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: June 30, 2013
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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
SEMI-ANNUAL
REPORT
FOR THE SIX MONTHS ENDED
JUNE 30, 2013
First Trust/
Aberdeen
Emerging
Opportunity
Fund (FEO)
ABERDEEN
ASSET MANAGEMENT
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TABLE OF CONTENTS
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2013
Shareholder Letter........................................................... 1
At A Glance.................................................................. 2
Portfolio Commentary......................................................... 3
Portfolio of Investments..................................................... 6
Schedule of Forward Foreign Currency Contracts............................... 15
Statement of Assets and Liabilities.......................................... 16
Statement of Operations...................................................... 17
Statements of Changes in Net Assets.......................................... 18
Statement of Cash Flows...................................................... 19
Financial Highlights......................................................... 20
Notes to Financial Statements................................................ 21
Additional Information....................................................... 27
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)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
JUNE 30, 2013
Dear Shareholders:
I am pleased to present you with the semi-annual report for your investment in
First Trust/Aberdeen Emerging Opportunity Fund (the "Fund").
The report you hold contains detailed information about your investment, a
portfolio commentary from the Fund's management team that provides a recap of
the period, a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the period this report covers.
I encourage you to read this document and discuss it with your financial
advisor. A successful investor is also typically a knowledgeable one, as we have
found to be the case at First Trust Advisors L.P. ("First Trust").
The six months covered by this report have been more positive for the U.S.
markets. In fact, the S&P 500 Index, as measured on a total return basis, rose
13.82% during the period, and many economists and investors have felt positive
about the current market environment. Of course, past performance can never be
an indicator of future performance, but First Trust believes that staying
invested in quality products through up and down markets and having a long-term
horizon can help investors reach their financial goals.
As you know, First Trust offers a variety of products that we believe could help
investors seeking long-term investment success. We encourage you to talk to your
advisor about the other investments First Trust offers that might fit your
financial goals and to discuss those goals with your advisor regularly so that
he or she can help keep you on track.
First Trust will continue to make available up-to-date information about your
investments so you and your financial advisor are current on any First Trust
investments you own. We value our relationship with you, and thank you for the
opportunity to assist you in achieving your financial goals. I look forward to
the remainder of 2013 and to the next edition of your Fund's report.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees and
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
"AT A GLANCE"
AS OF JUNE 30, 2013 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FEO
Common Share Price $18.91
Common Share Net Asset Value ("NAV") $21.12
Premium (Discount) to NAV (10.46)%
Net Assets Applicable to Common Shares $112,545,683
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) 7.40%
Current Distribution Rate on NAV (2) 6.63%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
6/12 $19.24 $21.52
19.65 21.64
19.95 21.69
20.58 21.89
7/12 20.37 22.03
20.65 22.26
20.80 22.40
21.03 22.20
21.08 22.23
8/12 21.03 22.12
21.25 22.57
21.99 23.11
21.70 22.68
9/12 22.15 22.67
21.85 22.83
21.83 22.75
22.33 22.91
10/12 21.39 22.83
21.52 22.88
21.11 22.79
20.52 22.55
21.17 22.91
11/12 21.17 23.08
21.40 23.44
22.09 23.69
22.08 23.41
12/12 22.00 23.55
23.10 23.87
23.37 23.88
23.36 23.97
1/13 23.54 23.93
23.20 23.95
23.44 23.88
23.00 23.86
2/13 22.44 23.78
22.77 23.69
22.82 23.90
22.94 23.77
21.94 23.02
3/13 22.51 23.28
22.53 23.26
22.85 23.53
22.72 23.33
4/13 22.94 23.49
22.69 23.85
22.63 23.93
22.48 23.81
21.95 23.44
5/13 21.05 22.74
20.68 22.31
20.20 22.05
18.25 20.64
6/13 18.91 21.12
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PERFORMANCE
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Average Annual Total Return
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6 Months Ended 1 Year Ended 5 Years Ended Inception (8/28/2006)
6/30/2013 6/30/2013 6/30/2013 to 6/30/2013
FUND PERFORMANCE (3)
NAV -7.71% 4.65% 8.96% 10.05%
Market Value -11.33% 4.80% 10.06% 7.56%
INDEX PERFORMANCE
Blended Benchmark(4) -8.33% 2.23% 5.17% 8.05%
Barclays Capital Global
Emerging Markets Index -6.04% 3.91% 8.02% 7.85%
FTSE All World Emerging
Market Index -9.03% 3.62% 0.15% 6.11%
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% OF TOTAL
TOP 10 COUNTRIES(5) INVESTMENTS
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Brazil 12.6%
Russia 9.5
Mexico 8.1
Turkey 6.6
India 6.2
South Africa 5.8
Hong Kong 5.6
Hungary 3.5
Indonesia 3.3
South Korea 3.3
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Total 64.5%
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% OF TOTAL
TOP 10 HOLDINGS INVESTMENTS
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Brazil Notas do Tesouro Nacional, Series F, 10.00%, 1/1/17 3.7%
Mexican Bonos Desarr Fixed Rate Bond, 7.50%, 6/3/27 2.8
RZD Capital Ltd., 8.30%, 4/2/19 2.3
Samsung Electronics Co., Ltd., Preference Shares 2.2
Hungary Government Bond, 6.75%, 11/24/17 2.1
China Mobile Ltd. 1.9
South Africa Government Bond, 10.50%, 12/21/26 1.8
Taiwan Semiconductor Manufacturing Co., Ltd. 1.8
Venezuela Government International Bond, 5.75%, 2/26/16 1.7
Nigeria Government Bond, 15.10%, 4/27/17 1.6
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Total 21.9%
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% OF TOTAL
CREDIT QUALITY(6) INVESTMENTS
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AAA 2.1%
AA- 1.1
A 2.4
A- 17.8
BBB+ 14.9
BBB 7.4
BBB- 17.3
BB+ 2.8
BB 3.2
BB- 13.6
B+ 6.5
B 6.5
B- 0.6
NR 3.8
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Total 100.0%
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% OF TOTAL
INDUSTRY CLASSIFICATION INVESTMENTS
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Sovereigns 38.0%
Commercial Banks 9.4
Oil, Gas & Consumable Fuels 5.5
Semiconductors & Semiconductor Equipment 4.0
Real Estate Management & Development 3.9
Wireless Telecommunication Services 2.6
Railroad 2.6
Food & Staples Retailing 2.5
Beverages 2.3
Metals & Mining 2.1
Automobiles 1.9
Construction Materials 1.7
Banking 1.5
Thrifts & Mortgage Finance 1.4
Pharmaceuticals 1.4
Food & Beverage 1.4
Tobacco 1.3
Exploration & Production 1.2
Insurance 1.2
Chemicals 1.1
Supranationals 1.1
Energy Equipment & Services 1.1
Wireless Telecom Services 0.9
Specialty Retail 0.9
Transportation Infrastructure 0.9
IT Services 0.9
Diversified Financial Services 0.8
Household Products 0.8
Financial Services 0.7
Government Development Banks 0.6
Consumer Finance 0.6
Industrial Other 0.6
Multiline Retail 0.5
Utilities 0.5
Wireline Telecom Services 0.3
Manufactured Goods 0.3
Pipeline 0.3
Automotive 0.3
Real Estate 0.3
Retail Discretionary 0.2
Oil & Gas Services 0.2
Home Improvement 0.2
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Total 100.0%
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(1) Most recent distribution paid or declared through 6/30/2013. 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 6/30/2013. 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 benchmark consists of the following: JPMorgan Emerging Market Bond
Index - Global Diversified (32.5%); JPMorgan Government Bond Index -
Emerging Markets (32.5%); MSCI Global Emerging Markets Index (35.0%).
(5) 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.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2013
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 FIONA MANNING
Head of Emerging Market Equity for the Aberdeen Group Investment Manager, GEM Equity Team
JOANNE IRVINE ANDY BROWN
Head of Global Emerging Market ("GEM") Equity Team ex Asia Investment Manager, GEM Equity Team
MARK GORDON-JAMES PETER TAYLOR
Investment Manager, GEM Equity Team Senior Investment Manager/Head of Corporate Governance
FIXED-INCOME MANAGEMENT TEAM
BRETT DIMENT MAX WOLMAN
Head of Emerging Market Debt Portfolio Manager, Emerging Market Debt
KEVIN DALY ESTHER CHAN
Portfolio Manager, Emerging Market Debt Portfolio Manager, Emerging Market Debt
EDWIN GUTIERREZ
Portfolio 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 -7.71% and a market
value total return(1) of -11.33% for the six months ended June 30, 2013,
compared to the Fund's blended benchmark(2) total return of -8.33% over the same
period. In addition to the benchmark, the Fund currently uses other indexes for
comparative purposes. The total returns for the six months ended June 30, 2013,
for these indices were as follows: the Barclays Capital Global Emerging Markets
Index was -6.04% and the FTSE All World Emerging Market Index was -9.03%.
MARKET RECAP - EQUITY
Emerging market equities fell amid volatile trading over the half-year period
ended June 30, 2013. An improving global backdrop, receding worries in Europe
and liquidity influx from ultra-loose monetary policies in the developed world
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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 Blended benchmark consists of the following: JPMorgan Emerging Market Bond
Index - Global Diversified (32.5%); JPMorgan Government Bond Index -
Emerging Markets (32.5%); MSCI Global Emerging Markets Index (35.0%).
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2013
buoyed markets at first. However, that subsequently gave way to a broad sell-off
in emerging market assets, as the prospect of the U.S. Federal Reserve (the
"Fed") scaling back its bond purchases undermined sentiment. A sharp credit
tightening in China compounded fear that already moderating growth could stall
in the mainland. Markets recovered somewhat after Beijing helped selected
lenders, but this failed to reverse the losses. Brazil and Turkey, which were
among the worst-performing markets, were dragged lower by widespread
anti-government protests.
MARKET RECAP - FIXED INCOME
Emerging market debt posted gains during the six months ending June 30, 2013.
The European Central Bank ("ECB") announced its "outright monetary transactions"
program, while the Fed decided to unleash further quantitative easing focused on
purchasing mortgage-backed securities and Germany's constitutional court
ratified the Eurozone bailout package. A surprise Italian parliamentary election
result in February and the news of a Cyprus bailout at the end of March caused
risk appetite to take a breather at the beginning of 2013. Poor employment
figures in the U.S., however, caused U.S. Treasury yields to fall sharply in
April, providing support for spread products.
Emerging market debt suffered a setback in May and June by increased rhetoric
from the Fed that it will seek to "taper" its quantitative easing program toward
the end of 2013. The announcement was motivated by increasingly positive signs
of economic recovery in the U.S., and U.S. Treasury yields rose as a result,
causing emerging market debt to suffer. Market concerns over a reversal in fund
flows into the asset class, as well as a higher cost of financing for emerging
market countries, led to a significant re-pricing across all segments of the
asset class.
Over the six-month period, the JPMorgan Emerging Market Bond Index - Global
Diversified declined by 7.8%, while the blended benchmark spread widened by
83bps to 341bps over U.S. Treasuries. High-yield credits outperformed
investment-grade bonds, as some of the smaller countries in the index traded on
more idiosyncratic rationales. Belize was the top performer as it bounced back
and benefitted from the restructuring of its "superbond", while Ecuador,
Pakistan and Jamaica also fared well. On the other hand, Egypt declined the most
over the period as the country's economic and political problems came to the
fore. Low-beta Latin American sovereigns also suffered, with Uruguay and Peru
the stand-outs, as their long-end bonds sold off aggressively. The JPMorgan
Global Bond Index - Emerging Market Diversified declined -7.8% during the
period. Asia outperformed due to stronger relative performance from Malaysia;
Latin America lagged due to poor bond and currency returns from Brazil, Peru and
Colombia.
PERFORMANCE ANALYSIS - EQUITY
The equity portion of the Fund outperformed the MSCI Global Emerging Markets
Index portion of the benchmark by 2.54% in U.S. dollar terms over the half-year
period ended June 30, 2013. Both stock selection and asset allocation were
positive.
Stock selection in Mexico contributed the most to relative return. Mexican
airport operator OMA maintained its good performance on the back of higher
passenger traffic and the successful roll out of non-aeronautical services.
Femsa outperformed as its core Coca-Cola bottling business and convenience store
subsidiary both performed well. The Fund's holdings in Korea also held up well,
although the local stock market lagged its regional counterparts. Samsung
Electronics rallied on the back of decent first-quarter results as it continued
to gain traction in the global smartphone race. Meanwhile, hopes that Taiwanese
companies would benefit from the economic recovery in the U.S. aided the Fund's
holdings in Taiwan Mobile and TSMC, which contributed to stock selection. Stocks
in India also aided relative performance of the Fund's portfolio. Hindustan
Unilever was buoyed by robust earnings and the premium that its parent offered
to increase its stake in the Indian subsidiary. Likewise, mortgage provider HDFC
benefited from good annual results; loan growth increased sharply while spreads
remained steady.
Against this, the Fund's holdings in South Africa and China detracted from
relative return. South African fashion retailer Truworths detracted from
relative performance as sluggish consumer demand weighed on the company's
prospects. PetroChina's shares fell in tandem with others in the energy sector,
which sold off because of negative sentiment on the back of softer-than-expected
macroeconomic data. Not holding Chinese internet company Tencent also hurt the
Fund's performance, as it posted robust first-quarter earnings that were driven
by higher online games revenue and improved profitability of the e-commerce
business.
From a country perspective, the non-benchmark exposure to Hong Kong was among
the top contributors to relative return, as the Fund's holding in AIA benefited
from healthy growth across its key markets. The overweight to the Philippines
also bolstered performance, despite the recent profit-taking. Shares there were
underpinned by healthy economic growth and the upgrade of the country's credit
rating to investment grade status. Against this, the Fund's significant
overweight to Brazil detracted from relative performance, as domestic equities
and the Real came under pressure on the back of the emerging market sell-off,
slowing economic growth and widespread protests. Indiscriminate selling there
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SEMI-ANNUAL REPORT
JUNE 30, 2013
weighed on the Fund's holdings in Vale, Petrobras and Bradesco. Vale was also
hurt by lower iron ore prices and uncertainty over a revision of the country's
mining code. Some of the losses, though, were mitigated by fuels and chemicals
company Ultrapar, which gained from healthy earnings and a rating upgrade from
Moody's, citing its solid business model and stable cash flows.
PERFORMANCE ANALYSIS - FIXED INCOME
The emerging market debt portion of the Fund outperformed its blended benchmark
of both hard currency and local bonds by 174 bps and 51 bps, respectively.
Within the hard currency space, the Fund's overweight position in Russia was the
key positive contributor to performance, helped by the Fund's allocation to
quasi-sovereign and corporate credits. Overweight positions in Pakistan and
Venezuela also added value to the Fund. An overweight position in Mexico
detracted from performance as the portfolio added exposure to the Mexican
homebuilder sector (which suffered from working capital issues during the first
quarter of 2013). An underweight in Lebanon and overweight position in Honduras
also detracted from Fund performance.
Within the local currency holdings, an underweight position in Peru benefitted
the Fund as did a non-benchmark holding in Serbian treasury bills. An overweight
position in Mexico was the main detractor from performance as was an overweight
position in Indonesia and South Africa.
An important factor impacting the return of the Fund relative to its benchmarks
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, as the prices of securities held by the
Fund decline, the negative impact of the evaluation 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 Capital Emerging Markets Index, the FTSE All World Emerging Market
Index and the components of the blended benchmark are not leveraged. Leverage
had a negative impact on the performance of the Fund over this reporting period.
MARKET OUTLOOK - EQUITY
Emerging stock markets are expected to remain jittery in the short-term, as
investors fret over the implications of the Fed's potential exit from loose
monetary policy, China's slowing economy and the outlook for corporate earnings.
Although emerging markets will not be immune from a further pullback, potential
catalysts lie ahead. The Fed could reaffirm its quantitative easing commitment,
given the tentative domestic recovery. Even if the U.S. central bank eventually
ends its bond purchases, the news should largely be priced in since it has given
ample notice of its intentions. Furthermore, the amount of liquidity still being
supplied by other major central banks, particularly those in Europe and Japan,
remain significant and should prove mitigating. Chinese policymakers, who
recently relented somewhat from their hard-line stance, may also implement more
measures to support growth.
The widespread sell-off in recent weeks may have revived memories of past
corrections. Whether it sparks another global rout remains to be seen.
Fundamentally, however, emerging markets (with a few exceptions) are in better
shape to withstand economic shocks. Many are far less indebted than developed
countries, having strengthened their fiscal and external finances following
previous crises. In general, these countries are also supported by an expanding
middle class and favourable demographics. Shares in emerging markets are trading
at a wider discount to their developed-market peers after the recent pullback;
we will be keen to pick up favoured stocks if valuations continue falling.
MARKET OUTLOOK - FIXED INCOME
It is difficult to assess how long this volatility will last. In the short term,
sentiment will remain data-dependent, with much of the focus on the U.S. growth
indicators. Fund flows--which often lag market movements--may continue as a
negative driver until the market feels an appropriate equilibrium level has been
found. From a medium- to long-term perspective, the fundamentals of emerging
markets remain constructive. Balance sheets at a country, company and individual
level remain in good shape, but may deteriorate on the margin as growth slows.
Debt sustainability in emerging markets is expected to remain intact amid rising
borrowing costs, with debt levels, on average, one-third of those in developed
markets.
Page 5
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a)
JUNE 30, 2013 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------------- ---------------------------------------------------------------------------------------- ------------
COMMON STOCKS - 47.4%
BRAZIL - 7.1%
125,316 Banco Bradesco S.A., ADR ............................................................... $ 1,630,361
22,000 Lojas Renner S.A........................................................................ 630,121
27,454 Multiplan Empreendimentos Imobiliarios S.A. (Preference Shares) ........................ 639,919
93,000 Petroleo Brasileiro S.A., ADR .......................................................... 1,363,380
66,500 Souza Cruz S.A.......................................................................... 821,061
62,267 Ultrapar Participacoes S.A.............................................................. 1,486,527
84,104 Vale S.A., ADR ......................................................................... 1,105,968
21,842 Vale S.A., Preference Shares, ADR ...................................................... 265,599
------------
7,942,936
------------
CHILE - 0.7%
32,728 Banco Santander Chile S.A., ADR ........................................................ 800,200
------------
CHINA - 1.0%
1,070,000 PetroChina Co., Ltd., Class H .......................................................... 1,138,147
------------
HONG KONG - 5.7%
311,600 AIA Group Ltd........................................................................... 1,319,756
208,500 China Mobile Ltd........................................................................ 2,177,468
202,000 Hang Lung Group Ltd..................................................................... 1,086,046
640,000 Swire Pacific Ltd., B Shares ........................................................... 1,510,052
89,600 Swire Properties Ltd.................................................................... 265,125
------------
6,358,447
------------
HUNGARY - 0.7%
5,500 Richter Gedeon Nyrt .................................................................... 824,054
------------
INDIA - 6.0%
20,000 GlaxoSmithKline Pharmaceuticals Ltd..................................................... 785,663
13,000 Grasim Industries Ltd................................................................... 603,764
23,000 Hero Honda Motors Ltd................................................................... 643,671
93,000 Hindustan Unilever Ltd.................................................................. 915,758
110,500 Housing Development Finance Corp., Ltd.................................................. 1,634,582
20,000 ICICI Bank Ltd.......................................................................... 360,370
23,668 Infosys Technologies Ltd................................................................ 995,251
112,173 ITC Ltd................................................................................. 612,256
7,428 UltraTech Cement Ltd.................................................................... 234,621
------------
6,785,936
------------
INDONESIA - 1.3%
2,124,000 PT Astra International Tbk ............................................................. 1,498,035
------------
ITALY - 1.1%
30,600 Tenaris S.A., ADR ...................................................................... 1,232,262
------------
KAZAKHSTAN - 0.0%
376 BTA Bank JSC (b) ....................................................................... 1
------------
MALAYSIA - 1.1%
226,400 CIMB Group Holdings Berhad ............................................................. 593,319
120,000 Public Bank Berhad ..................................................................... 647,951
------------
1,241,270
------------
Page 6 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2013 (UNAUDITED)
SHARES DESCRIPTION VALUE
--------------- ---------------------------------------------------------------------------------------- ------------
COMMON STOCKS - (CONTINUED)
MEXICO - 3.6%
15,700 Fomento Economico Mexicano, S.A.B. de C.V., ADR ........................................ $ 1,620,083
40,000 Grupo Aeroportuario del Centro Norte, S.A.B. de C.V., ADR .............................. 1,047,200
240,200 Grupo Financiero Banorte, S.A.B. de C.V., O Shares ..................................... 1,434,810
------------
4,102,093
------------
PHILIPPINES - 1.6%
1,400,000 Ayala Land, Inc......................................................................... 985,185
342,672 Bank of the Philippine Islands ......................................................... 761,493
------------
1,746,678
------------
POLAND - 0.8%
20,000 Bank Pekao S.A.......................................................................... 902,880
------------
RUSSIA - 1.9%
25,500 LUKOIL, ADR ............................................................................ 1,470,075
10,600 Magnit OJSC ............................................................................ 606,320
------------
2,076,395
------------
SOUTH AFRICA - 2.5%
43,610 Massmart Holdings Ltd................................................................... 791,020
20,978 SABMiller PLC .......................................................................... 1,018,653
119,729 Truworths International Ltd............................................................. 1,053,150
------------
2,862,823
------------
SOUTH KOREA - 2.7%
3,456 E-Mart Co., Ltd......................................................................... 608,254
3,200 Samsung Electronics Co., Ltd., Preference Shares ....................................... 2,476,949
------------
3,085,203
------------
TAIWAN - 2.6%
210,005 Taiwan Mobile Co., Ltd.................................................................. 830,322
561,954 Taiwan Semiconductor Manufacturing Co., Ltd............................................. 2,081,242
------------
2,911,564
------------
THAILAND - 2.8%
161,000 PTT Exploration and Production Public Co., Ltd.......................................... 822,779
67,200 Siam Cement Public (The) Co., Ltd....................................................... 992,346
230,600 Siam Commercial Bank Public Co., Ltd.................................................... 1,278,839
------------
3,093,964
------------
TURKEY - 2.7%
134,635 Akbank TAS ............................................................................. 548,674
40,444 Bim Birlesik Magazalar AS .............................................................. 876,528
181,150 Haci Omer Sabanci Holding A.S........................................................... 953,322
141,000 Turkiye Garanti Bankasi AS ............................................................. 615,554
------------
2,994,078
------------
UNITED KINGDOM - 1.5%
19,000 BHP Billiton PLC ....................................................................... 488,635
56,608 Standard Chartered PLC ................................................................. 1,228,625
------------
1,717,260
------------
TOTAL COMMON STOCKS .................................................................... 53,314,226
(Cost $38,406,424) ------------
See Notes to Financial Statements Page 7
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2013 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
--------------- ------------------------------------------------------------ ----------- ------------ ------------
FOREIGN SOVEREIGN BONDS AND NOTES - 39.7%
BRAZIL - 4.5%
9,689,000 Brazil Notas do Tesouro Nacional Series F (BRL) ............ 10.00% 01/01/17 $ 4,245,318
370,000 Federal Republic of Brazil (BRL) ........................... 8.50% 01/05/24 153,382
180,000 Brazilian Government International Bond (USD) .............. 7.13% 01/20/37 215,100
400,000 Brazilian Government International Bond (USD) .............. 5.63% 01/07/41 400,000
------------
5,013,800
------------
COLOMBIA - 0.1%
130,000,000 Republic of Colombia (COP) ................................. 7.75% 04/14/21 76,524
------------
COSTA RICA - 0.2%
300,000 Republic of Costa Rica (USD) ............................... 4.25% 01/26/23 279,000
------------
CROATIA - 0.6%
600,000 Croatia Government International Bond (USD) ................ 6.63% 07/14/20 639,312
------------
DOMINICAN REPUBLIC - 0.4%
200,000 Dominican Republic International Bond (USD) ................ 7.50% 05/06/21 216,500
110,000 Dominican Republic International Bond (USD) ................ 5.88% 04/18/24 104,500
118,000 Dominican Republic International Bond (USD) ................ 8.63% 04/20/27 135,995
------------
456,995
------------
GEORGIA - 0.3%
350,000 Georgian Oil and Gas Corp. (USD) (c) ....................... 6.88% 05/16/17 355,250
------------
HONDURAS - 0.6%
840,000 Honduras Government International Bond (USD) (c) ........... 7.50% 03/15/24 726,600
------------
HUNGARY - 2.8%
513,000,000 Hungary Government Bond (HUF) .............................. 6.75% 11/24/17 2,389,744
820,000 Hungary Government Bond (USD) .............................. 4.13% 02/19/18 801,550
------------
3,191,294
------------
INDONESIA - 1.6%
4,000,000,000 Indonesian Treasury Bond (IDR) ............................. 10.00% 07/15/17 453,906
4,500,000,000 Indonesian Treasury Bond (IDR) ............................. 7.00% 05/15/27 427,759
2,000,000,000 Indonesian Treasury Bond (IDR) ............................. 6.13% 05/15/28 174,985
5,500,000,000 Indonesian Treasury Bond (IDR) ............................. 10.50% 08/15/30 695,019
------------
1,751,669
------------
IRAQ - 0.2%
280,000 Republic of Iraq (USD) ..................................... 5.80% 01/15/28 234,500
------------
IVORY COAST - 0.5%
700,000 Ivory Coast Government International Bond (USD) ............ 5.75% 12/31/32 579,250
------------
MALAYSIA - 1.1%
3,900,000 Malaysia Government Bond (MYR) ............................. 4.01% 09/15/17 1,259,776
------------
MEXICO - 3.5%
36,500,000 Mexican Bonos (MXN) ........................................ 7.50% 06/03/27 3,161,953
4,000,000 Mexican Bonos (MXN) ........................................ 7.75% 11/13/42 334,019
400,000 Mexican Government International Bond (USD) ................ 6.05% 01/11/40 438,000
------------
3,933,972
------------
Page 8 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2013 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
--------------- ------------------------------------------------------------ ----------- ------------ ------------
FOREIGN SOVEREIGN BONDS AND NOTES (CONTINUED)
MONGOLIA - 0.6%
200,000 Development Bank of Mongolia (USD) ......................... 5.75% 03/21/17 $ 195,024
300,000 Mongolia Government International Bond (USD) ............... 4.13% 01/05/18 280,500
200,000 Mongolia Government International Bond (USD) ............... 5.13% 12/05/22 178,000
------------
653,524
------------
NIGERIA - 1.7%
295,000,000 Nigeria Government Bond (NGN) .............................. 15.10% 04/27/17 1,883,459
------------
PAKISTAN - 0.3%
390,000 Islamic Republic of Pakistan (USD) ......................... 6.88% 06/01/17 366,600
------------
PERU - 1.1%
2,900,000 Peru Government Bond (PEN) ................................. 7.84% 08/12/20 1,202,322
------------
ROMANIA - 1.0%
1,020,000 Romania Government International Bond (USD) ................ 6.75% 02/07/22 1,140,972
------------
RUSSIA - 2.9%
50,000,000 Russian Foreign Bond (RUB) ................................. 7.85% 03/10/18 1,590,260
46,000,000 Russian Federal Bond - OFZ (RUB) ........................... 7.50% 02/27/19 1,423,139
9,850,000 Russian Federal Bond - OFZ (RUB) ........................... 7.00% 01/25/23 290,207
------------
3,303,606
------------
RWANDA - 0.2%
200,000 Rwanda International Government Bond (USD) ................. 6.63% 05/02/23 174,500
------------
SERBIA - 2.8%
600,000 Republic of Serbia (USD) ................................... 5.25% 11/21/17 588,000
850,000 Republic of Serbia (USD) ................................... 7.25% 09/28/21 878,688
200,000 Republic of Serbia (USD) (c) ............................... 7.25% 09/28/21 206,750
137,000,000 Serbia Treasury Bills (RSD) ................................ (d) 01/23/14 1,489,863
------------
3,163,301
------------
SOUTH AFRICA - 3.4%
7,600,000 South Africa Government Bond (ZAR) ......................... 13.50% 09/15/15 884,283
5,350,000 South Africa Government Bond (ZAR) ......................... 8.25% 09/15/17 568,381
16,970,000 South Africa Government Bond (ZAR) ......................... 10.50% 12/21/26 2,084,218
3,300,000 South Africa Government Bond (ZAR) ......................... 7.00% 02/28/31 290,541
------------
3,827,423
------------
SOUTH KOREA - 0.6%
41,000,000 Export-Import Bank of Korea (INR) .......................... 6.00% 02/27/14 686,841
------------
TANZANIA - 0.6%
680,000 Tanzania Government International Bond (USD) (e) ........... 6.45% 03/08/20 683,400
------------
TURKEY - 3.5%
550,000 Turkey Government International Bond (USD) ................. 6.25% 09/26/22 610,500
3,400,000 Turkey Government Bond (TRY) ............................... 9.00% 01/27/16 1,811,324
1,600,000 Turkey Government Bond (TRY) ............................... 6.30% 02/14/18 776,680
1,300,000 Turkey Government Bond (TRY) ............................... 3.00% 02/23/22 745,549
------------
3,944,053
------------
See Notes to Financial Statements Page 9
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2013 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
--------------- ------------------------------------------------------------ ----------- ------------ ------------
FOREIGN SOVEREIGN BONDS AND NOTES (CONTINUED)
UNITED ARAB EMIRATES - 1.3%
1,300,000 Dubai Government International Bond (USD) .................. 7.75% 10/05/20 $ 1,504,750
------------
URUGUAY - 1.1%
22,296,993 Uruguay Government International Bond, Inflation Adjusted
Bond (UYU) (f) .......................................... 5.00% 09/14/18 1,234,376
------------
VENEZUELA - 2.0%
2,150,000 Venezuela Government International Bond (USD) .............. 5.75% 02/26/16 1,929,625
380,000 Venezuela Government International Bond (USD) .............. 7.75% 10/13/19 317,300
------------
2,246,925
------------
VIETNAM - 0.2%
200,000 Vietnam Government International Bond (USD) ................ 6.88% 01/15/16 212,000
------------
TOTAL FOREIGN SOVEREIGN BONDS AND NOTES ................................................ 44,725,994
(Cost $46,388,917) ------------
FOREIGN CORPORATE BONDS AND NOTES (g) - 14.6%
BRAZIL - 1.3%
200,000 Banco do Estado do Rio Grande do Sul S.A. (USD) (c) ........ 7.38% 02/02/22 205,750
350,000 OAS Financial Ltd. (USD) ................................... 8.88% 12/29/49 339,500
200,000 OAS Investments Gmbh (USD) (c) ............................. 8.25% 10/19/19 197,500
150,000 Odebrecht Finance Ltd. (USD) ............................... 7.50% 09/14/15 149,250
200,000 U.S.J. Acucar e Alcool S.A. (USD) .......................... 9.88% 11/09/19 199,750
370,000 Virgolino de Oliveira Finance Ltd. (USD) ................... 10.50% 01/28/18 334,850
------------
1,426,600
------------
CHILE - 0.2%
200,000 Saci Falabella (USD) ....................................... 3.75% 04/30/23 182,500
------------
CHINA - 0.6%
200,000 COSL Finance BVI Ltd. (USD) (c) ............................ 3.25% 09/06/22 180,490
300,000 Country Garden Holdings Co., Ltd. (USD) .................... 11.13% 02/23/18 327,000
200,000 Yancoal International Resources Development Co.
Ltd. (USD) (c) .......................................... 5.73% 05/16/22 183,441
------------
690,931
------------
DOMINICAN REPUBLIC - 0.3%
350,000 AES Andres Dominicana/Itabo Dominicana (USD) ............... 9.50% 11/12/20 371,000
------------
EL SALVADOR - 0.4%
450,000 Telemovil Finance Co., Ltd. (USD) .......................... 8.00% 10/01/17 478,125
------------
GUATEMALA - 0.4%
400,000 Industrial Subordinated Trust (USD) ........................ 8.25% 07/27/21 430,752
------------
INDIA - 0.3%
400,000 Bharti Airtel International Netherlands B.V. (USD) (c) ..... 5.13% 03/11/23 365,520
------------
INDONESIA - 0.5%
440,000 Pertamina Persero PT (USD) ................................. 4.30% 05/20/23 413,050
150,000 Adaro Indonesia PT (USD) ................................... 7.63% 10/22/19 158,063
------------
571,113
------------
Page 10 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2013 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS)
--------------- ------------------------------------------------------------ ----------- ------------ ------------
FOREIGN CORPORATE BONDS AND NOTES (g) (CONTINUED)
KAZAKHSTAN - 0.9%
300,000 Kazakhstan Temir Zholy Finance B.V. (USD) (c) .............. 6.95% 07/10/42 $ 305,640
290,000 KazMunayGas National Co., JSC (USD) ........................ 4.40% 04/30/23 269,700
400,000 Zhaikmunai International B.V. (USD) (c) .................... 7.13% 11/13/19 403,000
------------
978,340
------------
MEXICO - 1.1%
350,000 BBVA Bancomer S.A. (USD) (c) ............................... 6.75% 09/30/22 376,250
500,000 CEMEX Espana S.A. Luxembourg (USD) ......................... 9.88% 04/30/19 542,500
360,000 Tenedora Nemak S.A. de C.V. (USD) (c) ...................... 5.50% 02/28/23 342,000
------------
1,260,750
------------
MULTINATIONAL - 1.1%
76,200,000 European Bank For Reconstruction & Development (INR) ....... 5.25% 02/07/14 1,275,459
------------
NIGERIA - 0.3%
350,000 Access Finance B.V. (USD) (c) .............................. 7.25% 07/25/17 345,108
------------
RUSSIA - 4.9%
450,000 Alfa Bank OJSC Via Alfa Bond Issuance PLC (USD) ............ 7.88% 09/25/17 479,790
200,000 Alfa Bank OJSC Via Alfa Bond Issuance PLC (USD) ............ 7.75% 04/28/21 207,000
400,000 EuroChem Mineral & Chemical Co. OJSC (USD) (c) ............. 5.13% 12/12/17 395,000
230,000 Evraz Group S.A. (USD) ..................................... 6.50% 04/22/20 207,575
400,000 Metalloinvest Finance Ltd. (USD) ........................... 5.63% 04/17/20 368,000
200,000 MTS International Funding Ltd. (USD) ....................... 5.00% 05/30/23 192,500
200,000 Russian Agricultural Bank OJSC Via RSHB Capital
S.A. (USD) .............................................. 7.75% 05/29/18 224,500
86,400,000 Russian Railways Via RZD Capital PLC (RUB) ................. 8.30% 04/02/19 2,640,155
420,000 VimpelCom Holdings B.V. (USD) (c) .......................... 5.95% 02/13/23 392,427
400,000 VTB Bank OJSC via VTB Capital S.A. (USD) ................... 6.88% 05/29/18 425,000
------------
5,531,947
------------
TURKEY - 0.6%
200,000 Arcelik AS (USD) (c) ....................................... 5.00% 04/03/23 180,000
200,000 Turkiye Sise Ve Cam Fabrikalari AS (USD) ................... 4.25% 05/09/20 183,000
300,000 Yasar Holdings S.A. Via Willow No. 2 (USD) ................. 9.63% 10/07/15 307,200
------------
670,200
------------
UKRAINE - 1.5%
350,000 Ferrexpo Finance PLC (USD) ................................. 7.88% 04/07/16 324,755
360,000 Metinvest B.V. (USD) ....................................... 10.25% 05/20/15 365,400
350,000 MHP S.A. (USD) ............................................. 10.25% 04/29/15 364,003
370,000 MHP S.A. (USD) (c) ......................................... 8.25% 04/02/20 329,300
360,000 Mriya Agro Holding PLC (USD) ............................... 9.45% 04/19/18 321,300
------------
1,704,758
------------
UNITED ARAB EMIRATES - 0.2%
200,000 Abu Dhabi National Energy Co. (USD) (c) .................... 3.63% 01/12/23 185,260
------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES ................................................ 16,468,363
(Cost $16,966,279) ------------
See Notes to Financial Statements Page 11
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
JUNE 30, 2013 (UNAUDITED)
DESCRIPTION VALUE
---------------------------------------------------------------------------------------- ------------
TOTAL INVESTMENTS - 101.7% ............................................................. $114,508,583
(Cost $101,761,620)
OUTSTANDING LOAN - (5.1%) .............................................................. (5,800,000)
NET OTHER ASSETS AND LIABILITIES - 3.4% ................................................ 3,837,100
------------
NET ASSETS - 100.0% .................................................................... $112,545,683
============
--------
(a) All of the securities within the Portfolio of Investments, except for the
BTA Bank JSC common stock, are available to serve as collateral for the
outstanding loans.
(b) Non-income producing security.
(c) This security, sold within the terms of a private placement memorandum, is
exempt from registration under Rule 144A of 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 investment sub-advisor. At June 30,
2013, securities noted as such amounted to $5,675,286 or 5.04% of net
assets.
(d) Zero coupon bond.
(e) Floating rate security. The interest rate shown reflects the rate in
effect at June 30, 2013.
(f) 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.
(g) 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.
(h) Aggregate cost for financial reporting purposes, which approximates the
aggregate cost for federal income tax purposes. As of June 30, 2013, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $19,088,160 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $6,341,197.
ADR American Depositary Receipt
Currency Abbreviations
BRL Brazilian Real
COP Columbian Peso
GBP British Pound Sterling
HKD Hong Kong Dollar
HUF Hungarian Forint
IDR Indonesian Rupiah
INR Indian Rupee
KRW South Korean Won
KZT Kazakhstan Tenge
MXN Mexican Peso
MYR Malaysian Ringgit
NGN Nigerian Naira
PEN Peruvian New Sol
PHP Philippines Peso
PLN Polish Zloty
RSD Serbian Dinar
RUB Russian Ruble
THB Thailand Baht
TRY Turkish Lira
TWD Taiwan New Dollar
USD United States Dollar
UYU Uruguayan Peso
ZAR South African Rand
Page 12 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2013 (UNAUDITED)
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of June 30, 2013
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 6/30/2013 PRICES INPUTS INPUTS
------------ ------------ ------------ ------------
Common Stocks:
Brazil..................................... $ 7,942,936 $ 7,942,936 $ -- $ --
Chile...................................... 800,200 800,200 -- --
China...................................... 1,138,147 1,138,147 -- --
Hong Kong.................................. 6,358,447 6,358,447 -- --
Hungary.................................... 824,054 824,054 -- --
India...................................... 6,785,936 6,785,936 -- --
Indonesia.................................. 1,498,035 1,498,035 -- --
Italy...................................... 1,232,262 1,232,262 -- --
Kazakhstan................................. 1 -- 1 --
Malaysia................................... 1,241,270 1,241,270 -- --
Mexico..................................... 4,102,093 4,102,093 -- --
Philippines................................ 1,746,678 1,746,678 -- --
Poland..................................... 902,880 902,880 -- --
Russia..................................... 2,076,395 2,076,395 -- --
South Africa............................... 2,862,823 2,862,823 -- --
South Korea................................ 3,085,203 3,085,203 -- --
Taiwan..................................... 2,911,564 2,911,564 -- --
Thailand................................... 3,093,964 3,093,964 -- --
Turkey..................................... 2,994,078 2,994,078 -- --
United Kingdom............................. 1,717,260 1,717,260 -- --
------------ ------------ ------------ ------------
Total Common Stocks........................ 53,314,226 53,314,225 1 --
------------ ------------ ------------ ------------
Foreign Sovereign Bonds and Notes*.............. 44,725,994 -- 44,725,994 --
Foreign Corporate Bonds and Notes*.............. 16,468,363 -- 16,468,363 --
------------ ------------ ------------ ------------
Total Investments............................... 114,508,583 53,314,225 61,194,358 --
Forward Foreign Currency Contracts**............ 315,246 -- 315,246 --
------------ ------------ ------------ ------------
Total........................................... $114,823,829 $ 53,314,225 $ 61,509,604 $ --
============ ============ ============ ============
LIABILITIES TABLE
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
6/30/2013 PRICES INPUTS INPUTS
------------ ------------ ------------ ------------
Forward Foreign Currency Contracts**............ $ (39,930) $ -- $ (39,930) $ --
============ ============ ============ ============
* See the Portfolio of Investments for country breakout.
** See the Schedule of 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 June 30,
2013, the Fund transferred common stocks valued at $34,006,927 from Level 2 to
Level 1 of the fair value hierarchy. The common stocks that transferred from
Level 2 to Level 1 did so as a result of foreign equities that are now being
valued based on quoted prices that were previously fair valued using a factor
provided by a pricing service due to the change in value between the foreign
markets' close and the NYSE close on December 31, 2012 exceeding a certain
threshold.
See Notes to Financial Statements Page 13
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
PORTFOLIO OF INVESTMENTS (CONTINUED)
JUNE 30, 2013 (UNAUDITED)
CURRENCY EXPOSURE % OF TOTAL
DIVERSIFICATION INVESTMENTS +
USD 48.8%
HKD 6.5
INR 6.5
BRL 6.4
ZAR 5.7
IDR 4.2
TRY 2.8
MYR 2.7
THB 2.7
KRW 2.7
TWD 2.5
MXN 2.3
PHP 1.5
RSD 1.3
GBP 1.1
PLN 0.8
PEN 0.8
COP 0.5
HUF 0.4
UYU 0.3
NGN 0.2
KZT 0.0 ++
RUB (0.7)
----------------------------------------------
Total 100.0%
======
+ The weightings include the impact of currency forwards.
++ Amount is less than 0.1%.
Page 14 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
SCHEDULE OF FORWARD FOREIGN CURRENCY CONTRACTS
JUNE 30, 2013 (UNAUDITED)
FORWARD FOREIGN CURRENCY CONTRACTS
----------------------------------------------------------
PURCHASE SALE
VALUE AS OF VALUE AS OF UNREALIZED
SETTLEMENT AMOUNT AMOUNT JUNE 30, JUNE 30, APPRECIATION
DATE COUNTERPARTY PURCHASED (a) SOLD (a) 2013 2013 (DEPRECIATION)
----------- ------------ -------------------- ------------------- ------------- ------------- --------------
07/19/13 BAR ZAR 1,504,000 USD 153,750 $ 151,669 $ 153,750 $ (2,081)
07/19/13 RBS HUF 112,500,000 USD 494,991 495,383 494,991 392
09/05/13 JPM IDR 671,413,000 USD 64,821 67,055 64,821 2,234
09/05/13 RBS IDR 963,917,000 USD 94,530 96,268 94,530 1,738
09/05/13 UBS INR 43,181,000 USD 717,686 717,760 717,686 74
07/19/13 RBS TRY 882,000 USD 486,926 455,781 486,926 (31,145)
07/19/13 GSI USD 189,399 ZAR 1,737,000 189,399 175,166 14,233
07/19/13 JPM USD 452,691 RUB 14,308,890 452,691 433,824 18,867
07/19/13 RBS USD 565,275 TRY 1,050,000 565,275 542,596 22,679
09/05/13 RBS USD 711,056 INR 43,181,000 711,056 717,760 (6,704)
09/05/13 RBS USD 922,441 BRL 1,941,000 922,441 857,459 64,982
09/05/13 JPM USD 76,848 COP 149,470,000 76,848 76,848 --
07/19/13 JPM USD 1,575,890 HUF 357,827,000 1,575,890 1,575,656 234
09/05/13 RBS USD 1,927,443 IDR 19,279,246,000 1,927,443 1,925,451 1,992
07/19/13 RBS USD 374,936 MXN 4,763,000 374,936 366,879 8,057
09/05/13 RBS USD 3,825,500 RUB 122,372,000 3,825,500 3,677,679 147,821
07/19/13 GSI USD 487,724 TRY 882,000 487,724 455,781 31,943
------------
Net unrealized appreciation (depreciation)............................................................. $ 275,316
============
(a) Please see Portfolio of Investments for currency descriptions.
Counterparty Abbreviations:
BAR Barclays Bank
GSI Goldman Sachs International
JPM JPMorgan Chase
RBS Royal Bank of Scotland
UBS UBS
See Notes to Financial Statements Page 15
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2013 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $101,761,620)........................................................................ $114,508,583
Cash........................................................................................... 1,501,463
Foreign currency (Cost $20,379)................................................................ 20,041
Unrealized appreciation on forward foreign currency contracts.................................. 315,246
Receivables:
Interest.................................................................................... 1,307,210
Investment securities sold.................................................................. 1,198,484
Dividends................................................................................... 138,078
Prepaid expenses............................................................................... 15,254
------------
Total Assets............................................................................. 119,004,359
------------
LIABILITIES:
Outstanding loan............................................................................... 5,800,000
Unrealized depreciation on forward foreign currency contracts.................................. 39,930
Payables:
Deferred Thailand capital gains tax......................................................... 212,202
Custodian fees.............................................................................. 146,748
Investment advisory fees.................................................................... 99,836
Investment securities purchased............................................................. 76,984
Audit and tax fees.......................................................................... 30,031
Administrative fees......................................................................... 15,183
Legal fees.................................................................................. 10,348
Deferred Indonesian capital gains tax....................................................... 9,325
Transfer agent fees......................................................................... 7,366
Printing fees............................................................................... 5,697
Interest and fees on loan................................................................... 1,351
Financial reporting fees.................................................................... 771
Trustees' fees and expenses................................................................. 697
Other liabilities.............................................................................. 2,207
------------
Total Liabilities........................................................................ 6,458,676
------------
NET ASSETS..................................................................................... $112,545,683
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 97,410,376
Par value...................................................................................... 53,278
Accumulated net investment income (loss)....................................................... (392,709)
Accumulated net realized gain (loss) on investments, forward foreign currency
contracts and foreign currency transactions.................................................. 2,717,084
Net unrealized appreciation (depreciation) on investments, forward foreign
currency contracts and foreign currency translation.......................................... 12,757,654
------------
NET ASSETS..................................................................................... $112,545,683
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)........................... $ 21.12
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 5,327,785
============
Page 16 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2013 (UNAUDITED)
INVESTMENT INCOME:
Interest (net of foreign withholding tax of $5,543)............................................ $ 2,461,894
Dividends (net of foreign withholding tax of $82,138).......................................... 784,465
Other.......................................................................................... 21,569
------------
Total investment income..................................................................... 3,267,928
------------
EXPENSES:
Investment advisory fees....................................................................... 645,608
Custodian fees................................................................................. 95,154
Administrative fees............................................................................ 77,811
Interest and fees on loan...................................................................... 41,860
Audit and tax fees............................................................................. 29,216
Printing fees.................................................................................. 21,183
Transfer agent fees............................................................................ 17,858
Legal fees..................................................................................... 14,600
Trustees' fees and expenses.................................................................... 10,784
Financial reporting fees....................................................................... 4,625
Other.......................................................................................... 83,033
------------
Total expenses.............................................................................. 1,041,732
------------
NET INVESTMENT INCOME (LOSS)................................................................... 2,226,196
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................. 2,918,675
Forward foreign currency contracts.......................................................... 180,957
Foreign currency transactions............................................................... (288,278)
------------
Net realized gain (loss)....................................................................... 2,811,354
------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. (15,071,758)
Forward foreign currency contracts.......................................................... 180,254
Foreign currency translation................................................................ (58,765)
Net change in deferred Thailand capital gains tax.............................................. 60,308
Net change in deferred Indonesian capital gains tax............................................ 34,112
------------
Net change in unrealized appreciation (depreciation)........................................... (14,855,849)
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (12,044,495)
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS................................ $ (9,818,299)
============
See Notes to Financial Statements Page 17
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
6/30/2013 ENDED
(UNAUDITED) 12/31/2012
-------------- --------------
OPERATIONS:
Net investment income (loss)..................................................... $ 2,226,196 $ 4,774,944
Net realized gain (loss)......................................................... 2,811,354 1,919,847
Net change in unrealized appreciation (depreciation)............................. (14,855,849) 18,683,992
-------------- --------------
Net increase (decrease) in net assets resulting from operations.................. (9,818,299) 25,378,783
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................ (2,450,781) (4,677,795)
Net realized gain................................................................ (1,278,669) (2,781,104)
-------------- --------------
Total distributions to shareholders.............................................. (3,729,450) (7,458,899)
-------------- --------------
Total increase (decrease) in net assets.......................................... (13,547,749) 17,919,884
NET ASSETS:
Beginning of period.............................................................. 126,093,432 108,173,548
-------------- --------------
End of period.................................................................... $ 112,545,683 $ 126,093,432
============== ==============
Accumulated net investment income (loss) at end of period........................ $ (392,709) $ (168,124)
============== ==============
COMMON SHARES:
Common Shares at end of period................................................... 5,327,785 5,327,785
============== ==============
Page 18 See Notes to Financial Statements
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2013 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations................. $ (9,818,299)
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments.................................................. (34,312,346)
Sales, maturities and paydowns of investments............................. 35,148,265
Net realized gain/loss on foreign currency transactions................... 276,517
Net amortization/accretion of premiums/discounts on investments........... (71,676)
Net realized gain/loss on investments..................................... (2,918,675)
Net change in unrealized appreciation/depreciation on forward
foreign currency contracts............................................. (180,254)
Net change in unrealized appreciation/depreciation on investments......... 15,071,758
CHANGES IN ASSETS AND LIABILITIES:
Increase in interest receivable........................................... (69,658)
Increase in dividends receivable.......................................... (86,927)
Increase in prepaid expenses.............................................. (11,607)
Decrease in interest and fees on loan payable............................. (9,600)
Decrease in investment advisory fees payable.............................. (11,190)
Decrease in audit and tax fees payable.................................... (28,212)
Increase in legal fees payable............................................ 7,626
Decrease in printing fees payable......................................... (7,563)
Increase in administrative fees payable................................... 5,469
Increase in custodian fees payable........................................ 95,154
Increase in transfer agent fees payable................................... 3,777
Increase in trustees' fees and expenses payable........................... 689
Decrease in deferred Thailand capital gains tax........................... (60,308)
Decrease in Indonesian capital gains tax.................................. (20,130)
Decrease in deferred Indonesian capital gains tax......................... (34,112)
Decrease in other liabilities............................................. (7,222)
--------------
CASH PROVIDED BY OPERATING ACTIVITIES........................................... $ 2,961,476
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net realized gain............... (1,278,669)
Distributions to Common Shareholders from net investment income........... (2,450,781)
--------------
CASH USED IN FINANCING ACTIVITIES............................................... (3,729,450)
--------------
Decrease in cash (a)............................................................ (767,974)
Cash and foreign currency at beginning of period................................ 2,289,478
--------------
CASH AND FOREIGN CURRENCY AT END OF PERIOD...................................... $ 1,521,504
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees............................... $ 51,460
==============
---------------
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $(10,904).
See Notes to Financial Statements Page 19
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR YEAR
6/30/2013 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 12/31/2012 12/31/2011 12/31/2010 12/31/2009 12/31/2008
------------- ------------- ------------- ------------- ------------- -------------
Net asset value, beginning of period $ 23.67 $ 20.30 $ 22.77 $ 19.76 $ 12.87 $ 21.69
--------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.42 0.90 0.98 0.97 1.01 1.09 (a)
Net realized and unrealized gain (loss) (2.27) 3.87 (2.05) 3.41 7.16 (8.37)
--------- --------- --------- --------- --------- ---------
Total from investment operations (1.85) 4.77 (1.07) 4.38 8.17 (7.28)
--------- --------- --------- --------- --------- ---------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income (0.46) (0.88) (0.74) (0.83) (0.81) (1.08)
Net realized gain (0.24) (0.52) (0.66) (0.57) -- (0.10)
Return of capital -- -- -- -- (0.63) (0.38)
--------- --------- --------- --------- --------- ---------
Total distributions to Common
Shareholders (0.70) (1.40) (1.40) (1.40) (1.44) (1.56)
--------- --------- --------- --------- --------- ---------
Capital share repurchases -- -- -- 0.03 0.16 0.02
--------- --------- --------- --------- --------- ---------
Net asset value, end of period $ 21.12 $ 23.67 $ 20.30 $ 22.77 $ 19.76 $ 12.87
========= ========= ========= ========= ========= =========
Market value, end of period $ 18.91 $ 22.05 $ 17.82 $ 21.32 $ 18.04 $ 10.25
========= ========= ========= ========= ========= =========
TOTAL RETURN BASED ON NET ASSET VALUE (b) (7.71)% 24.36% (4.18)% 23.29% 69.25% (33.94)%
========= ========= ========= ========= ========= =========
TOTAL RETURN BASED ON MARKET VALUE (b) (11.33)% 32.02% (10.17)% 26.45% 94.01% (41.48)%
========= ========= ========= ========= ========= =========
-----------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's) $ 112,546 $ 126,093 $ 108,174 $ 121,338 $ 106,717 $ 75,365
Ratio of total expenses to average net
assets 1.69% (c) 1.78% 1.68% 1.76% 2.11% 2.00%
Ratio of total expenses to average net
assets excluding interest expense 1.62% (c) 1.70% 1.61% 1.62% 1.80% 1.60%
Ratio of net investment income (loss) to
average net assets 3.61% (c) 4.04% 4.47% 4.55% 6.11% 5.73%
Portfolio turnover rate 55% 49% 51% 87% 66% 64%
INDEBTEDNESS:
Total loan outstanding (in 000's) $ 5,800 $ 5,800 $ 5,800 $ 5,800 $ 5,800 $ 13,500
Asset coverage per $1,000 of
indebtedness (d) $ 20,404 $ 22,740 $19,651 $ 21,920 $ 19,399 $ 6,583
-----------------------
(a) Based on average shares outstanding.
(b) 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.
(c) Annualized.
(d) 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 20 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2013 (UNAUDITED)
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 Fund's Common Shares 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 in accordance with valuation procedures
adopted by the Fund's Board of Trustees, and in accordance with provisions of
the 1940 Act. The Fund's securities will be valued as follows:
Bonds, notes and other debt securities not traded in an organized market 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.
Common stocks and other securities listed on any national or foreign
exchange (excluding the NASDAQ Stock Market LLC ("NASDAQ") and the London
Stock Exchange Alternative Investment Market ("AIM")) are valued at the last
sale price on the exchange on which they are principally traded or, for
NASDAQ and AIM securities, the official closing price. Securities traded on
more than one securities exchange are valued at the last sale price or
official closing price, as applicable, at the close of the securities
exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are valued at their closing
bid prices.
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.
Debt securities having a remaining maturity of sixty days or less when
purchased are valued at cost adjusted for amortization of premiums and
accretions of discounts.
In the event that market quotations are not readily available, the pricing
service does not provide a valuation for a particular asset, or the valuations
are deemed unreliable, the Fund's Board of Trustees has designated First Trust
Advisors L.P. ("First Trust" or the "Advisor") to use a fair value method to
value the Fund's securities and other investments. Additionally, if events occur
after the close of the principal market for particular securities (e.g.,
domestic debt and foreign securities), but before the Fund values its assets,
that could materially affect NAV, First Trust may use a fair value method to
value the Fund's securities and other investments. The use of fair value pricing
by the Fund is governed by valuation procedures adopted by the Fund's Board of
Trustees, and in accordance with the provisions of the 1940 Act. As a general
principle, the fair value of a security is the amount which the Fund might
reasonably expect to receive for the security upon its current sale. In light
Page 21
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2013 (UNAUDITED)
of the judgment involved in fair valuations, there can be no assurance that a
fair value assigned to a particular security will be the amount which the Fund
might be able to receive upon its current sale. Fair valuation of a debt
security will be based on the consideration of all available information,
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 securities in question are foreign securities, the following
additional information may be considered:
1) the value of similar foreign securities traded on other foreign
markets;
2) ADR trading of similar securities;
3) closed-end fund trading of similar securities;
4) foreign currency exchange activity;
5) the trading prices of financial products that are tied to baskets of
foreign securities;
6) factors relating to the event that precipitated the pricing problem;
7) whether the event is likely to recur; and
8) whether the effects of the event are isolated or whether they affect
entire markets, countries or regions.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for identical
investments. An active market is a market in which transactions for the
investment occur with sufficient frequency and volume to provide pricing
information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where there
are few transactions for the investment, the prices are not
current, or price quotations vary substantially either over time
or among market makers, or in which little information is
released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities, prepayment
speeds, loss severities, credit risks, and default rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs may
reflect the reporting entity's own assumptions about the assumptions that
market participants would use in pricing the investment.
The inputs or methodology used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of June 30, 2013, is
included with the Fund's Portfolio of Investments.
Page 22
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2013 (UNAUDITED)
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 or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. 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 June 30, 2013, 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 objectives. Forward foreign currency contracts are agreements 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. 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 Schedule of Forward Foreign Currency Contracts.
During the six months ended June 30, 2013, the amount of notional values of
forward foreign currency contracts opened and closed were $43,552,885 and
$39,574,800, respectively.
D. Offsetting on the Statement of Assets and Liabilities:
In December 2011, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update No. 2011-11 "Disclosures about Offsetting Assets and
Liabilities" ("ASU 2011-11"). This disclosure requirement is intended to help
investors and other financial statement users better assess the effect or
potential effect of offsetting arrangements on a fund's financial position. ASU
2011-11 requires entities to disclose both gross and net information about both
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. In addition, in January 2013, FASB issued Accounting
Standards Update No. 2013-1 "Clarifying the Scope of Offsetting Assets and
Liabilities" ("ASU 2013-1"), specifying exactly which transactions are subject
to offsetting disclosures. The scope of the disclosure requirements is limited
to derivative instruments, repurchase agreements and reverse repurchase
agreements, and securities borrowing and securities lending transactions. ASU
2011-11 and ASU 2013-1 are effective for financial statements with fiscal years
beginning on or after January 1, 2013, and interim periods within those fiscal
years.
The Fund adopted the disclosure requirement on netting for the current reporting
period. For financial reporting purposes, the Fund does not offset financial
assets and financial liabilities that are subject to master netting arrangements
or similar agreements on the Statement of Assets and Liabilities.
At June 30, 2013, derivative assets and liabilities (by type) on a gross basis
are as follows:
Net Amounts
Gross Amounts of Assets
Offset in the Presented in the Collateral
Gross Amounts of Statement of Assets Statement of Assets Financial Amounts
Recognized Assets and Liabilities and Liabilities Instruments Received Net Amount
----------------- ------------------- -------------------- ----------- ------------ ------------
Forward Currency Contracts* $ 315,246 $ -- $ 315,246 $ -- $ -- $ 315,246
Net Amounts
Gross Amounts of Liabilities
Gross Amounts of Offset in the Presented in the Collateral
Recognized Statement of Assets Statement of Assets Financial Amounts
Liabilities and Liabilities and Liabilities Instruments Pledged Net Amount
----------------- ------------------- -------------------- ----------- ------------ ------------
Forward Currency Contracts* $ (39,930) $ -- $ (39,930) $ -- $ -- $ (39,930)
* The respective counterparties for each contract are disclosed in the Schedule
of Forward Foreign Currency Contracts.
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2013 (UNAUDITED)
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 gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future.
The tax character of distributions paid during the fiscal year ended December
31, 2012, was as follows:
Distributions paid from:
Ordinary income................................. $ 4,885,579
Long-term capital gains......................... 2,573,320
As of December 31, 2012, the distributable earnings and net assets on a tax
basis were as follows:
Undistributed ordinary income................... $ 1,191,872
Undistributed capital gains..................... 750,397
--------------
Total undistributed earnings.................... 1,942,269
Accumulated capital and other losses............ (266,715)
Net unrealized appreciation (depreciation) ..... 27,336,548
--------------
Total accumulated earnings (losses)............. 29,012,102
Other........................................... (382,324)
Paid-in capital................................. 97,463,654
--------------
Net assets...................................... $ 126,093,432
==============
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.
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2013 (UNAUDITED)
At December 31, 2012, the Fund had no capital loss carryforward 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, 2012, the Fund
intends to elect to defer net realized ordinary losses of $266,715 incurred from
November 1, 2012 through December 31, 2012.
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 2009, 2010,
2011 and 2012 remain open to federal and state audit. As of December 31, 2012,
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.
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 of $125,000 per year and an annual per fund fee of $4,000 for each
closed-end fund or other actively managed fund and $1,000 for each index fund in
the First Trust Fund Complex. The fixed annual retainer is allocated pro rata
among each fund in the First Trust Fund Complex based on net assets.
Additionally, the Lead Independent Trustee is paid $15,000 annually, the
Chairman of the Audit Committee is paid $10,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $5,000 annually to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and each Committee
Chairman will serve two-year terms until December 31, 2013, before rotating to
serve as Chairman of another Committee or as Lead Independent Trustee. After
December 31, 2013, the Lead Independent Trustee and Committee Chairmen will
rotate every three years. The officers and "Interested" Trustee receive no
compensation from the funds for serving in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the six months ended June 30, 2013, were $34,389,330 and
$36,346,749, respectively.
5. 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
$20,000,000. As of June 30, 2013, the Fund had one loan outstanding under the
revolving credit facility totaling $5,800,000. For the six months ended June 30,
2013, the average amount outstanding was $5,800,000. The high and low annual
interest rates during the six months ended June 30, 2013 were 1.16% and 1.09%,
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2013 (UNAUDITED)
respectively, and the weighted average interest rate was 1.11%. The interest
rate at June 30, 2013 was 1.09%. 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.
6. 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.
7. 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.
Page 26
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2013 (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 27
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2013 (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.
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 17, 2013 (the "Annual Meeting"). At
the Annual Meeting, Trustees James A. Bowen and Niel B. Nielsen were elected by
the Common Shareholders of the First Trust/Aberdeen Emerging Opportunity Fund as
Class III Trustees for three-year terms expiring at the Fund's annual meeting of
shareholders in 2016. The number of votes cast in favor of Mr. Bowen was
4,970,317, the number of votes against was 48,935 and the number of abstentions
was 308,533. The number of votes cast in favor of Mr. Nielsen was 4,967,265, the
number of votes against was 51,987 and the number of abstentions was 308,533.
Richard E. Erickson, Thomas R. Kadlec and Robert F. Keith are the other current
and continuing Trustees.
ADVISORY AND SUB-ADVISORY AGREEMENTS
BOARD CONSIDERATIONS REGARDING CONTINUATION OF INVESTMENT MANAGEMENT AND
SUB-ADVISORY AGREEMENTS
The Board of Trustees of First Trust/Aberdeen Emerging Opportunity Fund (the
"Fund"), including the Independent Trustees, approved the continuation of the
Investment Management Agreement (the "Advisory Agreement") between the Fund and
First Trust Advisors L.P. (the "Advisor") and the Investment Sub Advisory
Agreement (the "Sub Advisory Agreement" and together with the Advisory
Agreement, the "Agreements") among the Fund, the Advisor and Aberdeen Asset
Management Inc. (the "Sub-Advisor"), at a meeting held on June 9-10, 2013. The
Board determined that the continuation of the Agreements is in the best
interests of the Fund in light of the extent and quality of the services
provided and such other matters as the Board considered to be relevant in the
exercise of its reasonable business judgment.
To reach this determination, the Board considered its duties under the
Investment Company Act of 1940, as amended (the "1940 Act"), as well as under
the general principles of state law in reviewing and approving advisory
contracts; the requirements of the 1940 Act in such matters; the fiduciary duty
of investment advisors with respect to advisory agreements and compensation; the
standards used by courts in determining whether investment company boards have
fulfilled their duties; and the factors to be considered by the Board in voting
on such agreements. To assist the Board in its evaluation of the Agreements, the
Independent Trustees received a separate report from each of the Advisor and the
Sub-Advisor in advance of the Board meeting responding to a request for
information from counsel to the Independent Trustees. The reports, among other
things, outlined the services provided by the Advisor and the Sub-Advisor
(including the relevant personnel responsible for these services and their
experience); the advisory and sub-advisory fees for the Fund as compared to fees
charged to other clients of the Advisor and the Sub-Advisor and as compared to
fees charged by investment advisors and sub-advisors to comparable funds;
expenses of the Fund as compared to expense ratios of comparable funds; the
nature of expenses incurred in providing services to the Fund and the potential
for economies of scale, if any; financial data on the Advisor and the
Sub-Advisor; any fall out benefits to the Advisor and the Sub-Advisor; and
information on the Advisor's and the Sub-Advisor's compliance programs.
Following receipt of this information, the Independent Trustees and their
counsel met separately to discuss the information provided by the Advisor and
the Sub-Advisor. The Board applied its business judgment to determine whether
the arrangements between the Fund and the Advisor and among the Fund, the
Advisor and the Sub-Advisor are reasonable business arrangements from the Fund's
perspective as well as from the perspective of shareholders. The Board
considered that shareholders chose to invest or remain invested in the Fund
knowing that the Advisor and the Sub Advisor manage the Fund.
In reviewing the Agreements, the Board considered the nature, extent and quality
of services provided by the Advisor and the Sub-Advisor under the Agreements.
The Board considered the Advisor's statements regarding the incremental benefits
associated with the Fund's advisor/sub-advisor management structure. With
respect to the Advisory Agreement, the Board considered that the Advisor is
responsible for the overall management and administration of the Fund and
reviewed the services provided by the Advisor to the Fund, including the
oversight of the Sub-Advisor. The Board noted the compliance program that had
been developed by the Advisor and considered that it includes a robust program
for monitoring the Sub-Advisor's compliance with the 1940 Act and the Fund's
investment objective and policies. With respect to the Sub-Advisory Agreement,
the Board received a presentation from representatives of the Sub Advisor
discussing the services that the Sub-Advisor provides to the Fund and how the
Sub-Advisor manages the Fund's investments. In light of the information
presented and the considerations made, the Board concluded that the nature,
extent and quality of services provided to the Fund by the Advisor and the
Sub-Advisor under the Agreements have been and are expected to remain
satisfactory and that the Sub-Advisor, under the oversight of the Advisor, has
managed the Fund consistent with its investment objective and policies.
Page 28
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2013 (UNAUDITED)
The Board considered the advisory and sub-advisory fees paid under the
Agreements. The Board considered the advisory fees charged by the Advisor to
similar funds and other non-fund clients, noting that the Advisor provides
services to another closed-end fund sub-advised by the Sub-Advisor and certain
separately managed accounts with investment objectives and policies similar to
the Fund's. The Board noted that the Advisor charges the same advisory fee rate
to the Fund and the other closed-end fund sub-advised by the Sub-Advisor and a
lower advisory fee rate to the separately managed accounts. The Board noted the
Advisor's statement that the nature of the services provided to the separately
managed accounts is not comparable to those provided to the Fund. The Board
considered the sub advisory fee and how it relates to the Fund's overall
advisory fee structure and noted that the sub advisory fee is paid by the
Advisor from its advisory fee. The Board also considered information provided by
the Sub-Advisor as to the fees it charges to other clients, noting that the
Sub-Advisor does not manage any other funds directly comparable to the Fund, but
that the sub-advisory fee rate is the same as that received from the Advisor for
the other closed-end fund for which it serves as sub-advisor, and is generally
lower than or equal to the fees the Sub-Advisor charges to the other North
American closed-end fixed income funds and a separate account with a global bond
mandate that it manages. In addition, the Board reviewed data prepared by Lipper
Inc. ("Lipper"), an independent source, showing the advisory fees and expense
ratios of the Fund as compared to the advisory fees and expense ratios of an
expense peer group selected by Lipper and similar data from the Advisor for a
separate peer group selected by the Advisor. The Board noted that the Lipper and
Advisor peer groups included only two overlapping peer funds. The Board
discussed with representatives of the Advisor the limitations in creating a
relevant peer group for the Fund, including that (i) the Fund is unique in its
composition, which makes assembling peers with similar strategies and asset mix
difficult; (ii) most peer funds do not use leverage; (iii) none of the peer
funds employ an advisor/sub-advisor management structure; and (iv) many of the
peer funds are larger than the Fund, which causes the Fund's fixed expenses to
be higher on a percentage basis as compared to the larger peer funds. The Board
took these limitations into account in considering the peer data. The Board also
noted that excise taxes paid by the Fund in 2012 affected the Fund's expense
ratio relative to its peers. In reviewing the peer data, the Board noted that
the Fund's contractual advisory fee was below the median of the Lipper peer
group.
The Board also considered performance information for the Fund, noting that the
performance information included the Fund's quarterly performance report, which
is part of the process that the Board has established for monitoring the Fund's
performance and portfolio risk on an ongoing basis. The Board determined that
this process continues to be effective for reviewing the Fund's performance. In
addition to the Board's ongoing review of performance, the Board also received
data prepared by Lipper comparing the Fund's performance to a performance peer
universe selected by Lipper and to a blended benchmark. In reviewing the Fund's
performance as compared to the performance of the Lipper performance peer
universe, the Board took into account the limitations described above with
respect to creating a relevant peer group for the Fund. The Board also
considered the Fund's dividend yield as of March 28, 2013 and an analysis
prepared by the Advisor on the continued benefits provided by the Fund's
leverage. In addition, the Board compared the Fund's premium/discount over the
past eight quarters to the average and median premium/discount of the Advisor
peer group over the same period and considered factors that may impact a fund's
premium/discount.
On the basis of all the information provided on the fees, expenses and
performance of the Fund, the Board concluded that the advisory and sub-advisory
fees were reasonable and appropriate in light of the nature, extent and quality
of services provided by the Advisor and Sub-Advisor under the Agreements.
The Board noted that the Advisor has continued to invest in personnel and
infrastructure and considered whether fee levels reflect any economies of scale
for the benefit of shareholders. The Board determined that due to the Fund's
closed-end structure, the potential for realization of economies of scale as
Fund assets grow was not a substantial factor to be considered. The Board also
considered the costs of the services provided and profits realized by the
Advisor from serving as investment advisor to the Fund for the twelve months
ended December 31, 2012, as set forth in the materials provided to the Board.
The Board noted the inherent limitations in the profitability analysis, and
concluded that the Advisor's estimated profitability appeared to be not
excessive in light of the services provided to the Fund. In addition, the Board
considered fall-out benefits described by the Advisor that may be realized from
its relationship with the Fund, including the Advisor's compensation for fund
reporting services pursuant to a separate Fund Reporting Services Agreement.
The Board considered the Sub-Advisor's representation that because it manages
the Fund in a similar fashion to other accounts it is able to achieve economies
of scale through relationships with brokers, administrative systems and other
operational efficiencies and that while it expects operating costs in general to
continue to rise, it continues to expect to experience the benefits of economies
of scale. The Board considered that the sub advisory fee rate was negotiated at
arm's length between the Advisor and the Sub-Advisor, an unaffiliated third
party. The Board also considered data provided by the Sub-Advisor as to the
profitability of the Sub Advisory Agreement to the Sub-Advisor. The Board noted
the inherent limitations in the profitability analysis and concluded that the
profitability analysis for the Advisor was more relevant, although the
profitability of the Sub Advisory Agreement appeared to be not excessive in
light of the services provided to the Fund. The Board considered fall-out
benefits that may be realized by the Sub-Advisor from its relationship with the
Fund, including that the Sub-Advisor may enter into soft dollar and commission
sharing arrangements, and considered a summary of such arrangements.
Page 29
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2013 (UNAUDITED)
Based on all of the information considered and the conclusions reached, the
Board, including the Independent Trustees, unanimously determined that the terms
of the Agreements continue to be fair and reasonable and that the continuation
of the Agreements is in the best interests of the Fund. No single factor was
determinative in the Board's analysis.
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.
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.
Page 30
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST/ABERDEEN EMERGING OPPORTUNITY FUND (FEO)
JUNE 30, 2013 (UNAUDITED)
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,
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 31
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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.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
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.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a) Not applicable.
(b) There have been no changes, as of the date of filing, in any of the
Portfolio Managers identified in response to paragraph (a)(1) of this item
in the Registrant's most recent annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
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) Not applicable.
(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 August 9, 2013
---------------------
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 August 9, 2013
---------------------
By (Signature and Title)* /s/ James M. Dykas
------------------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date August 9, 2013
---------------------
* Print the name and title of each signing officer under his or her signature.