11,991
Ratio of total expenses to average net assets... 2.47% (e)
Ratio of net expenses to average net assets..... 1.25% (e)
Ratio of net investment income (loss) to
average net assets........................... 3.53% (e)
Portfolio turnover rate......................... 98%
(a) Class A Shares were initially seeded and commenced operations on November
1, 2012.
|
(b) Per share amounts have been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 3.50% or contingent
deferred sales charge (CDSC). On purchases of $1 million or more, a CDSC
of 1% may be imposed on certain redemptions made within twelve months of
purchase. If the sales charges were included, total returns would be
lower. These returns include Rule 12b-1 service fees of 0.25% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(d) The Fund received reimbursements from First Trust Advisors L.P. (the
"Advisor") in the amount of $1,079. The reimbursements from the Advisor
represent less than $0.01 per share and had no effect on the total return
of the Class A Shares.
(e) Annualized.
Page 20 See Notes to Financial Statements
FIRST TRUST SHORT DURATION HIGH INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
SIX MONTHS
ENDED
4/30/2013 (a)
CLASS C SHARES (UNAUDITED)
-------------
Net asset value, beginning of period............ $ 20.00
-----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................ 0.28
Net realized and unrealized gain (loss)......... 0.84
-----------
Total from investment operations................ 1.12
-----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.33)
-----------
Total distributions............................. (0.33)
-----------
Net asset value, end of period.................. $ 20.79
===========
TOTAL RETURN (c)................................ 5.65% (d)
===========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 4,780
Ratio of total expenses to average net assets... 3.22% (e)
Ratio of net expenses to average net assets..... 2.00% (e)
Ratio of net investment income (loss) to
average net assets........................... 2.78% (e)
Portfolio turnover rate......................... 98%
(a) Class C Shares were initially seeded and commenced operations on November
1, 2012.
|
(b) Per share amounts have been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
return would be lower. These returns include combined Rule 12b-1
distribution and service fees of 1% and do not reflect the deduction of
taxes that a shareholder would pay on Fund distributions or the redemption
of Fund shares. The total returns would have been lower if certain fees
had not been waived and expenses reimbursed by the investment advisor.
Total return is calculated for the time period presented and is not
annualized for periods less than one year.
(d) The Fund received reimbursements from First Trust Advisors L.P. (the
"Advisor") in the amount of $1,079. The reimbursements from the Advisor
represent less than $0.01 per share and had no effect on the total return
of the Class C Shares.
(e) Annualized.
See Notes to Financial Statements Page 21
FIRST TRUST SHORT DURATION HIGH INCOME FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
SIX MONTHS
ENDED
4/30/2013 (a)
CLASS I SHARES (UNAUDITED)
-------------
Net asset value, beginning of period............ $ 20.00
-----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (b)................ 0.37
Net realized and unrealized gain (loss)......... 0.85
-----------
Total from investment operations................ 1.22
-----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.42)
-----------
Total distributions............................. (0.42)
-----------
Net asset value, end of period.................. $ 20.80
===========
TOTAL RETURN (c)................................ 6.13% (d)
===========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)............ $ 9,304
Ratio of total expenses to average net assets... 2.22% (e)
Ratio of net expenses to average net assets..... 1.00% (e)
Ratio of net investment income (loss) to
average net assets........................... 3.78% (e)
Portfolio turnover rate......................... 98%
|
(a) Class I Shares were initially seeded and commenced operations on November
1, 2012.
(b) Per share amounts have been calculated using the average shares method.
(c) Assumes reinvestment of all distributions for the period. These returns do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares. The total returns would
have been lower if certain fees had not been waived and expenses
reimbursed by the investment advisor. Total return is calculated for the
time period presented and is not annualized for periods less than one
year.
(d) The Fund received reimbursements from First Trust Advisors L.P. (the
"Advisor") in the amount of $1,079. The reimbursements from the Advisor
represent less than $0.01 per share and had no effect on the total return
of the Class I Shares.
(e) Annualized.
Page 22 See Notes to Financial Statements
NOTES TO FINANCIAL STATEMENTS
FIRST TRUST SHORT DURATION HIGH INCOME FUND
APRIL 30, 2013 (UNAUDITED)
1. ORGANIZATION
First Trust Short Duration High Income Fund (the "Fund") is a series of the
First Trust Series Fund (the "Trust"), a Massachusetts business trust organized
on July 9, 2010, and is registered as a diversified open-end management
investment company with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund offers
three classes of shares: Class A, Class C and Class I. Each class represents an
interest in the same portfolio of investments but with a different combination
of sales charges, distribution and service (12b-1) fees, eligibility
requirements and other features.
The Fund's primary investment objective is to seek to provide a high level of
current income. As a secondary objective, the Fund seeks capital appreciation.
The Fund seeks to achieve its investment objectives by investing, under normal
market conditions, at least 80% of its net assets (plus the amount of any
borrowing for investment purposes) in high-yield debt securities and bank loans
that are rated below-investment grade or unrated. High-yield debt securities are
below-investment grade debt securities, commonly known as "junk bonds." For
purposes of determining whether a security is below-investment grade, the lowest
available rating is used. There can be no assurance that the Fund will achieve
its investment objective. The Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") for each class of shares of the Fund is determined
daily as of the close of regular trading on the New York Stock Exchange
("NYSE"), normally 4:00 p.m. Eastern time, on each day the NYSE is open for
trading. If the NYSE closes early on a valuation day, the NAV is determined as
of that time. Domestic debt securities and foreign securities are priced using
data reflecting the earlier closing of the principal markets for those
securities. The NAV for each class is calculated by dividing the value of the
Fund's total assets attributable to such class (including accrued interest and
dividends), less all liabilities attributable to such class (including accrued
expenses, dividends declared but unpaid and any borrowings of the Fund), by the
total number of shares of the class outstanding. Differences in NAV of each
class of the Fund's shares are generally expected to be due to the daily expense
accruals of the specified distribution and service (12b-1) fees and transfer
agency costs applicable to such class of shares and the resulting differential
in the dividends that may be paid on each class of shares.
The Fund's investments are valued daily in accordance with valuation procedures
adopted by the Trust's Board of Trustees, and in accordance with provisions of
the 1940 Act. The Senior Floating-Rate Loan Interests ("Senior Loans")(1) in
which the Fund invests are not listed on any securities exchange or board of
trade. Senior Loans are typically bought and sold by institutional investors in
individually negotiated private transactions that function in many respects like
an over-the-counter secondary market, although typically no formal market makers
exist. This market, while having grown substantially since its inception,
generally has fewer trades and less liquidity than the secondary market for
other types of securities. Some Senior Loans have few or no trades, or trade
infrequently, and information regarding a specific Senior Loan may not be widely
available or may be incomplete. Accordingly, determinations of the market value
of Senior Loans may be based on infrequent and dated information. Because there
is less reliable, objective data available, elements of judgment may play a
greater role in valuation of Senior Loans than for other types of securities.
Typically, Senior Loans are valued using information provided by a third-party
pricing service. The third-party pricing service primarily uses over-the-counter
pricing from dealer runs and broker quotes from indicative sheets to value the
Senior Loans.
Common stocks and other equity securities listed on any national or foreign
exchange (excluding the NASDAQ(R) Stock Market LLC ("NASDAQ") and the London
Stock Exchange Alternative Investment Market ("AIM")) are valued at the last
price on the exchange on which they are principally traded or, for NASDAQ and
AIM securities, the official closing price. Securities traded on more than one
securities exchange are valued at the last sale price or official closing price,
as applicable, at the close of the securities exchange representing the
principal market for such securities.
Debt securities having a remaining maturity of sixty days or less when purchased
are valued at cost adjusted for amortization of premiums and accretion of
discounts.
1 The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 23
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST SHORT DURATION HIGH INCOME FUND
APRIL 30, 2013 (UNAUDITED)
Bonds, notes and other debt securities are valued on the basis of valuations
provided by dealers who make markets in such securities or by an independent
pricing service approved by the Trust's Board of Trustees, which may use the
following valuation inputs when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Securities traded in an over-the-counter market are valued at their closing bid
prices.
Short-term investments that mature in less than 60 days when purchased are
valued at amortized cost.
In the event that market quotations are not readily available, the pricing
service does not provide a valuation, or the valuations received are deemed
unreliable, the Trust's Board of Trustees has designated First Trust Advisors
L.P. ("First Trust" or the "Advisor") to use a fair value method to value the
Fund's securities. Additionally, if events occur after the close of the
principal markets for certain securities (e.g., domestic debt securities and
foreign securities) that could materially affect the Fund's NAV, First Trust may
use a fair value method to value the Fund's securities. The use of fair value
pricing is governed by valuation procedures adopted by the Trust's Board of
Trustees, and in accordance with the provisions of the 1940 Act. As a general
principle, the fair value of a security is the amount which the Fund might
reasonably expect to receive for the security upon its current sale. In light of
the judgment involved in fair valuations, there can be no assurance that a fair
value assigned to a particular security will be the amount which the Fund might
be able to receive upon its current sale. Fair valuation of a security is based
on the consideration of all available information, including, but not limited
to, the following:
1) the fundamental business data relating to the borrower/issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the borrower/issuer;
5) the credit quality and cash flow of the borrower/issuer, based on
the Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the borrower/issuer, including any ability
to obtain money or resources from a parent or affiliate and an
assessment of the borrower's/issuer's management;
11) the prospects for the borrower's/issuer's industry, and multiples
(of earnings and/or cash flows) being paid for similar businesses in
that industry;
12) borrower's/issuer's competitive position within the industry;
13) borrower's/issuer's ability to access additional liquidity through
public and/or private markets; and
14) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
Page 24
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST SHORT DURATION HIGH INCOME FUND
APRIL 30, 2013 (UNAUDITED)
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2013, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Dividend income is recorded on the ex-dividend date. Interest income is recorded
daily on the accrual basis. Market premiums and discounts are amortized over the
expected life of each respective borrowing.
Securities purchased or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. Due
to the nature of the Senior Loan market, the actual settlement date may not be
certain at the time of the purchase or sale for some of the Senior Loans.
Interest income on such Senior Loans is not accrued until settlement date. The
Fund maintains liquid assets with a current value at least equal to the amount
of its when-issued, delayed-delivery or forward purchase commitments. The Fund
did not have any when-issued, delayed-delivery or forward purchase commitments
as of April 30, 2013.
C. UNFUNDED LOAN COMMITMENTS:
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. The Fund had unfunded delayed draw loan commitments of
$152,941 as of April 30, 2013.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will declare daily and pay monthly distributions of all or a portion of
its net income to holders of each class of shares. Distributions of any net
capital gains earned by the Fund will be distributed at least annually.
Distributions will automatically be reinvested into additional Fund shares
unless cash distributions are elected by the shareholder.
Distributions from net investment income and realized capital gains are
determined in accordance with income tax regulations, which may differ from U.S.
GAAP. Certain capital accounts in the financial statements are periodically
adjusted for permanent differences in order to reflect their tax character.
These permanent differences are primarily due to the varying treatment of income
and gain/loss on portfolio securities held by the Fund and have no impact on net
assets or net asset value per share. Temporary differences, which arise from
recognizing certain items of income, expense and gain/loss in different periods
for financial statement and tax purposes, will reverse at some point in the
future.
E. INCOME TAXES:
The Fund intends to qualify as a regulated investment company by complying with
the requirements under Subchapter M of the Internal Revenue Code of 1986, as
amended, which includes distributing substantially all of its net investment
income and net realized gains to shareholders. Accordingly, no provision has
been made for federal or state income taxes. However, due to the timing and
amount of distributions, the Fund may be subject to an excise tax of 4% of the
amount by which approximately 98% of the Fund's taxable income exceeds the
distributions from such taxable income for the calendar year.
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry a realized capital loss forward indefinitely following the
year of the loss and offset such loss against any future realized capital gains.
The Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. As of April 30, 2013, management
has evaluated the application of these standards to the Fund, and has determined
that no provision for income tax is required in the Fund's financial statements
for uncertain tax positions.
F. EXPENSES:
The Fund pays all expenses directly related to its operations. Expenses of the
Fund are allocated on a pro rata basis to each class of shares, except for
distribution and service fees and incremental transfer agency costs which are
unique to each class of shares.
Page 25
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST SHORT DURATION HIGH INCOME FUND
APRIL 30, 2013 (UNAUDITED)
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 0.65% of the Fund's average daily net assets.
First Trust also provides fund reporting services to the Fund for a flat annual
fee in the amount of $9,250.
First Trust has agreed to waive fees and/or pay Fund expenses to the extent
necessary to prevent the annual operating expenses of the Fund (excluding 12b-1
distribution and service fees, interest expenses, taxes, acquired fund fees and
expenses, fees incurred in acquiring and disposing of portfolio securities and
extraordinary expenses) from exceeding 1.00% of average daily net assets of any
class of shares of the Fund (the "Expense Cap") until November 1, 2014. Expenses
borne and fees waived by First Trust are subject to recovery by First Trust up
to three years from the date the fee was waived or expense was incurred, but no
reimbursement payment will be made by the Fund at any time if it would result in
the Fund's expenses exceeding the Expense Cap in place at the time the expense
was borne or the fee was waived by First Trust. These amounts would be included
in "Expenses previously waived or reimbursed" on the Statement of Operations.
The advisory fee waivers and expense reimbursement for the six months ended
April 30, 2013 and the expenses borne by First Trust subject to recovery were as
follows:
EXPENSES SUBJECT
ADVISORY FEE WAIVERS EXPENSE REIMBURSEMENTS TO RECOVERY
-------------------- ---------------------- --------------------
$34,667 $30,586 $65,253
|
During the six months ended April 30, 2013, the Fund received reimbursements
from the Advisor of $1,079 in connection with trade errors.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer of $125,000 per year and an annual per fund fee of $4,000 for each
closed-end fund or other actively managed fund and $1,000 for each index fund in
the First Trust Fund Complex. The fixed annual retainer is allocated pro rata
among each fund in the First Trust Fund Complex based on net assets.
Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and each Committee
chairman will serve two-year terms until December 31, 2013, before rotating to
serve as chairman of another committee or as Lead Independent Trustee. After
December 31, 2013, the Lead Independent Trustee and Committee Chairmen will
rotate every three years. The officers and "Interested" Trustee receive no
compensation from the funds for acting in such capacities.
Page 26
NOTES TO FINANCIAL STATEMENTS - (CONTINUED)
FIRST TRUST SHORT DURATION HIGH INCOME FUND
APRIL 30, 2013 (UNAUDITED)
4. CAPITAL SHARE TRANSACTIONS
Capital transactions were as follows:
SIX MONTHS
ENDED APRIL 30, 2013
SHARES VALUE
---------- ------------
Sales:
Class A 674,040 $ 13,826,414
Class C 313,083 6,366,378
Class I 647,982 13,274,434
---------- ------------
Total Sales: 1,635,105 $ 33,467,226
========== ============
Dividend Reinvestment:
Class A 2,026 $ 41,965
Class C 724 14,948
Class I 2,229 46,129
---------- ------------
Total Dividend Reinvestment: 4,979 $ 103,042
========== ============
Redemptions:
Class A (99,727) $ (2,058,378)
Class C (83,875) (1,730,674)
Class I (202,953) (4,190,369)
---------- ------------
Total Redemptions: (386,555) $ (7,979,421)
========== ============
|
5. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the six months ended April 30, 2013, were $34,427,195 and
$11,701,312, respectively.
6. BORROWINGS
Effective March 28, 2013, the Trust and First Trust Variable Insurance Trust
entered into a $20 million Committed Line of Credit ("Line of Credit") with the
Bank of Nova Scotia ("Scotia") to be a liquidity backstop during periods of high
redemption volume. A commitment fee of 0.125% of the daily amount of the excess
of the commitment amount over the outstanding principal balance of the loans
will be charged by Scotia, which First Trust will allocate amongst the funds
that have access to the Line of Credit. To the extent that the Fund accesses the
Line of Credit, there would also be an interest fee charged.
7. DISTRIBUTION AND SERVICE PLAN
The Board of Trustees adopted a Distribution and Service Plan pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Rule 12b-1 plan, the share
classes of the Fund are authorized to pay an amount up to 0.25% and 1.00% of
their average daily net assets each year for Class A and Class C, respectively,
to reimburse and compensate First Trust Portfolios L.P. ("FTP"), the distributor
of the Fund, for amounts expended to finance activities primarily intended to
result in the sale of Fund shares or the provision of investor services. FTP may
also use this amount to compensate securities dealers or other persons for
providing distribution assistance, including broker-dealer and shareholder
support and educational and promotional services.
8. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
9. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were no subsequent events to report.
Page 27
ADDITIONAL INFORMATION
FIRST TRUST SHORT DURATION HIGH INCOME FUND
APRIL 30, 2013 (UNAUDITED)
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
of the risks that should be considered for the Fund. For additional information
about the risks associated with investing in the Fund, please see the Fund's
prospectus and statement of additional information, as well as other Fund
regulatory filings.
HIGH-YIELD SECURITIES RISK: High-yield securities, or "junk bonds," are subject
to greater market fluctuations and risk of loss than securities with higher
investment ratings. These securities are issued by companies that may have
limited operating history, narrowly focused operations, and/or other impediments
to the timely payment of periodic interest and principal at maturity. If the
economy slows down or dips into recession, the issuers of high-yield securities
may not have sufficient resources to continue making timely payment of periodic
interest and principal at maturity. The market for high-yield securities is
smaller and less liquid than that for investment grade securities. High-yield
securities are generally not listed on a national securities exchange but trade
in the over-the-counter markets. Due to the smaller, less liquid market for
high-yield securities, the bid-offer spread on such securities is generally
greater than it is for investment grade securities and the purchase or sale of
such securities may take longer to complete.
CREDIT RISK: Credit risk is the risk that an issuer of a security may be unable
or unwilling to make dividend, interest and principal payments when due and the
related risk that the value of a security may decline because of concerns about
the issuer's ability or willingness to make such payments. Credit risk may be
heightened for the Fund because it invests a substantial portion of its net
assets in high-yield or "junk" debt; such securities, while generally offering
higher yields than investment grade debt with similar maturities, involve
greater risks, including the possibility of dividend or interest deferral,
default or bankruptcy, and are regarded as predominantly speculative with
respect to the issuer's capacity to pay dividends or interest and repay
principal. Credit risk is heightened for loans in which the Fund invests because
companies that issue such loans tend to be highly leveraged and thus are more
susceptible to the risks of interest deferral, default and/or bankruptcy.
INTEREST RATE RISK: Interest rate risk is the risk that the value of the debt
securities held by the Fund will decline because of rising market interest
rates. Interest rate risk is generally lower for shorter term investments and
higher for longer term investments. Duration is a common measure of interest
rate risk, which measures a bond's expected life on a present value basis,
taking into account the bond's yield, interest payments and final maturity.
Duration is a reasonably accurate measure of a bond's price sensitivity to
changes in interest rates. The longer the duration of a bond, the greater the
bond's price sensitivity is to changes in interest rates.
MARKET RISK: Market risk is the risk that a particular security owned by the
Fund or shares of the Fund in general may fall in value. Securities are subject
to market fluctuations caused by such factors as economic, political, regulatory
or market developments, changes in interest rates and perceived trends in stock
prices. Overall stock values could decline generally or could underperform other
investments.
BANK LOANS RISK: An investment in bank loans subjects the Fund to credit risk,
which is heightened for loans in which the Fund invests because companies that
issue such loans tend to be highly leveraged and thus are more susceptible to
the risks of interest deferral, default and/or bankruptcy. Senior floating rate
loans, in which the Fund invests, are usually rated below-investment grade but
may also be unrated. As a result, the risks associated with these loans are
similar to the risks of below-investment grade fixed income instruments. An
economic downturn would generally lead to a higher non-payment rate, and a
senior floating rate loan may lose significant market value before a default
occurs. Moreover, any specific collateral used to secure a senior floating rate
loan may decline in value or become illiquid, which would adversely affect the
loan's value. Unlike the securities markets, there is no central clearinghouse
for loan trades, and the loan market has not established enforceable settlement
standards or remedies for failure to settle. Therefore, portfolio transactions
in loans may have uncertain settlement time periods. Senior floating rate loans
are subject to a number of risks described elsewhere in this Prospectus,
including liquidity risk and the risk of investing in below-investment grade
fixed income instruments.
LIQUIDITY RISK: The Fund invests a substantial portion of its assets in
lower-quality debt issued by companies that are highly leveraged. Lower-quality
debt tends to be less liquid than higher-quality debt. Moreover, smaller debt
issues tend to be less liquid than larger debt issues. If the economy
experiences a sudden downturn, or if the debt markets for such companies become
distressed, the Fund may have particular difficulty selling its assets in
sufficient amounts, at reasonable prices and in a sufficiently timely manner to
raise the cash necessary to meet any potentially heavy redemption requests by
Fund shareholders.
CONVERTIBLE BONDS RISK: The market values of convertible bonds tend to decline
as interest rates increase and, conversely, to increase as interest rates
decline. A convertible bond's market value also tends to reflect the market
price of the common stock of the issuing company.
NON-U.S. SECURITIES RISK: Non-U.S. securities are subject to higher volatility
than securities of domestic issuers due to possible adverse political, social or
economic developments; restrictions on foreign investment or exchange of
securities; lack of liquidity; currency exchange rates; excessive taxation;
government seizure of assets; different legal or accounting standards; and less
government supervision and regulation of exchanges in foreign countries.
Page 28
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST SHORT DURATION HIGH INCOME FUND
APRIL 30, 2013 (UNAUDITED)
CURRENCY RISK: Because the Fund's NAV is determined on the basis of U.S. dollars
and the Fund invests in foreign securities, you may lose money if the local
currency of a foreign market depreciates against the U.S. dollar, even if the
local currency value of the Fund's holdings goes up.
PREPAYMENT RISK: Loans and other fixed income investments are subject to
prepayment risk. The degree to which borrowers prepay loans, whether as a
contractual requirement or at their election, may be affected by general
business conditions, the financial condition of the borrower and competitive
conditions among loan investors, among others. As such, prepayments cannot be
predicted with accuracy. Upon a prepayment, either in part or in full, the
actual outstanding debt on which the Fund derives interest income will be
reduced. The Fund may not be able to reinvest the proceeds received on terms as
favorable as the prepaid loan.
INCOME RISK: If interest rates fall, the income from the Fund's portfolio may
decline as the Fund generally holds floating rate debt that will adjust lower
with falling interest rates. For loans, interest rates typically reset every 30
to 90 days.
NEW FUND RISK: The Fund currently has less assets than larger funds, and like
other relatively small funds, large inflows and outflows may impact the Fund's
market exposure for limited periods of time. This impact may be positive or
negative, depending on the direction of market movement during the period
affected.
MANAGEMENT RISK: The Fund is subject to management risk because it is an
actively managed portfolio. In managing the Fund's investment portfolio, the
Advisor will apply investment techniques and risk analyses that may not have the
desired result. There can be no guarantee that the Fund will meet its investment
objectives.
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio securities during the most recent 12-month period ended June 30 will
be available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's website at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
BOARD CONSIDERATIONS REGARDING APPROVAL OF INVESTMENT MANAGEMENT AGREEMENT
The Board of Trustees of the First Trust Series Fund (the "Trust"), including
the Independent Trustees, approved the Investment Management Agreement (the
"Agreement") between the Trust, on behalf of the First Trust Short Duration High
Income Fund (the "Fund"), and First Trust Advisors L.P. (the "Advisor" or "First
Trust") at a meeting held on June 11, 2012. The Board of Trustees determined
that the Agreement is in the best interests of the Fund in light of the
services, expenses and such other matters as the Board considered to be relevant
in the exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreement, the
Independent Trustees received a report from the Advisor in advance of the Board
meeting responding to a request for information from counsel to the Independent
Trustees. The report, among other things, outlined the services to be provided
by the Advisor (including the relevant personnel responsible for these services
and their experience); the proposed advisory fee for the Fund as compared to
fees charged by investment advisors to comparable funds and as compared to fees
charged to other clients of the Advisor; estimated expenses of the Fund as
compared to expense ratios of comparable funds; the nature of expenses to be
incurred in providing services to the Fund; financial data on the Advisor; any
fall-out benefits to First Trust and First Trust Portfolios L.P.; and
information on the Advisor's compliance program. The Independent Trustees also
met separately with their independent legal counsel to discuss the information
provided by the Advisor. The Board applied its business judgment to determine
whether the arrangement between the Trust and the Advisor is a reasonable
business arrangement from the Fund's perspective as well as from the perspective
of shareholders.
Page 29
ADDITIONAL INFORMATION - (CONTINUED)
FIRST TRUST SHORT DURATION HIGH INCOME FUND
APRIL 30, 2013 (UNAUDITED)
In reviewing the Agreement, the Board considered the nature, extent and quality
of services to be provided by the Advisor under the Agreement, and noted that
First Trust employees provide management services to other investment companies
in the First Trust complex with diligence and care. The Board considered the
efforts expended by the Advisor in organizing the Trust and making arrangements
for other services to be provided to the Fund. The Board noted the compliance
program that had been developed by the Advisor and the skills of its employees
who would be working with the Fund. The Board considered that the Advisor
applies the same oversight model internally with its Leveraged Finance Team, who
would be managing the day-to-day investments of the Fund, as it uses for
overseeing external sub-advisors. At the meeting, the Trustees received a
presentation from one of the portfolio managers of the Fund and were able to ask
questions about the Leveraged Finance Team's proposed investment strategies for
the Fund. In light of the information presented and the considerations made, the
Board concluded that the nature, extent and quality of services to be provided
to the Fund by the Advisor under the Agreement are expected to be satisfactory.
The Board considered the advisory fees to be paid under the Agreement. The Board
reviewed data prepared by Morningstar Associates LLC ("Morningstar"), an
independent source, showing the proposed advisory fee of the Fund as compared to
the advisory fees of a peer group selected by Morningstar, based on Class A
shares. The Board noted that the Fund's proposed advisory fee was slightly above
the median of the Morningstar peer group. The Board also reviewed data prepared
by the Advisor showing the proposed advisory fee as compared to an additional
group of peer funds. The Board considered that the Advisor agreed to waive fees
and/or pay Fund expenses to the extent necessary to prevent the annual operating
expenses of the Fund (excluding taxes, interest, brokerage commissions and other
normal charges incidental to the purchase and sale of portfolio securities,
service fees and distribution fees pursuant to the Rule 12b-1 plan, if any, and
extraordinary expenses) from exceeding 1.00% of a class' average daily net
assets for a two year period beginning on the effective date of the Fund's
registration statement. The Board noted that fees waived or expenses borne by
the Advisor are proposed to be subject to reimbursement by the Fund for up to
three years from the date the fee was waived or the expense was incurred, but no
reimbursement payment would be made by the Fund if it would result in the Fund
exceeding an expense ratio equal to the expense cap in place at the time the fee
was waived or the expense was borne by the Advisor. The Board considered the
advisory fees charged by the Advisor to other clients and noted that the Advisor
does not provide advisory services to other funds with investment objectives and
policies similar to the Fund's. Since the Fund had yet to commence investment
operations, the Board could not consider the historical investment performance
of the Fund. On the basis of all the information provided on the fees and
expenses of the Fund, the Board concluded that the advisory fee was reasonable
and appropriate in light of the nature, extent and quality of services expected
to be provided by the Advisor under the Agreement.
The Board noted that the proposed advisory fee was not structured to pass the
benefits of any economies of scale on to shareholders as the Fund's assets grow.
The Board noted that First Trust has continued to invest in personnel and
infrastructure for the First Trust fund complex. The Board took the costs to be
borne by the Advisor in connection with its services to be performed under the
Agreement into consideration and noted that the Advisor was unable to estimate
the profitability of the Agreement to the Advisor. The Board considered that
First Trust had identified as a fall-out benefit its exposure to investors and
brokers who, in the absence of the Fund, may have had no dealings with First
Trust. The Board noted that in addition to the advisory fees to be paid by the
Fund, First Trust's affiliate, First Trust Portfolios L.P., would be compensated
for services provided to the Fund through 12b-1 fees and that First Trust also
would be compensated for providing fund reporting services to the Fund. The
Board noted that the Advisor does not maintain any soft-dollar arrangements.
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreement are fair and reasonable and that the approval of the Agreement
is in the best interests of the Fund. No single factor was determinative in the
Board's analysis.
Page 30
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FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
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