UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-21905
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First Trust/Aberdeen Emerging Opportunity Fund
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: (630) 765-8000
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Date of fiscal year end: December 31
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Date of reporting period: December 31, 2014
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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
ANNUAL
REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2014
First Trust/
Aberdeen
Emerging
Opportunity
Fund
(FEO)
Aberdeen
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TABLE OF CONTENTS
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2014
Shareholder Letter........................................................... 1
At a Glance.................................................................. 2
Portfolio Commentary......................................................... 4
Portfolio of Investments..................................................... 8
Statement of Assets and Liabilities.......................................... 18
Statement of Operations...................................................... 19
Statements of Changes in Net Assets.......................................... 20
Statement of Cash Flows...................................................... 21
Financial Highlights......................................................... 22
Notes to Financial Statements................................................ 23
Report of Independent Registered Public Accounting Firm...................... 30
Additional Information....................................................... 31
Board of Trustees and Officers............................................... 35
Privacy Policy............................................................... 37
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 Aberdeen Asset Management Inc. ("Aberdeen" 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/Aberdeen Emerging Opportunity 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 the 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 Additional
Information section of this report 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, net asset value and common share price 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
Aberdeen 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.
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SHAREHOLDER LETTER
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
DECEMBER 31, 2014
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust/Aberdeen Emerging Opportunity Fund (the "Fund"). This report provides
detailed information about the Fund, including a performance review and the
financial statements for the 12 months ended December 31, 2014. I encourage you
to read this document and discuss it with your financial advisor.
Although markets have seemed choppy over the past 12 months, the U.S. has shown
sustained growth over the period. In fact, the S&P 500(R) Index, as measured on
a total return basis, rose 13.69% in the time covered by this report. Globally,
there was only modest economic growth. Several geopolitical events, including
trade sanctions between the U.S., Europe and Russia due to Russia's conflict
with Ukraine, low interest rate levels on government bonds in most developed
nations, and the absence of any significant inflationary pressures, weighed on
global markets. First Trust Advisors L.P. ("First Trust") believes that staying
invested in quality products through different types of markets can benefit
investors over the long term.
First Trust is pleased to offer a variety of products that we believe could fit
the financial plans for many investors seeking long-term investment success. We
invite you to look at our investment products with your financial advisor to
determine if any of them might fit your financial goals. We believe that
regularly discussing your financial objectives and investment options with your
financial advisor 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.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
"AT A GLANCE"
AS OF DECEMBER 31, 2014 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FEO
Common Share Price $16.45
Common Share Net Asset Value ("NAV") $18.59
Premium (Discount) to NAV (11.51)%
Net Assets Applicable to Common Shares $99,052,617
Current Quarterly Distribution per Common Share (1) $0.350
Current Annualized Distribution per Common Share $1.400
Current Distribution Rate on Closing Common Share Price (2) 8.51%
Current Distribution Rate on NAV (2) 7.53%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
12/13 $18.05 $20.61
17.86 20.33
17.76 20.36
17.78 20.37
17.41 19.92
1/14 17.24 19.64
17.40 19.88
17.54 20.03
17.83 20.10
2/14 17.81 20.23
17.81 20.26
17.57 20.06
17.44 19.76
3/14 17.85 20.44
18.14 20.72
18.40 20.95
18.44 20.97
4/14 18.24 20.74
18.56 21.04
18.68 21.27
18.99 21.48
19.09 21.53
5/14 18.89 21.44
19.16 21.72
19.44 21.74
19.14 21.34
6/14 19.11 21.37
19.18 21.50
19.33 21.59
19.34 21.67
7/14 19.50 21.84
18.95 21.32
18.80 21.20
19.01 21.57
19.11 21.60
8/14 19.24 21.77
19.41 21.87
18.93 21.30
18.73 21.19
9/14 18.04 20.47
17.60 20.05
17.71 20.00
17.60 20.00
17.83 20.06
10/14 17.88 20.33
17.56 19.93
17.52 19.90
17.83 20.19
11/14 17.80 20.11
17.53 19.65
16.44 18.75
16.57 18.89
12/14 16.37 18.68
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PERFORMANCE
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Average Annual Total Return
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1 Year Ended 5 Years Ended Inception (08/28/2006)
12/31/2014 12/31/2014 to 12/31/2014
FUND PERFORMANCE (3)
NAV -2.49% 6.02% 8.01%
Market Value -1.47% 5.36% 5.86%
INDEX PERFORMANCE
Blended Index(4) -1.08% 4.28% 6.94%
Barclays Global Emerging Markets Index 3.13% 6.83% 7.24%
FTSE All World Emerging Market Index 1.55% 2.33% 5.92%
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% OF TOTAL
TOP 10 COUNTRIES(5) INVESTMENTS
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Brazil 10.9%
Mexico 9.0
India 7.7
Turkey 6.4
Hong Kong 5.7
South Africa 5.6
Russia 4.7
Indonesia 4.5
South Korea 3.0
Taiwan 2.6
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Total 60.1%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Brazil Notas do Tesouro Nacional, Series F, 10.00%,
1/1/25 2.6%
Mexican Bonos, 8.50%, 11/18/38 2.4
Samsung Electronics Co., Ltd., Preference Shares 2.4
Taiwan Semiconductor Manufacturing Co., Ltd. 2.1
Brazil Notas do Tesouro Nacional, Series F, 10.00%,
1/1/17 1.8
PT Astra International Tbk 1.7
Housing Development Finance Corp., Ltd. 1.6
China Mobile Ltd. 1.5
AIA Group Ltd. 1.5
Russian Federal Bond - OFZ, 7.50%, 3/15/18 1.5
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Total 19.1%
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% OF TOTAL
CREDIT QUALITY(6) INVESTMENTS
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A 7.9%
A- 2.1
BBB+ 15.0
BBB 16.8
BBB- 12.8
BB+ 6.9
BB 5.6
BB- 5.0
B+ 14.3
B 9.0
CCC+ 2.4
CCC 0.5
Not Rated 1.7
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Total 100.0%
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(1) Most recent distribution paid or declared through 12/31/2014. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share Price or NAV, as applicable, as of 12/31/2014. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share Price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
(4) Blended Index consists of the following: JP Morgan Emerging Markets Bond
Index - Global Diversified (32.5%); JP Morgan Government Bond Index -
Emerging Markets (32.5%); MSCI Global Emerging Markets Index (35.0%)
(5) Fixed-income portfolio securities are included in a country based upon
their underlying credit exposure as determined by Aberdeen Asset
Management Inc., the sub-advisor.
(6) 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., Fitch Ratings 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. The credit ratings shown relate
to the creditworthiness of the issuers of the underlying securities in the
Fund, and not to the Fund or its Shares. Credit ratings are subject to
change.
Page 2
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
"AT A GLANCE" (CONTINUED)
AS OF DECEMBER 31, 2014 (UNAUDITED)
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% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
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Sovereigns 37.9%
Banks 12.2
Semiconductors & Semiconductor Equipment 4.5
Real Estate Management & Development 4.0
Oil, Gas & Consumable Fuels 3.5
Wireless Telecommunications Services 3.4
Food & Staples Retailing 3.2
Beverages 2.5
Automobiles 2.4
Construction Materials 1.8
Metals & Mining 1.8
Thrifts & Mortgage Finance 1.6
Tobacco 1.6
Exploration & Production 1.5
Insurance 1.5
IT Services 1.4
Chemicals 1.2
Transportation Infrastructure 1.2
Energy Equipment & Services 0.9
Food & Beverage 0.9
Household Products 0.9
Financial Services 0.8
Specialty Retail 0.8
Consumer Services 0.7
Government Agencies 0.7
Hotels, Restaurants & Leisure 0.7
Industrial Other 0.7
Real Estate 0.7
Diversified Financial Services 0.6
Integrated Oils 0.6
Multiline Retail 0.6
Pharmaceuticals 0.6
Wireline Telecommunications Services 0.5
Power Generation 0.4
Consumer Finance 0.3
Department Stores 0.3
Pipeline 0.3
Home Improvement 0.2
Refining & Marketing 0.2
Software & Services 0.2
Supermarkets & Pharmacies 0.2
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Total 100.0%
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Page 3
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PORTFOLIO COMMENTARY
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2014
SUB-ADVISOR
Aberdeen Asset Management Inc. ("Aberdeen" or the "Sub-Advisor"), a Securities
and Exchange Commission registered investment advisor, is a wholly-owned
subsidiary of Aberdeen Asset Management PLC ("Aberdeen Group"). Aberdeen Group
is a publicly-traded international investment management group listed on the
London Stock Exchange, managing assets for both institutional and retail clients
from offices around the world.
PORTFOLIO MANAGEMENT TEAM
Investment decisions for the First Trust/Aberdeen Emerging Opportunity Fund (the
"Fund") are made by Aberdeen using a team approach and not by any one
individual. By making team decisions, Aberdeen seeks to ensure that the
investment process results in consistent returns across all portfolios with
similar objectives. Aberdeen does not employ separate research analysts.
Instead, Aberdeen's investment managers combine analysis with portfolio
management. Each member of the team has sector and portfolio responsibilities
such as day-to-day monitoring of liquidity. The overall result of this matrix
approach is a high degree of cross-coverage, leading to a deeper understanding
of the securities in which Aberdeen invests. Below are the members of the team
with significant responsibility for the day-to-day management of the Fund's
portfolio.
EQUITY MANAGEMENT TEAM
DEVAN KALOO
Head of Global Emerging Markets Equity
JOANNE IRVINE
Head of Global Emerging Markets ex Asia
MARK GORDON-JAMES
Senior Investment Manager, Global Emerging Markets Equity
FIONA MANNING
Senior Investment Manager, Global Emerging Markets Equity
PETER TAYLOR
Senior Investment Manager/Head of Corporate Governance,
Global Emerging Markets Equity
FIXED-INCOME MANAGEMENT TEAM
BRETT DIMENT
Head of Emerging Market Debt
KEVIN DALY
Senior Investment Manager, Emerging Market Debt
EDWIN GUTIERREZ
Head of Emerging Market Sovereign Debt
MAX WOLMAN
Senior Investment Manager, Emerging Market Debt
COMMENTARY
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND
The investment objective of the Fund is to provide a high level of total return.
The Fund pursues its investment objective by investing at least 80% of its
managed assets in a diversified portfolio of equity and fixed-income securities
of issuers in emerging market countries. There can be no assurance that the
Fund's investment objective will be achieved, and the Fund may not be
appropriate for all investors.
FUND RECAP
The Fund had a net asset value ("NAV") total return(1) of -2.49% and a market
value total return of -1.47% for the year ended December 31, 2014, compared to
the Fund's blended index(2) total return of -1.08% over the same period. In
addition to the blended index, the Fund currently uses other indexes for
comparative purposes. The total returns for the year ended December 31, 2014,
for these indexes were as follows: the Barclays Global Emerging Markets Index
was 3.13% and the FTSE All World Emerging Market Index was 1.55%.
An important factor impacting the return of the Fund relative to the indexes was
the Fund's use of financial leverage through the use of bank borrowings. The
Fund uses leverage because its managers believe that, over time, leverage
provides opportunities for additional income and total return for common
shareholders. However, the use of leverage can also expose common shareholders
to additional volatility. For example, if the prices of securities held by the
Fund decline, the negative impact of changes on Common Share NAV and Common
shareholder total return is magnified by the use of leverage. Conversely,
leverage may enhance Common Share returns during periods when the prices of
securities held by the Fund generally are rising. Unlike the Fund, the Barclays
Global Emerging Markets Index, the FTSE All World Emerging Market Index and the
components of the blended index are not leveraged. Leverage had a negative
impact on the performance of the Fund over this reporting period.
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(1) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in NAV per share for NAV
returns and changes in Common Share Price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
(2) The blended index consists of the following: JP Morgan Emerging Markets
Bond Index - Global Diversified (32.5%); JP Morgan Government Bond Index -
Emerging Markets (32.5%); MSCI Global Emerging Markets Index (35.0%).
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2014
FIXED INCOME COMMENTARY
MARKET RECAP
The U.S. Federal Reserve ("Fed") began tapering its asset purchasing program in
January 2014. The program was reduced by a U.S. $10 billion monthly until
October when there was a U.S. $15 billion reduction of purchases, finishing the
tapering process. Tapering initially weighed on emerging market sentiment in
January; however, there was a turnaround in February thanks to supportive and
pragmatic measures by emerging market central banks as well as the market
realization that certain idiosyncratic events were not indicative of wider
contagion.
Emerging market ("EM") debt continued to post gains throughout the summer months
as investors focused on the yield differential between EMs and the developed
world, rather than tensions between Russia and Ukraine. The key themes of last
year, including the "Fragile Five" (Brazil, Indonesia, India, Turkey and South
Africa) and external vulnerabilities, ceased to be as important, given the clear
improvement in the fundamentals of many countries.
While declines in hard currency sovereign and corporate bonds were somewhat
tempered, EM currencies weakened significantly towards September when the JP
Morgan Emerging Markets Currency Index declined to levels last seen at the
height of the credit crunch in 2009. While election and geopolitical risks may
have accounted for a decline in the Brazilian real and Russian ruble, the
broader underperformance was due to a strengthening U.S. dollar, which reflected
the improving U.S. economy and softer growth expectations for China.
EM debt rebounded in October, reversing much of the negativity experienced
across the asset class in September. U.S. Treasuries experienced a roller
coaster ride, as yields fell by 50 basis points towards the middle of October
before relinquishing some of these gains by the end of the month.
After a rebound in October, EM debt suffered during the fourth quarter. Risk
aversion in the midst of continuing geopolitical tensions in the Eurozone and
resulting Western sanctions against Russia as well as tumbling commodity prices
caused the asset class to underperform. The market did retrace some of its
losses towards the end of the quarter, but it was not enough to bring
performance into positive territory. The oil-price collapse had a large effect
on certain sovereign credits, particularly damaging exporters like Russia,
Venezuela and Nigeria. Given the asymmetric impact on the commodity exporters
and importers, however, heavy importers such as Turkey and South Africa found
solace in the lower prices, though this did not outweigh the negative effect on
earlier mentioned exporters. Unsurprisingly, currency has also felt the burn of
the difficult quarter for EMs with the JP Morgan Emerging Markets Currency Index
reaching all-time lows at the end of the reporting period, driven primarily by a
sharp fall in the value of the Russian ruble and the broader effects of the
stronger U.S. dollar.
PERFORMANCE ANALYSIS
The EM debt portion of the Fund underperformed the EM debt portion of its
blended index in hard currency but not in local currency bonds.
Within the hard currency space, the Fund's overweight positions in Croatia,
Honduras and Romania were the key positive contributors to performance, as were
off-index holdings in the United Arab Emirates and Rwanda. On the other side, an
overweight position in Venezuela detracted from performance as did corporate
holdings in Brazil. Underweight positions in the Philippines, Hungary and China
also detracted from the Fund's performance.
Within the local currency holdings, an underweight position in Poland benefited
the Fund as did overweight positions in Mexico and Indonesia. Positioning in
Russia was the main detractor from performance as were an overweight in Colombia
and an off-index position in Serbia.
MARKET OUTLOOK
A mixed year for EM debt presents selective opportunities. One of the key areas
worth looking at is EM currencies which are selectively looking more attractive
on valuation grounds. On aggregate, EM currencies have been depreciating since
2011. Despite a significant balance of payments improvement among certain
countries, the generalized U.S. dollar strength has had a major, broad effect
across currencies (not just in EMs), despite the fact that local currency debt
positioning among foreigners remains at all-time highs while long-term yields in
EMs are also not at distressed levels.
The on-going geopolitical fall-out between Russia and the West also looks set to
continue as there are no suggestions of a softening of Russian rhetoric
surrounding Ukraine. While Russia's economy looks set for a recession in 2015,
any rebound in crude oil prices will provide a welcome boost for the country -
it should be noted that forward oil prices have yet to experience the type of
collapse that we have seen in the spot market which suggests that there could be
some relief for oil. China's policy-makers will likely provide further easing
measures in an effort to boost growth which may also have positive knock-on
effects for broader EMs.
Page 5
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2014
EQUITY COMMENTARY
MARKET RECAP
EM equities fell in U.S. dollar terms over the year. Sentiment was initially
dominated by uncertainty over the timing of the Fed's withdrawal of monetary
stimulus and nagging concerns of a sharp economic slowdown in China. But markets
later rebounded and maintained a largely uninterrupted rise as investors took
the Fed's gradual reduction of its asset purchases in their stride. Hopes of
political change in key developing economies provided further impetus. The
rally, though, ended in September as healthier U.S. economic growth rekindled
concerns that the Fed may hike interest rates earlier than expected. A continued
deceleration in China and declining oil prices also cast doubts over the global
recovery, while the turmoil in Russia's financial markets and the ruble's
collapse at the year-end triggered a broad sell-off in emerging stock markets
and currencies.
Russia was the worst-performing market in 2014. Local equities and the ruble
plunged to a five-year low as the sustained fall in oil prices and the weight of
international sanctions hampered the domestic economy. Growth forecasts for
Russia were slashed and the central bank hiked its key interest rate in a futile
attempt to stem the currency's decline. Brazil was another laggard. The stock
market was driven by the bitterly contested presidential elections, which saw
incumbent Dilma Rousseff edging out Aecio Neves to secure a second term. India
and Indonesia, however, outperformed on hopes for reform following the election
of pro-growth and business-friendly leaders.
PERFORMANCE ANALYSIS
The equity portion of the Fund outperformed the equity portion of its blended
index over the year. Both asset allocation and stock selection were positive.
The currency effect was negative as EM currencies depreciated against the U.S.
dollar, which rose amid expectations that the Fed may be forced to raise
interest rates soon as the economy improves.
India was a key contributor to relative return. The overweight to the market was
positive as it returned to favor after the sharp sell-off in 2013, given the
improvement in its current account and hopes of policy changes after the
pro-business Bharatiya Janata Party swept into power. Consequently, many of the
Fund's holdings also performed well. Top contributors to performance included
Housing Development Finance Corp., Ltd. (HDFC), ICICI Bank Ltd., Hero MotoCorp
Ltd., and UltraTech Cement Ltd. ICICI Bank Ltd. and mortgage lender HDFC were
further lifted by hopes of better loan growth, while UltraTech gained on
expectations of increased infrastructure spending.
Also aiding the Fund's performance was our underweight to Korea, which was the
key laggard in Asia. The market was partly weighed down by lackluster economic
data and partly on fears that the won's strength against the sliding yen would
disadvantage local exporters. At the stock level, Samsung Electronics Co.,
Ltd.'s (SEC) preferred shares, which we hold, outperformed the ordinary shares.
The company announced a buyback of both the preferred and ordinary shares, and
this lifted the stock that had been weighed down earlier by weak results amid
increasing competition. Nevertheless, SEC remains well placed given its
vertically integrated operation and we are beginning to see a turnaround in the
key memory division.
In Russia the lack of exposure to index heavyweights, such as Gazprom and
Sberbank, aided relative performance, although our holdings in LUKOIL and Magnit
OJSC pared some of the gains.
Conversely, our overweight to Brazil was negative as President Dilma Rousseff's
re-election disappointed investors. Likewise stock selection was weak as miner
Vale S.A.'s share price declined on the back of lower iron ore prices. The
Fund's non-index exposure to Tenaris S.A. was another detractor. The oil and gas
pipe manufacturer came under pressure on concerns that demand would fall if oil
prices weaken further.
MARKET OUTLOOK
Existing headwinds such as the knock-on impact of China's slowing growth, along
with the prospect of a U.S. interest rate hike and stronger dollar, are expected
to hamper emerging markets and affect capital flows in the short term. But
despite the gloomy backdrop, there are reasons to be optimistic.
For one, the normalization of Fed policy is based on the assumption of a
sustainable U.S. economic recovery which bodes well for exports. This is set to
benefit EM exporters and may help offset some of the effects of a China
slowdown. A strong U.S. dollar is not necessarily bad for EMs either. A key
distinction to make is that current weakness in EM currencies is relative to the
dollar's strength, and not because of fundamental problems in the developing
world.
Meanwhile, investors are rightly concerned that weaker commodity and oil prices
point to a deteriorating outlook for global growth. But cheaper oil should
benefit EMs overall (net oil importers account for a significant portion of the
MSCI Emerging Markets Index), as it helps reduce fiscal pressures, takes
pressure off inflation, thus making a cut in interest rates more likely.
Page 6
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
ANNUAL REPORT
DECEMBER 31, 2014
Economic reforms being rolled out in key developing nations offer cause for some
optimism too, even if implementing them may be long and fraught. India and
Indonesia have already cut costly fuel subsidies; China has enacted financial
reforms that set the economy up for healthier development; while Mexico has made
sweeping changes across the education, financial, telecom and energy sectors.
Other countries will feel pressured to pursue a similar agenda to fuel economic
development.
At the corporate level, there appears to be scant signs of an earnings pickup;
recent declines in commodity and oil prices could put further pressure on
energy-related companies. Beyond that, however, other EM corporates remain
profitable with scope for operating improvements. Given the discount EM equities
trade to their developed market peers, and the anticipated improvement in
corporate profitability, we are confident in the outlook.
Page 7
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a)
DECEMBER 31, 2014
SHARES DESCRIPTION VALUE
-------------- ----------------------------------------------------------------------------------------- ------------
COMMON STOCKS - 50.3%
BRAZIL - 5.5%
112,316 Banco Bradesco S.A., ADR................................................................. $ 1,501,665
22,000 Lojas Renner S.A......................................................................... 632,887
27,454 Multiplan Empreendimentos Imobiliarios S.A., Preference Shares........................... 489,962
73,500 Souza Cruz S.A........................................................................... 534,204
58,267 Ultrapar Participacoes S.A............................................................... 1,127,769
84,104 Vale S.A., ADR........................................................................... 687,971
58,842 Vale S.A., Preference Shares, ADR........................................................ 427,193
------------
5,401,651
------------
CHILE - 0.6%
32,459 Banco Santander Chile S.A., ADR.......................................................... 640,092
------------
CHINA - 1.1%
960,000 PetroChina Co., Ltd., Class H (b)........................................................ 1,065,684
------------
HONG KONG - 5.8%
280,000 AIA Group Ltd. (b)....................................................................... 1,544,332
132,000 China Mobile Ltd. (b).................................................................... 1,546,084
202,000 Hang Lung Group Ltd. (b)................................................................. 915,991
600,000 Swire Pacific Ltd., B Shares (b)......................................................... 1,427,624
89,600 Swire Properties Ltd. (b)................................................................ 263,640
------------
5,697,671
------------
HUNGARY - 0.6%
45,000 Richter Gedeon Nyrt (b).................................................................. 606,014
------------
INDIA - 7.7%
17,000 Grasim Industries Ltd. (b)............................................................... 909,615
16,000 Hero MotoCorp Ltd. (b)................................................................... 785,098
78,000 Hindustan Unilever Ltd. (b).............................................................. 937,372
93,500 Housing Development Finance Corp., Ltd. (b).............................................. 1,676,675
100,000 ICICI Bank Ltd. (b)...................................................................... 556,494
44,736 Infosys Ltd. (b)......................................................................... 1,388,054
182,173 ITC Ltd. (b)............................................................................. 1,061,225
7,428 UltraTech Cement Ltd. (b)................................................................ 313,714
------------
7,628,247
------------
INDONESIA - 1.7%
2,832,100 PT Astra International Tbk (b)........................................................... 1,689,021
------------
ITALY - 0.9%
30,900 Tenaris S.A., ADR........................................................................ 933,489
------------
MALAYSIA - 1.0%
234,242 CIMB Group Holdings Berhad (b)........................................................... 371,769
120,000 Public Bank Berhad (b)................................................................... 626,916
------------
998,685
------------
MEXICO - 3.9%
16,700 Fomento Economico Mexicano, S.A.B. de C.V., ADR (c)...................................... 1,470,101
34,500 Grupo Aeroportuario del Centro Norte, S.A.B. de C.V., ADR................................ 1,253,730
211,200 Grupo Financiero Banorte, S.A.B. de C.V., O Shares....................................... 1,162,378
------------
3,886,209
------------
Page 8 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2014
SHARES DESCRIPTION VALUE
-------------- ----------------------------------------------------------------------------------------- ------------
COMMON STOCKS (CONTINUED)
PHILIPPINES - 1.9%
1,400,000 Ayala Land, Inc. (b)..................................................................... $ 1,043,948
394,359 Bank of the Philippine Islands (b)....................................................... 824,983
------------
1,868,931
------------
POLAND - 0.9%
17,000 Bank Pekao S.A. (b)...................................................................... 854,355
------------
PORTUGAL - 0.5%
45,692 Jeronimo Martins SGPS S.A. (b)........................................................... 457,853
------------
RUSSIA - 1.8%
29,500 LUKOIL, ADR (b).......................................................................... 1,131,325
4,217 Magnit OJSC (b).......................................................................... 666,497
------------
1,797,822
------------
SOUTH AFRICA - 2.9%
48,610 Massmart Holdings Ltd. (b)............................................................... 595,713
22,811 MTN Group Ltd. (b)....................................................................... 433,923
20,978 SABMiller PLC (b)........................................................................ 1,092,406
119,729 Truworths International Ltd. (b)......................................................... 795,092
------------
2,917,134
------------
SOUTH KOREA - 3.1%
3,500 E-Mart Co., Ltd. (b)..................................................................... 647,701
2,620 Samsung Electronics Co., Ltd., Preference Shares (b)..................................... 2,464,294
------------
3,111,995
------------
TAIWAN - 2.7%
150,005 Taiwan Mobile Co., Ltd. (b).............................................................. 495,307
493,954 Taiwan Semiconductor Manufacturing Co., Ltd. (b)......................................... 2,176,100
------------
2,671,407
------------
THAILAND - 2.5%
79,000 PTT Exploration and Production Public Co., Ltd. (b)...................................... 267,524
67,700 Siam Cement Public (The) Co., Ltd. (b)................................................... 923,748
230,600 Siam Commercial Bank Public Co., Ltd. (b)................................................ 1,270,072
------------
2,461,344
------------
TURKEY - 3.0%
188,635 Akbank TAS (b)........................................................................... 696,474
40,444 BIM Birlesik Magazalar AS (b)............................................................ 864,890
146,150 Haci Omer Sabanci Holding AS (b)......................................................... 634,395
192,000 Turkiye Garanti Bankasi AS (b)........................................................... 771,290
------------
2,967,049
------------
UNITED KINGDOM - 1.4%
26,000 BHP Billiton PLC (b)..................................................................... 556,181
58,242 Standard Chartered PLC (b)............................................................... 871,063
------------
1,427,244
------------
UNITED STATES - 0.8%
10,500 Yum! Brands, Inc......................................................................... 764,925
------------
TOTAL COMMON STOCKS...................................................................... 49,846,822
(Cost $37,894,851) ------------
See Notes to Financial Statements Page 9
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2014
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES - 41.0%
ARGENTINA - 1.2%
1,300,000 Argentina Bonar Bonds (USD).................................. 7.00% 04/17/17 $ 1,235,500
------------
ARMENIA - 0.6%
620,000 Republic of Armenia (USD) (d)................................ 6.00% 09/30/20 604,500
------------
BAHRAIN - 0.2%
250,000 Bahrain Government International Bond (USD) (d).............. 6.00% 09/19/44 237,500
------------
BRAZIL - 4.9%
250,000 Brazil Notas do Tesouro Nacional, Series B, Inflation
Adjusted Bond (BRL) (e) .................................. 6.00% 08/15/20 234,462
5,109,000 Brazil Notas do Tesouro Nacional, Series F (BRL)............. 10.00% 01/01/17 1,835,525
470,000 Brazil Notas do Tesouro Nacional, Series F (BRL)............. 10.00% 01/01/23 157,227
8,020,000 Brazil Notas do Tesouro Nacional, Series F (BRL)............. 10.00% 01/01/25 2,642,593
------------
4,869,807
------------
CHILE - 0.3%
250,000 Empresa Nacional del Petroleo (USD) (d)...................... 4.38% 10/30/24 245,024
------------
COLOMBIA - 1.8%
833,000,000 Colombia Government International Bond (COP)................. 7.75% 04/14/21 379,783
2,677,000,000 Colombia Government International Bond (COP)................. 9.85% 06/28/27 1,418,647
------------
1,798,430
------------
COSTA RICA - 0.3%
300,000 Costa Rica Government International Bond (USD)............... 4.25% 01/26/23 276,000
------------
CROATIA - 1.5%
1,170,000 Croatia Government International Bond (USD).................. 6.63% 07/14/20 1,287,725
200,000 Croatia Government International Bond (USD).................. 6.00% 01/26/24 216,500
------------
1,504,225
------------
DOMINICAN REPUBLIC - 0.5%
200,000 Dominican Republic International Bond (USD).................. 7.50% 05/06/21 220,286
118,000 Dominican Republic International Bond (USD).................. 8.63% 04/20/27 139,240
100,000 Dominican Republic International Bond (USD) (d).............. 7.45% 04/30/44 109,841
------------
469,367
------------
EGYPT - 1.2%
8,950,000 Egypt Treasury Bills (EGP)................................... (f) 04/14/15 1,220,133
------------
ETHIOPIA - 0.3%
310,000 Federal Democratic Republic of Ethiopia (USD) (d)............ 6.63% 12/11/24 305,350
------------
GEORGIA - 0.4%
350,000 Georgian Oil and Gas Corp. JSC (USD) (d)..................... 6.88% 05/16/17 357,455
------------
GHANA - 0.8%
350,000 Republic of Ghana (USD) (d).................................. 8.13% 01/18/26 324,625
500,000 Republic of Ghana (USD)...................................... 8.13% 01/18/26 463,750
------------
788,375
------------
HONDURAS - 0.7%
630,000 Honduras Government International Bond (USD) (d)............. 7.50% 03/15/24 663,075
------------
HUNGARY - 0.6%
140,630,000 Hungary Government Bond (HUF)................................ 5.50% 06/24/25 622,156
------------
Page 10 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2014
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES (CONTINUED)
INDONESIA - 2.5%
700,000 Indonesia Government International Bond (USD) (d)............ 5.88% 01/15/24 $ 792,750
4,000,000,000 Indonesia Treasury Bond (IDR)................................ 10.00% 07/15/17 340,940
6,900,000,000 Indonesia Treasury Bond (IDR)................................ 6.13% 05/15/28 463,726
5,500,000,000 Indonesia Treasury Bond (IDR)................................ 10.50% 08/15/30 530,304
4,230,000,000 Indonesia Treasury Bond (IDR)................................ 8.38% 03/15/34 345,917
------------
2,473,637
------------
IRAQ - 0.2%
280,000 Republic of Iraq (USD)....................................... 5.80% 01/15/28 236,600
------------
IVORY COAST - 0.6%
570,000 Ivory Coast Government International Bond (USD).............. 5.75% 12/31/32 550,050
------------
KAZAKHSTAN - 0.6%
600,000 Kazakhstan Government International Bond (USD) (d)........... 3.88% 10/14/24 562,875
------------
KENYA - 0.2%
200,000 Kenya Government International Bond (USD).................... 6.88% 06/24/24 210,500
------------
MEXICO - 3.4%
3,890,000 Mexican Bonos (MXN).......................................... 6.50% 06/09/22 277,102
29,350,000 Mexican Bonos (MXN).......................................... 8.50% 11/18/38 2,469,721
899,400 Mexican Udibonos, Inflation Adjusted Bond (MXN) (e).......... 4.50% 11/22/35 386,435
150,000 Mexico Government International Bond (USD)................... 6.05% 01/11/40 184,200
------------
3,317,458
------------
MONGOLIA - 0.7%
580,000 Development Bank of Mongolia LLC (USD)....................... 5.75% 03/21/17 562,600
200,000 Mongolia Government International Bond (USD)................. 5.13% 12/05/22 174,000
------------
736,600
------------
PERU - 0.8%
2,102,000 Peruvian Government International Bond (PEN)................. 6.95% 08/12/31 750,237
------------
POLAND - 0.8%
1,670,000 Poland Government Bond (PLN)................................. 4.00% 10/25/23 531,555
640,000 Poland Government Bond (PLN)................................. 5.75% 04/25/29 246,597
------------
778,152
------------
ROMANIA - 1.2%
700,000 Romanian Government International Bond (USD)................. 6.75% 02/07/22 845,166
260,000 Romanian Government International Bond (USD) (d)............. 6.13% 01/22/44 315,575
------------
1,160,741
------------
RUSSIA - 2.2%
115,090,000 Russian Federal Bond - OFZ (RUB)............................. 7.50% 03/15/18 1,539,270
59,120,000 Russian Federal Bond - OFZ (RUB)............................. 7.05% 01/19/28 613,096
------------
2,152,366
------------
RWANDA - 0.5%
200,000 Rwanda International Government Bond (USD) (d)............... 6.63% 05/02/23 203,632
300,000 Rwanda International Government Bond (USD)................... 6.63% 05/02/23 305,448
------------
509,080
------------
SENEGAL - 0.6%
380,000 Senegal Government International Bond (USD).................. 8.75% 05/13/21 419,026
200,000 Senegal Government International Bond (USD) (d).............. 6.25% 07/30/24 191,540
------------
610,566
------------
See Notes to Financial Statements Page 11
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2014
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN SOVEREIGN BONDS AND NOTES (CONTINUED)
SERBIA - 1.8%
400,000 Republic of Serbia (USD)..................................... 5.25% 11/21/17 $ 412,800
32,300,000 Serbia Treasury Bills (RSD).................................. (f) 01/29/15 320,789
63,300,000 Serbia Treasury Bills (RSD).................................. (f) 02/26/15 625,358
40,000,000 Serbia Treasury Bonds (RSD).................................. 10.00% 01/10/15 398,936
------------
1,757,883
------------
SOUTH AFRICA - 2.9%
210,000 Eskom Holdings SOC Ltd. (USD) (d)............................ 6.75% 08/06/23 218,925
450,000 Eskom Holdings SOC Ltd. (USD)................................ 6.75% 08/06/23 469,125
9,550,000 South Africa Government Bond (ZAR)........................... 10.50% 12/21/26 993,885
13,810,000 South Africa Government Bond (ZAR)........................... 8.00% 01/31/30 1,159,841
------------
2,841,776
------------
TANZANIA - 0.7%
680,000 Tanzania Government International Bond (USD) (g)............. 6.33% 03/09/20 714,000
------------
TURKEY - 3.1%
2,960,000 Turkey Government Bond (TRY)................................. 9.00% 01/27/16 1,281,223
1,600,000 Turkey Government Bond (TRY)................................. 6.30% 02/14/18 660,170
1,690,000 Turkey Government Bond (TRY)................................. 10.40% 03/20/24 845,894
250,000 Turkey Government International Bond (USD)................... 6.25% 09/26/22 285,938
------------
3,073,225
------------
UNITED ARAB EMIRATES - 0.6%
520,000 Emirate of Dubai Government International Bonds (USD)........ 7.75% 10/05/20 634,400
------------
URUGUAY - 1.4%
183,000 Uruguay Government International Bond (USD).................. 7.63% 03/21/36 250,253
14,175,000 Uruguay Government International Bond, Inflation Adjusted
Bond (UYU) (e)............................................ 5.00% 09/14/18 1,118,916
760,000 Uruguay Government International Bond, Inflation Adjusted
Bond (UYU) (e)............................................ 4.25% 04/05/27 56,065
------------
1,425,234
------------
VENEZUELA - 0.6%
1,230,000 Venezuela Government International Bond (USD)................ 12.75% 08/23/22 635,295
------------
ZAMBIA - 0.3%
250,000 Zambia Government International Bond (USD) (d)............... 8.50% 04/14/24 274,269
------------
TOTAL FOREIGN SOVEREIGN BONDS AND NOTES.................................................. 40,601,841
(Cost $45,865,956) ------------
FOREIGN CORPORATE BONDS AND NOTES (h) - 12.0%
BANGLADESH - 0.3%
250,000 Banglalink Digital Communications Ltd. (USD) (d)............. 8.63% 05/06/19 249,375
------------
BRAZIL - 0.8%
350,000 JBS Investments GmbH (USD) (d)............................... 7.75% 10/28/20 364,175
290,000 JBS Investments GmbH (USD)................................... 7.25% 04/03/24 285,650
350,000 OAS Financial Ltd. (USD) (d) (j)............................. 8.88% (i) 112,000
200,000 OAS Investments GmbH (USD) (d)............................... 8.25% 10/19/19 73,000
------------
834,825
------------
Page 12 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2014
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN CORPORATE BONDS AND NOTES (h) (CONTINUED)
CANADA - 0.5%
650,000 Uranium One Investments, Inc. (USD) (d)...................... 6.25% 12/13/18 $ 481,000
------------
CHILE - 0.3%
320,000 SACI Falabella (USD)......................................... 3.75% 04/30/23 307,124
------------
COLOMBIA - 0.4%
460,000 Pacific Rubiales Energy Corp. (USD) (d)...................... 5.38% 01/26/19 397,440
------------
DOMINICAN REPUBLIC - 0.4%
350,000 AES Andres Dominicana, Ltd. / Itabo Dominicana, Ltd.
(USD)..................................................... 9.50% 11/12/20 379,400
------------
EL SALVADOR - 0.3%
268,000 Telemovil Finance Co., Ltd. (USD)............................ 8.00% 10/01/17 277,380
------------
GUATEMALA - 0.9%
400,000 Comcel Trust (USD) (d)....................................... 6.88% 02/06/24 420,000
400,000 Industrial Subordinated Trust (USD).......................... 8.25% 07/27/21 434,000
------------
854,000
------------
HONG KONG - 0.2%
200,000 MIE Holdings Corp. (USD) (d)................................. 7.50% 04/25/19 151,500
------------
INDIA - 0.2%
200,000 Bharti Airtel International Netherlands B.V. (USD) (d)....... 5.13% 03/11/23 214,456
------------
INDONESIA - 0.4%
440,000 Pertamina Persero PT (USD) (d)............................... 4.30% 05/20/23 422,400
------------
KAZAKHSTAN - 0.4%
400,000 Zhaikmunai LLP (USD) (d)..................................... 7.13% 11/13/19 347,240
------------
MEXICO - 2.0%
270,000 Alfa SAB de CV (USD)......................................... 6.88% 03/25/44 295,312
350,000 BBVA Bancomer S.A. (USD) (d)................................. 6.75% 09/30/22 385,875
350,000 CEMEX Espana S.A. (USD)...................................... 9.88% 04/30/19 385,875
650,000 Offshore Drilling Holding S.A. (USD) (d)..................... 8.63% 09/20/20 568,750
150,000 Petroleos Mexicanos (USD).................................... 6.38% 01/23/45 170,625
200,000 Sixsigma Networks Mexico SA de CV (USD) (d).................. 8.25% 11/07/21 204,000
------------
2,010,437
------------
MOZAMBIQUE - 0.7%
700,000 EMATUM Via Mozambique EMATUM Finance 2020 BV
(USD)..................................................... 6.31% 09/11/20 686,140
------------
NIGERIA - 0.5%
320,000 Diamond Bank PLC (USD) (d)................................... 8.75% 05/21/19 275,002
200,000 Zenith Bank PLC (USD) (d).................................... 6.25% 04/22/19 183,760
------------
458,762
------------
PARAGUAY - 0.5%
500,000 Banco Regional SAECA (USD) (d)............................... 8.13% 01/24/19 535,250
------------
PERU - 0.4%
200,000 Cementos Pacasmayo SAA (USD)................................. 4.50% 02/08/23 185,200
160,000 InRetail Consumer (USD) (d).................................. 5.25% 10/10/21 163,200
------------
348,400
------------
See Notes to Financial Statements Page 13
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
DECEMBER 31, 2014
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
-------------- ------------------------------------------------------------- ---------- -------------- ------------
FOREIGN CORPORATE BONDS AND NOTES (h) (CONTINUED)
RUSSIA - 0.8%
400,000 Alfa Bank OJSC Via Alfa Bond Issuance PLC (USD).............. 7.75% 04/28/21 $ 341,519
230,000 Evraz Group S.A. (USD) (d)................................... 6.50% 04/22/20 176,129
380,000 Vimpel Communications Via VIP Finance Ireland Ltd., OJS
(USD)..................................................... 7.75% 02/02/21 323,380
------------
841,028
------------
TURKEY - 0.5%
200,000 Arcelik AS (USD) (d)......................................... 5.00% 04/03/23 193,620
300,000 Yasar Holdings AS (USD) (d).................................. 8.88% 05/06/20 318,000
------------
511,620
------------
UKRAINE - 0.2%
350,000 MHP S.A. (USD)............................................... 8.25% 04/02/20 241,500
------------
UNITED ARAB EMIRATES - 0.7%
600,000 Jafz Sukuk Ltd. (USD)........................................ 7.00% 06/19/19 684,000
------------
VENEZUELA - 0.6%
1,050,000 Petroleos de Venezuela S.A. (USD)............................ 8.50% 11/02/17 603,225
------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES.................................................. 11,836,502
(Cost $12,962,107) ------------
TOTAL INVESTMENTS - 103.3%............................................................... 102,285,165
(Cost $96,722,914) (k)
OUTSTANDING LOAN - (5.9%)................................................................ (5,800,000)
NET OTHER ASSETS AND LIABILITIES - 2.6%.................................................. 2,567,452
------------
NET ASSETS - 100.0%...................................................................... $ 99,052,617
============
-----------------------------
(a) All of these securities are available to serve as collateral for the
outstanding loans.
(b) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Fund's Board of Trustees and in
accordance with provisions of the Investment Company Act of 1940, as
amended. At December 31, 2014, securities noted as such are valued at
$38,220,456 or 38.6% of net assets.
(c) Non-income producing security.
(d) This security, sold within the terms of a private placement memorandum, is
exempt from registration under Rule 144A under the Securities Act of 1933,
as amended (the "1933 Act"), and may be resold in transactions exempt from
registration, normally to qualified institutional buyers. Pursuant to
procedures adopted by the Fund's Board of Trustees, this security has been
determined to be liquid by the Fund's Sub-Advisor. At December 31, 2014,
securities noted as such amounted to $11,643,108 or 11.8% of net assets.
(e) Security whose principal value is adjusted in accordance with changes to
the country's Consumer Price Index. Interest is calculated on the basis of
the current adjusted principal value.
(f) Zero coupon bond.
(g) Floating rate security. The interest rate shown reflects the rate in
effect at December 31, 2014.
(h) Portfolio securities are included in a country based upon their underlying
credit exposure as determined by Aberdeen Asset Management Inc., the
Fund's investment sub-advisor.
(i) Perpetual maturity.
(j) Fixed to Floating rate security. The interest rate shown reflects the
fixed rate in effect at December 31, 2014.
(k) Aggregate cost for federal income tax purposes is $96,768,435. As of
December 31, 2014, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost was
$17,335,324 and the aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value was
$11,818,594.
ADR American Depositary Receipt
Page 14 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2014
Currency Abbreviations:
BRL Brazilian Real IDR Indonesian Rupiah RUB Russian Ruble
COP Colombian Peso INR Indian Rupee TRY Turkish Lira
EGP Egyptian Pound MXN Mexican Peso USD United States Dollar
GBP British Pound Sterling PEN Peruvian New Sol UYU Uruguayan Peso
HUF Hungarian Forint PLN Polish Zloty ZAR South African Rand
RSD Serbian Dinar
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of December 31,
2014 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
ASSETS TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 12/31/2014 PRICES INPUTS INPUTS
--------------------------------------------------- ------------ ------------ -------------- ------------
Common Stocks*..................................... $ 49,846,822 $ 11,626,366 $ 38,220,456 $ --
Foreign Sovereign Bonds and Notes*................. 40,601,841 -- 40,601,841 --
Foreign Corporate Bonds and Notes*................. 11,836,502 -- 11,836,502 --
------------ ------------ -------------- ------------
Total Investments.................................. $102,285,165 $ 11,626,366 $ 90,658,799 $ --
Forward Foreign Currency Contracts**............... 25,131 -- 25,131 --
------------ ------------ -------------- ------------
Total.............................................. $102,310,296 $ 11,626,366 $ 90,683,930 $ --
============ ============ ============== ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
12/31/2014 PRICES INPUTS INPUTS
------------ ------------ -------------- ------------
Forward Foreign Currency Contracts**............... $ (83,060) $ -- $ (83,060) $ --
============ ============ ============== ============
* See the Portfolio of Investments for country breakout.
** See the Forward Foreign Currency Contracts for contract and currency
detail.
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 December
31, 2014, the Fund transferred common stocks valued at $34,541,894 from Level 1
to Level 2 of the fair value hierarchy. The common stocks that transferred from
Level 1 to Level 2 did so as a result of foreign equities that were valued based
on quoted prices at December 31, 2013 that are now being fair valued using a
factor provided by a pricing service due to the change in value between the
foreign markets' close and the New York Stock Exchange close on December 31,
2014 exceeding a certain threshold.
See Notes to Financial Statements Page 15
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2014
CURRENCY EXPOSURE % OF TOTAL
DIVERSIFICATION INVESTMENTS #
------------------------------------
USD 35.6%
INR 9.3
HKD 6.6
BRL 6.3
ZAR 6.0
MXN 4.5
TRY 4.3
IDR 3.3
KRW 3.0
RUB 2.8
TWD 2.6
THB 2.4
PLN 1.9
COP 1.8
PHP 1.8
RSD 1.3
EGP 1.2
HUF 1.2
UYU 1.1
MYR 1.0
GBP 0.9
PEN 0.7
EUR 0.4
------------------------------------
Total 100.0%
======
# The weightings include the impact of currency forwards.
Page 16 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 2014
FORWARD FOREIGN CURRENCY CONTRACTS
-------------------------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION
DATE COUNTERPARTY PURCHASED (a) SOLD (a) DECEMBER 31, 2014 DECEMBER 31, 2014 (DEPRECIATION)
------------ ------------ --------------------- ------------------- ----------------- ----------------- --------------
02/13/15 DNDF INR 116,729,000 USD 1,860,816 $ 1,832,288 $ 1,860,816 (28,528)
01/16/15 UBS MXN 3,999,000 USD 295,668 270,778 295,668 (24,890)
01/16/15 BAR PLN 1,020,000 USD 306,915 287,871 306,915 (19,044)
01/05/15 CIT ZAR 812,804 USD 69,855 70,265 69,855 410
01/16/15 JPM ZAR 4,700,000 USD 415,830 405,232 415,830 (10,598)
02/13/15 CIT USD 1,257,419 BRL 3,326,000 1,257,419 1,236,411 21,008
01/02/15 BAR USD 149,990 TRY 349,251 149,990 149,601 389
01/16/15 JPM USD 1,164,290 TRY 2,721,000 1,164,290 1,160,966 3,324
----------
Net Unrealized Appreciation (Depreciation).................................................................. $ (57,929)
==========
(a) Please see Portfolio of Investments for currency descriptions.
Please see Note 2D - Offsetting on the Statement of Assets and Liabilities for a
table that presents the forward foreign currency contracts asset and liability
amounts on a gross basis.
Counterparty Abbreviations:
BAR Barclays Bank
CIT Citibank, NA
DNDF Deutsche NDF Currencies
JPM JPMorgan Chase
UBS UBS
See Notes to Financial Statements Page 17
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2014
ASSETS:
Investments, at value
(Cost $96,722,914).......................................................................... $102,285,165
Cash........................................................................................... 1,519,777
Foreign currency (Cost $472,533)............................................................... 471,530
Unrealized appreciation on forward foreign currency contracts.................................. 25,131
Receivables:
Interest.................................................................................... 1,230,414
Dividends................................................................................... 71,674
Miscellaneous............................................................................... 40,381
Prepaid expenses............................................................................... 1,261
------------
Total Assets................................................................................ 105,645,333
------------
LIABILITIES:
Outstanding loan............................................................................... 5,800,000
Unrealized depreciation on forward foreign currency contracts.................................. 83,060
Payables:
Investment securities purchased............................................................. 242,748
Deferred Thailand capital gains tax......................................................... 181,693
Investment advisory fees.................................................................... 91,021
Custodian fees.............................................................................. 59,171
Audit and tax fees.......................................................................... 58,200
Administrative fees......................................................................... 38,582
Printing fees............................................................................... 14,860
Interest and fees on loan................................................................... 11,225
Transfer agent fees......................................................................... 5,490
Deferred Indonesian capital gains tax....................................................... 4,471
Legal fees.................................................................................. 925
Financial reporting fees.................................................................... 771
Trustees' fees and expenses................................................................. 3
Other liabilities.............................................................................. 496
------------
Total Liabilities........................................................................... 6,592,716
------------
NET ASSETS..................................................................................... $ 99,052,617
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 93,968,227
Par value...................................................................................... 53,278
Accumulated net investment income (loss)....................................................... 42,897
Accumulated net realized gain (loss) on investments, forward foreign currency
contracts and foreign currency transactions................................................. (253,743)
Net unrealized appreciation (depreciation) on investments, forward foreign
currency contracts and foreign currency translation......................................... 5,241,958
------------
NET ASSETS..................................................................................... $ 99,052,617
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)........................... $ 18.59
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 5,327,785
============
Page 18 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2014
INVESTMENT INCOME:
Interest (net of foreign withholding tax of $13,036)........................................... $ 4,597,652
Dividends (net of foreign withholding tax of $144,958)......................................... 1,363,441
Other.......................................................................................... 18,125
------------
Total investment income..................................................................... 5,979,218
------------
EXPENSES:
Investment advisory fees....................................................................... 1,156,947
Custodian fees................................................................................. 194,889
Administrative fees............................................................................ 146,707
Interest and fees on loan...................................................................... 80,658
Audit and tax fees............................................................................. 65,010
Printing fees.................................................................................. 48,935
Transfer agent fees............................................................................ 35,609
Trustees' fees and expenses.................................................................... 17,781
Legal fees..................................................................................... 15,507
Financial reporting fees....................................................................... 9,250
Other.......................................................................................... 109,519
------------
Total expenses.............................................................................. 1,880,812
------------
NET INVESTMENT INCOME (LOSS)................................................................... 4,098,406
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................. 2,309,888
Forward foreign currency contracts.......................................................... 81,084
Foreign currency transactions............................................................... (2,914,093)
------------
Net realized gain (loss)....................................................................... (523,121)
------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. (6,682,378)
Forward foreign currency contracts.......................................................... (115,861)
Foreign currency translation................................................................ (49,573)
Net change in deferred Thailand capital gains tax.............................................. (25,363)
Net change in deferred Indonesian capital gains tax............................................ (3,640)
------------
Net change in unrealized appreciation (depreciation)........................................... (6,876,815)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (7,399,936)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................... $ (3,301,530)
============
See Notes to Financial Statements Page 19
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
12/31/2014 12/31/2013
------------- -------------
OPERATIONS:
Net investment income (loss)...................................................... $ 4,098,406 $ 4,230,666
Net realized gain (loss).......................................................... (523,121) 2,442,577
Net change in unrealized appreciation (depreciation).............................. (6,876,815) (15,494,730)
------------- -------------
Net increase (decrease) in net assets resulting from operations................... (3,301,530) (8,821,487)
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................. (1,678,391) (4,041,125)
Net realized gain................................................................. (2,365,537) (3,417,774)
Return of capital................................................................. (3,414,971) --
------------- -------------
Total distributions to shareholders............................................... (7,458,899) (7,458,899)
------------- -------------
Total increase (decrease) in net assets........................................... (10,760,429) (16,280,386)
NET ASSETS:
Beginning of period............................................................... 109,813,046 126,093,432
------------- -------------
End of period..................................................................... $ 99,052,617 $ 109,813,046
============= =============
Accumulated net investment income (loss) at end of period......................... $ 42,897 $ (204,964)
============= =============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at end of period.................................................... 5,327,785 5,327,785
============= =============
Page 20 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations $ (3,301,530)
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments.................................................. (54,068,033)
Sales, maturities and paydowns of investments............................. 59,165,256
Net amortization/accretion of premiums/discounts on investments........... (162,217)
Net realized gain/loss on investments..................................... (2,309,888)
Net realized gain/loss on foreign currency transactions (a)............... 2,800,206
Net change in unrealized appreciation/depreciation on forward foreign
currency contracts..................................................... 115,861
Net change in unrealized appreciation/depreciation on investments......... 6,682,378
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable........................................... 37,338
Increase in dividends receivable.......................................... (39,855)
Decrease in prepaid expenses.............................................. 674
Decrease in interest and fees on loan payable............................. (818)
Decrease in investment advisory fees payable.............................. (8,133)
Decrease in legal fees payable............................................ (294)
Increase in printing fees payable......................................... 3,786
Increase in administrative fees payable................................... 19,180
Decrease in custodian fees payable........................................ (125,667)
Increase in transfer agent fees payable................................... 171
Increase in Trustees' fees and expenses payable........................... 3
Increase in deferred Thailand capital gains tax........................... 25,363
Increase in deferred Indonesian capital gains tax......................... 3,640
Increase in other liabilities payable..................................... 292
-------------
CASH PROVIDED BY OPERATING ACTIVITIES........................................... $ 8,837,713
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income........... (1,678,391)
Distributions to Common Shareholders from net realized gain............... (2,365,537)
Distributions to Common Shareholders from return of capital............... (3,414,971)
-------------
CASH USED IN FINANCING ACTIVITIES............................................... (7,458,899)
-------------
Increase in cash and foreign currency (b)....................................... 1,378,814
Cash and foreign currency at beginning of period................................ 612,493
-------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD...................................... $ 1,991,307
=============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees............................... $ 81,476
=============
(a) This amount is a component of net realized gain/loss on foreign currency
transactions as shown on the Statement of Operations.
(b) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $(841).
See Notes to Financial Statements Page 21
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
12/31/2014 12/31/2013 12/31/2012 12/31/2011 12/31/2010
------------ ------------ ------------ ------------ ------------
Net asset value, beginning of period....... $ 20.61 $ 23.67 $ 20.30 $ 22.77 $ 19.76
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss)............... 0.77 0.79 0.90 0.98 0.97
Net realized and unrealized gain (loss).... (1.39) (2.45) 3.87 (2.05) 3.41
---------- ---------- ---------- ---------- ----------
Total from investment operations........ (0.62) (1.66) 4.77 (1.07) 4.38
---------- ---------- ---------- ---------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income...................... (0.32) (0.76) (0.88) (0.74) (0.83)
Net realized gain.......................... (0.44) (0.64) (0.52) (0.66) (0.57)
Return of capital.......................... (0.64) -- -- -- --
---------- ---------- ---------- ---------- ----------
Total from distributions................... (1.40) (1.40) (1.40) (1.40) (1.40)
---------- ---------- ---------- ---------- ----------
Capital share repurchases.................. -- -- -- -- 0.03
---------- ---------- ---------- ---------- ----------
Net asset value, end of period............. $ 18.59 $ 20.61 $ 23.67 $ 20.30 $ 22.77
========== ========== ========== ========== ==========
Market value, end of period................ $ 16.45 $ 18.05 $ 22.05 $ 17.82 $ 21.32
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON NET ASSET
VALUE (a)............................... (2.49)% (6.49)% 24.36% (4.18)% 23.29%
========== ========== ========== ========== ==========
TOTAL RETURN BASED ON MARKET
VALUE (a)............................... (1.47)% (12.13)% 32.02% (10.17)% 26.45%
========== ========== ========== ========== ==========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)....... $ 99,053 $ 109,813 $ 126,093 $ 108,174 $ 121,338
Ratio of expenses to average net assets.... 1.71% 1.75% 1.78% 1.68% 1.76%
Ratio of total expenses to average net
assets excluding interest expense....... 1.64% 1.68% 1.70% 1.61% 1.62%
Ratio of net investment income (loss) to
average net assets...................... 3.73% 3.57% 4.04% 4.47% 4.55%
Portfolio turnover rate.................... 48% 50% 49% 51% 87%
INDEBTEDNESS:
Total loan outstanding (in 000's).......... $ 5,800 $ 5,800 $ 5,800 $ 5,800 $ 5,800
Asset coverage per $1,000 senior
indebtedness (b)........................ $ 18,078 $ 19,933 $ 22,740 $ 19,651 $ 21,920
-----------------------------
(a) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan, and changes in net asset value per share
for net asset value returns and changes in Common Share Price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(b) Calculated by subtracting the Fund's total liabilities (not including the
loan outstanding) from the Fund's total assets, and dividing by the
outstanding loan balance in 000's.
Page 22 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2014
1. ORGANIZATION
First Trust/Aberdeen Emerging Opportunity Fund (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on May 16, 2006 and is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund trades under the ticker symbol FEO on the New York Stock
Exchange ("NYSE").
The Fund's investment objective is to seek a high level of total return. The
Fund pursues its objective by investing at least 80% of its Managed Assets in a
diversified portfolio of equity and fixed-income securities of issuers in
emerging market countries. "Managed Assets" means the total asset value of the
Fund minus the sum of the Fund's liabilities other than the principal amount of
borrowings, if any. There can be no assurance that the Fund will achieve its
investment objective.
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 the Common Shares of the Fund is determined
daily, as of the close of regular trading on the 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 per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in absence of market
value with respect to any portfolio securities, at fair value. Market value
prices represent last sale or official closing prices from a national or foreign
exchange (i.e., a regulated market) and are primarily obtained from third party
pricing services. Fair value prices represent any prices not considered market
value prices and are either obtained from a third party pricing service or are
determined by the Pricing Committee of the Fund's investment advisor, First
Trust Advisors L.P. ("First Trust" or the "Advisor"), in accordance with
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with provisions of the 1940 Act. Investments valued by the Advisor's Pricing
Committee, if any, are footnoted as such in the footnotes to the Portfolio of
Investments. The Fund's investments are valued as follows:
Corporate bonds, corporate 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 Fund'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.
Fixed income and other debt securities having a remaining maturity of
sixty days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretions of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes
thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Page 23
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2014
Common stocks and other 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 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 fair valued at the
mean of their most recent bid and asked prices, if available, and
otherwise at their closing bid price.
Forward foreign currency contracts are valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety and one-hundred eighty day
forward rates provided by an independent pricing service.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose
market or fair value price is not available from a pre-established pricing
source; a security with respect to which an event has occurred that is likely to
materially affect the value of the security after the market has closed but
before the calculation of the Fund's NAV or make it difficult or impossible to
obtain a reliable market quotation; and a security whose price, as provided by
the pricing service, does not reflect the security's fair value. As a general
principle, the current fair value of a security would appear to be the amount
which the owner might reasonably expect to receive for the security upon its
current sale. When fair value prices are used, generally they will differ from
market quotations or official closing prices on the applicable exchanges. A
variety of factors may be considered in determining the fair value of such
securities, including, but not limited to, the following:
1) the fundamental business data relating to the issuer, or economic
data relating to the country of issue;
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 security;
4) the financial statements of the issuer, or the financial condition
of the country of issue;
5) the credit quality and cash flow of the issuer, or country of issue,
based on the Sub-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 issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management (for corporate debt only);
11) the economic, political and social prospects/developments of the
country of issue and the assessment of the country's governmental
leaders/officials (for sovereign debt only);
12) the prospects for the issuer's industry, and multiples (of earnings
and/or cash flows) being paid for similar businesses in that
industry (for corporate debt only); and
13) other relevant factors.
Fair valuation of an equity 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 equity security in question is a foreign security, 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;
Page 24
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2014
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 December 31, 2014, 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. Amortization of premiums and accretion of discounts
are recorded by using the effective interest method.
Securities purchased on a when-issued, delayed-delivery or forward commitment
basis may have extended settlement periods. The value of the security so
purchased is subject to market fluctuations during this period. 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 until payment is
made. At December 31, 2014, the Fund had no when-issued, delayed-delivery or
forward purchase commitments.
C. FORWARD FOREIGN CURRENCY CONTRACTS:
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objective. Forward foreign currency contracts are agreements
between two parties ("Counterparties") to exchange one currency for another at a
future date and at a specified price. The Fund uses forward foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's foreign currency exposure. These contracts are valued daily, and the
Fund's net equity therein, representing unrealized gain or loss on the contracts
as measured by the difference between the forward foreign exchange rates at the
dates of entry into the contracts and the forward rates at the reporting date,
is included in "Unrealized appreciation (depreciation) on forward foreign
currency contracts" on the Statement of Assets and Liabilities. The change in
unrealized appreciation (depreciation) is included in "Net change in unrealized
appreciation(depreciation) on forward foreign currency contracts" on the
Statement of Operations. When the forward contract is closed, the Fund records a
realized gain or loss equal to the difference between the proceeds from (or the
cost of) the closing transaction and the Fund's basis in the contract. This
realized gain or loss is included in "Net realized gain (loss) on forward
foreign currency contracts" on the Statement of Operations. Risks arise from the
possible inability of counterparties to meet the terms of their contracts and
from movement in currency and securities values and interest rates. Due to the
risks, the Fund could incur losses in excess of the net unrealized value shown
on the Forward Foreign Currency Contracts table in the Portfolio of Investments.
In the event of default by the Counterparty, the Fund will provide notice to the
Counterparty of the Fund's intent to convert the currency held by the Fund into
the currency that the Counterparty agreed to exchange with the Fund. If a
Counterparty becomes bankrupt or otherwise fails to perform its obligations due
to financial difficulties, the Fund may experience significant delays in
obtaining any recovery in a bankruptcy or other reorganization proceeding. The
Fund may obtain only limited recovery or may obtain no recovery in such
circumstances.
D. OFFSETTING ON THE STATEMENT OF ASSETS AND LIABILITIES:
Accounting Standards Update No. 2011-11 "Disclosures about Offsetting Assets and
Liabilities" ("ASU 2011-11") requires entities to disclose both gross and net
information about instruments and transactions eligible for offset on the
Statement of Assets and Liabilities, and disclose instruments and transactions
subject to master netting or similar agreements. These disclosure requirements
are intended to help investors and other financial statement users better assess
the effect or potential effect of offsetting arrangements on a fund's financial
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2014
position. In addition, Accounting Standards Update No. 2013-1 "Clarifying the
Scope of Offsetting Assets and Liabilities" ("ASU 2013-1"), specifies exactly
which transactions are subject to offsetting disclosures. The scope of the
disclosure requirements is limited to derivative instruments, repurchase
agreements and reverse purchase agreements, and securities borrowing and
securities lending transactions.
For financial reporting purposes, the Fund does not offset financial assets and
financial liabilities that are subject to master netting arrangements ("MNAs")
or similar agreements on the Statement of Assets and Liabilities. MNAs provide
the right, in the event of default (including bankruptcy and insolvency) for the
non-defaulting counterparty to liquidate the collateral and calculate the net
exposure to the defaulting party or request additional collateral.
At December 31, 2014, derivative assets and liabilities (by type) on a gross
basis are as follows:
Gross Amounts
not Offset in the
Statement of
Net Amounts of Assets and Liabilities
Gross Amounts Assets Presented ------------------------
Gross amounts of Offset in the in the Statement Collateral
Recognized Statement of Assets of Assets and Financial Amounts
Assets and Liabilities Liabilities Instruments Received Net Amount
----------------------------------------------------------------------------------------------------------------------
Forward Foreign
Currency Contracts* $ 25,131 $ -- $ 25,131 $ (3,713) $ -- $ 21,418
Gross Amounts
not Offset in the
Net Amounts of Statement of
Liabilities Assets and Liabilities
Gross Amounts Presented ------------------------
Gross amounts of Offset in the in the Statement Collateral
Recognized Statement of Assets of Assets and Financial Amounts
Liabilities and Liabilities Liabilities Instruments Pledged Net Amount
----------------------------------------------------------------------------------------------------------------------
Forward Foreign
Currency Contracts* $ (83,060) $ -- $ (83,060) $ 3,713 $ -- $ (79,347)
* The respective counterparties for each contract are disclosed in the
Forward Foreign Currency Contracts table in the Portfolio of Investments.
E. FOREIGN CURRENCY:
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign currency gains and losses
include the effect of changes in exchange rates between trade date and
settlement date on investment security transactions, foreign currency
transactions and interest and dividends received. The portion of foreign
currency gains and losses related to fluctuation in exchange rates between the
initial purchase trade date and subsequent sale trade date is included in "Net
realized gain (loss) on foreign currency transactions" on the Statement of
Operations.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Level dividend distributions are declared and paid quarterly to Common
Shareholders after the payment of interest and/or dividends in connection with
leverage. The level dividend rate may be modified by the Board of Trustees from
time to time. If, for any quarterly distribution, net investment company taxable
income, if any (which term includes net short-term capital gain), is less than
the amount of the distribution, the difference will generally be a tax-free
return of capital distributed from the Fund's assets. Distributions of any net
long-term capital gains earned by the Fund are distributed at least annually.
Distributions will automatically be reinvested into additional Common Shares
pursuant to the Fund's Dividend Reinvestment Plan unless cash distributions are
elected by the shareholder.
Distributions from income and 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
Page 26
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2014
gain/loss in different periods for financial statement and tax purposes, will
reverse at some point in the future. Permanent differences incurred during the
year ended December 31, 2014, primarily as a result of differing book and tax
treatment on realization of foreign currency gains (losses), have been
reclassified at year end to reflect a decrease to accumulated net investment
income (loss) of $2,172,154 and an increase to accumulated net realized gain
(loss) of $2,172,154. Net assets were not affected by these reclassifications.
The tax character of distributions paid during the fiscal years ended December
31, 2014, and December 31, 2013 was as follows:
Distributions paid from: 2014 2013
Ordinary income................................. $ 1,761,380 $ 4,520,626
Capital gain.................................... 2,282,548 2,938,273
Return of capital............................... 3,414,971 --
As of December 31, 2014, the distributable earnings and net assets on a tax
basis were as follows:
Undistributed ordinary income................... $ --
Undistributed capital gains..................... --
-------------
Total undistributed earnings.................... --
Accumulated capital and other losses............ (219,132)
Net unrealized appreciation (depreciation)...... 5,441,219
-------------
Total accumulated earnings (losses)............. 5,222,087
Other........................................... (190,975)
Paid-in capital................................. 94,021,505
-------------
Net assets...................................... $ 99,052,617
=============
G. INCOME AND OTHER 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 (the "Code"), 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.
Certain countries assess a capital gains tax on securities sold in their local
markets. This tax is accrued as the securities in these foreign markets
appreciate in value and is paid at the time of sale to the extent a capital gain
is realized. Taxes accrued on securities in an unrealized appreciation position
are included in "Net change in unrealized appreciation (depreciation)" on the
Statement of Operations. The capital gains tax paid on securities sold is
included in "Other" expenses on the Statement of Operations.
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 December 31, 2014, the
Fund had no capital loss carryforwards for federal income tax purposes.
Certain losses realized during the current fiscal year may be deferred and
treated as occurring on the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended December 31, 2014, the Fund
incurred and elected to defer capital losses of $219,132.
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, 2012,
2013 and 2014 remain open to federal and state audit. As of December 31, 2014,
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.
H. EXPENSES:
The Fund will pay all expenses directly related to its operations.
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 1.00% of the Fund's Managed Assets. First Trust also provides fund reporting
services to the Fund for a flat annual fee in the amount of $9,250.
Page 27
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2014
Aberdeen Asset Management, Inc. ("Aberdeen" or the "Sub-Advisor") 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 0.50% of the Fund's Managed Assets that is paid
by First Trust out of its investment advisory fee.
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 that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees 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 Committee Chairmen rotate every
three years. The officers and "Interested" Trustee receive no compensation from
the Fund for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the year ended December 31, 2014, were $54,099,559 and
$58,635,524, respectively.
5. DERIVATIVES TRANSACTIONS
The following table presents the type of derivative held by the Fund at December
31, 2014, the primary underlying risk exposure and location of these instruments
as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
--------------------------------------- ----------------------------------------
DERIVATIVE STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION VALUE LIABILITIES LOCATION VALUE
------------------ --------------- ----------------------- -------------- ----------------------- ---------------
Unrealized appreciation Unrealized depreciation
Forward foreign on forward foreign on forward foreign
currency contracts Currency Risk currency contracts $ 25,131 currency contracts $ (83,060)
The following table presents the amount of net realized gain(loss) and change in
net unrealized appreciation (depreciation) recognized for the year ended
December 31, 2014, on derivative instruments, as well as the primary underlying
risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION EQUITY RISK
--------------------------------------------------------------------------------
CURRENCY RISK EXPOSURE
Net realized gain (loss) on forward foreign currency contracts $ 81,084
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts (115,861)
During the year ended December 31, 2014, notional values of forward foreign
currency contracts opened and closed were $72,527,691 and $77,290,239,
respectively.
6. BORROWINGS
The Fund has entered into a credit agreement with The Bank of Nova Scotia, which
provides for a revolving credit facility to be used as leverage for the Fund.
The revolving credit facility provides for a secured line of credit for the Fund
where Fund assets are pledged against advances made to the Fund. Under the
requirements of the 1940 Act, the Fund, immediately after any such borrowings,
must have an "asset coverage" of at least 300% (33-1/3% of the Fund's total
assets after borrowings). The total commitment under the facility is up to
$15,000,000. The borrowing rate under the revolving credit facility is equal to
the 1-month LIBOR plus 75 basis points. As of December 31, 2014, the Fund had
one loan outstanding under the revolving credit facility totaling $5,800,000.
For the year ended December 31, 2014, the average amount outstanding was
$5,800,000. The high and low annual interest rates during the year ended
December 31, 2014 were 1.06%
Page 28
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2014
and 1.00%, respectively, and the weighted average interest rate was 1.01%. The
interest rate at December 31, 2014 was 1.06%. The Fund pays a commitment fee of
0.15% (or 0.30% if loan balance drops below 40% of total commitment) per year,
which is included in "Interest and fees on loan" on the Statement of Operations.
7. 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.
8. 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 29
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST/ABERDEEN EMERGING
OPPORTUNITY FUND:
We have audited the accompanying statement of assets and liabilities of First
Trust/Aberdeen Emerging Opportunity Fund (the "Fund"), including the portfolio
of investments, as of December 31, 2014, and the related statements of
operations and cash flows for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
The Fund is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of December 31, 2014 by correspondence with the Fund's
custodian and brokers; where replies were not received, we performed other
auditing procedures. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of First
Trust/Aberdeen Emerging Opportunity Fund, as of December 31, 2014, and the
results of its operations and its cash flows for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the financial highlights for each of the five years in the period then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 19, 2015
Page 30
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2014 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
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 investments 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 ("SEC") website located at
http://www.sec.gov.
Page 31
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2014 (UNAUDITED)
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.
TAX INFORMATION
The Fund hereby designates as qualified dividend income 46.01% of its ordinary
income distributions (including short-term capital gains, if applicable) for the
year ended December 31, 2014. None of the ordinary income (including short-term
capital gain, if applicable) distributions made by the Fund during the year
ended December 31, 2014, qualify for corporate dividends received deduction
available to corporate shareholders.
The Fund meets the requirements of Section 853 of the Code, and elects to pass
through to its shareholders credit for foreign taxes paid. The total amount of
income received by the Fund from sources within foreign countries and
possessions of the United States is $5,093,648 (representing a total of $0.956
per share). The total amount of taxes paid to such countries is $192,183
(representing a total of $0.036 per share).
For the year ended December 31, 2014, the amount of long-term capital gain
distributions designated by the Fund was $2,282,548 which is taxable at the
applicable capital gain tax rates for federal income purposes.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of April 28, 2014, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR, N-CSRS and N-Q contain certifications by the Fund's
principal executive officer and principal financial officer that relate to the
Fund's public disclosure in such reports and are required by Rule 30a-2 under
the 1940 Act.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Dividend and Income Fund (formerly known as First Trust Active
Dividend Income Fund), First Trust High Income Long/Short Fund and First Trust
Energy Infrastructure Fund was held on April 23, 2014 (the "Annual Meeting"). At
the Annual Meeting, Trustee Robert F. Keith was elected by the Common
Shareholders of the First Trust/Aberdeen Emerging Opportunity Fund as a Class I
Trustee for a three-year term expiring at the Fund's annual meeting of
shareholders in 2017. The number of votes cast in favor of Mr. Keith was
4,288,002, the number of votes against was 143,354 and the number of broker
non-votes was 896,429. James A. Bowen, Niel B. Nielsen, Richard E. Erickson and
Thomas R. Kadlec are the other current and continuing Trustees.
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.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the securities owned by the Fund, which include a global bond and equity
portfolio of investment grade and below-investment grade government and
corporate debt securities. The value of these securities, like other market
investments, may move up or down, sometimes rapidly and unpredictably. Common
Shares at any point in time may be worth less than the original investment, even
after taking into account the reinvestment of Fund dividends and distributions.
Security prices can fluctuate for several reasons including the general
condition of the bond market, or when political or economic events affecting the
issuers occur. When the Advisor or Sub-Advisor determines that it is temporarily
unable to follow the Fund's investment strategy or that it is impractical to do
so (such as when a market disruption event has occurred and trading in the
securities is extremely limited or absent), the Fund may take temporary
defensive positions.
Page 32
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2014 (UNAUDITED)
NON-INVESTMENT GRADE SECURITIES RISK: The Fund may invest up to 80% of its
Managed Assets in non-investment grade securities. Non-investment grade
securities are rated below "Baa3" by Moody's Investors Service, Inc., below
"BBB-" by Standard & Poor's, or comparably rated by another nationally
recognized statistical rating organization or, if unrated, determined by the
Sub-Advisor to be of comparable credit quality. Non-investment grade debt
instruments are commonly referred to as "high-yield" or "junk" bonds and are
considered speculative with respect to the issuer's capacity to pay interest and
repay principal and are susceptible to default or decline in market value due to
adverse economic and business developments. The market values for high-yield
securities tend to be very volatile, and these securities are less liquid than
investment grade debt securities.
EMERGING MARKETS RISK: Under normal market conditions, the Fund will invest at
least 80% of its Managed Assets in equity or fixed-income securities of issuers
located in countries considered to be emerging markets. Investments in such
securities are considered speculative. In addition to the general risks of
investing in non-U.S. securities, heightened risks of investing in emerging
markets securities include: smaller market capitalization of securities markets,
which may suffer periods of relative illiquidity; significant price volatility;
restrictions on foreign investment; and possible restrictions on repatriation of
investment income and capital. Furthermore, foreign investors may be required to
register the proceeds of sales, and future economic or political crises could
lead to price controls, forced mergers, expropriation or confiscatory taxation,
seizure, nationalization or creation of government monopolies. The currencies of
emerging market countries may experience significant declines against the U.S.
dollar, and devaluation may occur subsequent to investments in these currencies
by the Fund. Inflation and rapid fluctuations in inflation rates have had, and
may continue to have, negative effects on the economies and securities markets
of certain emerging market countries.
FIXED-INCOME SECURITIES RISK: Debt securities, including high-yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or; (ii)
reinvestment risk, which is the risk that income from the Fund's portfolio will
decline if the Fund invests the proceeds from matured, traded or called bonds at
market interest rates that are below the Fund portfolio's current earnings rate;
(iii) prepayment risk, which is the risk that during periods of declining
interest rates, the issuer of a security may exercise its option to prepay
principal earlier than scheduled, forcing the reinvestment in lower yielding
securities; and (iv) credit risk, which is the risk that a security in the
Fund's portfolio will decline in price or the issuer fails to make interest
payments when due because the issuer of the security experiences a decline in
its financial status.
INTEREST RATE RISK: The Fund's portfolio is also subject to interest rate risk.
Interest rate risk is the risk that fixed-income securities will decline in
value because of changes in market interest rates. Investments in debt
securities with long-term maturities may experience significant price declines
if long-term interest rates increase.
NON-U.S. ISSUER RISK: Investments in the securities and instruments of non-U.S.
issuers involve certain considerations and risks not ordinarily associated with
investments in securities and instruments of U.S. issuers. Non-U.S. companies
are not generally subject to uniform accounting, auditing and financial
standards and requirements comparable to those applicable to U.S. companies.
Non-U.S. securities exchanges, brokers and listed companies may be subject to
less government supervision and regulation than exists in the United States.
Dividend and interest income may be subject to withholding and other non-U.S.
taxes, which may adversely affect the net return on such investments. There may
be difficulty in obtaining or enforcing a court judgment abroad.
CURRENCY RISK: The value of securities denominated or quoted in foreign
currencies may be adversely affected by fluctuations in the relative currency
exchange rates and by exchange control regulations. The Fund's investment
performance may be negatively affected by a devaluation of a currency in which
the Fund's investments are denominated or quoted. Further, the Fund's investment
performance may be significantly affected, either positively or negatively, by
currency exchange rates because the U.S. dollar value of securities denominated
or quoted in another currency will increase or decrease in response to changes
in the value of such currency in relation to the U.S. dollar. While certain of
the Fund's non-U.S. dollar-denominated securities may be hedged into U.S.
dollars, hedging may not alleviate all currency risks.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. The funds borrowed pursuant to a leverage borrowing
program constitute a substantial lien and burden by reason of their prior claim
against the income of the Fund and against the net assets of the Fund in
liquidation. The rights of lenders to receive payments of interest on and
repayments of principal on any borrowings made by the Fund under a leverage
borrowing program are senior to the rights of holders of Common Shares with
respect to payment of dividends or upon liquidation. If the Fund is not in
compliance with certain credit facility provisions, the Fund may not be
permitted to declare dividends or other distributions, including dividends and
distributions with respect to Common Shares or purchase Common Shares.
GOVERNMENT SECURITIES RISK: The ability of a government issuer, especially in an
emerging market country, to make timely and complete payments on its debt
obligations will be strongly influenced by the government issuer's balance of
payments, including export performance, its access to international credits and
investments, fluctuations of interest rates and the extent of its foreign
reserves. A country whose exports are concentrated in a few commodities or whose
economy depends on certain strategic imports could be vulnerable to fluctuations
in international prices of these commodities or imports. To the extent that a
country receives payment for its exports in currencies other than U.S. dollars,
Page 33
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2014 (UNAUDITED)
its ability to make debt payments denominated in U.S. dollars could be adversely
affected. If a government issuer cannot generate sufficient earnings from
foreign trade to service its external debt, it may need to depend on continuing
loans and aid from foreign governments, commercial banks, and multinational
organizations. There are no bankruptcy proceedings similar to those in the
United States by which defaulted government debt may be collected. Additional
factors that may influence a government issuer's ability or willingness to
service debt include, but are not limited to, a country's cash flow situation,
the availability of sufficient foreign exchange on the date a payment is due,
the relative size of its debt service burden to the economy as a whole, and the
issuer's policy towards the International Monetary Fund, the International Bank
for Reconstruction and Development and other international agencies to which a
government debtor may be subject.
NON-U.S. GOVERNMENT SECURITIES RISK: Economies and social and political climates
in individual countries may differ unfavorably from the United States. Non-U.S.
economies may have less favorable rates of growth of gross domestic product,
rates of inflation, currency valuation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Many countries have
experienced extremely high rates of inflation for many years. Unanticipated
economic, political and social developments may also affect the values of the
Fund's investments and limit the availability of additional investments in such
countries. Furthermore, such developments may significantly disrupt the
financial markets or interfere with the Fund's ability to enforce its rights
against non-U.S. government issuers.
Investments in debt instruments of issuers located in emerging market countries
are considered speculative. Heightened risks of investing in emerging markets
government debt include: smaller market capitalization of securities markets,
which may suffer periods of relative illiquidity; significant price volatility;
restrictions on foreign investment; and possible repatriation of investment
income and capital. Furthermore, foreign investors may be required to register
the proceeds of sales and future economic or political crises could lead to
price controls, forced mergers, expropriation or confiscatory taxation, seizure,
nationalization or creation of government monopolies. The currencies of emerging
market countries may experience significant declines against the U.S. dollar,
and devaluation may occur subsequent to investments in these currencies by the
Fund. Inflation and rapid fluctuations in inflation rates have had, and may
continue to have, negative effects on the economies and securities markets of
certain emerging market countries.
Page 34
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2014 (UNAUDITED)
NUMBER OF OTHER
PORTFOLIOS IN TRUSTEESHIPS OR
THE FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS, TERM OF OFFICE FUND COMPLEX HELD BY TRUSTEE
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY DURING PAST
POSITION WITH THE FUND SERVICE(2) DURING PAST 5 YEARS TRUSTEE 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three-Year Term Physician; President, Wheaton Orthopedics; 114 None
c/o First Trust Advisors L.P. Limited Partner, Gundersen Real Estate
120 East Liberty Drive, o Since Fund Limited Partnership; Member, Sportsmed
Suite 400 Inception LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three-Year Term President (March 2010 to Present), Senior 114 Director of ADM
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer Investor Services,
120 East Liberty Drive, o Since Fund (May 2007 to March 2010), ADM Investor Inc., ADM
Suite 400 Inception Services, Inc. (Futures Commission Investor Services
Wheaton, IL 60187 Merchant) International, and
D.O.B.: 11/57 Futures Industry
Association
Robert F. Keith, Trustee o Three-Year Term President (2003 to Present), Hibs 114 Director of Trust
c/o First Trust Advisors L.P. Enterprises (Financial and Management Company of
120 East Liberty Drive, o Since Fund Consulting) Illinois
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three-Year Term Managing Director and Chief Operating 114 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 East Liberty Drive, o Since Fund Harapan Education Foundation (Education Transport, Inc.
Suite 400 Inception Products and Services); President and (May 2003 to
Wheaton, IL 60187 Chief Executive Officer (June 2012 to May 2014)
D.O.B.: 03/54 September 2014), Servant Interactive LLC
(Educational Products and Services);
President and Chief Executive Officer
(June 2012 to September 2014), Dew
Learning LLC (Educational Products and
Services); President (June 2002
to June 2012), Covenant College
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(1), Trustee and o Three-Year Term Chief Executive Officer (December 2010 114 None
Chairman of the Board to Present), President (until December
120 East Liberty Drive, o Since Fund 2010), First Trust Advisors L.P. and First
Suite 400 Inception Trust Portfolios L.P.; Chairman of the
Wheaton, IL 60187 Board of Directors, BondWave LLC
D.O.B.: 09/55 (Software Development Company/
Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
-----------------------------
(1) Mr. Bowen is deemed an "interested person" of the Fund due to his position
as Chief Executive Officer of First Trust Advisors L.P., investment
advisor of the Fund.
(2) Currently, Richard E. Erickson and Thomas R. Kadlec, as Class II Trustees,
are serving as trustees until the Fund's 2015 annual meeting of
shareholders. James A. Bowen and Niel B. Nielson, as Class III Trustees,
are serving as trustees until the Fund's 2016 annual meeting of
shareholders. Robert F. Keith, as a Class I Trustee, is serving as a
trustee until the Fund's 2017 annual meeting of shareholders.
Page 35
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2014 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS(3)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley President and Chief o Indefinite Term Chief Operating Officer (December 2010 to Present)
120 E. Liberty Drive, Executive Officer and Chief Financial Officer, First Trust Advisors
Suite 400 o Since January 2012 L.P. and First Trust Portfolios L.P.; Chief Financial
Wheaton, IL 60187 Officer, BondWave LLC (Software Development
D.O.B.: 11/57 Company/Investment Advisor) and Stonebridge
Advisors LLC(Investment Advisor)
James M. Dykas Treasurer, Chief Financial o Indefinite Term Controller (January 2011 to Present), Senior Vice
120 E. Liberty Drive, Officer and Chief Accounting President (April 2007 to Present), First Trust
Suite 400 Officer o Since January 2012 Advisors L.P. and First Trust Portfolios L.P.
Wheaton, IL 60187
D.O.B.: 01/66
W. Scott Jardine Secretary and Chief Legal o Indefinite Term General Counsel, First Trust Advisors L.P. and
120 E. Liberty Drive, Officer First Trust Portfolios L.P.; Secretary and
Suite 400 o Since Fund Inception General Counsel, BondWave LLC (Software
Wheaton, IL 60187 Development Company/Investment Advisor);
D.O.B.: 05/60 Secretary of Stonebridge Advisors LLC
(Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present),
120 E. Liberty Drive, Senior Vice President (September 2005 to July 2012),
Suite 400 o Since Fund Inception First Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.
D.O.B.: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust Advisors L.P.
120 E. Liberty Drive, and Assistant Secretary and First Trust Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer Since
D.O.B.: 12/66 January 2011
o Assistant Secretary
Since Fund Inception
-----------------------------
(3) Officers of the Fund have an indefinite term. The term "officer" means the
president, vice president, secretary, treasurer, controller or any other
officer who performs a policy making function.
Page 36
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
DECEMBER 31, 2014 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies".
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required under law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives, proxy
services, solicitors and printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees who need to
know that information to provide products or services to you. We maintain
physical, electronic and procedural safeguards to protect your nonpublic
personal information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time, however, if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
Page 37
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FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Aberdeen Asset Management Inc.
1735 Market Street, 32nd Floor
Philadelphia, PA 19103
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
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, regardless
of whether these individuals are employed by the registrant or a third
party.
(c) There have been no amendments, during the period covered by this report,
to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, and that relates to any element of the code of ethics
description.
(d) The registrant has not granted any waivers, including an implicit waiver,
from a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant or
a third party, that relates to one or more of the items set forth in
paragraph (b) of this item's instructions.
(e) Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's board of
trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees (Registrant) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in connection with
statutory and regulatory filings or engagements were $53,000 for 2013 and
$53,000 for 2014.
(b) Audit-Related Fees (Registrant) -- The aggregate fees billed in each
of the last two fiscal years, for assurance and related services by the
principal accountant that are reasonably related to the performance of the audit
of the registrant's financial statements and are not reported under paragraph
(a) of this Item were $0 for 2013 and $0 for 2014.
Audit-Related Fees (Investment Adviser) -- The aggregate fees billed in
each of the last two fiscal years of the registrant for assurance and related
services by the principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements and are not
reported under paragraph (a) of this Item were $0 for 2013 and $0 for 2014.
(c) Tax Fees (Registrant) -- The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning to the registrant were $8,290
for 2013 and $8,670 for 2014. These fees were for tax preparation.
Tax Fees (Investment Adviser) -- The aggregate fees billed in each of the
last two fiscal years of the registrant for professional services rendered by
the principal accountant for tax compliance, tax advice, and tax planning to the
registrant's adviser were $0 for 2013 and $0 for 2014.
(d) All Other Fees (Registrant) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the principal
accountant to the registrant, other than the services reported in paragraphs (a)
through (c) of this Item were $0 for 2013 and $0 for 2014.
All Other Fees (Investment Adviser) -- The aggregate fees billed in each
of the last two fiscal years for products and services provided by the principal
accountant to the registrant's investment adviser, other than services reported
in paragraphs (a) through (c) of this Item were $0 for 2013 and $0 for 2014.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the registrant, if the engagement relates
directly to the operations and financial reporting of the registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) for the registrant and the registrant's investment adviser of this
Item that were approved by the audit committee pursuant to the pre-approval
exceptions included in paragraph (c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most recent
fiscal year that were attributed to work performed by persons other than the
principal accountant's full-time, permanent employees was less than fifty
percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's investment
adviser (not including any sub-adviser whose role is primarily portfolio
management and is subcontracted with or overseen by another investment adviser),
and any entity controlling, controlled by, or under common control with the
adviser that provides ongoing services to the Registrant for 2013 were $8,290
and $38,000 for the Registrant and the Registrant's investment adviser,
respectively and for 2014 were $8,670 and $8,500 for the Registrant and the
Registrant's investment adviser, respectively.
(h) The Registrant's audit committee of its Board of Trustees determined
that the provision of non-audit services that were rendered to the Registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the investment adviser that provides ongoing services to the Registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal accountant's
independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The registrant has a separately designated audit committee consisting of all
the independent trustees of the Registrant. The members of the audit committee
are: Thomas R. Kadlec, Niel B. Nielson, Richard E. Erickson and Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of the
close of the reporting period is included as part of the report to
shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
ABERDEEN U.S. REGISTERED ADVISERS
PROXY VOTING POLICIES AND PROCEDURES
AS OF AUGUST 29, 2012
The following are proxy voting policies and procedures ("Policies and
Procedures") adopted by affiliated investment advisers registered with the U.S.
Securities and Exchange Commission ("SEC") under the Investment Advisers Act of
1940, as amended ("Advisers Act"), that are subsidiaries of Aberdeen Asset
Management PLC ("AAM"); including, specifically, Aberdeen Asset Management Inc.,
a Delaware Corporation, ("Aberdeen US"), Aberdeen Asset Management Asia Limited,
a Singapore Corporation ("Aberdeen Singapore"), Aberdeen Asset Management
Limited, an Australian Corporation ("Aberdeen AU"), and Aberdeen Asset Managers
Limited, a UK Corporation ("AAM UK"), (collectively referred to herein as
"Aberdeen Advisers" and each an "Aberdeen Adviser") (collectively with AAM,
"Aberdeen"). These Policies and Procedures address proxy voting considerations
under U.S. law and regulation and under Canadian securities laws. These Policies
and Procedures do not address the laws or requirements of other jurisdictions.
Each of the Aberdeen Advisers provides advisory resources to certain U.S.
clients, including substantive advice on voting proxies for certain equity
securities. These Policies and Procedures are adopted to ensure compliance by
the Aberdeen Advisers with Rule 206(4)-6 under the Advisers Act and other
applicable fiduciary obligations under rules and regulations of the SEC and
interpretations of its staff with respect to proxies for voting securities held
by client portfolios.
Clients may consist of investment companies registered under the Investment
Company Act of 1940, as amended ("1940 Act") ("Funds" and each a "Fund"), and
other U.S. residents as well as non-U.S. registered funds or clients. Each
Aberdeen Adviser follows these Policies and Procedures for each of its
respective U.S. clients as required under the Advisers Act and other applicable
law, unless expressly directed by a client in writing to refrain from voting
that client's proxies or to vote in accordance with the client's proxy voting
policies and procedures. Aberdeen Advisers who advise or subadvise the Funds
follow both these Policies and Procedures and the proxy voting policies and
procedures adopted by the Funds and their respective Boards of Directors or
Trustees. Aberdeen Advisers located outside the U.S. may provide proxy voting
services to their non-U.S. based clients in accordance with the jurisdiction in
which the client is located. Aberdeen US, Aberdeen Singapore and Aberdeen AU
will provide proxy voting services to Canadian investment funds in accordance
with National Instrument 81-106 - Investment Fund Continuous Disclosure.
I. DEFINITIONS
A. "Best interest of clients". Clients' best economic interests over the long
term that is, the common interest that all clients share in seeing the value of
a common investment increase over time. Clients may have differing political or
social interests, but their best economic interest is generally uniform.
B. "Material conflict of interest". Circumstances when an Aberdeen Adviser or
any member of senior management, portfolio manager or portfolio analyst
knowingly does business with a particular proxy issuer or closely affiliated
entity, which may appear to create a material conflict between the interests of
the Aberdeen Adviser and the interests of its clients in how proxies of that
issuer are voted. A material conflict of interest might also exist in unusual
circumstances when Aberdeen has actual knowledge of a material business
arrangement between a particular proxy issuer or closely affiliated entity and
an affiliate of an Aberdeen Adviser.
II. GENERAL VOTING POLICIES
A. Client's Best Interest. These Policies and Procedures are designed and
implemented in a way that is reasonably expected to ensure that proxies are
voted in the best interests of clients. Proxies are voted with the aim of
furthering the best economic interests of clients, promoting high levels of
corporate governance and adequate disclosure of company policies, activities and
returns, including fair and equal treatment of stockholders.
B. Shareholder Activism. Aberdeen Advisers seek to develop relationships with
the management of portfolio companies to encourage transparency and improvements
in the treatment of employees, owners and stakeholders. Thus, Aberdeen Advisers
may engage in dialogue with the management of portfolio companies with respect
to pending proxy voting issues.
C. Case-by-Case Basis. These Policies and Procedures are guidelines. Each vote
is ultimately cast on a case-by-case basis, taking into consideration the
contractual obligations under the advisory agreement or comparable document, and
all other relevant facts and circumstances at the time of the vote. Aberdeen
Advisers may cast proxy votes in favor of management proposals or seek to change
the views of management, considering specific issues as they arise on their
merits. Aberdeen Advisers may also join with other investment managers in
seeking to submit a shareholder proposal to a company or to oppose a proposal
submitted by the company. Such action may be based on fundamental, social,
environmental or human rights grounds.
D. Individualized. These Policies and Procedures are tailored to suit Aberdeen's
advisory business and the types of securities portfolios Aberdeen Advisers
manage. To the extent that clients (e.g., investment companies, corporations,
pension plans) have adopted their own procedures, Aberdeen Advisers may vote the
same securities differently depending upon clients' directions.
E. Material Conflicts of Interest. Material conflicts are resolved in the best
interest of clients. When a material conflict of interest between an Aberdeen
Adviser and its respective client(s) is identified, the Aberdeen Adviser will
choose among the procedures set forth in Section IV.B.2. below to resolve such
conflict.
F. Limitations. The circumstances under which Aberdeen may take a limited role
in voting proxies, include the following:
1 No Responsibility. Aberdeen Advisers will not vote proxies for client accounts
in which the client contract specifies that Aberdeen will not vote. Under such
circumstances, the clients' custodians are instructed to mail proxy material
directly to such clients or the clients' designees.
2 Limited Value. An Aberdeen Adviser may abstain from voting a client proxy if
the Aberdeen Adviser determines that the effect on shareholders' economic
interests or the value of the portfolio holding is indeterminable or
insignificant. Aberdeen Advisers may also abstain from voting the proxies of
portfolio companies held in their passively managed funds. Proxies with respect
to securities that have been sold before the date of the shareholders meeting
and are no longer held by a client generally will not be voted.
3 Unjustifiable Costs. An Aberdeen Adviser may abstain from voting a client
proxy for cost reasons (e.g., non-U.S. securities).
4 Securities Lending Arrangements. If voting securities are part of a securities
lending program, Aberdeen may be unable to vote while the securities are on
loan.
5 Share Blocking. Certain jurisdictions may impose share blocking restrictions
at various times which may prevent Aberdeen from exercising its voting
authority.
6 Special Considerations. Aberdeen's responsibilities for voting proxies are
determined generally by its obligations under each advisory contract or similar
document. If a client requests in writing that an Aberdeen Adviser vote its
proxy in a manner inconsistent with these Policies and Procedures, the Aberdeen
Adviser may follow the client's direction or may request that the client vote
the proxy directly.
G. Sources of Information. The Aberdeen Advisers may conduct research internally
and/or use the resources of an independent research consultant. The Aberdeen
Advisers may consider legislative materials, studies of corporate governance and
other proxy voting issues, and/or analyses of shareholder and management
proposals by a certain sector of companies, e.g., Fortune 500 companies.
H. Subadvisers. To the extent that an Aberdeen Adviser may rely on subadvisers,
whether affiliated or unaffiliated, to manage any client portfolio on a
discretionary basis, the Aberdeen Adviser may delegate responsibility for voting
proxies to the subadviser. However, such subadvisers will be required either to
follow these Policies and Procedures or to demonstrate that their proxy voting
policies and procedures are consistent with these Policies and Procedures or
otherwise implemented in the best interests of the Aberdeen Advisers' clients.
I. Availability of Policies and Procedures. Aberdeen Advisers will provide
clients with a copy of these Policies and Procedures, as revised from time to
time, upon request.
J. Disclosure of Vote. As disclosed in Part 2 of each Aberdeen Adviser's Form
ADV, a client may obtain information on how its proxies were voted by requesting
such information from its Aberdeen Adviser. Aberdeen Advisers do not generally
disclose client proxy votes to third parties, other than as required for Funds,
unless specifically requested, in writing, by the client.
III. SPECIFIC VOTING POLICIES
A. General Philosophy.
o Support existing management on votes on the financial statements of
a company and the election of the Board of Directors;
o Vote for the acceptance of the accounts unless there are grounds to
suspect that either the accounts as presented or audit procedures
used, do not present an accurate picture of company results; and o
Support routine issues such as the appointment of independent
auditors, allocation of income and the declaration of stock (scrip)
dividend proposals provided there is a cash alternative.
B. Anti-takeover Measures. Aberdeen Advisers vote on anti-takeover measures on a
case-by-case basis taking into consideration such factors as the long-term
financial performance of the target company relative to its industry
competition. Key measures of performance will include the growth rates for
sales, operating income, net income and total shareholder returns. Other factors
which will be considered include margin analysis, cash flow and debt levels.
C. Proxy Contests for Control. Aberdeen Advisers vote on proxy contests for
control on a case-by-case basis taking into consideration such factors as
long-term financial performance of the target company relative to its industry,
management's track record, background to the proxy contest, qualifications of
director nominees, evaluation of what each side is offering shareholders as well
as the likelihood that the proposed objectives and goals can be met, and stock
ownership positions.
D. Contested Elections. Aberdeen Advisers vote on contested elections on a
case-by-case basis taking into consideration such factors as the qualifications
of all director nominees. Aberdeen Advisers also consider the independence of
board and key committee members and the corporate governance practices of the
company.
E. Executive compensation proposals. Aberdeen Advisers consider such proposals
on a case-by-case basis taking into consideration such factors as executive pay
and spending perquisites, particularly in conjunction with sub-par performance
and employee layoffs.
F. Shareholder Proposals. Aberdeen Advisers consider such proposals on a
case-by-case basis. Aberdeen Advisers support those proposals which will improve
the company's corporate governance or business profile at a reasonable cost, but
may oppose proposals which result in significant cost being incurred with little
or no benefit to the company or its shareholders.
IV. PROXY VOTING PROCEDURES
This section applies to each Aberdeen Adviser except to the extent that certain
procedures are identified as applicable only to a specific Aberdeen Adviser.
A. Obtain Proxy. Registered owners of record, e.g., trustees or custodian banks,
that receive proxy materials from the issuer or its information agent, are
instructed to sign physical proxy cards in blank and forward directly to the
Global Voting Team based in Scotland ("GVT"). Proxies may also be delivered
electronically by custodians using proxy services Institutional Shareholder
Services ("ISS"). Each proxy received is matched to the securities to be voted.
B. Material Conflicts of Interest.
1 Portfolio managers and research analysts ("Analysts") and senior
management of each Aberdeen Adviser have an affirmative duty to disclose
any personal conflicts such as officer or director positions held by them,
their spouses or close relatives in the portfolio company or attempts by
the portfolio company to exert influence over such person with respect to
their vote. Conflicts based on business relationships or dealings of
affiliates of any Aberdeen Adviser will only be considered to the extent
that the Aberdeen Adviser has actual knowledge of such business
relationships. Details of each conflict are maintained in a Conflicts of
Interest Record. The GVT is responsible for referring to the Conflicts of
Interest Record to identify whether there is a material conflicts of
interest relating to the securities to be voted.
2 When a material conflict of interest between an Aberdeen Adviser's
interests and its clients' interests appears to exist, this fact is
highlighted by the GVT when the details of the vote are sent to the
relevant Analyst. The Analyst may choose among the following options to
eliminate such conflict: (1) vote in accordance with these Policies and
Procedures if it involves little or no discretion; (2) vote as recommended
by a third party service if the Aberdeen Adviser utilizes such a service;
(3) "echo vote" or "mirror vote" the proxies in the same proportion as the
votes of other proxy holders that are not Aberdeen clients; (4) if
possible, erect information barriers around the person or persons making
voting decisions sufficient to insulate the decision from the conflict;
(5) if practical, notify affected clients of the conflict of interest and
seek a waiver of the conflict; or (6) if agreed upon in writing with the
client, forward the proxies to affected clients allowing them to vote
their own proxies. The Analyst is responsible for documenting their
acknowledgement of the conflict, the method used to vote the proxy, and an
appropriate rationale for their recommendation.
C. Analysts. The proxy administration process is carried out by the GVT. The GVT
ensures that each proxy statement is directed to the appropriate Analyst. If a
third party recommendation service has been retained, the GVT will forward the
proxy statement to the Analyst with the recommendation highlighted. The Analyst
will determine whether to vote as recommended by the service provider or to
recommend an alternative and shall advise the GVT. The Analyst may consult with
the GVT as necessary. If the Analyst recommends voting against the third party
recommendation, he or she is responsible for documenting the reasons for such
recommendation and that no conflict of interest influenced such recommendation.
If no third party recommendation service is utilized or if no recommendation is
provided, the Analyst is responsible for documenting the rationale for his or
her vote recommendation. If a material conflict of interest is noted, the
Analyst will follow the conflict of interest procedures set forth in Section
IV.B.2. above.
D. Vote. The following describes the breakdown of responsibilities between the
GVT and the Analyst in voting portfolio securities and the extent to which the
Aberdeen Advisers rely on third party service providers.
The GVT is responsible for ensuring that votes for Aberdeen Advisers' clients
are cast in a timely fashion and in accordance with these Policies and
Procedures. In addition, the GVT is primarily responsible for administering
proxy votes for the US and Canadian Funds which are advised or sub-advised by
the Aberdeen Advisers.
Responsibility for considering the substantive issues relating to any vote and
for deciding how shares will be voted resides with the relevant Analyst.
The Aberdeen Advisers have engaged ISS, a third party service provider, to
provide (1) notification of impending votes; (2) research into non-routine
votes, including shareholder resolutions; (3) voting recommendations which may
be viewed on-line; and (4) web-based voting. In the absence of any material
conflict of interest, the Aberdeen Advisers may either vote in accordance with
the ISS recommendation or decline to follow the ISS recommendation based on its
own view of the agenda item provided that decisions to vote contrary to the ISS
recommendation are documented as set forth in Section IV.C., above. In the event
of a material conflict of interest, the Aberdeen Advisers will follow the
procedures outlined in Section IV.B.2, above.
E. Review. GVT are responsible for ensuring that proxy materials are received in
a timely manner and reconciled against holdings on the record date of client
accounts over which the Aberdeen Adviser has voting authority to ensure that all
shares held on the record date, and for which a voting obligation exists, are
voted.
V. DOCUMENTATION, RECORDKEEPING AND REPORTING REQUIREMENTS
A. Documentation.
Each Adviser's Chief Compliance Officer is responsible for implementing
and updating these Policies and Procedures;
The GVT is responsible for:
1 Overseeing the proxy voting process;
2 Consulting with portfolio managers/analysts for the relevant portfolio
security; and
3 Maintaining manual proxy voting records, if any, and overseeing and reviewing
voting execution and recordkeeping
by third party providers such as ISS.
B. Record Keeping.
1. Each Aberdeen Adviser maintains or procures the maintenance of records of all
proxies it has voted. As permitted by Rule 204-2(c), electronic proxy statements
and the record of each vote cast by each client account may be maintained by
ISS. A US Fund's proxy voting record must be filed with the SEC on Form N-PX.
Form N-PX must be completed and signed in the manner required, containing a
fund's proxy voting record for the most recent twelve-month period ended June
30th. If an Aberdeen Adviser delegates this reporting responsibility to a third
party service provider such as ISS, it will ensure that the third party service
provider files Form N-PX accordingly. Aberdeen Advisers shall obtain and
maintain an undertaking from ISS to provide copies of proxy voting records and
other documents relating to its clients' votes promptly upon request. Aberdeen
Advisers and ISS may rely on the SEC's EDGAR system to keep records of certain
proxy statements if the proxy statements are maintained by issuers on that
system (e.g., large U.S.-based issuers).
2. As required by Rule 204-2(c), such records will also include: (a) a copy of
the Policies and Procedures; (b) a copy of any document created by the Aberdeen
Adviser that was material to making a decision on how to vote proxies on behalf
of a client or that memorializes the basis for that decision; and (c) each
written client request for proxy voting records and the Aberdeen Adviser's
written response to any (written or oral) client request for such records.
3. Duration. Proxy voting books and records will be maintained in an easily
accessible place for a period of five years, the first two in an appropriate
office of the Aberdeen Adviser.
C. Reporting. The Aberdeen Advisers will initially inform clients of these
Policies and Procedures by summary disclosure in Part 2 of their respective
Forms ADV. Upon receipt of a client's request for more information, the Aberdeen
Advisers will provide to the client a copy of these Policies and Procedures
and/or, in accordance with the client's stated requirements, how the client's
proxies were voted during the period requested subsequent to the adoption of
these Policies and Procedures. Such periodic reports, other than those required
for Funds, will not be made available to third parties absent the express
written request of the client. However, to the extent that any Aberdeen Adviser
may serve as a subadviser to another adviser to a Client, such Aberdeen Adviser
will be deemed to be authorized to provide proxy voting records on such Client
accounts to such other adviser.
For Canadian investment funds, Aberdeen US, Aberdeen AU and Aberdeen
Singapore will assist in preparing annual proxy voting records for the period
ending June 30 of each year and will post an annual proxy voting record on each
Canadian investment fund's website no later than August 31 of each year. Upon
receipt of a client or securityholder's request, Aberdeen US, Aberdeen AU or
Aberdeen Singapore will make available a copy of these Policies and Procedures
and the Canadian investment fund's proxy voting record, without charge, to any
client or securityholder upon a request made by the client or securityholder
after August 31.
D. Review of Policies and Procedures. These Policies and Procedures will be
subject to review on a periodic basis as deemed appropriate by the Aberdeen
Advisers. Any questions regarding the Policies and Procedures should be directed
to the Compliance Department of the respective Aberdeen Adviser.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(A)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS AND
DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF MARCH 4, 2015
Aberdeen Asset Management Inc. ("Aberdeen" or the "Sub-Advisor"), a Securities
and Exchange Commission registered investment advisor, is a wholly-owned
subsidiary of Aberdeen Asset Management PLC ("Aberdeen Group") and serves as the
investment sub-advisor to the registrant. Aberdeen Group is a publicly-traded
international investment management group listed on the London Stock Exchange,
managing assets for both institutional and retail clients from offices around
the world.
Investment decisions for the registrant are made by Aberdeen using a team
approach and not by any one individual. By making team decisions, Aberdeen seeks
to ensure that the investment process results in consistent returns across all
portfolios with similar objectives. Aberdeen does not employ separate research
analysts. Instead, Aberdeen's investment managers combine the roles of analysis
with portfolio management. Each member of the team has sector and portfolio
responsibilities such as day-to-day monitoring of liquidity. The overall result
of this matrix approach is a high degree of cross-coverage, leading to a deeper
understanding of the securities in which Aberdeen invests.
DEVAN KALOO
Head of Global Emerging Markets Equity
Mr. Kaloo is responsible for the London based Global Emerging Market ("GEM")
Equity Team, which manages Latin America, Europe, Middle East and Africa
equities, and also has oversight of global emerging market input from the Asia
research team based in Singapore, with which he works closely.
JOANNE IRVINE
Head of Global Emerging Markets ex Asia
Ms. Irvine is Head of Global Emerging Markets (ex-Asia), on the Global Emerging
Markets Equity Team in London. Joanne joined Aberdeen in 1996 in a group
development role, and moved to the Global Emerging Markets Equity Team in 1997.
PETER TAYLOR
Senior Investment Manager/Head of Corporate Governance, Global Emerging Markets
Equity
Mr. Taylor is a Senior Investment Manager and Head of Corporate Governance on
the Global Emerging Markets Equity Team. Peter joined Aberdeen's Asian Equities
Team in Singapore in 2007 and transferred to London in 2011. Previously, he was
with the International Finance Corporation, where he worked on corporate
governance and capital markets development for seven years from their Washington
DC and Hong Kong offices.
BRETT DIMENT
Head of Emerging Market Debt
Mr. Diment is Head of Emerging Market and Sovereign Debt and joined Aberdeen
following the acquisition of Deutsche Asset Management ("Deutsche") in 2005. He
is responsible for the day-to-day management of the Emerging Market Debt Team
and portfolios. Mr. Diment had been at Deutsche since 1991 as a member of the
Fixed Income group and served as Head of the Emerging Debt Team there from 1999
until its acquisition by Aberdeen.
MAX WOLMAN
Senior Investment Manager, Emerging Market Debt
Mr. Wolman is a Senior Investment Manager on the Emerging Market Debt Team and
has been with Aberdeen since January 2001. Mr. Wolman originally specialized in
currency and domestic debt analysis but is now responsible for a wide range of
emerging debt analysis including external and corporate issuers. Mr. Wolman is a
member of the Emerging Markets Debt Investment Committee at Aberdeen and is also
responsible for the daily implementation of the investment process.
(A)(2) OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
AND POTENTIAL CONFLICTS OF INTEREST
OTHER ACCOUNTS MANAGED BY PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBER
INFORMATION PROVIDED AS OF DECEMBER 31, 2014
(assets in millions).
# of Accounts Total Assets
Managed for which for which
Total Advisory Fee is Advisory Fee
Name of Portfolio Manager or # of Accounts Total Based on is Based on
Team Member Type of Accounts Managed Assets Performance Performance
----------------
1. Devan Kaloo Registered Investment Companies: 10 $9,495.18 0 $0
Other Pooled Investment Vehicles: 25 $21,841.30 0 $0
Other Accounts: 56 $19,323.18 5 $1,331.74
2. Joanne Irvine Registered Investment Companies: 10 $9,495.18 0 $0
Other Pooled Investment Vehicles: 25 $21,841.30 0 $0
Other Accounts: 56 $19,323.18 5 $1,470.54
3. Peter Taylor Registered Investment Companies: 10 $9,495.18 0 $0
Other Pooled Investment Vehicles: 25 $21,841.30 0 $0
Other Accounts: 56 $19,323.18 5 $1,470.54
4. Brett Diment Registered Investment Companies: 5 $2,496.08 0 $0
Other Pooled Investment Vehicles: 69 $12,509.54 0 $0
Other Accounts: 119 $23,393.72 1 $137.0
5. Max Wolman Registered Investment Companies: 5 $2,496.08 0 $0
Other Pooled Investment Vehicles: 69 $12,509.54 0 $0
Other Accounts: 119 $23,393.72 1 $137.00
POTENTIAL CONFLICTS OF INTERESTS
AS OF DECEMBER 31, 2014
In accordance with legal requirements in the various jurisdictions in which they
operate, and their own Conflicts of Interest policies, all subsidiaries of
Aberdeen Asset Management PLC, (together Aberdeen), have in place arrangements
to identify and manage Conflicts of Interest that may arise between them and
their clients or between their different clients. Where Aberdeen does not
consider that these arrangements are sufficient to manage a particular conflict,
it will inform the relevant client(s) of the nature of the conflict so that the
client(s) may decide how to proceed.
The portfolio managers' management of "other accounts", including (1) mutual
funds; (2) other pooled investment vehicles; and (3) other accounts that may pay
advisory fees that are based on account performance ("performance-based fees"),
may give rise to potential conflicts of interest in connection with their
management of a Fund's investments, on the one hand, and the investments of the
other accounts, on the other. The other accounts may have the same investment
objective as a Fund. Therefore, a potential conflict of interest may arise as a
result of the identical investment objectives, whereby the portfolio manager
could favor one account over another. However, Aberdeen believes that these
risks are mitigated by the fact that: (i) accounts with like investment
strategies managed by a particular portfolio manager are generally managed in a
similar fashion, subject to exceptions to account for particular investment
restrictions or policies applicable only to certain accounts, differences in
cash flows and account sizes, and similar factors; and (ii) portfolio manager
personal trading is monitored to avoid potential conflicts. In addition,
Aberdeen has adopted trade allocation procedures that require equitable
allocation of trade orders for a particular security among participating
accounts.
In some cases, another account managed by the same portfolio manager may
compensate Aberdeen based on the performance of the portfolio held by that
account. The existence of such performance-based fees may create additional
conflicts of interest for the portfolio manager in the allocation of management
time, resources and investment opportunities.
Another potential conflict could include instances in which securities
considered as investments for a Fund also may be appropriate for other
investment accounts managed by Aberdeen or its affiliates. Whenever decisions
are made to buy or sell securities by the Fund and one or more of the other
accounts simultaneously, Aberdeen may aggregate the purchases and sales of the
securities and will allocate the securities transactions in a manner that it
believes to be equitable under the circumstances. As a result of the
allocations, there may be instances where the Fund will not participate in a
transaction that is allocated among other accounts. While these aggregation and
allocation policies could have a detrimental effect on the price or amount of
the securities available to a Fund from time to time, it is the opinion of
Aberdeen that the benefits from the Aberdeen organization outweigh any
disadvantage that may arise from exposure to simultaneous transactions. Aberdeen
has adopted policies that are designed to eliminate or minimize conflicts of
interest, although there is no guarantee that procedures adopted under such
policies will detect each and every situation in which a conflict arises.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF DECEMBER 31, 2014
Aberdeen Asset Management PLC's ("Aberdeen") remuneration policies are designed
to support its business strategy, as a leading international asset manager. The
objective is to attract, retain and reward talented individuals for the delivery
of sustained, superior returns for its clients and shareholders. Aberdeen
operates in a highly competitive international employment market, and aims to
maintain its strong track record of success in developing and retaining talent.
Aberdeen's policy is to recognize corporate and individual achievements each
year through an appropriate annual bonus scheme. The aggregate value of awards
in any year is dependent on the group's overall performance and profitability.
Consideration is also given to the levels of bonuses paid in the market.
Individual awards which are payable to all members of staff are determined by a
rigorous assessment of achievement against defined objectives.
A long-term incentive plan for key staff and senior employees comprises of a
mixture of cash and deferred shares in Aberdeen PLC or select Aberdeen funds
(where applicable). Overall compensation packages are designed to be competitive
relative to the investment management industry.
Base Salary
Aberdeen's policy is to pay a fair salary commensurate with the individual's
role, responsibilities and experience, and having regard to the market rates
being offered for similar roles in the asset management sector and other
comparable companies. Any increase is to reflect inflation and is applied in a
manner consistent with other Aberdeen employees; any other increases must be
justified by reference to promotion or changes in responsibilities.
Annual Bonus
Aberdeen's policy is to recognize corporate and individual achievements each
year through an appropriate annual bonus scheme. The Remuneration Committee of
Aberdeen determines the key performance indicators that will be applied in
considering the overall size of the bonus pool. In line with practice amongst
other asset management companies, individual bonuses are not subject to an
absolute cap. However, the aggregate size of the bonus pool is dependent on the
group's overall performance and profitability. Consideration is also given to
the levels of bonuses paid in the market. Individual awards are determined by a
rigorous assessment of achievement against defined objectives, and are reviewed
and approved by the Remuneration Committee.
Aberdeen has a deferral policy which is intended to assist in the retention of
talent and to create additional alignment of executives' interests with
Aberdeen's sustained performance and, in respect of the deferral into funds,
managed by Aberdeen, to align the interest of asset managers with our clients.
Staff performance is reviewed formally at least once a year. The review process
evaluates the various aspects that the individual has contributed to the
Aberdeen, and specifically, in the case of portfolio managers, to the relevant
investment team. Discretionary bonuses are based on client service, asset growth
and the performance of the respective portfolio manager. Overall participation
in team meetings, generation of original research ideas and contribution to
presenting the team externally are also evaluated.
In the calculation of a portfolio management team's bonus, the Aberdeen takes
into consideration investment matters (which include the performance of funds,
adherence to the company investment process, and quality of company meetings) as
well as more subjective issues such as team participation and effectiveness at
client presentations. To the extent performance is factored in, such performance
is not judged against any specific benchmark and is evaluated over the period of
a year - January to December. The pre- or after-tax performance of an individual
account is not considered in the determination of a portfolio manager's
discretionary bonus; rather the review process evaluates the overall performance
of the team for all of the accounts they manage.
Portfolio manager performance on investment matters is judged over all of the
accounts the portfolio manager contributes to and is documented in the appraisal
process. A combination of the team's and individual's performance is considered
and evaluated.
Although performance is not a substantial portion of a portfolio manager's
compensation, the Aberdeen also recognizes that fund performance can often be
driven by factors outside one's control, such as (irrational) markets, and as
such pays attention to the effort by portfolio managers to ensure integrity of
our core process by sticking to disciplines and processes set, regardless of
momentum and 'hot' themes. Short-terming is thus discouraged and
trading-oriented managers will thus find it difficult to thrive in the Aberdeen
environment. Additionally, if any of the aforementioned undue risks were to be
taken by a portfolio manager, such trend would be identified via Aberdeen's
dynamic compliance monitoring system.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP
INFORMATION PROVIDED AS OF DECEMBER 31, 2014
Name of Portfolio Manager Dollar ($) Range of
-------------------------- --------------------
or Fund Shares
--- ------------
Team Member Beneficially Owned
----------- -------------------
Devan Kaloo $0
Joanne Irvine $0
Peter Taylor $0
Brett Diment $0
Max Wolman $0
(B) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
None.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers, or
persons performing similar functions, have concluded that the registrant's
disclosure controls and procedures (as defined in Rule 30a-3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR
270.30a-3(c))) are effective, as of a date within 90 days of the filing
date of the report that includes the disclosure required by this
paragraph, based on their evaluation of these controls and procedures
required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and
Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as
amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR
270.30a-3(d)) that occurred during the registrant's second fiscal quarter
of the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section
302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section
906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust/Aberdeen Emerging Opportunity Fund
-----------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: February 20, 2015
--------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: February 20, 2015
--------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: February 20, 2015
--------------------
* Print the name and title of each signing officer under his or her signature.